CREDIT ACCEPTANCE CORPORATION - 10-K Annual Report

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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 THIS FISCAL YEAR ENDED DECEMBER 31, 2003

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 (I.R.S. Employer
incorporation or organization) Identification No.)

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

(248) 353-2700

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

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

COMMON STOCK

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

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

The aggregate market value of 12,011,309 shares of the Registrant's common
stock held by non-affiliates on June 30, 2003 was approximately $120.1 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 January 31, 2004, there were 39,663,690 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
2004 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2003

INDEX TO FORM 10-K

1

PART I

ITEM 1. BUSINESS

GENERAL

Since 1972, Credit Acceptance (the "Company" or "Credit Acceptance") has
provided auto loans to consumers, regardless of their credit history. The
Company's product is offered through a nationwide network of automobile dealers
who benefit by selling vehicles to consumers who otherwise could not obtain
financing, by repeat and referral sales generated by these same customers, and
from sales to customers responding to advertisements for the Company's product,
but who actually end up qualifying for traditional financing.

Without the Company's product, consumers are often unable to purchase a
vehicle or they purchase an unreliable one and are not provided the opportunity
to improve their credit standing. As the Company reports to the three national
credit reporting agencies, a significant number of its customers improve their
lives by improving their credit score and move on to more traditional sources of
financing.

Credit Acceptance was founded to service and collect retail installment
contracts (referred to as "Loans") originated and funded by automobile
dealerships owned by the Company's founder, majority shareholder, and current
Chairman, Donald Foss. During the 1980's, the Company began to market this
service to non-affiliated dealers and, at the same time, began to offer
dealer-partners a non-recourse cash payment (an "advance") against anticipated
future collections on Loans serviced for that dealer-partner. Today, the
Company's program is offered to dealers throughout the United States. The
Company refers to participating dealers who share its commitment to changing
customers' lives as "dealer-partners".

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

PRINCIPAL BUSINESS

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

(i) a down payment from the customer;

(ii) a cash advance from the Company; and

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

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

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

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

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

- Allows dealer-partners to share in the profits not only from the sale of
the vehicle, but also from its financing.

- Attracts customers by advertising "guaranteed credit approval". The
customers will often use other services of the dealer-partners and refer
friends and relatives to them.

- Attracts customers who mistakenly assume they do not qualify for
conventional financing.
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Credit Acceptance derives its revenues from the following principal
sources:

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

(ii) fees earned from the Company's third party ancillary product
offerings, which primarily consist of service contract programs;

(iii) lease revenue from investments in operating leases;

(iv) premiums earned on service contract and credit life insurance
programs; and

(v) other income, which primarily consists of: monthly fees from the
Company's Internet based Credit Approval Processing System ("CAPS"),
interest income and fees from floorplan receivables, secured lines of
credit, and notes receivable; net gains resulting from lease
terminations; rental income from leasing part of the Company's
headquarters to outside parties; and fees charged to dealer-partners at
the time they enroll in the Company's program.

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

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

The Company is organized into four primary business segments: United
States, United Kingdom, Automobile Leasing and Other. In early 2002, the Company
stopped originating automobile leases and effective June 30, 2003 stopped
originating Loans in the United Kingdom and Canada. The Company is in the
process of liquidating these portfolios. For information regarding the Company's
reportable segments, see Note 12 to the consolidated financial statements, which
is incorporated herein by reference.

OPERATIONS

UNITED STATES

Sales and Marketing. The Company's target market is a select group of the
more than 75,000 independent and franchised automobile dealers in the United
States. The Company's market development process identifies high quality dealers
in each geographic market and limits the number of automobile dealers in each
geographic market that can participate in the Company's program. The selective
marketing of the Company's program is intended to: (i) result in a network
consisting of the highest quality dealer-partners who share the Company's
commitment to changing lives; and (ii) increase the value of the Company's
program to the Company's dealer-partners. Dealer-partners pay a one-time
enrollment fee of $9,850 to join the Company's program. In return, the Company
provides the dealer-partner with sales promotion kits, signs, training and the
first month's access to CAPS.

3

Dealer-partner enrollments in the United States for each of the last five
years are presented in the table below.

A new dealer-partner is required to execute a servicing agreement, which
defines the legal relationship between the Company and the dealer-partner. The
servicing agreement assigns the responsibilities for administering, servicing
and collecting the amounts due on Loans to the Company. The servicing agreement
provides that collections received by Credit Acceptance during a calendar month
on Loans assigned by a dealer-partner are applied on a pool-by-pool basis as
follows:

- First, to reimburse Credit Acceptance for certain collection costs;

- Second, to pay Credit Acceptance its servicing fee;

- Third, to reduce the aggregate advance balance and to pay any other
amounts owing from the dealer-partner to the Company; and

- Fourth, to the dealer-partner as payment for amounts contractually due
under the servicing agreement (dealer holdback).

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

In the event that the Company discovers a misrepresentation by the
dealer-partner relating to a Loan submitted to the Company, the Company can
demand that the Loan be repurchased for the then current balance owed on the
Loan less the amount of any unearned finance charge plus the applicable
termination fee, generally $500. Upon receipt in full of such amount, the
Company will reassign the Loan receivable and its security interest in the
financed vehicle to the dealer-partner.

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

(i) the dealer-partner's refusal to allow the Company to audit its records
relating to the Loans assigned to the Company;

(ii) the dealer-partner, without the Company's 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

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

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

(i) any unreimbursed collection costs;

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

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(iii) a termination fee equal to 15% of the then outstanding amount of the
Loans accepted by the Company.

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

Loan Origination. Once a dealer-partner has enrolled in the Company's
program, the dealer-partner may begin submitting Loans to the Company for
servicing, administration, and collection. A Loan occurs when a customer enters
into a contract with a dealer-partner that sets forth the terms of the agreement
between the customer and the dealer-partner for the payment of the purchase
price of the automobile. The amount of the Loan consists of the total principal
and interest that the customer is required to pay over the term of the Loan.
During 2003, virtually all of the Company's United States Loan originations were
processed through CAPS. CAPS was offered to all dealer-partners located in the
United States beginning in January 2001, and allows dealer-partners to input a
credit application and view the response from the Company on-line. CAPS, which
is patent pending, allows dealer-partners to: (i) receive an approval from the
Company much faster than with traditional methods; and (ii) interact with the
Company's credit scoring system to improve the structure of each transaction
prior to delivery. All responses include the amount of the advance, as well as
any stipulations required for funding. The amount of the advance is determined
by using a computer model which considers a number of factors including the
timing and amount of cash flows expected on the related Loan and the Company's
target return on capital at the time the Loan is originated. The estimated
future cash flows are determined based upon a proprietary credit scoring system,
which considers numerous variables, including the customer's credit bureau
report, data contained in the customer'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. The
Company's credit scoring system predicts the probability of default based upon
the historical performance of Loans in the Company's portfolio that share
similar characteristics. The performance of the credit scoring system is
evaluated monthly by comparing projected to actual Loan performance. Adjustments
are made to the credit scoring system when necessary.

While a dealer-partner can assign any Loan to the Company for servicing,
administration and collection, the decision whether to pay an advance to the
dealer-partner and the amount of any advance, is made solely by the Company. The
Company performs all significant functions relating to the processing of the
Loan applications and bears certain costs of origination, including the cost of
assessing the adequacy of Loan documentation, compliance with underwriting
guidelines and the cost of verifying employment, residence and other information
submitted by the dealer-partner.

CAPS interfaces with the Company's Application and Contract System ("ACS").
Loan information included in CAPS is automatically entered into ACS through a
download from CAPS. Additional Loan information is entered into ACS manually.
ACS provides credit scoring capability as well as the ability to process Loan
packages. ACS compares Loan data against information provided during the
approval process and allows the funding analyst to check that all stipulations
have been met prior to funding. Loan contracts are written on a contract form
provided by the Company and the Loan transaction typically is not completed
until the dealer-partner has received approval from the Company. The assignment
of the Loan from the dealer-partner to the Company occurs simultaneously with
the customer's signing of the Loan contract. Although the dealer-partner is
named in the Loan contract, the dealer-partner does not have ownership of the
Loan for more than a moment and the Company, not the dealer-partner, is listed
as lien holder on the vehicle title. The customer's payment obligation is
directly to the Company. Payments are generally made by the customer directly to
the Company. For these reasons, the Company views the Loan to be an asset of the
Company, not the dealer-partner. The customer's failure to pay amounts due under
the Loan will result in collection action by the Company and may result in a
charge-off of the Loan. See "Credit Loss Policy" for a description of the
Company's charge-off policy.

The Company may offer the dealer-partner a non-recourse advance against
anticipated future collections on the Loan. Since typically the combination of
the advance and the customer's down payment provides the dealer-partner with a
cash profit at the time of sale, the dealer-partner's risk in the Loan is
limited. The dealer-partner would typically view any future cash flows from
dealer holdback payments to be additional profit. The

5

Company cannot demand repayment from the dealer-partner of the advance except in
the event the dealer-partner is in default of the servicing agreement. Advances
are made only after the Loan is approved, accepted by and assigned to the
Company and all other stipulations required for funding have been satisfied.

As advances are originated, they are automatically assigned to the
originating dealer-partner's open pool of advances. Periodically, pools are
closed and subsequent advances are assigned to a new pool. All advances due from
a dealer-partner are secured by the future collections on the dealer-partner's
portfolio of Loans. Collections on all related Loans within the pool, after
payment of the Company's servicing fee and reimbursement of certain collection
costs, are applied to reduce the aggregate advance balance owing against those
Loans. Once the advance balance has been repaid, the dealer-partner is entitled
to receive future collections from Loans within that pool, after payment of the
Company's servicing fee and reimbursement of certain collection costs. If the
collections on Loans from a dealer-partner's pool are not sufficient to repay
the advance balance, the dealer-partner will not receive the dealer holdback.
Loans accepted by the Company are secured by liens on the financed vehicles. The
Company's acceptance of Loans is generally without recourse to the general
assets of the dealer-partner.

Dealer-partners have an opportunity to receive a portion of the dealer
holdback at the time a pool of 100 or more Loans is capped. The amount paid to
the dealer-partner is calculated using a formula that considers the collection
rate and the advance balance on the capped pool.

The Company records the total payments due under the Loan as a Loan
receivable and the amount of its servicing fee as an unearned finance charge,
which is netted from the gross amount of the Loan in the balance sheet. The
servicing fee represents the portion of the Loan payments above the amount of
the advance that the Company is entitled to retain and therefore becomes the
interest element on the Loan from the Company's perspective. Amounts
contractually due to the dealer-partner, generally 80% of the gross Loan amount,
are reflected as a liability (dealer holdback) from which the advance on the
Loan is netted. The dealer holdback is a contractual obligation to the
dealer-partner from the Company and includes the dealer-partner's profit on the
sale of the vehicle as well as the dealer-partner's share of the profits from
the financing. Actual payments of dealer holdback will be contingent on
collections of the related Loans assigned to the Company.

The Company's business model allows it to share the risk and reward of
collecting on the Loans with the dealer-partners. Such sharing is intended to
motivate the dealer-partner to assign better quality Loans, follow the Company's
underwriting guidelines, and provide appropriate service and support to the
customer after the sale. The Company believes this arrangement aligns the
interests of the Company, the dealer-partner and the customer. The Company
measures various criteria for each dealer-partner against other dealer-partners
in their area as well as the top performing dealer-partners. Sales
representatives are required to present the results to the dealer-partner and to
develop an action plan on a quarterly basis with the dealer-partner to improve
the dealer-partner's overall success with the Company's program.

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

6

Information on the Company's Loan originations in the United States for
2003 and 2002 is presented in the following table:

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(1) Active dealer-partners are dealer-partners who submitted at least one Loan
during the period.

The increase in Loan originations in the United States in 2003 is due to:
(i) an increase in the number of active dealer-partners due to increased
dealer-partner enrollments and reduced levels of dealer-partner attrition, (ii)
a continued increase in the number of Loans per active dealer-partner and (iii)
an increase in the average Loan size.

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

When a Loan is approved for repossession, the account is transferred to the
repossession team. Repossession personnel continue to service the 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 customer can
negotiate a redemption with the Company, whereby the vehicle is returned to the
customer in exchange for paying off the Loan balance, or where appropriate or if
required by law, the vehicle is returned to the customer and the Loan
reinstated, in exchange for reducing or eliminating the past due balance. If the
redemption process is not successful, the vehicle is typically sold at a
wholesale automobile auction. Prior to sale, the vehicle is usually inspected by
the Company's remarketing representatives who authorize 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 Loan, the Loan is assigned either to: (i) the Company's senior
collection team, in the event that the customer is willing to make payments on
the deficiency balance; or (ii) where permitted by law, the Company's legal
team, if it is believed that legal action is required to reduce the deficiency
balance owing on the Loan. The Company's legal team assigns Loans to third party
collection attorneys who file a claim and upon obtaining a judgment, garnish
wages or other assets.

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

(i) evaluate the Company's proprietary credit scoring system;

(ii) forecast future collections;

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(iii) establish the Company's allowance for credit losses; and

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

SERVICE CONTRACTS AND INSURANCE PRODUCTS

The Company maintains relationships with certain insurance carriers which
provide dealer-partners the ability to offer customers credit life and
disability insurance. Should the customer elect to purchase this insurance, the
premium on the insurance policy is added to the amount due under the Loan and to
the advance balance. The Company is not involved in the actual sale of the
insurance; however, the insurance carrier cedes the premiums, less a fee, to a
wholly-owned subsidiary of the Company, which reinsures the coverage under the
policy. As a result, the Company, through its subsidiary, bears the risk of
loss, and earns revenues from premiums ceded and the investment of such funds.
The Company's reserve for insurance claims was $455,000 and $575,000 at December
31, 2003 and 2002, respectively.

The Company provides dealer-partners the ability to offer vehicle service
contracts to customers. Under this program, the sales price of the service
contract is added to the amount due under the Loan. The cost of the service
contract, plus a commission earned by the dealer-partner on the sale of the
service contract is added to the advance balance. A portion of the amount added
to the advance balance is retained by the Company as a fee. Generally, a third
party bears all of the risk of loss on claims. Historically, the Company also
offered a vehicle service contract program where the Company bore the risk of
loss on claims relating to the service contracts. The Company discontinued
offering this product effective November 1, 2003, as the product was not
competitive with the third-party service contract products offered by the
Company. The Company's reserve for service contract claims was $64,000 and
$155,000 at December 31, 2003 and 2002, respectively.

Revenues derived from the Company's service contract and insurance product
businesses during 2003, 2002 and 2001 are as follows:

BUSINESSES IN LIQUIDATION

UNITED KINGDOM

Effective June 30, 2003, the Company decided to stop originating automobile
Loans in the United Kingdom. This decision was based upon the conclusion that
the United Kingdom retail automobile Loan operation was unlikely to produce a
higher risk-adjusted return on capital than the Company's principal business in
the United States over the long-term. Prior to this decision, the Company
originated and serviced Loans in the United Kingdom on approximately the same
basis as in the United States. As of December 31, 2003, the amount of capital
invested in this business was $31.0 million.

8

AUTOMOBILE LEASING

In January 2002, the Company decided to exit the automobile leasing
business. This decision was based upon the conclusion that the automobile
leasing business was unlikely to produce a higher risk-adjusted return on
capital than the Company's principal business in the United States over the
long-term. Prior to this decision, the Company purchased automobile leases from
dealer-partners for an amount based on the value of the vehicle as determined by
an industry guidebook, assumed ownership of the related vehicle from the dealer-
partner and received title to the vehicle. This program differed from the
Company's principal business in that, as leases were purchased outright, the
Company assumed no liability to the dealer-partner for dealer holdback payments.
Additionally, the customer was required to remit a security deposit to the
Company. At lease termination, the Company is responsible for the ultimate
disposal of the vehicle, which is sold directly to the dealer-partner, to the
customer or at auction. Leases generally have an original term ranging from 24
to 48 months, with an average of 37 months. As of December 31, 2003, the amount
of capital invested in this business was $1.9 million.

OTHER

Canada. Effective June 30, 2003, the Company decided to stop originating
automobile Loans in Canada. This decision was based upon the conclusion that the
Canadian retail automobile Loan operation was unlikely to produce a higher
risk-adjusted return on capital than the Company's principal business in the
United States over the long-term. Prior to this decision, the Company originated
and serviced Loans in Canada on approximately the same basis as in the United
States. As of December 31, 2003, the amount of capital invested in this business
was $3.9 million.

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

(i) a lien on the financed inventory;

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

(iii) the personal guarantee of the owner.

In 2002 and 2003, the Company significantly reduced its investment in the
floorplan portfolio after concluding this business was not likely to generate an
acceptable return on capital. The Company intends to continue to reduce the
amount of capital invested in this business. As of December 31, 2003, the amount
of capital invested in this business was $2.7 million.

Secured Line of Credit Loans. The Company offered line of credit
arrangements to certain dealers who were not participating in the Company's core
program. These lines of credit are secured primarily by loans, originated and
serviced by the dealer, with additional security provided by the personal
guarantee of the dealership's owner. The effective interest rate on these loans
varies based upon the amount advanced to the dealer and the percentage of
collections on the loan portfolio required to be remitted to the Company. During
the third quarter of 2001, the Company discontinued offering this program to new
dealers, and is in the process of reducing the amount of capital invested in
this business. As of December 31, 2003, the amount of capital invested in this
business was $2.3 million.

Beginning in 2002, entities owned by the Company's majority shareholder and
Chairman began offering secured line of credit loans in a manner similar to the
Company's prior program, at his dealerships and at two other dealers, one of
whom also does business with the Company. The Company's majority shareholder and
Chairman does not intend to expand his line of credit lending activities to
additional dealers, except to dealerships which he owns or controls.

CREDIT LOSS POLICY

For information regarding the Company's accounting policy for the allowance
for credit losses, see Note 1 to the consolidated financial statements, which is
incorporated herein by reference.
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COMPETITION

The market for customers who do not qualify for conventional automobile
financing is large and highly competitive. The Company's largest competition
comes from "buy here pay here" dealerships where the dealer finances the
customer's purchase and services the loan themselves. 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
resources than the Company. These companies typically target higher credit tier
customers within the Company's market. While the Company is unaware of any other
companies offering guaranteed credit approval on a national scale, there is the
potential that significant direct competition could emerge and that the Company
will be unable to compete successfully.

CUSTOMER AND GEOGRAPHIC CONCENTRATIONS

No single dealer-partner accounted for more than 10% of total revenues
during any of the last three years. The following table provides information
regarding the five states that are responsible for the largest dollar amount of
Loan originations in the United States during 2003:

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(1) Active dealer-partners are dealer-partners who submitted at least one Loan
during the year.

While not considered to be a concentration, the Company's transactions with
related parties are significant. For information regarding the Company's
transactions with related parties, see Note 9 to the consolidated financial
statements, which is incorporated herein by reference.

GEOGRAPHIC FINANCIAL INFORMATION

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

The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's domestic and foreign operations. Accordingly, the

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revenue and identifiable assets shown may not be indicative of the amounts which
would have been reported if the domestic and foreign operations were independent
of one another.

REGULATION

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

(i) require licensing and qualification,

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

(iii) require specified disclosures to customers,

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

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

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

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

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

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

11

EMPLOYEES

As of January 31, 2004, the Company had 694 employee team members. The
Company's team members have no union affiliations and the Company believes its
relationship with its team members is good. The table below presents team
members by department:

ITEM 2. PROPERTIES

UNITED STATES, AUTOMOBILE LEASING, AND OTHER

The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993
and has a mortgage loan from a commercial bank that is secured by a first
mortgage lien on the property. The office building includes approximately
118,000 square feet of space on five floors. The Company occupies approximately
79,000 square feet of the building, with most of the remainder of the building
leased to various tenants. The Company plans to continue to lease excess space
in the building until such time as the Company's expansion needs require it to
occupy additional space.

The Company leases approximately 8,700 square feet of office space in
Henderson, Nevada. The lease expires in April 2004. The Company is currently in
the process of negotiating a new lease for 30,000 square feet of office space in
Henderson, Nevada, which will replace the Company's existing office space at
this location. This lease is expected to be executed by the end of the first
quarter of 2004.

UNITED KINGDOM

The Company leases space in an office building in Worthing, West Sussex, in
the United Kingdom. The Company occupies approximately 10,000 square feet of the
building under a lease expiring in September 2007. The Company expects to stop
using this office space in the fourth quarter of 2005 or the first quarter of
2006.

ITEM 3. LEGAL PROCEEDINGS

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

For a description of material pending litigation to which the Company is a
party, see Note 13 to the consolidated financial statements, which is
incorporated herein by reference.

12

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

No matters were submitted to a vote of the shareholders during the fourth
quarter. The Company's annual meeting typically occurs during the second quarter
of each fiscal year and the results of such matters submitted to a vote of the
shareholders at the meeting normally appears in the Quarterly Report on Form
10-Q for that quarter.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on The Nasdaq Stock Market(R) under
the symbol CACC.
The high and low sale prices for the common stock for each quarter during the
two year period ending December 31, 2003 as reported by The Nasdaq Stock
Market(R) are set forth in the following table:

As of February 5, 2004, the number of beneficial holders and shareholders
of record of the common stock was approximately 1,649 based upon securities
position listings furnished to the Company.

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

EQUITY COMPENSATION PLANS

The Company has two stock option plans pursuant to which it grants stock
options with time or performance-based vesting requirements to employees,
officers, and directors. The Company's 1992 Stock Option Plan (the "1992 Plan")
was approved by shareholders in 1992 prior to the Company's initial public
offering. The Company's Director Stock Option Plan (the "Director Plan") was
approved by shareholders in 2002. The following table sets forth, with respect
to each of the option plans, (i) the number of shares of common stock to be
issued upon the exercise of outstanding options, (ii) the weighted average
exercise price of outstanding options, and (iii) the number of shares remaining
available for future issuance, as of December 31, 2003.

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

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

13

For additional information regarding the Company's stock option plans, see
Note 11 to the consolidated financial statements, which is incorporated herein
by reference.

ITEM 6. SELECTED FINANCIAL DATA

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

Certain amounts for prior periods have been reclassified to conform to the
current presentation, including the following significant balance sheet
reclassifications: (i) the reserve for advance losses, which was previously
classified within dealer holdbacks, net, was eliminated and the balance
transferred to the allowance for credit losses, which is classified within Loans
receivable, net and (ii) repossessed assets were reclassified from Loans
receivable, net to other assets. Additionally, as a result of the Company's
adoption of the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
under the retroactive restatement method selected by the Company as described in
SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" in the second quarter of 2003, the Company restated all prior
periods to reflect the stock-based compensation expense that would have been
recognized had the recognition provisions of SFAS No. 123 been applied to all
awards granted to employees or directors after January 1, 1995.

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

(A) In 1999, the Company increased the provision for credit losses to $56.9
million as the result of higher provisions needed for losses on its net
investment with respect to Loan pools originated primarily in 1995, 1996,
and 1997. In addition, in 1999 the Company recorded a valuation adjustment
of $13.5 million on the retained interest in its July 1998 securitization
relating to these Loan pools.

(B) In 1999, the Company recorded a gain of $14.7 million from the sale of its
credit reporting services subsidiary.

(C) No dividends were paid during the periods presented.

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

EXECUTIVE SUMMARY

Since 1972, Credit Acceptance has provided auto loans to consumers,
regardless of their credit history. The Company's product is offered through a
nationwide network of automobile dealers who benefit by selling vehicles to
consumers who otherwise could not obtain financing. The Company delivers credit
approvals instantly through the Internet. The Company's revenues are generated
primarily through the servicing fees it receives for the collection and
administration of Loans assigned by dealer-partners to the Company, and to a
lesser extent, through the fees it receives through the sale of third-party
ancillary products.

The Company's strategy is to increase the amount of economic profit per
share by increasing its return on capital and profitably growing its business.
See page 29 for the Company's definition of economic profit. The Company
believes it has been successful in improving the returns on Loan originations in
recent years primarily as a result of increasing the spread between the
forecasted collection rate and the advance rate. Loan originations grew 30% in
2003 due to an increase in the number of active dealer-partners, an increase in
the number of Loans per active dealer-partner, and an increase in the average
Loan size. Since the company believes it is the only financial services company
offering "guaranteed credit approval" for automobile dealers on a national
scale, and the Company presently serves only a small portion of its target
market, the Company believes that it has a good opportunity to grow its business
profitably in the future.

Critical success factors for the Company include its access to capital and
its ability to accurately forecast Loan performance. The Company employs modest
financial leverage with a funded debt to equity ratio of 0.320 at December 31,
2003. The Company funds its business through a revolving credit facility, a
warehouse line of credit and privately placed asset-backed financings. The
Company's forecasts impact Loan pricing and

15

structure as well as the required allowance for credit losses. The Company
manages its risk by managing the spread between the forecasted collection rate
and the advance rate.

FORECASTING LOAN PERFORMANCE

The following table presents forecasted collection rates, advance rates,
the spread (the forecasted collection rate less the advance rate), and the
percentage of the forecasted collections that have been realized as of December
31, 2003. The amounts presented are expressed as a percent of the original Loan
amount by year of Loan origination.

The risk of a forecasting error declines as Loans age. For example, the
risk of a material forecasting error for business written in 1999 is very small
since 98.2% of the total amount forecasted has already been realized. In
contrast, the Company's forecast for recent Loan originations is less certain.
If the Company produces disappointing operating results, it will likely be
because the Company overestimated future Loan performance.

A wider spread between the forecasted collection rate and the advance rate
reduces the Company's risk of credit losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of losses, but it does reduce the risk significantly. The Company made
no material changes in credit policy or pricing during 2003, other than routine
changes designed to maintain current profitability levels.

16

One method for evaluating the reasonableness of the Company's forecast is
to examine the trends in forecasted collection rates over time. The following
table compares the Company's forecast as of December 31, 2003 with the forecast
as of December 31, 2002.

The Company first began publishing collection forecasts in its 2001 Annual
Report. Forecasted collection rates declined in 2002 when a difficult collection
system conversion negatively impacted collection results. The unanticipated
difficulties associated with the conversion resulted in a decreased number of
phone calls placed per delinquent account, which resulted in a reduction in
collection rates during the third and fourth quarters of 2002. During the fourth
quarter, collection system performance improved and by the end of the quarter
had returned to pre-system conversion levels as measured by call volumes and
charge-off rates. In the first quarter of 2003, the Company's collection
forecast continued to decline when post repossession collection results (known
as deficiency balance collections) deteriorated. During the remainder of 2003,
forecasted collection rates stabilized.

Accurately predicting future collection rates is critical to the Company's
success. Historically, the Company has experienced an adverse change in the
profitability of Loan originations during periods of high growth. While the
growth rates experienced in the United States in 2003 are higher than the
Company's expected long-term growth rate, the Company believes that the
investments in corporate support functions in 2002, combined with decreases in
Loan origination volumes in 2002, have adequately prepared the Company for this
growth. The Company intends to make every possible effort to assess collection
rates as accurately as possible.

17

RESULTS OF OPERATIONS

Consolidated

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

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

For the year ended December 31, 2003, consolidated net income remained
relatively consistent at $28.2 million compared to $28.4 million for the same
period in 2002. Consolidated net income for the year ended December 31, 2003
included a net loss of $4.6 million in the United Kingdom, which was primarily
the result of $11.1 million in asset impairment and other expenses recorded in
connection with the Company's decision to stop Loan originations in the United
Kingdom effective June 30, 2003. The impact of the loss in

18

the United Kingdom was partially offset by an increase in net income in the
United States to $33.0 million in 2003 from $23.8 million in 2002.

The increase in net income in the United States was due primarily to: (i)
an increase in finance charges to $91.6 million in 2003 from $78.4 million in
2002 as a result of an increase in the average size of the Loan portfolio due to
an increase in Loan originations in 2003, (ii) an increase in ancillary product
income to $18.5 million in 2003 from $13.2 million in 2002 due to an increase in
the number of third-party service contracts sold, and (iii) a decrease in
provision for credit losses to $6.9 million in 2003 from $11.7 million in 2002
due to higher 2002 losses as a result of a difficult conversion to a new
collection system. To a lesser extent, the increase in net income was also due
to two tax-related adjustments in 2002 related to the anticipated repatriation
of earnings from the United Kingdom and a change in estimate of state income tax
owed that increased the provision for income taxes and decreased net income by
$2.6 million. Partially offsetting these items that positively impacted net
income were: (i) a decrease in other income to $10.7 million in 2003 from $14.6
million in 2002 due to interest income of $4.8 million from the Internal Revenue
Service received in 2002 in connection with a change in tax accounting methods
that affected the characterization and timing of revenue recognition for tax
purposes, (ii) an increase in salaries and wages to $28.8 million in 2003 from
$23.7 million in 2002 due to increased spending on employee bonuses, servicing
salaries, corporate support salaries, and employee benefits, and (iii) an
increase of $2.9 million in foreign exchange loss as a result of the Company
recognizing the fair value of forward contracts entered into to manage foreign
currency risk associated with the cash flows anticipated from the exit of the
United Kingdom operation.

The results of operations for the Company as a whole are attributable to
changes described by segment in the discussion of the results of operations in
the United States, United Kingdom, Automobile Leasing, and Other business
segments. The following discussion of the results of operations for interest
expense is provided on a consolidated basis, as the explanation is not
meaningful by business segment.

Interest. Consolidated interest expense decreased to $8.1 million in 2003
from $9.1 million in 2002. The decrease in consolidated interest expense was
primarily the result of a decrease in average outstanding debt. The decrease was
partially offset by an increase in the weighted average interest rate to 7.5%
for the year ended December 31, 2003 from 5.7% for the same period in 2002. This
increase was primarily the result of an increased impact of borrowing fees and
costs on average interest rates due to lower average outstanding borrowings.

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

Consolidated net income remained relatively consistent at $28.4 million in
2002 and 2001. Net income for the year ended December 31, 2002 included: (i) an
increase in net income in the United States business segment to $23.8 million in
2002 from $23.1 million in 2001 and (ii) a reduction in net income in the United
Kingdom business segment to $6.3 million in 2002 from $7.2 million in 2001.

The increase in net income in the United States was due primarily to: (i)
an increase in finance charges to $78.4 million in 2002 from $66.3 million in
2001 as a result of an increase in the average size of the Loan portfolio due to
an increase in Loan originations in 2001 and (ii) an increase in other income
due to interest income of $4.8 million received from the Internal Revenue
Service in 2002 in connection with a change in tax accounting methods that
affected the characterization and timing of revenue recognition for tax
purposes. Partially offsetting these items that positively impacted net income
were: (i) an increase in the provision for credit losses to $11.7 million in
2002 from $2.7 million in 2001 due to higher losses in 2002 as a result of a
difficult conversion to a new collection system and (ii) an increase in salaries
and wages to $23.7 million in 2002 from $20.0 million in 2001 resulting
primarily from increased spending on corporate support functions such as
information systems, finance, and a new Six Sigma initiative.

The reduction in net income in the United Kingdom was due primarily to a
reduction in finance charges to $17.7 million in 2002 from $21.8 million in
2001. The decline in finance charges was due to a reduction in the average size
of the Loan portfolio as a result of a reduction in Loan originations in 2002
due to a decline in the amount advanced to dealer-partners as a percent of the
gross Loan amount and the Company discontinuing its relationship with certain
dealer-partners whose business did not meet the Company's return on capital
objectives. This reduction in net income was partially offset by a reduction in
salaries and wages to
19

$3.6 million in 2002 from $4.9 million in 2001 primarily as a result of $700,000
in executive severance expense incurred in 2001 and a reduction in staffing
levels in 2002.

The results of operations for the Company as a whole are attributable to
changes described by segment in the discussion of the results of operations in
the United States, United Kingdom, Automobile Leasing, and Other business
segments. The following discussion of the results of operations for interest
expense is provided on a consolidated basis, as the explanation is not
meaningful by business segment.

Interest. Consolidated interest expense decreased to $9.1 million in 2002
from $14.7 million in 2001. The decrease in consolidated interest expense was
primarily the result of: (i) a decrease in average outstanding debt and (ii) a
decrease in the weighted average interest rate to 5.7% in 2002 from 7.5% in
2001, which was the result of a decrease in the average interest rate on the
Company's variable rate debt, including lines of credit and secured financings,
and repayment of the senior note debt.

United States

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Finance Charges. Finance charges increased to $91.6 million in 2003 from
$78.4 million in 2002 primarily due to an increase in the: (i) average size of
the Loan portfolio due to an increase in Loan originations in 2003 and (ii)
average annualized yield on the Company's Loan portfolio to 12.6% in 2003 from
12.5% in 2002. The increase in Loan originations in the United States in 2003 is
due to: (i) an increase in the number of active dealer-partners due to an
increase in dealer-partner enrollments and reduced levels of dealer-partner
attrition, (ii) an increase in the number of Loans per active dealer-partner and
(iii) an increase in the average Loan size. The increase in the average yield
was primarily due to a decrease in the percent of non-

20

accrual Loans to 17.9% as of December 31, 2003 from 21.9% for the same period in
2002 due primarily to an increase in Loan originations in 2003.

Ancillary Product Income. Ancillary product income increased to $18.5
million in 2003 from $13.2 million in 2002 primarily due to an increase in the
number of third party service contract products sold, primarily due to the
increase in Loan originations in 2003 compared to 2002.

Premiums Earned. Premiums earned decreased to $3.0 million in 2003 from
$4.5 million in 2002 primarily due to a decrease in the penetration rate on the
Company's in-house service contract product in 2003. The decrease in the
penetration rate was a result of this product not being competitive with the
third-party service contract products offered by the Company.

Other Income. Other income decreased to $10.7 million in 2003 from $14.6
million in 2002 primarily due to interest income of $4.8 million received from
the Internal Revenue Service in the third quarter of 2002 in connection with a
change in tax accounting methods that affected the characterization and timing
of revenue recognition for tax purposes. This decrease was partially offset by
an increase of $900,000 in monthly fees paid by dealer-partners for the use of
CAPS.

Salaries and Wages. Salaries and wages increased to $28.8 million in 2003
from $23.7 million in 2002 primarily due to increases of: (i) $1.6 million in
employee bonus expense due to improved financial and operational performance,
(ii) $1.5 million in servicing salaries due to an increase in servicing
personnel as a result of an increase in the number of Loans serviced in the
United States, (iii) $800,000 for corporate support salaries, and (iv) $500,000
in employee benefits. The Company expects that servicing salaries will grow at a
rate commensurate with the growth in the number of Loans serviced.

General and Administrative. General and administrative expenses decreased
to $16.8 million in 2003 from $19.2 million in 2002 due to: (i) $1.4 million in
losses on the disposal of computer hardware in 2002, (ii) a decrease of $700,000
in legal expenses resulting from a reduction in the frequency and severity of
legal proceedings in which the Company is engaged, and (iii) a decrease of
$400,000 in Michigan single business tax expense resulting from a reduction in
the amount of income apportioned to the state of Michigan.

Provision for Credit Losses. The provision for credit losses decreased to
$6.9 million in 2003 from $11.7 million in 2002. The provision for credit losses
consists of three components: (i) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period, (ii) a
provision to reflect losses inherent in the Company's Loan portfolio, and (iii)
a provision for losses on notes receivable. The decrease in the provision for
credit losses in 2003 compared to 2002 was primarily due to a decrease in the
provision for losses inherent in the Company's Loan portfolio to $3.9 million in
2003 from $8.1 million in 2002 due to higher 2002 losses as a result of a
difficult conversion to a new collection system (see "Item 7 -- General").

Sales and Marketing. Sales and marketing expenses increased to $7.5
million in 2003 from $6.5 million in 2002 due primarily to increased sales
commissions as a result of an increase in the number of Loans originated.

Stock-based Compensation Expense. Stock-based compensation expense
increased to $3.3 million in 2003 from $1.7 million in 2002. While the number of
stock options outstanding declined in 2003, stock-based compensation expense
increased as a result of a change in assumptions that reduced the period over
which certain performance based stock options are expected to vest.

Provision for Insurance and Service Contract Claims. The provision for
insurance and service contract claims, as a percent of premiums earned,
decreased to 18.3% in 2003 from 41.2% in 2002 primarily due to a reassessment of
the amount of incurred but not reported claims reserves.

Foreign exchange loss. The foreign exchange loss increased to $2.9 million
in 2003 from zero in 2002. In 2003, the Company entered into forward contracts
to ensure that currency fluctuations would not reduce the amount of United
States dollars received from the liquidation of the United Kingdom operation.
From the date the forward contracts were entered into, the weakening of the
United States dollar versus the British pound sterling caused a reduction in the
fair value of the contracts and an approximately equal increase in the value of
British-pound-sterling-denominated net assets held. These amounts were not equal
for the full year ended December 31, 2003 because the change in shareholders'
equity reflects the change in exchange rates for
21

the year while the change in the value of the forward contracts reflects the
change in exchange rates from the date the contracts were entered into until the
end of the year. The reduction in fair value of the forward contracts is
recorded as foreign exchange loss while the increase in
British-pound-sterling-denominated net assets is recorded as an increase in
shareholders' equity. In future periods, the Company expects the amount of the
gain or loss recognized by the Company on the forward contracts to be
approximately offset by an increase or decrease in shareholders' equity.

Provision for Income Taxes. The effective tax rate decreased to 34.9% in
2003 from 41.4% in 2002. The reduction in the effective tax rate in 2003 was
primarily due to a decrease of 9.7% resulting from expense recorded in 2002 for
estimated taxes due upon repatriation of prior years' earnings in the United
Kingdom, partially offset by an increase of 3.2% resulting from a change in
estimate of state income tax owed.

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

Finance Charges. Finance charges increased to $78.4 million in 2002 from
$66.3 million in 2001 primarily due to an increase in the average size of the
Loan portfolio due to an increase in Loan originations in 2001. This increase
was partially offset by a reduction in the average annualized yield on the
Company's Loan portfolio to 12.5% in 2002 from 12.8% in 2001. The decrease in
the average yield was primarily due to an increase in the percent of non-accrual
Loans to 21.9% as of December 31, 2002 from 18.6% for the same period in 2001
due primarily to a reduction in Loan originations in 2002.

Ancillary Product Income. Ancillary product income increased to $13.2
million in 2002 from $10.2 million in 2001 primarily due an increase in the
number of third party service contracts sold due to increases in penetration
rates and the average amount earned per service contract in 2002 compared to
2001.

Premiums Earned. Premiums earned decreased to $4.5 million in 2002 from
$6.6 million in 2001 primarily due to a decrease in penetration rates on the
Company's in-house service contract product in 2002 and 2001.

Other Income. Other income increased to $14.6 million in 2002 from $10.0
million in 2001 primarily due to: (i) interest income of $4.8 million from the
Internal Revenue Service received in connection with a change in tax accounting
methods that affected the characterization and timing of revenue recognition for
tax purposes and (ii) an increase of $1.2 million in monthly fees paid by
dealer-partners for the use of CAPS. These increases were partially offset by
the one-time gain of $1.1 million in 2001 to record the exercise of a clean-up
call relating to the July 1998 securitization of advance receivables.

Salaries and Wages. Salaries and wages increased to $23.7 million in 2002
from $20.0 million in 2001 primarily due to an increase of $2.9 million
resulting primarily from increased spending on corporate support functions such
as information systems, finance, and a Six Sigma initiative.

General and Administrative. General and administrative expenses increased
to $19.2 million in 2002 from $13.5 million in 2001 due to: (i) the reversal in
2001 of Michigan single business taxes of $4.7 million, which were paid from
1993 to 2000, resulting from a re-characterization of the Company's revenue as a
result of an Internal Revenue Service examination. This reversal of Michigan
single business taxes was partially offset by an increase in state income taxes
(see "Provision for Income Taxes" below). The increase was also due to losses of
$1.4 million on the disposal of computer hardware in 2002.

Provision for Credit Losses. The provision for credit losses increased to
$11.7 million in 2002 from $2.7 million in 2001. The increase in the provision
for credit losses for the year ended December 31, 2002 compared to the year
ended December 31, 2001 was primarily due to increases of: (i) $6.1 million in
the provision for losses inherent in the Company's Loan portfolio due to higher
losses in 2002 as a result of a difficult conversion to a new collection system
(see "Part I, Item 2 -- General"); and (ii) $2.6 million in the provision for
earned but unpaid revenue due to an increase in the percent of non-accrual Loans
to 21.9% as of December 31, 2002 from 18.6% for the same period in 2001.

Sales and Marketing. Sales and marketing expenses increased to $6.5
million in 2002 from $6.2 million in 2001 as a result of expense associated with
a direct mail lead generation product provided to dealer-partners and an
increase in the average sales commission per Loan originated.

22

Provision for Insurance and Service Contract Claims. The provision for
insurance and service contract claims, as a percent of premiums earned,
increased to 41.2% in 2002 from 23.5% in 2001 as the amount of incurred but not
reported claims reserves increased relative to the number of insurance and
service contract policies outstanding.

Provision for Income Taxes. The effective tax rate remained relatively
consistent at 41.4% in 2002 compared to 41.8% in 2001. The provision for income
taxes in 2002 includes a provision of $3.6 million for estimated taxes due upon
repatriation of prior years' earnings in the United Kingdom, which were
previously considered permanently invested. Partially offsetting this was a 2.6%
decrease in the provision related to a change in the estimate of state income
tax owed versus what was originally estimated in 2001. The provision for income
taxes in 2001 includes a $4.1 million increase in the estimate of state income
tax owed partially offset by a related federal income tax benefit of $1.4
million.

United Kingdom

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

Effective June 30, 2003, the Company decided to stop originating Loans in
the United Kingdom. As a result, the average size of the Loan portfolio in the
United Kingdom declined significantly in 2003. The decline in the above income
statement captions is primarily a result of this decision, except as discussed
below.

Salaries and Wages. Salaries and wages remained relatively consistent at
$3.6 million in 2003 and 2002. The impact of a reduction in staffing levels
resulting from the decision to stop Loan originations in the United Kingdom was
partially offset by increases of: (i) $250,000 in expenses related to employee
severance costs and (ii) $200,000 in employee bonus expense.

23

United Kingdom Asset Impairment Expense. As a result of the decision to
stop originating Loans in the United Kingdom, the Company recorded an expense in
the second quarter of 2003 consisting of: (i) $9.8 million to reduce the
carrying value of the operation's net asset value of the Loan portfolio to the
present value (using a discount rate of 13%) of the forecasted cash flows
relating to the Loan portfolio less estimated future servicing expenses and (ii)
a write-off of $700,000 of fixed assets that would no longer be used in the
operation. In determining the impairment of the Loan portfolio, the Company
analyzed the expected cash flows from this operation assuming lower collection
rates than were assumed before the decision to liquidate. These lower collection
rates reflect uncertainties (such as potentially higher employee turnover or
reduced morale) in the servicing environment that may arise as a result of the
decision to liquidate. The Company does not expect to record additional
impairment expense unless the actual results are less than the forecast used by
management in the impairment analysis, resulting in a decrease in the present
value of forecasted cash flows relative to the United Kingdom's net asset value.
For further discussion on the impairment analysis performed in accordance with
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", see
Note 1 to the consolidated financial statements, which is incorporated herein by
reference.

As of June 30, 2003, the effective date of the Company's decision to stop
Loan originations in the United Kingdom, the Company estimated future cash flows
from the United Kingdom of approximately $50.9 million. Since June 30, 2003,
approximately $21.0 million in cash flows from the United Kingdom Loan portfolio
have been reinvested in the United States. The Company expects that
approximately 70% of the remaining estimated cash flows will be reinvested in
the United States within one year, 90% within two years, and the remainder
within three years. In order to manage the foreign currency risk associated with
the expected cash flows, the Company entered into a series of forward contracts
to deliver British pounds sterling, representing approximately 90% of the total
expected cash to be repatriated, to a commercial bank in exchange for United
States dollars at an agreed upon rate through June 30, 2005.

Sales and Marketing. Sales and marketing expenses increased to $900,000 in
2003 from $800,000 in 2002 primarily due to employee severance costs of $250,000
associated with the Company's decision to stop Loan originations in the United
Kingdom. This increase was partially offset by the elimination of sales and
marketing activities after the decision to stop Loan originations.

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

Finance Charges. Finance charges decreased to $17.7 million in 2002 from
$21.8 million in 2001 primarily as the result of decreases in: (i) the average
size of the Loan portfolio due to a decrease in Loan originations in 2002 and
(ii) the average annualized yield on the Company's Loan portfolio to 12.7% in
2002 from 13.6% in 2001. The decrease in the average yield was primarily due to
an increase in the percent of non-accrual Loans to 31.3% as of December 31, 2002
from 22.4% for the same period in 2001 due to a reduction in Loan originations
in 2002. Loan originations decreased in 2002 to $43.3 million from $122.8
million in 2001 as the result of the Company decreasing the amount advanced to
dealer-partners and discontinuing its relationship with certain dealer-partners
whose business did not meet the Company's return on capital objectives.

Ancillary Product Income. Ancillary product income increased to $3.3
million in 2002 from $2.7 million in 2001 primarily due to a change in revenue
recognition policy, which increased revenue by $1.5 million. This change was the
result of a complete review of the Company's revenue recognition policies, which
determined that, while conservative, the policies relative to ancillary product
revenue recognition in the United Kingdom were inconsistent with those employed
in the United States. Therefore, the Company adopted the accounting treatment
that was appropriate and consistent with the policies employed in the United
States. This increase in income resulting from the change in revenue recognition
was partially offset by a $300,000 decrease in revenue under a profit sharing
agreement with an insurance provider.

Salaries and Wages. Salaries and wages decreased to $3.6 million in 2002
from $4.9 million in 2001 primarily due to executive severance agreement
expenses of $700,000 incurred in 2001 and a reduction in staffing levels in
2002.

General and Administrative. General and administrative expenses decreased
to $2.5 million in 2002 from $2.8 million in 2001 as a result of accounting and
legal expenses incurred in 2001 related to the restructuring of legal entities
within this business segment.
24

Provision for Credit Losses. Provision for credit losses increased to $4.5
million in 2002 from $3.4 million in 2001. The provision for credit losses
consists of two components: (i) a provision for earned but unpaid revenue on
Loans that were transferred to non-accrual status during the period; and (ii) a
provision to reflect losses inherent in the Company's Loan portfolio. The
increase was primarily due to an increase of $1.4 million in the provision for
losses inherent in the Company's Loan portfolio due to a decline in credit
quality of Loans originated in 2001, partially offset by a decrease of $300,000
in the provision for earned but unpaid revenue. As a result of the decline in
credit quality of Loans originated in 2001, the Company stopped originating
Loans in Ireland and decreased the amount advanced to dealer-partners in the
United Kingdom.

Stock-based Compensation Expense. Stock-based compensation expense
increased to $400,000 in 2002 from $100,000 in 2001 due to an increase in the
number of stock options outstanding as a result of stock options granted during
the second half of 2001 and in 2002.

Provision for Income Taxes. The effective tax rate decreased to 27.2% in
2002 from 29.5% in 2001. The reduction in the effective rate in 2002 was
attributable to a restructuring of the legal entities within this business
segment.

Automobile Leasing

In January 2002, the Company decided to stop originating automobile leases.
As a result, the average size of the lease portfolio declined significantly in
2003 and 2002. The decline in the above income statement captions is primarily a
result of this decision, except as discussed below.

Other Income. Other income, as a percent of revenue, increased to 21.8% in
2003 from 7.4% in 2002 due to an increase in net gains recognized on lease
terminations.

25

Other

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

The Other segment consists of the Company's Canadian automobile Loan
operations, floorplan, and secured line of credit financing businesses.
Effective June 30, 2003, the Company decided to stop originating Loans in
Canada. As a result, the average size of the Loan portfolio in Canada declined
significantly in 2003. The Company has also decided to significantly reduce its
floorplan and secured line of credit portfolios since 2001. The decline in the
above income statement captions is primarily a result of these decisions, except
as discussed below.

Provision for Income Taxes. The effective tax rate increased to 61.0% in
2003 from 46.5% in 2002 due to losses reported in the secured line of credit
business in 2003. This business is based in the United States, and has a lower
effective tax rate than the Canadian automobile Loan business. As a result, the
tax benefit from the loss incurred in this business does not fully offset taxes
relating to profits earned in the Canadian operation, thereby increasing the
effective tax rate.

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

Finance charges. Finance charges decreased to $1.7 in 2002 from $2.1 in
2001 primarily due to an decrease in the average size of the Canadian Loan
portfolio due to a decrease in Loan originations in Canada in 2002.

Other Income. Other income decreased to $3.4 million in 2002 from $4.4
million in 2001 primarily due to a decrease of $1.0 million in revenue from
secured lines of credit and floorplan financing offered to certain
dealer-partners due to a reduction in the amount of capital invested in these
businesses.

Salaries and Wages. Salaries and wages, as a percent of revenue, decreased
to 5.2% in 2002 from 7.1% in 2001 primarily due to a reduction in salaries and
wages relating to the Company's floorplan and line of credit loan businesses, as
well as a reduction in the amount of resources necessary to support the Canadian
operations.

26

General and Administrative. General and administrative expenses decreased
to $800,000 in 2002 from $1.4 million in 2001 due to a general reduction in the
amount of resources necessary to support the Canadian operations.

Provision for Credit Losses. The provision for credit losses increased to
$2.6 million in 2002 from $1.8 million in 2001. The provision for credit losses
consists of four components: (i) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period, (ii) a
provision to reflect losses inherent in the Company's Loan portfolio, (iii) a
provision for losses on secured line of credit loans, and (iv) a provision for
floorplan loan losses. The increase in the provision for credit losses in 2002
was primarily due to an increase of $800,000 in the provision for floorplan and
secured line of credit loan losses in 2002.

Provision for Income Taxes. The effective tax rate increased to 46.5% in
2002 from 36.5% in 2001. The increase in the effective rate was due to losses
reported in the floorplan business in 2002. This business is based in the United
States, and has a lower effective tax rate than the Canadian automobile Loan
business. As a result, the tax benefit from losses incurred in these businesses
does not fully offset taxes relating to profits earned in the Canadian
operation, thereby increasing the effective tax rate for the business segment.

AVERAGE CAPITAL ANALYSIS

The following presentation of financial results and subsequent analysis is
based on analyzing the income statement as a percent of capital invested. This
information provides an additional perspective on the financial performance of
the Company in addition to the presentation of the Company's results as a
percent of revenue. The Company believes this information provides a useful
measurement of how effectively the Company is utilizing its capital.

Consolidated

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

(1) Average capital is equal to the average amount of debt and equity during the
period, each calculated in accordance with generally accepted accounting
principles in the United States of America ("GAAP"). The calculation of
average capital follows:

RETURN ON CAPITAL ANALYSIS

The return on capital is equal to net operating profit after-tax (net
income plus interest expense after-tax) divided by average capital as follows:

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

The Company's return on capital increased to 7.5% for the year ended
December 31, 2003 from 7.3% for the same period in 2002. The increase in return
on capital was primarily due to an increase in return on capital in the United
States and an increase in average total capital invested in the United States to
$379.2 million in 2003 from $350.3 million in 2002, partially offset by a
reduction in the return on capital in the United Kingdom.

The increase in the return on capital in the United States was due to: (i)
an increase in finance charges as a percent of average capital due to a
reduction in the average advance as a percent of the gross Loan amount,

28

(ii) a decrease in the provision for credit losses as a percent of average
capital due to higher 2002 losses as a result of a difficult conversion to a new
collection system, (iii) an increase in ancillary product income as a percent of
average capital due to Loan originations increasing at a faster rate than
average capital, and (iv) a decrease in the provision for income taxes as a
percent of average capital due to two tax-related adjustments in 2002. Partially
offsetting these items that positively impacted return of capital were: (i) a
decrease in other income as a percent of average capital due to interest income
received from the Internal Revenue Service in 2002 in connection with a change
in tax accounting methods that affected the characterization and timing of
revenue recognition for tax purposes, (ii) an increase in salaries and wages as
a percent of average capital due to increased spending on employee bonuses,
servicing salaries, corporate support functions, and employee benefits, and
(iii) an increase in foreign exchange loss as a percent of average capital due
to the Company recognizing the fair value of forward contracts entered into to
manage foreign currency risk associated with the cash flows anticipated from the
exit of the United Kingdom business.

The decrease in the return on capital in the United Kingdom was primarily a
result of the $7,238,000 after-tax adjustment for asset impairment and accrued
expenses related to the Company's decision to stop originating Loans in the
United Kingdom effective June 30, 2003. This adjustment decreased the Company's
reported return on capital by 1.6% for the year ended December 31, 2003.

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

The Company's return on capital decreased to 7.3% for the year ended
December 31, 2002 from 8.2% for the same period in 2001. The decrease in return
on capital was primarily due to a reduction in the return on capital in the
United States, partially offset by an increase in the percent of total capital
invested in the United States to 74.6% in 2002 from 69.2% in 2001. The decrease
in the return on capital in the United States was primarily a result of an
increase in the provision for credit losses. This increase was due to higher
2002 losses as a result of a difficult conversion to a new collection system.

ECONOMIC PROFIT

The Company defines economic profit as net operating profit after-tax less
an imputed cost of equity. Economic profit measures how efficiently the Company
utilizes its total capital, both debt and equity. To consider the cost of both
debt and equity, the Company's calculation of economic profit deducts from net
income as determined under GAAP a cost of equity equal to 10% of average equity,
which approximates the S&P 500's rate of return since 1965. Management uses
economic profit to assess the Company's performance as well as to make capital
allocation decisions. Management believes this information is important to
shareholders because it allows shareholders to compare the returns earned by the
Company investing capital in its core business with the return they could expect
if the Company returned capital to shareholders and they invested in other
securities. The Company generated an economic loss of ($5,757,000), or ($0.13)
per diluted share, for the year ended December 31, 2003 compared to an economic
loss of ($2,425,000), or ($0.06) per diluted share for the same period in 2002
and an economic profit of $1,144,000, or $0.03 per diluted share, for the same
period in 2001.

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

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

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

29

(2) Cost of equity is equal to 10% (on an annual basis) of total average
shareholders' equity, which was $339,378,000, $307,895,000 and $272,707,000
for years ended December 31, 2003, 2002, and 2001, respectively, calculated
as described in the Average Capital Analysis.

(3) Economic profit (loss) per share equals the economic profit (loss) divided
by the weighted average number of shares outstanding.

CRITICAL ACCOUNTING POLICIES AND LOSS EXPERIENCE

The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, the Company evaluates its estimates,
including those related to the allowance for credit losses, finance charge
revenue, stock-based compensation expense, impairment of various assets,
contingencies, and taxes. The Company believes the following critical accounting
policies involve a high degree of judgment and complexity, and the use of
different estimates or assumptions could produce different financial results.

Allowance for Credit Losses

Balance Sheet Caption: Allowance for credit losses

Income Statement Caption: Provision for credit losses

Nature of Estimates
Required: Estimating losses inherent in the Company's
Loan portfolio.

Assumptions and Approaches
Used: The Company maintains an allowance for credit
losses at a level it considers to be adequate
to absorb probable losses inherent in the
Company's Loan portfolio. The Company compares
the present value of estimated future
collections for each dealer-partner's Loan
portfolio to the Company's net investment in
that portfolio to record losses. The estimate
of future collections uses various assumptions
based on a dealer-partner's actual loss data on
a static pool basis and the Company's
historical loss and collection experience.
Forecasted collections are discounted to
present value using a rate equal to the rate of
return expected at the origination of the Loan.
The allowance also includes estimates of the
amount of earned but unpaid finance charge
revenue on non-accrual Loans. The Company
estimates the amount of finance charge revenue
earned not paid at the time the Loan moves to
non-accrual status based on the Loan's month of
origination. For additional information, see
Note 1 to the consolidated financial
statements, which is incorporated herein by
reference.

Key Factors: Variances in the amount and timing of future
collections from current estimates and the
amount of earned but unpaid revenue on
non-accrual Loans would impact earnings in
future periods.

Finance Charge Revenue

Balance Sheet Caption: Loans receivable, net

Income Statement Caption: Finance charges

Nature of Estimates
Required: Estimating revenue recognition using the
interest rate method of accounting.

Assumptions and Approaches
Used: The Company calculates finance charge income
based on a pooling methodology that converts
cash basis collections to accrual basis earned
finance charge income. The Company does not
apply the

30

interest rate method of accounting at the
individual installment contract level.

Key Factors: Applying the interest rate method of accounting
at the individual contract level may impact
earnings in future periods.

Stock-Based Compensation
Expense

Balance Sheet Caption: Paid-in capital

Income Statement Caption: Stock-based compensation expense

Nature of Estimates
Required: Compensation expense for stock options is based
on this fair value of the options on the date
of grant, which is estimated by the Company,
and is recognized over the vesting period of
the options.

Assumptions and Approaches
Used: The Company uses the Black-Scholes option
pricing model to estimate the fair value of
stock option grants. This model calculates the
fair value using various assumptions, including
the expected life of the option, the expected
volatility of the underlying stock, and the
expected dividend yield on the underlying
stock. In recognizing stock-based compensation
expense, the Company makes assumptions
regarding the expected forfeiture rate of stock
options and the expected vesting date of
performance-based options. For additional
information, see Notes 1 and 11 to the
consolidated financial statements, which are
incorporated herein by reference.

Key Factors: Factors impacting future stock-based
compensation expense would be a change in
forfeiture rate and a change in the expected
vesting date of performance-based stock options
versus assumptions currently employed.

Impairment of Assets

Balance Sheet Caption: Various assets

Income Statement Caption: Impairment expense

Nature of Estimates
Required: Estimating impairment for businesses in
liquidation on a quarterly basis.

Assumptions and Approaches
Used: The Company estimates impairment for each
business in liquidation by comparing its future
forecasted net cash flows to its net asset
value. In estimating the future net cash flows
of the business, the Company makes assumptions
regarding the amount and timing of cash flows.
For additional information, see Note 1 to the
consolidated financial statements, which is
incorporated herein by reference.

Key Factors: Negative variances in future forecasted net
cash flows from current estimates may result in
the recognition of impairment expenses in
future periods.

Litigation and Contingent
Liabilities

Balance Sheet Caption: Accrued liabilities

Income Statement Caption: General and administrative expense

Nature of Estimates
Required: Estimating the likelihood of adverse legal
judgments and any resulting damages owed.

Assumptions and Approaches
Used: The Company, with assistance from its legal
counsel, determines if the likelihood of an
adverse judgment for various claims and
31

litigation is remote, reasonably possible, or
probable. To the extent the Company believes an
adverse judgment is probable and the amount of
the judgment is estimable, the Company
recognizes a liability. For information
regarding the potential various customer claims
against the Company, see Note 13 to the
consolidated financial statements, which is
incorporated herein by reference.

Key Factors: Negative variances in the ultimate disposition
of claims and litigation outstanding from
current estimates could result in additional
expense in future periods.

Taxes

Balance Sheet Caption: Deferred income taxes, net

Income Statement Caption: Provision for income taxes

Nature of Estimates
Required: Estimating the recoverability of deferred tax
assets.

Assumptions and Approaches
Used: The Company, based on historical and projected
future financial results by tax jurisdiction,
determines if it is more likely than not a
deferred tax asset will be realized. To the
extent the Company believes the recovery of all
or a portion of a deferred tax asset is not
likely, a valuation allowance is established.
For additional information, see Note 10 to the
consolidated financial statements, which is
incorporated herein by reference.

Key Factors: Changes in tax laws and variances in projected
future results from current estimates that
impact judgments made on valuation allowances
could impact the Company's provision for income
taxes in future periods.

Loss Experience

The following sets forth the components of the provision for credit losses,
charge-offs related to the Company's Loan portfolio, and the allowance for
credit losses as a percentage of gross Loans receivable:

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

* Amounts include charge-offs for both Loans and advances in all years
presented.

The allowance for credit losses as a percentage of gross Loans receivable
was 1.7%, 2.3%, and 1.5% at December 31, 2003, 2002, and 2001, respectively.
32

Effective July 1, 2003, the Company prospectively eliminated its charge-off
policy related to dealer advances and modified its Loans receivable charge-off
policy to require charge-off of Loans receivable after 270 days of no payment
against dealer holdbacks, net and, if such holdback is insufficient, against the
allowance for credit losses. For the first six months of 2003, advances were
charged-off when the Company's analysis forecasted no future collections on
Loans relating to the dealer-partner advance pool. Prior to January 1, 2003,
advances were charged-off or partially charged-off when the Company's analysis
determined that the expected discounted cash flows associated with the related
Loans were insufficient to recover the outstanding advance balance in the pool.
As a result, the charge-offs for the year ended December 31, 2003 are presented
on a different basis than the other years presented and, as a result, are not
comparable.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of capital are cash flows from operating
activities, collections on Loans receivable and borrowings under the Company's
lines of credit and secured financings. The Company's principal need for capital
is to fund cash advances made to dealer-partners in connection with the
acceptance of Loans and for the payment of dealer holdbacks to dealer-partners
who have repaid their advance balances.

The Company's cash flow requirements are dependent on levels of Loan
originations. In 2003, the Company experienced an increase in Loan originations
over 2002 primarily due to: (i) an increase in the number of active
dealer-partners due to increased dealer-partner enrollments and reduced levels
of dealer-partner attrition, (ii) a continued increase in the number of Loans
per active dealer-partner, and (iii) an increase in the average Loan size.

The Company currently finances its operations through: (i) a bank line of
credit facility; (ii) term secured financings; (iii) revolving secured
financings; (iv) a mortgage loan; and (v) capital lease obligations. For
information regarding these financings and the covenants included in the related
documents, see Note 7 to the consolidated financial statements, which is
incorporated herein by reference. The Company is currently in compliance with
these covenants.

The Company's total balance sheet indebtedness decreased to $106.5 million
at December 31, 2003 from $109.8 million at December 31, 2002. In addition to
the balance sheet indebtedness as of December 31, 2003, the Company also has
contractual obligations resulting in future minimum payments under operating
leases.

A summary of the total future contractual obligations requiring repayments
is as follows (in thousands):

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

(1) Purchase obligations consist of a commitment the Company entered into in
December 2003 for a 49 month capital lease obligation for computer equipment
commencing in March 2004.

(2) The Company has dealer holdback liabilities on its balance sheet; however,
as payments of dealer holdbacks are contingent upon the receipt of customer
payments on Loans receivable and the repayment of dealer advances, these
obligations are excluded from the above table.

(3) The Company has entered into a series of forward contracts to deliver
British pound sterling in exchange for United States dollars. As the forward
contracts are derivatives that are recorded on the balance sheet at their
fair value and as this fair value does not represent the amounts that will
ultimately be received or paid under these contracts, these obligations are
excluded from the above table.

Liquidation of Non-Core Businesses -- As a result of the decision in the
second quarter to stop Loan originations in the United Kingdom and Canada and
the decision to stop lease originations in January 2002,

33

the Company expects to receive approximately $37.9 million from the liquidation
of its United Kingdom, Canadian, and Automobile Leasing businesses. The expected
liquidation proceeds have been determined based on the Company's forecast of
cash inflows and outflows during the estimated remaining years of operation for
each business. Detail of expected future net liquidation proceeds follows:

The Company intends to utilize proceeds from businesses being liquidated
to: (i) fund dealer-partner advances on loans originated in the United States
and (ii) fund share repurchases. During 2003, the Company received $37.0 million
in liquidation proceeds.

Repurchase and Retirement of Common Stock -- For information regarding the
Company's stock repurchase program, see Note 11 to the consolidated financial
statements, which is incorporated herein by reference.

Based upon anticipated cash flows, management believes that cash flows from
operations and its various financing alternatives will provide sufficient
financing for debt maturities and for future operations. The Company's ability
to borrow funds may be impacted by many economic and financial market
conditions. If the various financing alternatives were to become limited or
unavailable to the Company, the Company's operations could be materially and
adversely affected.

MARKET RISK

The following discussion contains forward-looking statements. Actual
results may differ materially from results implied by these statements due to
changes in the Company's product and debt mix and developments in the financial
markets. The impact of such factors on the Company's business, results of
operations, and the financial markets in general, cannot be predicted.

The Company is exposed primarily to market risks associated with movements
in interest rates and foreign currency exchange rates. The Company's policies
and procedures prohibit the use of financial instruments for trading purposes.

A discussion of the Company's accounting policies for derivative
instruments is included in the Summary of Significant Accounting Policies in the
notes to the consolidated financial statements.

Interest Rate Risk. The Company relies on various sources of financing to
assist in funding its operations, some of which is at floating rates of interest
and exposes the Company to risks associated with increases in interest rates.
While the Company had no floating rate debt outstanding on its bank credit
facilities or under its secured financings at December 31, 2003, the Company
renews its debt at interest rates prevailing in the market at such time. The
Company manages its risk associated with increases in interest rates by entering
into interest rate cap agreements on certain portions of its floating rate debt.

Foreign Currency Risk. The Company is exposed to changes in foreign
exchange rates that could have a negative impact on earnings or asset and
liability values from operations in foreign countries. The Company's most
significant foreign currency exposure relates to the United Kingdom.

In the third quarter of 2003, the Company entered into a series of forward
contracts with a commercial bank to manage foreign currency exchange risk
associated with the cash flows anticipated from the exit of the United Kingdom
operation. As of December 31, 2003, the Company had contracts outstanding to
deliver 16.9 million British pounds sterling to the commercial bank which will
be exchanged into United States dollars at a weighted average exchange rate of
1.59 United States dollars per British pound sterling on a monthly basis through
June 30, 2005. The Company believes that this transaction will minimize the
currency exchange risk associated with an adverse change in the relationship
between the United States dollar and the British pound sterling as it
repatriates cash from the United Kingdom operation. As the Company has not

34

designated these contracts as hedges as defined under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138
and SFAS No. 149, changes in the fair value of these forward contracts will
increase or decrease net income. As of December 31, 2003, the fair value of the
forward contracts was $2,817,000 less than the notional amount of the contracts
due to the weakening of the United States dollar versus the British pound
sterling since the date the contracts were entered into. As a result, during
2003, the Company recognized a foreign currency loss of $2,817,000 related to
the change in the fair value of the forward contracts.

At December 31, 2003, an immediate 10% weakening of the United States
dollar would have increased shareholders' equity by approximately $400 thousand
and decreased net income by approximately $1.9 million.

NEW ACCOUNTING PRONOUNCEMENTS

For information regarding new accounting pronouncements and the related
impact of adoption to the Company, see Note 1 to the consolidated financial
statements, which is incorporated herein by reference.

FORWARD-LOOKING STATEMENTS

The Company makes forward-looking statements in this report and may make
such statements in future filings with the Securities and Exchange Commission.
It may also make forward-looking statements in its press releases or other
public or shareholder communications. The Company's forward-looking statements
are subject to risks and uncertainties and include information about its
expectations and possible or assumed future results of operations. When the
Company uses any of the words "believes," "expects," "anticipates," "estimates"
or similar expressions, it is making forward-looking statements.

The Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
all of its forward-looking statements. These forward-looking statements
represent the Company's outlook only as of the date of this report. While the
Company believes that its forward-looking statements are reasonable, actual
results could differ materially since the statements are based on our current
expectations, which are subject to risks and uncertainties. Factors that might
cause such a difference include, but are not limited to, the following:

- the Company's potential inability to accurately forecast and estimate
future collections and historical collection rates,

- increased competition from traditional financing sources and from
non-traditional lenders,

- the unavailability of funding at competitive rates of interest,

- the Company's potential inability to continue to obtain third party
financing on favorable terms,

- the Company's potential inability to generate sufficient cash flow to
service its debt and fund its future operations,

- adverse changes in applicable laws and regulations,

- adverse changes in economic conditions,

- adverse changes in the automobile or finance industries or in the
non-prime consumer finance market,

- the Company's potential inability to maintain or increase the volume of
Loans,

- the Company's potential inability to accurately estimate the residual
values of the lease vehicles,

- an increase in the amount or severity of litigation against the Company,

35

- the loss of key management personnel, and

- the effect of terrorist attacks and potential attacks.

Other factors not currently anticipated by management may also materially
and adversely affect the Company's results of operations. The Company does not
undertake, and expressly disclaims any obligation, to update or alter its
forward-looking statements whether as a result of new information, future events
or otherwise, except as required by applicable law.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by Item 7A is incorporated by reference from the
information in Item 7 under the caption "Market Risk" in this Form 10-K.

36

INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Credit Acceptance Corporation

We have audited the accompanying consolidated balance sheets of Credit
Acceptance Corporation and subsidiaries (the "Company") as of December 31, 2003
and 2002, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 1, during 2003 the Company changed its method of
accounting for stock-based compensation by adopting the fair value method
prescribed by Statement of Financial Accounting Standard (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, with
retroactive restatement of all prior periods.

DELOITTE & TOUCHE LLP
Detroit, Michigan
February 26, 2004

37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.
38

CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.
39

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes to consolidated financial statements.
40

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.
41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Principal Business. Since 1972, Credit Acceptance (the "Company" or
"Credit Acceptance") has provided auto loans to consumers, regardless of their
credit history. The Company's product is offered through a nationwide network of
automobile dealers who benefit by selling vehicles to consumers who otherwise
could not obtain financing, by repeat and referral sales generated by these same
customers, and from sales to customers responding to advertisements for the
Company's product, but who actually end up qualifying for traditional financing.

Without the Company's product, consumers are often unable to purchase a
vehicle or they purchase an unreliable one and are not provided the opportunity
to improve their credit standing. As the Company reports to the three national
credit reporting agencies, a significant number of its customers improve their
lives by improving their credit score and move on to more traditional sources of
financing.

The Company refers to participating dealers who share its commitment to
changing customers' lives as "dealer-partners". Upon enrollment in the Company's
financing program, the dealer-partner enters into a servicing agreement with
Credit Acceptance that defines the legal relationship between Credit Acceptance
and the dealer-partner. The servicing agreement assigns the responsibilities for
administering, servicing, and collecting the amounts due on retail installment
contracts (referred to as "Loans") from the dealer-partners to the Company.

Upon acceptance of an assigned Loan, the Company records the total payments
due under the Loan as a Loan receivable and the amount of its servicing fee as
an unearned finance charge which, for balance sheet purposes, is netted from the
gross amount of the Loan and represents the interest element on the Loan from
the Company's perspective. The Company records the remaining portion of the Loan
(the gross amount of the Loan less the unearned finance charge) as a dealer
holdback. At the time of acceptance, Loans that meet certain criteria are
eligible for a cash advance, which is computed on a formula basis.

As advances are originated, they are automatically assigned to the
originating dealer-partner's open pool of advances. Periodically, pools are
closed and subsequent advances are assigned to a new pool. All advances due from
a dealer-partner are secured by the future collections on the dealer-partner's
portfolio of Loans. Collections on all related Loans within the pool, after
payment of the Company's servicing fee and reimbursement of certain collection
costs, are applied to reduce the aggregate advance balance owing against those
Loans. Once the advance balance has been repaid, the dealer-partner is entitled
to receive future collections from Loans within that pool, after payment of the
Company's servicing fee and reimbursement of certain collection costs. If the
collections on Loans from a dealer-partner's pool are not sufficient to repay
the advance balance, the dealer-partner will not receive the dealer holdback.
Loans accepted by the Company are secured by liens on the financed vehicles. The
Company's acceptance of Loans is generally without recourse to the general
assets of the dealer-partner. Dealer-partner advances are netted against dealer
holdbacks in the accompanying consolidated financial statements.

Businesses in Liquidation. Pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", an impairment analysis is performed on the net asset value
of the United Kingdom, Canadian, and Automobile Leasing operations on a
quarterly basis. This analysis compares the undiscounted forecasted future net
cash flows (including future servicing expenses and any payments due to
dealer-partners under servicing agreements) of each operation to the operation's
net asset value at the balance sheet date. If this analysis indicates impairment
(i.e. the net asset value exceeds the undiscounted forecasted future net cash
flows), the Company is required to write down the value of the asset to the
present value of the forecasted net cash flows. While the impairment analysis
for operations that are being liquidated reduces the future cash flows by the
amount of servicing expenses (under SFAS No. 144), the impairment analysis for
Loan portfolios relating to continuing operations does not (under SFAS No. 114).

Effective June 30, 2003, the Company decided to stop originating Loans in
the United Kingdom. In analyzing the expected cash flows from this operation,
the Company assumed lower collection rates than

42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assumed before the decision to liquidate. These lower collection rates reflect
uncertainties (such as potentially higher employee turnover or reduced morale)
in the servicing environment that may arise as a result of the decision to
liquidate. As a result of this analysis, in the second quarter of 2003, the net
asset value of the operation's Loan portfolio was deemed to be impaired and the
Company recorded an after-tax expense of $6.4 million to reduce the carrying
value of its Loan portfolio to the present value (using a discount rate of 13%)
of the forecasted cash flows relating to the Loan portfolio less estimated
future servicing expenses. Based upon management's analysis as of December 31,
2003, no additional reduction of the carrying value of the United Kingdom Loan
portfolio is required.

Effective June 30, 2003, the Company decided to stop originating Loans in
Canada. Since Loans originated in Canada are serviced in the United States, the
Company evaluated cash flows related to the Canadian operation based on the same
collection rate assumptions as were used before the decision to liquidate. Based
upon management's analysis as of December 31, 2003, no reduction of the carrying
value of the Canadian Loan portfolio is required.

In January 2002, the Company decided to stop originating automobile leases.
Based upon management's analysis as of December 31, 2003, no reduction of the
carrying value of the Automobile Leasing's net assets is required.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in Restructuring)." SFAS No. 146 requires a
liability for a cost associated with an exit or disposal activity to be
recognized and measured initially at its fair value in the period in which the
liability is incurred, rather than at the time of commitment to an exit plan.
The Company adopted this standard for exit or disposal activities initiated
after December 31, 2002. As a result of the Company's decision to exit the
United Kingdom business in the second quarter of 2003, the Company recognized:
(i) $300,000 after-tax increase in salaries and wages resulting from employee
severance expenses and (ii) $100,000 after-tax reduction in other income due to
a refund of profit sharing income on ancillary products to an ancillary product
provider which was based on volume targets no longer attainable due to the
decision to stop Loan originations. As of December 31, 2003, the remaining
liability for these expenses was $156,000, which the Company expects to pay by
December 2005. The Company may record an additional liability of up to $400,000
for payment of future lease obligations under a rental agreement through
September 2007 once the Company stops using the office space in the United
Kingdom. The Company expects to stop using the United Kingdom office space in
the fourth quarter of 2005 or first quarter of 2006.

Ancillary Products and Services. Buyers Vehicle Protection Plan, Inc.
("BVPP") and CAC Reinsurance, Ltd. ("Credit Acceptance Reinsurance"), both
wholly-owned subsidiaries of the Company, provide additional services to
participating dealer-partners.

BVPP has a relationship with third party service contract providers that
pay BVPP a fee on service contracts included on Loans financed through
participating dealer-partners. BVPP does not bear any risk of loss for claims
covered on these third party service contracts. The income from the
non-refundable fee is recognized upon sale of the service contract. The Company
advances to dealer-partners an amount equal to the purchase price of the vehicle
service contract on Loans accepted by the Company that include vehicle service
contracts. In addition, BVPP had its own short-term limited extended service
contract product offered by participating dealer-partners. In connection
therewith, BVPP bears the risk of loss for any repairs covered under the service
contract. The Company recognizes income and related expense for this service
contract program on an accelerated basis over the life of the service contract.
The Company stopped offering this product effective November 1, 2003.

Credit Acceptance Reinsurance is engaged primarily in the business of
reinsuring credit life and disability insurance policies issued to borrowers
under Loans originated by participating dealer-partners. The Company advances to
dealer-partners an amount equal to the credit life and disability insurance
premium on Loans accepted by the Company which include credit life and
disability insurance written by the Company's designated insurance carriers. The
policies insure the holder of the Loan for the outstanding balance payable
43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in the event of death or disability of the customer. Premiums are ceded to
Credit Acceptance Reinsurance on both an earned and written basis and are earned
over the life of the Loans using pro rata and sum-of-digits methods. Credit
Acceptance Reinsurance bears the risk of loss attendant to claims under the
coverage ceded to it.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.

REPORTABLE BUSINESS SEGMENTS

The Company is organized into four primary business segments: United
States, United Kingdom, Automobile Leasing, and Other. See Note 12 - Business
Segment Information for information regarding the Company's reportable segments.

USE OF ESTIMATES

The accounting and reporting policies of the Company require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The accounts which are subject to significant
estimation include the allowance for credit losses, finance charge revenue,
stock-based compensation expense, impairment of various assets, contingencies,
and taxes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of readily marketable securities with original
maturities at the date of acquisition of three months or less. Cash and cash
equivalents totaling $16.0 million and $9.7 million at December 31, 2003 and
2002, respectively, are restricted pursuant to: (i) the secured financings and
(ii) reinsurance agreements.

LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

The Company maintains an allowance for credit losses to cover losses
inherent in the Company's Loan portfolio. Such losses consist of Loans
receivable determined to be uncollectible or with expected future collections
less than the full contractual amount, less any losses absorbed by dealer
holdbacks. By definition, these losses equal the amount by which the advances to
dealer-partners plus accrued income (the "net investment") exceed the net
present value of the related Loans receivable.

To record losses, as required under SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan -- an amendment of FASB Statements No. 5 and 15", as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures", the Company utilizes a present
value methodology and compares the present value of estimated future collections
for each dealer-partner's Loan portfolio to the Company's net investment in that
portfolio. The Company maintains historical loss experience for each
dealer-partner on a static pool basis and uses this information to forecast the
timing and amount of the future collections on each dealer-partner's Loan
portfolio. In estimating future collections for each dealer-partner, the Company
considers: (i) a dealer-partner's actual loss data on a static pool basis and
(ii) the Company's historical loss and collection experience. The Company's
collection forecast for each dealer-partner is updated monthly, and considers
the most recent static pool data available for each dealer-partner and the
Company's entire portfolio of Loans. Forecasted collections are discounted to
present value using a rate equal to the rate of return expected at the
origination of the Loan. To the extent that the present value of future
collections is less than the Company's net investment in the portfolio, the
Company records an allowance equal to the difference between the net investment
and the present value of the estimated future collections. Proceeds from one
dealer-partner's portfolio cannot be used to offset losses relating to another
dealer-partner.
44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective July 1, 2003, the Company retroactively eliminated the reserve
for advance losses balance, which was previously classified within dealer
holdbacks, net and transferred the balance into the allowance for credit losses
which is classified within Loans receivable, net. In addition, the Company
prospectively eliminated its charge-off policy related to dealer advances and
modified its Loans receivable charge-off policy to require charge-off of Loans
receivable after 270 days of no payment against dealer holdbacks, net and, if
such holdback is insufficient, against the allowance for credit losses. In
effect, the Company combined its advance and Loans receivable charge-off
policies into a single policy whereby the Loan and related advance are
charged-off at the same time. For the first six months of 2003, advances were
charged-off when the Company's analysis forecasted no future collections on
Loans relating to the dealer-partner advance pool. Prior to January 1, 2003,
advances were charged-off or partially charged-off when the Company's analysis
determined that the expected discounted cash flows associated with the related
Loans were insufficient to recover the outstanding advance balance in the pool.

In addition, effective July 1, 2003, the Company implemented a revised
policy related to collections of previously charged-off Loans ("recoveries").
Under the new policy, recoveries of Loans charged-off are credited to the
allowance for credit losses to the extent that any prior losses were charged
against the allowance, with the remainder credited to dealer holdbacks. Under
the Company's prior policy, generally 80% of recoveries were credited to dealer
holdbacks and 20% to finance charges.

A significant percentage of charged-off Loans are absorbed by dealer
holdbacks and, as a result, do not result in losses to the Company. The
Company's primary protection against losses relates to appropriately managing
the spread between the collection rate and the amount advanced to
dealer-partners at Loan inception.

The Company's allowance for credit losses also covers earned but unpaid
servicing fees on Loans receivable in non-accrual status. Servicing fees, which
are recorded as finance charges, are recognized under the interest method of
accounting until the earlier of the underlying obligation becoming 90 days past
due on a recency basis (no payments received for 90 days) or the repossession
and sale of the vehicle securing the Loan. At such time, the Company suspends
the recognition of revenue and records a provision for credit losses equal to
the earned but unpaid revenue. Once a Loan is classified in non-accrual status,
it remains in non-accrual status for the remaining life of the Loan. Revenue on
non-accrual Loans is recognized on a cash basis.

INVESTMENT IN OPERATING LEASES

Leased assets are depreciated to their residual values on a straight-line
basis over the scheduled lease term. The Company established its residual values
based upon an industry guidebook and data from repossessed vehicles sold at
auction. Realization of the residual values is dependent on the Company's future
ability to market the vehicles under then prevailing market conditions.

FLOORPLAN RECEIVABLES

Floorplan receivables represent loans to dealer-partners to finance used
vehicle inventories and are secured primarily by the related inventories and any
future cash collections owed to the dealer-partner on outstanding Loans, with
additional security provided by the personal guarantee of the dealership's
owner. Floorplan receivables are reported net of the related allowance for
credit losses of $87,000 and $831,000 at December 31, 2003 and 2002,
respectively.

NOTES RECEIVABLE

Notes receivable are primarily working capital loans that are generally due
on demand and are secured primarily by any future cash collections owed to the
dealer-partner on outstanding Loans. Notes receivable are reported net of the
related allowance for credit losses of $7,000 and $220,000 at December 31, 2003
and 2002, respectively.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LINES OF CREDIT

Secured lines of credit represent loans to dealers not participating in the
Company's core program and are secured primarily by loans originated and
serviced by the dealer with additional security provided by the personal
guarantee of the dealership's owner. Secured lines of credit are reported net of
the related allowance for credit losses of $12,000 and $210,000 at December 31,
2003 and 2002, respectively.

PROPERTY AND EQUIPMENT

Additions to property and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the assets.
Estimated useful lives are generally as follows: buildings and building
improvements -- 10 years, data processing equipment and software -- 5 years,
office furniture and equipment -- 7 years, and leasehold improvements -- the
lesser of the lease term or 7 years. The cost of assets sold or retired and the
related accumulated depreciation are removed from the accounts at the time of
disposition and any resulting gain or loss is included in operations.
Maintenance, repairs and minor replacements are charged to operations as
incurred; major replacements and betterments are capitalized. Software
development costs are capitalized and generally amortized on a straight-line
basis. The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.

OTHER ASSETS

Repossessed collateral, which is included in other assets on the balance
sheets, is valued at the lower of the carrying amount of the receivable or
estimated fair value, less estimated costs of disposition. As of December 31,
2003 and 2002, repossessed assets totaled approximately $8.4 million and $8.6
million, respectively.

DEALER HOLDBACKS

As part of the dealer-partner servicing agreement, the Company records the
gross amount of the Loan less the unearned finance charges as dealer holdbacks.
Loans originated by and advances to each dealer-partner are automatically
assigned to that dealer-partner's open pool of Loans. Periodically, pools are
closed and subsequent Loans and advances are assigned to a new pool. Collections
on the Loans within each pool, after payment of the Company's servicing fee and
reimbursement of certain collection costs, are applied to reduce the aggregate
advance balance owing against those Loans. Once the advance balance has been
repaid, the dealer-partner is entitled to receive collections from the Loans
within that pool.

All advances from a dealer-partner are secured by all of the future
collections on Loans originated by that dealer-partner. For balance sheet
purposes, dealer holdbacks are shown net of the current advance balance.

INCOME TAXES

Deferred income taxes are provided for all temporary differences between
the book and tax basis of assets and liabilities. Deferred income taxes are
adjusted to reflect new tax rates when they are enacted into law.

DERIVATIVE INSTRUMENTS

Interest Rate Caps. The Company purchases interest rate cap agreements to
manage its interest rate risk on its secured financings. As the Company has not
designated these agreements as hedges as defined under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138
and SFAS No. 149, changes in the fair value of these agreements will increase or
decrease net income.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 2003, the following interest rate cap agreements were
outstanding (in thousands of dollars):

Foreign Currency Forward Contracts. In the third quarter of 2003, the
Company entered into a series of forward contracts with a commercial bank to
manage foreign currency exchange risk associated with the cash flows anticipated
from the exit of the United Kingdom operation. As of December 31, 2003, the
Company had contracts outstanding to deliver 16.9 million British pounds
sterling to the commercial bank which will be exchanged into United States
dollars at a weighted average exchange rate of 1.59 United States dollars per
British pound sterling on a monthly basis through June 30, 2005. The Company
believes that this transaction will minimize the currency exchange risk
associated with an adverse change in the relationship between the United States
dollar and the British pound sterling as it repatriates cash from the United
Kingdom operation. As the Company has not designated these contracts as hedges
as defined under SFAS No. 133, changes in the fair value of these forward
contracts will increase or decrease net income. As of December 31, 2003, the
fair value of the forward contracts was $2,817,000 less than the notional amount
of the contracts due to the weakening of the United States dollar versus the
British pound sterling since the date the contracts were entered into. As a
result, during 2003, the Company recognized a foreign currency loss of
$2,817,000 related to the change in the fair value of the forward contracts.

STOCK OPTIONS

At December 31, 2003, the Company has two stock-based compensation plans,
one for employees and one for directors, which are described more fully in Note
11 -- Capital Transactions. Prior to April 1, 2003, the Company accounted for
those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. In the second quarter of 2003, the Company adopted the
fair value recognition and measurement provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" for stock-based employee
compensation. Under the retroactive restatement transition method selected by
the Company described in SFAS No. 148, the Company restated all prior periods to
reflect the stock-based compensation expense that would have been

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized had the recognition provisions of SFAS No. 123 been applied to all
awards granted to employees or directors after January 1, 1995. The following
tables summarize the reported and restated results:

As of December 31, 2000, the cumulative increase in paid-in capital as a
result of this restatement was $16.1 million. The increase in paid-in capital
was offset by a $13.9 million decrease in retained earnings and a $2.2 million
decrease in deferred income taxes.

FOREIGN CURRENCY TRANSLATION

The financial position and results of operations of the Company's foreign
operations are measured using the local currency as the functional currency.
Revenues and expenses are translated at average exchange rates during the year
and assets and liabilities are translated at current exchange rates at the
balance sheet date. Translation adjustments are reflected in accumulated other
comprehensive income, as a separate component of shareholders' equity. Realized
foreign currency transaction gains and losses are included in the statement of
income.

REVENUE RECOGNITION

Finance Charges. The Company computes its servicing fee based upon the
gross amount due under the Loan. Income is recognized under the interest method
of accounting until the underlying obligation is 90 days past due on a recency
basis. At such time, the Company suspends the accrual of revenue and makes a
provision for credit losses equal to the earned but unpaid revenue.

Ancillary Product Income. Fees received by the Company for the sale of
third party vehicle service contracts are recognized upon sale of the service
contract, as the Company bears no further obligation.

Lease Revenue. Income from operating lease assets is recognized on a
straight-line basis over the scheduled lease term. Revenue recognition is
suspended at the point the customer becomes 90 days past due on a recency basis.

Premiums Earned. Premiums earned include credit life and disability
premiums and service contract premiums. Credit life and disability premiums are
ceded to the Company on both an earned and written basis and are earned over the
life of the Loans using the pro rata and sum-of-digits methods. The Company
recognizes income and related expense for the service contract program on an
accelerated basis over the life of the service contract. In 2002, the Company
changed its revenue recognition policy for insurance and service contract
products in the United Kingdom to be consistent with those employed in the
United States. This change in revenue recognition policy increased 2002 pre-tax
income by approximately $1.1 million.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Income

Other income consists of the following (in thousands):

The Company recognizes a monthly dealer-partner access fee for the
Company's Internet-based proprietary Credit Approval Processing System ("CAPS")
in the month the access is provided.

Dealer-partners are charged an initial fee to floorplan a vehicle, and
interest is recognized monthly based on the number of days a vehicle remains on
the floorplan, with interest rates generally ranging from 12% to 18% per annum.
Income from secured lines of credit is recognized under the interest method of
accounting. Interest on notes receivable is recognized as income based on the
outstanding monthly balance and is generally 5% to 18% per annum. When a
floorplan receivable, line of credit, or note receivable is determined to be
impaired, the recognition of income is suspended and the Company records a
provision for losses equal to the difference between the carrying value and the
present value of the expected cash flows.

The Company recognizes gains on lease terminations when the proceeds from
the sale of leased vehicles at auctions exceed the carrying values of the
vehicles.

The Company leases part of its headquarters to outside parties under
non-cancelable operating leases. This activity is not a significant part of its
business activities. Rental revenue is recognized on a straight-line basis over
the related lease term.

Enrollment fees of $9,850 are generally paid by each dealer-partner signing
a servicing agreement. In return for the enrollment fee, the Company provides
the dealer-partner with sales promotion kits, signs, training and the first
month's access to CAPS. Beginning in the fourth quarter of 2002, the enrollment
fee in the United States is 100% refundable for 180 days. The fees and the
related direct incremental costs of enrolling these dealer-partners are deferred
and amortized on a straight-line basis over the estimated repayment term of the
outstanding dealer-partner advance based on the Company's experience. The
Company estimates the amount of fees that will not be refunded and begins
amortizing this portion of the deferred fees and costs immediately. After the
180-day refund period expires, the Company begins amortizing any remaining fees
that have not been refunded along with the related costs.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The adoption of this statement
on July 1, 2003 did not have a material impact on the Company.

In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards for how an issuer classifies and measures certain
freestanding financial instruments that have characteristics of both liabilities
and equity. It

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

requires that items such as mandatorily redeemable financial instruments,
obligations to repurchase equity shares by transferring assets, and certain
obligations to issue a variable number of shares be classified as liabilities.
The adoption of this statement on July 1, 2003 did not have a material impact on
the Company.

In December 2003, the FASB issued Interpretation No. 46 (Revised),
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R requires that
subsidiaries defined as variable interest entities be consolidated by the
enterprise that will absorb the majority of the entities' expected gains or
losses. The Company, through fully consolidated wholly owned subsidiaries,
sponsors debt issuances. The Company determined that these subsidiaries meet the
definition of variable interest entities and that the Company is the primary
beneficiary of these subsidiaries' activities. The adoption of this
interpretation on December 31, 2003 did not have a material impact on the
Company.

RECLASSIFICATION

Certain amounts for prior periods have been reclassified to conform to the
current presentation, including the following significant balance sheet
reclassifications: (i) the reserve for advance losses, which was previously
classified within dealer holdbacks, net, was eliminated and the balance
transferred to the allowance for credit losses, which is classified within Loans
receivable, net and (ii) repossessed assets were reclassified from Loans
receivable, net to other assets. Additionally, as a result of the Company's
adoption of the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" under the retroactive restatement method selected
by the Company as described in SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" in the second quarter of 2003, the
Company restated all prior periods to reflect the stock-based compensation
expense that would have been recognized had the recognition provisions of SFAS
No. 123 been applied to all awards granted to employees or directors after
January 1, 1995.

(2) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
their value.

Cash and Cash Equivalents and Investments. The carrying amount of cash and
cash equivalents and investments approximate their fair value due to the short
maturity of these instruments.

Net Investment in Loans. Loans receivable, net less dealer holdbacks, net
represents the Company's net investment in Loans. The Company received an
independent valuation of its Unites States automobile Loan portfolio as of
December 31, 2002. As the United States automobile Loan portfolio represents 94%
and 84% of the Company's total Loan portfolio as of December 31, 2003 and 2002,
respectively, the Company has used the relationship between the fair value as
determined in this valuation and the related carrying value as the basis for
calculating the fair value of the total Loan portfolio for both years.

Floorplan, Lines of Credit, and Notes Receivable. The carrying values of
floorplan, lines of credit, and notes receivable approximate their fair values
as the interest rates on these instruments approximate the interest rates the
Company would charge on similar instruments as of December 31, 2003 and 2002.

Debt. The fair value of debt is determined using quoted market prices, if
available, or calculated using the estimated value of each debt instrument based
on current rates offered to the Company for debt with similar maturities.

Derivative Instruments. The fair value of interest rate caps and foreign
currency forward contracts are based on quoted market values.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A comparison of the carrying value and estimated fair value of these
financial instruments is as follows (in thousands):

(3) LOANS RECEIVABLE

Loans generally have initial terms ranging from 24 to 48 months and are
collateralized by the related vehicles. The initial average term of a Loan was
approximately 37 months in 2003 and 36 months in 2002 and 2001. The Company's
program allows dealer-partners to establish the interest rate on Loans up to the
maximum rate allowable by the state or country in which the dealer-partner is
doing business.

Loans receivable consists of the following (in thousands):

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of changes in gross Loans receivable is as follows (in
thousands):

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

* Charge-offs presented net of recoveries for activity prior to July 1, 2003

A summary of the allowance for credit losses is as follows (in thousands):

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

* Charge-offs presented net of recoveries for periods prior to July 1, 2003

The charge-offs for the year ended December 31, 2003 are presented on a
different basis than the other years presented and, as a result, are not
comparable. The charge-offs reported for the year ended December 31, 2003
include $12.4 million of charge-offs recorded upon adoption of the new
charge-off policy.

(4) LEASED PROPERTIES

The Company leases offices and office equipment. Management expects that in
the normal course of business, leases will be renewed or replaced by other
leases. Total rental expense on all operating leases was $391,000, $361,000, and
$321,000 and for 2003, 2002, and 2001, respectively. Contingent rentals under
the operating leases were insignificant. Minimum future lease commitments under
operating leases as of December 31, 2003 are as follows (in thousands):

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) INVESTMENTS IN OPERATING LEASES

The composition of net investment in operating leases consists of the
following (in thousands):

A summary of changes in the investment in operating leases is as follows
(in thousands):

Future minimum rentals on leased vehicles at December 31, 2003 are $2.3
million in 2004 and $529,000 in 2005.

(6) PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

Depreciation expense on property and equipment was $4,469,000, $4,718,000,
and $4,652,000 in 2003, 2002, and 2001, respectively.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) DEBT

LINES OF CREDIT

At December 31, 2003, the Company had a $135.0 million credit agreement
with a commercial bank syndicate. The facility has a commitment period through
June 9, 2005. The agreement provides that, at the Company's discretion, interest
is payable at either the eurodollar rate plus 140 basis points (2.44% at
December 31, 2003), or at the prime rate (4.0% at December 31, 2003). The
eurodollar borrowings may be fixed for periods of up to six months. Borrowings
under the credit agreement are subject to a borrowing base limitation equal to
65% of advances to dealer-partners and leased vehicles (as reflected in the
consolidated financial statements and related notes), less a hedging reserve
(not exceeding $1.0 million), the amount of letters of credit issued under the
line of credit, and the amount of other debt secured by the collateral which
secures the line of credit. Currently, the borrowing base limitation does not
inhibit the Company's borrowing ability under the line of credit. The credit
agreement has certain restrictive covenants, including a minimum required ratio
of the Company's assets to debt, its liabilities to tangible net worth, and its
earnings before interest, taxes and non-cash expenses to fixed charges.
Additionally, the agreement requires that the Company maintain a specified
minimum level of net worth. Borrowings under the credit agreement are secured by
a lien on most of the Company's assets. The Company must pay annual and
quarterly fees on the amount of the commitment. As of December 31, 2003 and
2002, there was zero and $43.4 million outstanding under this facility,
respectively. The maximum amount outstanding was approximately $82.9 million and
$105.5 million in 2003 and 2002, respectively. The weighted average balance
outstanding was $59.0 million and $77.2 million in 2003 and 2002, respectively.

The Company also had a 1.0 million Canadian dollar line of credit with a
commercial bank in Canada, which expired on June 5, 2003. The borrowings were
used to fund the day-to-day cash flow requirements of the Company's Canadian
subsidiary, and were secured by a letter of credit issued by the Company's
principal commercial bank, with interest payable at the LIBOR rate plus 1.4% or
at the Canadian bank's prime rate. Additionally, the Company had to pay a
quarterly commitment fee of 0.6% on the amount of the commitment. As of December
31, 2002, there was 183,000 Canadian dollars ($116,000) outstanding under the
facility.

The weighted average interest rate on line of credit borrowings outstanding
as of December 31, 2002 was 3.3%.

SECURED FINANCING

In the second quarter of 2003, the Company's wholly-owned subsidiary,
Credit Acceptance Funding LLC 2003-1 ("Funding 2003-1"), completed a secured
financing transaction, in which Funding 2003-1 received $100.0 million in
financing. In connection with this transaction, the Company conveyed, for cash
and the sole membership interest in Funding 2003-1, dealer-partner advances
having a carrying amount of approximately $134.0 million to Funding 2003-1,
which, in turn, conveyed the advances to a trust, which issued $100 million in
notes to qualified institutional investors. A financial insurance policy was
issued in connection with the transaction. The policy guarantees the timely
payment of interest and ultimate repayment of principal on the final scheduled
distribution date. The notes are rated "AA" by Standard & Poor's Rating
Services. The proceeds of the conveyance to Funding 2003-1 were used by the
Company to reduce outstanding borrowings under the Company's line of credit.
Until December 15, 2003, the Company and Funding 2003-1 received additional
proceeds from the transaction by having the Company convey additional
dealer-partner advances to Funding 2003-1 that were then conveyed by Funding
2003-1 to the trust and used by the trust as collateral to support additional
borrowings. Additional dealer-partner advances having a carrying amount of
approximately $35.0 million have been conveyed by the Company after the
completion of the initial funding. After December 15, 2003, the debt outstanding
under the facility began to amortize. The total expected term of the facility is
16 months. The secured financing creates loans for which the trust is liable and
which are secured by all the assets of the trust and of Funding 2003-1. Such
loans are non-recourse to the Company, even though the trust, Funding 2003-1 and
the Company are consolidated for financial reporting purposes. The notes bear
interest at a fixed rate of 2.77%. The expected annualized cost of the secured
financing, including underwriters fees, the insurance premium and other costs is
approximately 6.8%. As Funding 2003-1 is organized as a

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

separate legal entity from the Company, assets of Funding 2003-1 (including the
conveyed dealer-partner advances) will not be available to satisfy the general
obligations of the Company. All the assets of Funding 2003-1 have been
encumbered to secure Funding 2003-1's obligations to its creditors. The Company
receives a monthly servicing fee paid out of collections equal to 6% of the
collections received with respect to the conveyed dealer-partner advances and
related Loans. Except for the servicing fee and payments due to dealer-
partners, the Company does not receive, or have any rights in, any portion of
such collections until the trust's underlying indebtedness is paid in full,
either through collections or through a prepayment of the indebtedness.
Thereafter, remaining collections would be paid over to Funding 2003-1 as the
sole beneficiary of the trust where they would be available to be distributed to
the Company as the sole member of Funding 2003-1, or the Company may choose to
cause Funding 2003-1 to repurchase the remaining dealer-partner advances from
the trust and then dissolve, whereby the Company would become the owner of such
remaining collections.

In the third quarter of 2003, the Company's wholly-owned subsidiary, CAC
Warehouse Funding Corp. II ("Warehouse Funding" or "2003-2"), completed a
revolving secured financing transaction with an institutional investor, in which
Warehouse Funding may receive up to $100.0 million in financing when the Company
conveys dealer-partner advances to Warehouse Funding for equity in Warehouse
Funding. Warehouse Funding will in turn pledge the dealer-partner advances as
collateral to the institutional investor to secure loans that will fund the cash
portion of the purchase price of the dealer-partner advances. No dealer-partner
advances were contributed and no financing proceeds were received at the time of
closing or through December 31, 2003. This revolving facility allows conveyances
of dealer-partner advances by the Company and related borrowing by Warehouse
Funding in which Warehouse Funding will receive 70% of the net book value of the
contributed dealer-partner advances up to the $100.0 million facility limit. The
facility has a commitment period through September 28, 2004. Provided that the
commitment is renewed, there is a requirement that any amounts outstanding under
the facility be refinanced, and the facility paid to zero, by December 23, 2004.
If this does not occur, the transaction will cease to revolve, will amortize as
collections are received and, at the option of the institutional investor, may
be the subject of acceleration and foreclosure. Upon completion of the
refinancing and pay down, the full facility will again be available to Warehouse
Funding. Although Warehouse Funding will be liable for any secured financing
under the facility, the loans will be non-recourse to the Company, even though
Warehouse Funding and the Company are consolidated for financial reporting
purposes. Such loans will bear interest at a floating rate equal to the
commercial paper rate plus 65 basis points, which has been limited to a maximum
rate of 6.25% through an interest rate cap agreement executed in the fourth
quarter of 2003. As Warehouse Funding is organized as a separate special purpose
legal entity from the Company, assets of Warehouse Funding (including the
conveyed dealer-partner advances) will not be available to satisfy the general
obligations of the Company. All the assets of Warehouse Funding have been
encumbered to secure Warehouse Funding's obligations to its creditors. The
Company will receive a monthly servicing fee paid out of collections equal to 6%
of the collections received with respect to the conveyed dealer-partner advances
and related Loans. Except for the servicing fee and payments due to
dealer-partners, the Company will not receive, or have any rights in, any
portion of such collections until Warehouse Funding's underlying indebtedness is
paid in full either through collections or through a prepayment of the
indebtedness.

The Company has completed a total of ten secured financing transactions,
eight of which have been repaid in full. Information about the currently
outstanding secured financing transactions is as follows (dollars in thousands):

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

* Anticipated to fully amortize by October 31, 2004.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MORTGAGE LOAN PAYABLE

The Company has a mortgage loan from a commercial bank that is secured by a
first mortgage lien on the Company's headquarters building and an assignment of
all leases, rents, revenues and profits under all present and future leases of
the building. There was $5,418,000 and $6,195,000 outstanding on this loan as of
December 31, 2003 and 2002, respectively. The loan matures on May 1, 2004,
bearing interest at a fixed rate of 7.07%, and requires monthly payments of
$99,582 and a balloon payment at maturity for the balance of the loan.

CAPITAL LEASE OBLIGATIONS

As of December 31, 2003, the Company has various capital lease obligations
outstanding for computer equipment, with monthly payments totaling $83,000.
These capital lease obligations bear interest at rates ranging from 4.45% to
9.31% and have maturity dates between June 2004 and October 2006.

LETTERS OF CREDIT

Letters of credit are issued by a commercial bank and reduce amounts
available under the Company's line of credit. As of December 31, 2003, the
Company has three letters of credit relating to reinsurance agreements totaling
$5.4 million. Such letters of credit will expire on May 26, 2004, at which time
they will be automatically extended for the period of one year unless the
Company is notified otherwise by the commercial bank syndicate.

PRINCIPAL DEBT MATURITIES

The scheduled principal maturities of the Company's debt at December 31,
2003 are as follows (in thousands):

2004........................................................ $106,113
2005........................................................ 348
2006........................................................ 6
--------
$106,467
========

Included in scheduled principal maturities are anticipated maturities of
secured financing debt. The maturities of this debt are dependent on the timing
of cash collections on the Loans receivable related to contributed
dealer-partner advances, the amounts due to dealer-partners for payments of
dealer holdbacks and changes in interest rates on the secured financing. Such
amounts included in the table above are $100 million for 2004.

DEBT COVENANTS

As of December 31, 2003, the Company is in compliance with various
restrictive debt covenants that require the maintenance of certain financial
ratios and other financial conditions. The most restrictive covenants require a
minimum ratio of the Company's assets to debt, its liabilities to tangible net
worth, and its earnings before interest, taxes and non-cash expenses to fixed
charges. The Company must also maintain a specified minimum level of net worth.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) DEALER HOLDBACKS

Dealer holdbacks consists of the following (in thousands):

(9) RELATED PARTY TRANSACTIONS

In the normal course of its business, the Company regularly accepts
assignments of Loans originated by affiliated dealer-partners owned by: (i) the
Company's majority shareholder and Chairman; (ii) the Company's President; and
(iii) a member of the Chairman's family. Loans accepted from these affiliated
dealer-partners were approximately $23.1 million, $19.1 million, and $21.2
million in 2003, 2002, and 2001, respectively. Loans receivable from affiliated
dealer-partners represented approximately 3.0% and 2.8% of the gross Loans
receivable balance as of December 31, 2003 and 2002, respectively. The Company
accepts Loans from affiliated dealer-partners and nonaffiliated dealer-partners
on the same terms. Dealer holdbacks from Loans accepted from affiliated
dealer-partners were approximately $18.5 million, $15.3 million, and $16.9
million in 2003, 2002, and 2001, respectively. Advance balances from affiliated
dealer-partners were $12.2 million and $10.4 million, or 3.0% and 2.8% of the
Company's total advances, as of December 31, 2003 and 2002, respectively. Total
CAPS fees and dealer enrollment fees earned from affiliated dealer-partners were
$66,000, $34,000, and $43,000 for the years ended December 31, 2003, 2002, and
2001, respectively.

Until the Company's decision to stop originating automobile leases in
January 2002, the Company regularly accepted automobile leases originated by
affiliated dealer-partners owned by: (i) the Company's majority shareholder and
Chairman; and (ii) the Company's President. Automobile leases accepted from
affiliated dealer-partners were $11,000 and $1.4 million in 2002 and 2001,
respectively. Affiliated dealer-partners originated approximately 1.0% and 4.6%
of the value of automobile leases accepted by the Company during 2002 and 2001,
respectively. The Company accepted automobile leases from affiliated
dealer-partners and nonaffiliated dealer-partners on the same terms.

In the normal course of business, the Company records receivables from
dealer-partners for ancillary product chargebacks on repossessed leased
vehicles. Chargeback receivables from affiliated dealer-partners owned by the
Company's President were zero and $10,000 as of December 31, 2003 and December
31, 2002, respectively.

The Company records interest income from unsecured notes receivable due
from the Company's President with a total balance of $1.6 million and $1.5
million as of December 31, 2003 and 2002, respectively. The notes bear interest
at a fixed rate of 5.22% with interest and principal due on April 19, 2011.
Total income earned on the notes receivable was $70,000, $63,000 and $50,000 for
the years ended December 31, 2003, 2002, and 2001, respectively.

The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $159,000,
$77,000 and $42,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. The Company also paid for vehicle reconditioning services provided
by affiliated dealer-partners owned by the Company's majority shareholder and
Chairman totaling $8,000 for the year ended December 31, 2001.

In the normal course of business, the Company analyzes the viability of new
products and services by first offering them to a small group of
dealer-partners, which includes affiliated dealer-partners, prior to offering
them to the entire network of dealer-partners. The Company received fees for
direct mail lead generation services provided to affiliated dealer-partners
owned by: (i) the Company's majority shareholder and Chairman; (ii) the
Company's President; and (iii) a member of the Chairman's family totaling
$39,000 for the year ended December 31, 2002. In 2002, the Company received fees
totaling $8,200 from an affiliated
57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

dealer-partner owned by the Company's President for a test program which offered
increased CAPS functionality to dealer-partners. The Company did not provide
these products and services to affiliated dealer-partners in 2003.

Beginning in 2000, the Company offered a line of credit arrangement to
certain dealers who were not participating in the Company's core business. These
lines of credit are secured primarily by loans originated and serviced by the
dealer, with additional security provided by the personal guarantee of the
dealership's owner. The Company ceased offering this program to new dealers in
the third quarter of 2001 and has been reducing the amount of capital invested
in this program since that time. Beginning in 2002, entities owned by the
Company's majority shareholder and Chairman began offering secured line of
credit loans in a manner similar to the Company's prior program, at his
dealerships and at two other dealers, one of whom also does business with the
Company. The Company's majority shareholder and Chairman does not intend to
expand his line of credit lending activities to additional dealers, except to
dealerships which he owns or controls.

(10) INCOME TAXES

The income tax provision consists of the following (in thousands):

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of timing differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of the
following (in thousands):

A reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate are as follows:

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 2001, there was an increase in state income taxes due to the
re-characterization of revenue resulting from the Internal Revenue Service
examination. The 2001 state income tax expense is an estimated cumulative amount
of taxes owed to various states for the years 1993 to 2001. The decrease in
state income taxes in 2002 was primarily due to a change in the estimate of the
cumulative amounts owed from 1993 to 2001.

During 2002, management determined that the undistributed earnings of the
Company's foreign subsidiaries should no longer be considered to be permanently
reinvested. As a result of that determination, the Company recorded the amount
of U.S. federal income taxes and withholding taxes that would be due upon
repatriation of these earnings.

(11) CAPITAL TRANSACTIONS

NET INCOME PER SHARE

Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total of the weighted
average number of common shares and common stock equivalents outstanding. Common
stock equivalents included in the computation represent shares issuable upon
assumed exercise of stock options that would have a dilutive effect using the
treasury stock method. The share effect is as follows:

The diluted net income per share calculations exclude stock options to
purchase approximately 423,000, 378,000, and 839,000 shares in 2003, 2002, and
2001, respectively, as inclusion of these options would be anti-dilutive to the
net income per share due to the relationship between the exercise prices and the
average market price of common stock during these periods.

STOCK REPURCHASE PROGRAM

The Company began acquiring shares of its common stock in connection with a
stock repurchase program announced in August 1999. That program authorized the
Company to purchase common shares on the open market or pursuant to privately
negotiated transactions at price levels the Company deems attractive. As of
December 31, 2003, the Company has repurchased approximately 5.5 million shares
of the 6.0 million shares authorized to be repurchased under this program at a
cost of $35.8 million. The 6.0 million shares authorized to be repurchased
represented approximately 13.0% of the shares outstanding at the beginning of
the program.

In the fourth quarter of 2003, the Board of Directors authorized the
repurchase of an additional 2.6 million common shares through a modified Dutch
tender offer. Upon expiration of the tender offer in January 2004, the Company
repurchased 2.2 million shares at a cost of $37.4 million. The Company financed
the share repurchase from existing cash reserves and by borrowing under its $135
million revolving credit facility.

STOCK OPTION PLANS

Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the
Company has reserved 8.0 million shares of its common stock for the future
granting of options to officers and other employees. The exercise price of the
options is no less than the fair market value on the date of the grant. Options
under the 1992 Plan generally become exercisable over a three to five year
period, or the Company's attainment of certain performance related criteria, or
immediately upon a change of Company control. The Company issued 138,500,
629,969, and 1,000,000 options in 2003, 2002, and 2001, respectively, that will
vest only if certain

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

performance targets are met. In addition, the Company issued 234,810 and 890,838
options in 2002 and 2001, respectively, that will vest over a three to five year
period. Nonvested options are forfeited upon termination of employment and
otherwise expire ten years from the date of grant. Shares available for future
grants totaled 1,647,225, 1,607,615, and 2,155,028 as of December 31, 2003,
2002, and 2001, respectively.

Pursuant to the Company's Director Stock Option Plan (the "Director Plan"),
the Company has reserved 200,000 shares of its common stock for future granting
of options to members of its Board of Directors. The exercise price of the
options is equal to the fair market value on the date of grant. In 2001, the
Company granted 100,000 options that will vest only if the Company meets certain
performance targets. Nonvested options are forfeited if the participant should
cease to be a director and otherwise expire ten years from the date of grant.
Shares available for future grants totaled 100,000 as of December 31, 2003, 2002
and 2001.

Pursuant to the Company's Stock Option Plan for Dealers (the "Dealer
Plan"), the Company had reserved 1.0 million shares of its common stock for the
future granting of options to participating dealer-partners. Effective January
1, 1999, the Company suspended the granting of future options under the Dealer
Plan. As of December 31, 2003, the Dealer Plan has been cancelled and all
previously outstanding options under the Dealer Plan have been exercised or
forfeited.

The Company accounts for the compensation costs related to its grants under
the stock option plans in accordance with SFAS No. 123. The Company recognized
stock-based compensation expense of $3,583,000, $2,072,000, and $1,755,000 for
2003, 2002, and 2001, respectively, for the 1992 Plan and Director Plan.

The fair value of each option granted used in determining the above
stock-based compensation expense is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted-average assumptions used in the
option-pricing model as well as the resulting weighted-average fair value of
options granted are as follows:

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additional information relating to the stock option plans is as follows:

The following tables summarize information about options outstanding at
December 31, 2003:

(12) BUSINESS SEGMENT INFORMATION

The Company classifies its operations into four reportable business
segments: United States, United Kingdom, Automobile Leasing, and Other.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REPORTABLE SEGMENT OVERVIEW

In the second quarter of 2003, the Company re-evaluated its business
segments as a result of the decision to stop Loan originations in the United
Kingdom and Canada. Business decisions, including resources to be allocated, are
based on the financial performance of the operations that will continue to
originate new business, separate from those that do not. The chief operating
decision maker reviews financial information combined into six components:
United States, United Kingdom, Automobile Leasing, Canada, Floor Plan and Lines
of Credit. Each component is an operating segment, however, Canada, Floor Plan
and Lines of Credit are combined in an "all other" category as none meet the
quantitative thresholds of a reportable segment. As a result, the Company has
four reportable business segments: United States, United Kingdom, Automobile
Leasing, and Other. Prior year's disclosures have been reclassified to conform
to the current year presentation. The United States segment primarily consists
of the Company's United States automobile financing business. The United Kingdom
segment primarily consists of the Company's United Kingdom retail automobile
Loan operation. The Automobile Leasing segment consists of the Company's
automobile leasing operation. The Other segment consists of the Company's
Canadian retail automobile Loan operation and secured lines of credit and
floorplan financing programs. The Company is currently liquidating its
operations in all segments other than the United States.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MEASUREMENT

The table below presents finance charge revenue, lease revenue, other
revenue, segment net income (loss) and segment assets information for each
reportable segment (in thousands):

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company operates primarily in the United States and the United Kingdom
(excluding Ireland). The table below presents the key financial information by
geographic location (in thousands):

INFORMATION ABOUT PRODUCTS AND SERVICES

The Company manages its product and service offerings primarily through
those reportable segments. Therefore, in accordance with the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
no enterprise-wide disclosures of information about products and services are
necessary.

MAJOR CUSTOMERS

The Company did not have any customers that provided 10% or more of the
Company's revenue during 2003, 2002, or 2001.

(13) LITIGATION AND CONTINGENT LIABILITIES

In the normal course of business and as a result of the customer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various customer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth-in-lending, credit availability,
credit reporting, customer protection, warranty, debt collection, insurance and
other customer-oriented laws and regulations, including claims seeking damages
for physical and mental damages relating to the Company's repossession and sale
of the customer's vehicle and other debt collection activities. The Company, as
the assignee of Loans originated by dealer-partners, may

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

also be named as a co-defendant in lawsuits filed by customers principally
against dealer-partners. Many of these cases are filed as purported class
actions and seek damages in large dollar amounts. An adverse ultimate
disposition in any such action could have a material adverse impact on the
Company's financial position, liquidity and results of operations.

The Company is currently a defendant in a class action proceeding commenced
on October 15, 1996 in the United States District Court for the Western District
of Missouri seeking unspecified money damages for alleged violations of a number
of state and federal consumer protection laws. On October 9, 1997, the District
Court certified two classes on the claims brought against the Company, one
relating to alleged overcharges of official fees, the other relating to alleged
overcharges of post-maturity interest. On August 4, 1998, the District Court
granted partial summary judgment on liability in favor of the plaintiffs on the
interest overcharge claims based upon the District Court's finding of certain
violations but denied summary judgment on certain other claims. The District
Court also entered a number of permanent injunctions, which among other things,
restrained the Company from collecting on certain class accounts. The Court also
ruled in favor of the Company on certain claims raised by class plaintiffs.
Because the entry of an injunction is immediately appealable, the Company
appealed the summary judgment order to the United States Court of Appeals for
the Eighth Circuit. Oral argument on the appeals was heard on April 19, 1999. On
September 1, 1999, the United States Court of Appeals for the Eighth Circuit
overturned the August 4, 1998 partial summary judgment order and injunctions
against the Company. The Court of Appeals held that the District Court lacked
jurisdiction over the interest overcharge claims and directed the District Court
to sever those claims and remand them to state court. On February 18, 2000, the
District Court entered an order remanding the post-maturity interest class to
Missouri state court while retaining jurisdiction on the official fee class. The
Company then filed a motion requesting that the District Court reconsider that
portion of its order of August 4, 1998, in which the District Court had denied
the Company's motion for summary judgment on the federal Truth-In-Lending Act
("TILA") portion of the claim. On May 26, 2000, the District Court entered
summary judgment in favor of the Company on the TILA claim and directed the
Clerk of the Court to remand the remaining state law official fee claims to the
appropriate state court. On September 18, 2001, the Circuit Court of Jackson
County, Missouri mailed an order assigning this matter to a judge. On October
28, 2002, the plaintiffs filed a fourth amended complaint. The Company filed a
motion to dismiss the plaintiff's fourth amended complaint on November 4, 2002.
On November 18, 2002, the Company filed a memorandum urging the decertification
of the classes. On January 15, 2003, the case was assigned to a new judge. On
February 21, 2003 the plaintiffs filed a brief opposing the Company's November
4, 2002 motion to dismiss the case. The Company will continue its vigorous
defense of all remaining claims. However, an adverse ultimate disposition of
this litigation could have a material negative impact on the Company's financial
position, liquidity and results of operations.

(14) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of quarterly financial position and results of
operations for the years ended December 31, 2003 and 2002, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Certain amounts for prior periods have been
reclassified to conform to the current presentation, including the following
significant balance sheet reclassifications: (i) the reserve for advance losses,
which was previously classified within dealer holdbacks, net, was eliminated and
the balance transferred to the allowance for credit losses, which is classified
within Loans receivable, net and (ii) repossessed assets were reclassified from
Loans receivable, net to other assets. Additionally, as a result of the
Company's adoption of the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" under the retroactive restatement
method selected by the Company as described in SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" in the second quarter of
2003, the Company restated all prior periods to reflect the stock-based
compensation expense that would have been recognized had the recognition
provisions of SFAS No. 123 been applied to all awards granted to employees or
directors after January 1, 1995.

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

68

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to cause the material information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
There were no changes in the Company's internal controls over financial
reporting during the quarter ended December 31, 2003 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information is contained under the captions "Matters to Come Before the
Meeting -- Election of Directors" (excluding the Report of the Audit Committee)
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information is contained under the caption "Compensation of Executive
Officers" (excluding the Report of the Executive Compensation Committee and the
stock performance graph) in the Company's Proxy Statement and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Information is contained under the caption "Common Stock Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement and
is incorporated herein by reference. In addition, the information contained in
the "Equity Compensation Plans" subheading under Item 5 of this Report is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information is contained under the caption "Certain Relationships and
Transactions" in the Company's Proxy Statement and is incorporated herein by
reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information is contained under the caption "Independent Accountants" in the
Company's Proxy Statement and is incorporated herein by reference.

69

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) The following consolidated financial statements of the Company and
Report of Independent Public Accountants are contained in "Item 8 -- Financial
Statements and Supplementary Data."

Report of Independent Public Accountants

Consolidated Financial Statements:

-- Consolidated Balance Sheets as of December 31, 2003 and 2002

-- Consolidated Income Statements for the years ended December 31, 2003,
2002 and 2001

-- Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001

-- Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.

(3) The Exhibits filed in response to Item 601 of Regulation S-K are listed
in the Exhibit Index, which is incorporated herein by reference.

(b) Reports on Form 8-K

The Company filed a current report on Form 8-K pursuant to Items 9 and 12,
dated September 24, 2003, furnishing institutional investor presentation
materials, a copy of which was filed as Exhibit 99.1.

The Company filed a current report on Form 8-K pursuant to Items 5 and 7,
dated October 6, 2003, reporting that the Company issued a press release
announcing the completion of a $100 million revolving warehouse facility, a copy
of which was filed as Exhibit 99.1.

The Company filed a current report on Form 8-K pursuant to Items 5 and 7,
dated November 4, 2003, reporting that the Company issued a press release
announcing the delay of its third quarter earnings, a copy of which was filed as
Exhibit 99.1.

The Company filed a current report on Form 8-K pursuant to Items 7 and 12,
dated November 17, 2003, reporting that the Company issued a press release
announcing financial results for the three and nine months ended September 30,
2003, a copy of which was filed as Exhibit 99.1.

The Company filed a current report on Form 8-K pursuant to Items 5 and 7,
dated November 26, 2003, reporting that the Company issued a press release
announcing that it commenced a modified Dutch auction tender offer, a copy of
which was filed as Exhibit 99.1.

70

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CREDIT ACCEPTANCE CORPORATION

By: /s/ BRETT A. ROBERTS
------------------------------------
Brett A. Roberts
Chief Executive Officer
Date: March 15, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 15, 2004 on
behalf of the registrant and in the capacities indicated.

71

EXHIBIT INDEX

The following documents are filed as part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted. The Company's
commission file number is 000-20202.

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

* Management compensatory contracts and arrangements.

1 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.

2 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1998, and incorporated herein by reference.

3 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1999, and incorporated herein by reference.

4 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 2001, and incorporated herein by reference.

5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2001, and incorporated herein by reference.

6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2001, and incorporated herein by reference.

7 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 2001, and incorporated herein by reference.

8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2002, and incorporated herein by reference.

9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2002, and incorporated herein by reference.

10 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2003, and incorporated herein by reference.

11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2003, and incorporated herein by reference.

12 Filed herewith.