CREDIT ACCEPTANCE CORPORATION - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THIS FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 000-20202

CREDIT ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

25505 W. TWELVE MILE ROAD, 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. [ ]

The aggregate market value of 14,312,629 shares of the Registrant's common stock
held by nonaffiliates on March 24, 1999 was approximately $80,508,538. For
purposes of this computation all officers, directors and 5% 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 March 24, 1999 there were 46,298,904 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 1999
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, 1998

INDEX TO FORM 10-K

ITEM PAGE
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PART I

1. Business.................................................... 2
2. Properties.................................................. 10
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security Holders......... 11

PART II

5. Market Price and Dividend Information....................... 12
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
8. Financial Statements and Supplemental Data.................. 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 52

PART III

10. Directors and Executive Officers of the Registrant.......... 52
11. Executive Compensation...................................... 52
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 52
13. Certain Relationships and Related Transactions.............. 52

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 52

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PART I

ITEM 1. BUSINESS

GENERAL

Credit Acceptance Corporation ("CAC" or the "Company"), incorporated in
Michigan in 1972, is a specialized financial services company which provides
funding, receivables management, collection, sales training and related products
and services to automobile dealers located in the United States, the United
Kingdom, Canada and Ireland. CAC assists such dealers with the sale of used
vehicles by providing an indirect financing source for buyers with limited
access to traditional sources of consumer credit ("Non-prime Consumers"). For
the year ended December 31, 1998, CAC had total revenues of $142.3 million and
net earnings of $25.0 million. At December 31, 1998, aggregate gross installment
contracts receivable were $794.8 million and total shareholders' equity was
$276.3 million.

CAC also provides additional products and services to dealers which give
the Non-prime Consumer the opportunity to purchase a number of ancillary
products, including credit life and disability insurance and vehicle service
contracts offered by dealers and point-of-sale dual interest collateral
protection insurance provided by third party insurance carriers. Through
wholly-owned subsidiaries, the Company also reinsures certain of the credit life
and disability insurance and point-of-sale dual interest collateral protection
insurance policies issued in conjunction with installment contracts originated
by dealers. In addition, the Company's credit reporting subsidiary provides
credit information and consumer reports to companies serving the Non-prime
Consumer market. Furthermore, the Company, through a wholly-owned subsidiary,
operates automobile auctions that provide vehicle suppliers with a full range of
services to process and sell vehicles to buyers at the auctions.

The Company is organized into four primary business units: North American
automotive finance, U.K./Ireland automotive finance, credit reporting services,
and auction services. See Note 12 to the consolidated financial statements for
information regarding the Company's reportable segments.

PRODUCTS AND SERVICES

CAC derives its revenues from the following principal sources: (i)
servicing fees (which are accounted for as finance charges) earned as a result
of servicing and collecting installment contracts originated and assigned to the
Company by dealers; (ii) fees charged to dealers at the time they enroll in the
Company's program; (iii) gains from the securitization of dealer advances; (iv)
premiums earned from the Company's reinsurance activities and service contract
programs; and (v) other income which primarily consists of fees earned from
third party service contract products offered by dealers, the processing and
sale of vehicles at auctions, fees from the Company's credit reporting services
and interest income from loans made directly to dealers for floor plan financing
and working capital purposes. The following table sets forth the percent
relationship to total revenue of each of these sources.

FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
PERCENT OF TOTAL REVENUE 1996 1997 1998
------------------------ ----- ----- -----

Finance charges.......................................... 75.0% 71.2% 68.8%
Dealer enrollment fees................................... 4.1 4.5 2.5
Gain on sale of advance receivables, net................. -- -- 0.5
----- ----- -----
Total core products and services....................... 79.1 75.7 71.8
----- ----- -----
Premiums earned.......................................... 7.7 6.9 7.7
Other income............................................. 13.2 17.4 20.5
----- ----- -----
Total ancillary products and services.................. 20.9 24.3 28.2
----- ----- -----
Total revenue.......................................... 100.0% 100.0% 100.0%
===== ===== =====

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PRINCIPAL BUSINESS

CAC's principal business involves: (i) the acceptance of installment
contracts originated and assigned by participating dealers; and (ii) the
subsequent management and collection of such contracts. For installment
contracts meeting the Company's criteria, CAC makes a formula-based cash payment
to the dealer (an "Advance"). The Company may Advance up to 90% of the amount
financed, but Advances typically range between 50% and 75% of the amount
financed. To mitigate its risk, at the time of accepting the assignment of an
installment contract, CAC obtains a security interest in the vehicle and
establishes a dealer holdback equal to the gross amount of the contract, less
the Company's servicing fee, which is recorded as an unearned finance charge.
CAC's acceptance of such contracts is generally without recourse to the general
assets of the dealer, and accordingly, the dealer usually has no liability to
the Company if the consumer defaults on the contract.

CAC offers its dealers several Advance alternatives, which are calculated
based upon the dealer's history with the Company, the credit profile of a
particular customer and the year, make, model, and mileage of the used vehicle
to be financed.

Monthly cash receipts related to the aggregate installment contracts
accepted from an individual dealer are remitted to such dealer, but only after:

(i) the Company is reimbursed for certain collection costs relating to
all contracts accepted from such dealer;

(ii) the Company receives a servicing fee (typically 20%) of the
aggregate net monthly receipts (monthly cash receipts less certain
collection costs); and

(iii) the Company has recovered all advances made to such dealer.

OPERATIONS

Dealer Selection and Enrollment Fee. CAC has adopted specific policies
relative to establishing the eligibility of prospective dealers for the
Company's program. A dealer's participation in the Company's program begins with
the execution of a Servicing Agreement, which requires the dealer to disclose
information about his dealership and personal finances. The Company undertakes a
review of the dealer information to determine whether the dealer should be
permitted to participate in the Company's program.

Pursuant to the Servicing Agreement, a dealer represents that it will only
submit contracts to CAC 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. Dealers receive a monthly statement
from the Company, summarizing all transactions on contracts originated by such
dealer. Also, where applicable, the dealer will receive a payment from CAC for
any portion of the payments on contracts to which the dealer is entitled under
the Servicing Agreement.

The Servicing Agreement may be terminated by the Company or by the dealer
(as long as there is no event of default or an event which, with the lapse of
time, giving of notice or both, would become an event of default) upon 30 days
prior written notice. Events of default include, among other things, (i) the
dealer's failure to perform or observe covenants in the Servicing Agreement;
(ii) the dealer's breach of a representation in the Servicing Agreement; (iii) a
misrepresentation by the dealer relating to an installment contract submitted to
the Company or a related vehicle or purchaser; and (iv) the appointment of a
receiver for, or the bankruptcy or insolvency of, the dealer. The Company may
terminate the servicing agreement immediately in the case of an event of default
by the dealer. Upon any termination by the dealer or in the event of a default,
the dealer must immediately pay the Company: (i) any unreimbursed collection
costs; (ii) any unpaid advances and all amounts owed by the dealer to the
Company; and (iii) a termination fee equal to 20% of the then outstanding amount
of the installment contracts originated and accepted by the Company. Upon
receipt in full of such amounts, the Company will reassign the installment
contract receivable and its security interest in the financed vehicle to the
dealer. In the event of a termination by the Company (or any other termination

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if the Company and the dealer agree), the Company may continue to service
installment contracts accepted prior to termination in the normal course of
business without charging a termination fee.

New dealers located in North America are generally charged a $4,500 dealer
enrollment fee, which affords the dealer access to the Company's training
material and programs and helps offset the administrative expenses associated
with new dealer enrollment. No dealer enrollment fee is charged to dealers in
the United Kingdom and Ireland.

Assignment of Contracts. The dealer assigns title to the installment
contract and the security interest in the vehicle to the Company. Thereafter,
the rights and obligations of the Company and the dealer are defined by the
servicing agreement, which provides that the contract assignment to the Company
is for the purposes of administration, servicing and collection of the amounts
due under the assigned contract, as well as for security purposes. At the time a
contract is submitted, CAC evaluates the contract to determine if it meets the
Company's cash Advance criteria. Contracts which do not meet the Company's cash
Advance criteria may still be accepted for servicing without an Advance being
paid.

Contract Portfolio. The portfolio of installment contracts contains loans
of initial duration generally ranging from 24 to 36 months, with an average
initial maturity of approximately 31 months. The Company receives a servicing
fee generally equal to 20% of the gross amount of the contract, with rate of
return varying, based upon the amount of the Advance and the term of the
contract.

The following table sets forth, for each of the periods indicated, the
average size of installment contracts accepted by the Company, the percent
growth in the average size of contracts accepted, the average initial maturity
of the contracts accepted, the average advance per installment contract accepted
and the average advance as a percent of the average installment contract
accepted.

AS OF DECEMBER 31,
----------------------------------------------
AVERAGE CONTRACT DATA 1994 1995 1996 1997 1998
--------------------- ------ ------ ------ ------ ------

Average size of installment contracts accepted
during the period................................. $5,922 $6,507 $7,249 $8,340 $8,402
Percentage growth in average size of contract....... 34.1% 9.9% 11.4% 15.1% 0.7%
Average initial maturity (in months)................ 25 25 30 31 31
Average advance per installment contract............ $2,637 $3,220 $3,837 $4,228 $4,260
Average advance as a percent of average installment
contract.......................................... 44.5% 49.5% 52.9% 50.7% 50.7%

Systems Overview. The Company employs three major computer systems in its
U.S. operations: (i) the Application and Contract System ("ACS") which is used
from the time a dealer faxes an application to the Company until the contract is
received and funded, (ii) the Loan Servicing System ("LSS") which contains all
loan and payment information and is the primary source for management
information reporting, and (iii) the Collection System ("CS") which is used by
the Company's collections personnel to track and service all active customer
accounts.

ACS -- The ACS, designed and built by an independent consulting firm hired
by the Company, was installed in May 1997. This system replaced certain
functionality of the Company's previous systems. The system enables the Company
to efficiently process a large volume of application and contract data. When a
dealer faxes an application to the Company's headquarters in Southfield,
Michigan, Company personnel input the application data into the ACS. The system
automatically pulls all credit bureau and vehicle guidebook data and includes
such data in the application file, which is routed to the analyst team assigned
to the dealer's geographic area. An analyst reviews each application file
on-line to determine if the transaction is properly structured and meets the
Company's guidelines for an advance. The ACS provides the analyst with
information regarding the borrower, including information on the borrower's
residence, employment, wage level and references, information regarding the
vehicle, including the vehicle's age, mileage and guidebook value, and
information regarding the transaction, including sale price, down payment,
interest rate and term. The system computes the Advance amount according to
predefined programs based on dealer and loan variables, provides the analyst
with warning flags on out-of-tolerance application variables and allows the

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analyst to select from a predefined set of stipulations to include on the
Advance approval transmittal, which is automatically faxed to the dealer. After
the sale of the vehicle, the installment contract package is sent to the Company
by the dealer. The contract information is input into the ACS. The system
compares the contract data to the application data and reviews compliance with
analyst stipulations. After any variances have been addressed, the system sends
an Advance payment to the dealer by check or electronic transaction. The system
generally enables the Company to approve application files in under one hour and
fund contracts within 24 hours of receipt of all required documents. The system
enables management personnel to report on service level by analyst and by
region, application and contract volumes by dealer and by program, exceptions
granted and various other reports as needed. The ACS automatically loads all new
contract data into the LSS system.

LSS -- The LSS, designed and built for the Company by the same consulting
firm, was installed and implemented in the third quarter 1997. This system
contains all loan transaction data, including payments and charge-offs for loans
accepted by the Company since July 1990. The system is the Company's primary
information source for management reporting including production of monthly
statements sent to dealers summarizing the status of their accounts and the
Company's static pool system, which provides the Company with a static pool
analysis on a per dealer basis. This system projects future collections for each
dealer based on actual prior loss history. These projections are then used to
analyze dealer profitability and to estimate and record the Company's reserve on
Advances to dealers. The LSS interfaces with both the ACS and CS.

CS -- The CS, which is used by Company collection personnel to service all
active accounts was purchased, modified and installed in 1989. The collection
system provides data on all of the Company's customer accounts including loan
and payment information as well as a log of all account activity including
letters sent and summaries of telephone contact. The system generates payment
books which are sent on all new accounts, generates all collection letters and
notices, allows collectors to record promises to pay and broken promises,
interfaces with a predictive dialing system, assigns accounts to collection
personnel and tracks results on a per collector basis. Repossession and legal
accounts are also processed on this system. The CS interfaces with the phone
system, predictive dialer and the LSS.

The Company has developed a comprehensive project plan for achieving year
2000 readiness. The ACS and LSS were developed by the Company in Oracle 7.3 and
Oracle Form 4.5 which are year 2000 complaint. The CS has been updated to a
version which is year 2000 compliant. See the Company's "Year 2000 Update"
included as part of Item 7. of this report.

Servicing and Collections. CAC's staff of professional and experienced
collection personnel collects amounts due on installment contracts, assisted by
the CS and telephone systems. The customized CS system is integrated with a
predictive dialing telephone system, which allows the Company's collection
personnel to contact a large number of customers on a daily basis. The
integration of the systems allows critical calling information to be seamlessly
uploaded to the CS. This integration helps identify customers who are difficult
to contact by phone and need additional collections efforts. Customer payments
are received through a bank lockbox and at CAC's Southfield, Michigan location.
Payment receipt data is electronically transferred from the bank lockbox on a
daily basis for posting to the customer's account. The payments are processed in
CAC's LSS which provides customer payment information to the CS on a real time
basis.

Customer accounts are monitored and serviced by regional collection teams.
The team members consist of junior, mid-level, and senior collection personnel.
The teams typically take action on accounts within five days of delinquency. If
a customer is delinquent, the Company's policy is to attempt to resolve the
delinquency by persuading the customer to make payment arrangements until the
delinquency is resolved. Since the customer generally has a poor credit history,
the Company's program provides the customer with an opportunity to restore their
credit rating. The Company believes its interests are best served by permitting
the customer to retain the vehicle while making payments, even if the maturity
of the loan needs to be extended beyond the original term. Customers, within the
first three payments of the contract, are monitored and serviced by a
specialized collection team. The first-payment-miss team typically takes action
on accounts at one day past due, attempting to resolve the delinquency as soon
as possible.

The repossession process typically begins when a customer becomes
approximately 60 days past due. However, when a new customer misses one of their
first three payments, or if the customer does not respond to
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the collection effort, the repossession process typically begins when the
customer becomes approximately 30 days past due. At that time, the Company
contracts with a third party to repossess and sell the vehicle at an auction.
The costs related to such activities, to the extent permitted by law, are added
to the amount due from the customer and the dealer Advance amount. If the
proceeds from the sale are not sufficient to cover the total balance due, the
Company may seek to recover its "deficiency balance" from the customer through
legal means, including wage garnishment to the extent permitted by applicable
law. Although the Company continues to pursue collection, the deficiency balance
is charged-off after nine months of not receiving any material payments.

ANCILLARY PRODUCTS

The Company continually explores methods by which its business
relationships with dealers may be enhanced, including several ancillary products
such as insurance and service contracts.

Insurance and Service Contract Programs. CAC has arrangements with
insurance carriers to assist dealers in offering credit life and disability
insurance to Non-prime Consumers. Pursuant to this program, the Company advances
to dealers an amount equal to the credit life and disability insurance premium
on contracts accepted by the Company, which include credit life and disability
insurance written by the Company's designated insurance carriers. The Company is
not involved in the actual sale of insurance; however, as part of the program,
the insurance carriers cede insurance coverages and premiums (less a fee) to a
wholly-owned subsidiary of the Company, which reinsures such coverages. As a
result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.

Buyers Vehicle Protection Plan, Inc. ("BVPP"), a subsidiary of CAC,
operates as an administrator of certain vehicle service contract programs
offered by dealers to consumers. Under this program, BVPP charges dealers a
premium for the service contracts and in return agrees to reimburse dealers for
designated amounts that the dealer is required to pay for covered repairs on the
vehicles it sells. CAC advances to dealers an amount equal to the purchase price
of the vehicle service contract on contracts accepted by the Company which
include vehicle service contracts. CAC has, in turn, subcontracted its
obligations to administer these programs to third parties that have experience
with such programs. Nevertheless, the risk of loss (reimbursement obligations in
excess of the purchase price of the vehicle service contract) remains with BVPP.
In addition, BVPP has relationships with third party service contract providers
which pay BVPP a fee on service contracts included on installment contracts
financed through participating dealers. BVPP does not bear any risk of loss for
covered claims on these third party service contracts.

The Company has an arrangement with insurance carriers and a third party
administrator to market and provide claims administration for a dual interest
collateral protection program. This insurance program, which insures the
financed vehicle against physical damage up to the lesser of the cost to repair
the vehicle or the unpaid balance owed on the related installment contract, is
offered to Non-prime Consumers who finance vehicles through participating
dealers. If desired by a Non-prime Consumer, collateral protection insurance
coverage is written under a group master policy issued by the unaffiliated
insurance carriers to the Company. The Company is not involved in the actual
sale of insurance; however, as part of the program, the insurance carriers cede
insurance coverages and premiums (less a fee) to CAC Reinsurance, Ltd., a
subsidiary of the Company, which acts as a reinsurer of such coverages. As a
result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.

The Company continually considers other programs that will increase its
services to dealers. The Company intends that such programs, if undertaken, will
be initially marketed selectively in order to establish strong operating systems
and assess the potential profitability of these services.

OTHER SERVICES

Credit Reporting Services. Montana Investment Group, Inc. a subsidiary of
the Company, supplies risk assessment and fraud alert information and
computerized skiptracing services regarding Non-prime
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Consumers to companies serving the Non-prime Consumer market. Such information
and services are generally not available from traditional consumer information
sources.

Auction Services. In June 1998, the Company acquired substantially all of
the assets and liabilities of an automobile auction in Pennsylvania and
incorporated this business, which currently operates auctions in Pennsylvania
and South Carolina, as a wholly-owned subsidiary of the Company. The subsidiary
provides vehicle suppliers with a full range of services to process and sell
vehicles to buyers at the auctions.

Floor Plan Financing and Secured Working Capital Loans. The Company offers
floor plan financing to certain dealers, pursuant to which the Company makes
loans to dealers to finance vehicle inventories, in each case secured by the
inventory, the related proceeds from the future sale of such inventory and, for
dealers participating in the Company's financing program, future collections on
installment contracts accepted from such dealers. This financing is provided on
a selected basis primarily to dealers participating in the Company's financing
program. On a limited basis, the Company provides floor plan financing to
dealers not participating in the Company's financing program. The interest rate
charged on outstanding floor plan balances generally ranges from 12% to 18% per
annum. On a selected basis, the Company also provides dealers with working
capital loans. These loans are secured by all assets of the dealer, including
any future cash collections owed to the dealer on installment contracts accepted
by the Company.

SALES AND MARKETING

The Company's program is marketed directly to used vehicle dealers and to
new automobile dealers with used vehicle departments. Marketing efforts are
initially concentrated in a particular geographic area through the distribution
of marketing brochures and via advertising in trade journals and other industry
publications directly to automobile dealers. Follow-up is subsequently conducted
through telemarketing, videotapes and monthly newsletters explaining the
Company's program. Free training seminars are available to dealers desiring to
learn more about the Company's program, as well as to participating dealers. The
Company also establishes relationships with dealers through referrals from third
party vendors and participating dealers.

CAC employs experienced sales and marketing professionals (sales
representatives) both at the Company's headquarters and in the field for
purposes of enrolling new dealers and providing services to existing dealers.
The sales force also includes non-employee individuals (sales agents) operating
on a contract basis. Sales personnel are compensated on a commission basis
calculated on the profitability and volume of business submitted by dealers.

CAC provides dealers with training regarding the operation of the Company's
program. Seminars are held on a regular basis at the Company's headquarters and
periodically at locations throughout the country. Pursuant to the Servicing
Agreement, each dealer agrees to attend at least one such seminar each calendar
year.

CREDIT LOSS POLICY AND EXPERIENCE

When an installment contract is originated, the Company generally pays a
cash Advance to the dealer. These Advance balances represent the Company's
primary risk of loss related to the funding activity with the dealers.

The Company maintains a reserve against Advances to dealers that are not
expected to be recovered through collections on the related installment contract
portfolio. For purposes of establishing the reserve, future collections are
reduced to present-value in order to achieve a level yield over the remaining
term of the Advance equal to the expected yield at the origination of the
impaired Advance. Future reserve requirements will depend in part on the
magnitude of the variance between management's prediction of future collections
and the actual collections that are realized. Ultimate losses may vary from
current estimates and the amount of provision, which is a current expense, may
be either greater or less than actual charge offs. The Company charges off
dealer Advances against the reserve at such time and to the extent that the
Company's static pool analysis determines that the Advance is completely or
partially impaired.

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The Company also maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected losses in the
portfolio of receivables. The risk of loss to the Company related to the
installment contracts receivable balances relates primarily to the earned but
unpaid servicing fee or finance charge previously recognized on contractually
delinquent accounts.

Servicing fees, which are booked as finance charges, are recognized under
the interest method of accounting until the underlying obligation is 90 days
past due on a recency basis. At such time, the Company suspends the accrual of
revenue and makes a provision for credit losses equal to the earned but unpaid
revenue. In all cases, contracts on which no material payment has been received
for nine months are charged off against dealer holdbacks, unearned finance
charges and the allowance for credit losses.

During the third quarter of 1997, the Company changed its non-accrual
policy from 120 days on a contractual basis to 90 days on a recency basis and,
during the fourth quarter of 1997, changed its charge off policy to nine months
on a recency basis from one year on a recency basis. The Company believes these
changes allow for earlier recognition of under-performing dealer pools.

COMPETITION

The Non-prime Consumer finance market is very fragmented and highly
competitive. The Company believes that there are numerous competitors providing,
or are capable of providing, financing programs through dealers to purchasers of
used vehicles. The Company also competes, indirectly, with dealers operating
dealer-financed programs. Because the Company's program is directed to provide
financing to individuals who cannot ordinarily qualify for traditional
financing, the Company does not believe that it directly competes with
commercial banks, thrifts, automobile finance companies and others that apply
more traditional lending criteria to the credit approval process. Historically,
these traditional sources of used vehicle financing (some of which are larger,
have significantly greater financial resources and have relationships with
captive dealer networks) have not served the Company's market segment
consistently. The Company's market is primarily served by smaller finance
organizations which solicit business when and as their capital resources allow.
The Company intends to capitalize on this market segment's lack of a major,
consistent financing source. However, if such a competitor were to enter the
Company's market segment, the Company's financial position and results of
operations could be materially adversely affected. The Company believes that it
can compete on the basis of service provided to its participating dealers and
superior collection performance.

During the past few years, many of CAC's competitors have disclosed that
they have exited the Non-prime Consumer finance market, do not have funding to
acquire additional installment contract receivables from dealers or have
strengthened credit standards which in turn has reduced the volume of new
business. These events suggest that the Non-prime Consumer finance market should
become less competitive; however, dealers appear to continue to have many
alternatives for financing used vehicles.

CUSTOMER AND GEOGRAPHIC CONCENTRATIONS

Installment contracts receivable attributable to contracts accepted from
affiliated dealers owned by the Company's majority shareholder represented
approximately 4%, 4% and 2% of gross installment contracts receivable at the end
of 1996, 1997 and 1998, respectively. Approximately 3%, 1% and 2% of the value
of installment contracts accepted and approximately 3%, 1% and 2% of the number
of installment contracts accepted by the Company during 1996, 1997 and 1998,
respectively, were originated by affiliated dealers. Affiliated dealers are not
obligated to continue doing business with CAC, nor are they precluded from
owning or operating businesses which may compete with the Company. As of
December 31, 1998, approximately 24.9% of the participating dealers in the
United States were located in Michigan, Ohio, and Virginia and these dealers
accounted for approximately 29.7% of the number of contracts accepted from
United States dealers in 1998. As of December 31, 1998, approximately 11.4% of
the Company's total participating dealers were located in the United Kingdom and
during 1998 these dealers accounted for approximately 9.8% of the new contracts
accepted by the Company. No single dealer accounted for more than 10% of the
number of installment contracts accepted by the Company during 1996, 1997 or
1998.

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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):

AS OF AND FOR YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------

Revenues from customers
United States................................. $107,315 $134,950 $120,086
United Kingdom................................ 16,600 28,598 20,828
Other foreign................................. 19 687 1,435
Long-lived assets
United States................................. $ 14,083 $ 18,910 $ 18,781
United Kingdom................................ 854 1,914 1,834
Other foreign................................. 21 15 12

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

REGULATION

The Company's businesses are subject to various state, federal and foreign
laws and regulations which require licensing and qualification, limit interest
rates, fees and other charges associated with the installment contracts assigned
to the Company, require specified disclosures by automobile dealers to
consumers, govern the sale and terms of the ancillary products and define the
Company's rights to 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 contracts, or resulting in potential
liability related to contracts accepted from dealers. In addition, governmental
regulations which would deplete the supply of used vehicles, such as
environmental protection regulations governing emissions or fuel consumption,
could have a material adverse effect on the Company. The Company is not aware of
any such legislation currently pending.

The sale of insurance products by dealers is also subject to state laws and
regulations. As the Company does not deal directly with consumers in the sale of
insurance products, it does not believe that its business is significantly
affected by such laws and regulations. Nevertheless, there can be no assurance
that insurance regulatory authorities in the jurisdictions in which such
products are offered by dealers 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.
CAC's credit life and disability reinsurance subsidiary is licensed, and is
subject to regulation, in the state of Arizona, and CAC's property and casualty
reinsurance subsidiary is licensed in the Turks and Caicos Islands.

The Company's operations in the United Kingdom, Canada and Ireland 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. In addition,
the Company's credit reporting subsidiary is subject to various state and
federal regulations including the Fair Credit Reporting Act. Furthermore, the
Company's auction services subsidiary is subject to various state and federal
regulations which require disclosure to consumers regarding licensing,
qualification and fees associated with the sale of vehicles.

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

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EMPLOYEES

As of December 31, 1998, the Company employed 655 persons, 370 of whom were
collection personnel, 83 were contract origination and processing personnel, 67
were marketing professionals, 28 were accounting professionals and the remainder
were management or support personnel. The Company's employees have no union
affiliations and the Company believes its relationship with its employees is
good.

ITEM 2. PROPERTIES

NORTH AMERICAN AUTOMOTIVE FINANCE

The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993,
which it financed in part by a loan secured by a mortgage on the building. The
office building includes approximately 118,000 square feet of space on five
floors. The Company occupies approximately 56,000 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.

U.K./IRELAND AUTOMOTIVE FINANCE

The Company leases an office building in Worthing, West Sussex, in the
United Kingdom, which is the headquarters for the Company's United Kingdom
operations. The Company occupies approximately 10,000 square feet of the
building under a lease expiring in September 2007.

OTHER

The Company leases an office building in Norcross, Georgia which houses the
Company's credit reporting services subsidiary. The office building includes
approximately 13,300 square feet of space on one floor. The lease expires in
December 2003.

The Company plans to sell a vacant office building in Norcross, Georgia
which previously housed the Company's credit reporting services subsidiary. The
office building includes approximately 4,100 square feet of space on two floors.

The Company's auction services subsidiary leases a 13,400 square foot
building and 35 acres of land in the Township of East Hanover, Pennsylvania and
leases a 17,000 square foot building and five acres of land in North Charleston,
South Carolina. The lease on the Pennsylvania property expires in June 1999, and
the Company has an option to buy the land and building. The lease on the South
Carolina property expires in March 2000.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth in lending, credit availability,
credit reporting, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations. The Company, as the assignee of
finance contracts originated by dealers, may also be named as a co-defendant in
lawsuits filed by consumers principally against dealers. Many of these cases are
filed as purported class actions and seek damages in large dollar amounts.

The Company is currently a defendant in a class action proceeding commenced
on October 15, 1996 in the United States District Court for the Western District
of Missouri seeking money damages resulting for alleged violations of a number
of state and federal consumer protection laws (the "Missouri Litigation"). On
October 9, 1997, the Court certified two classes on the claims brought against
the Company. On August 4, 1998, the Court granted partial summary judgment on
liability in favor of the plaintiffs based upon the Court's finding of certain
violations but denied summary judgment on certain other claims. The Court also
entered a

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12

number of permanent injunctions, which among other things, restrain the Company
from collecting the amounts found to be uncollectible. 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 as of right, the Company has
appealed the summary judgment order to the United States Court of Appeals for
the Eighth Circuit and the Company believes that its appeal has substantial
merit. Plaintiffs have filed a cross appeal. A trial on the remaining claims, as
well as on damages, is not expected to be scheduled until after the appeal has
been concluded. Should the Company's appeal be unsuccessful, the potential
damages could have a material adverse impact on the Company's financial
position, liquidity and results of operations.

During the first quarter of 1998, several putative class action complaints
were filed against the Company and certain officers and directors of the Company
in the United States District Court for the Eastern District of Michigan seeking
money damages for alleged violations of the federal securities laws. On August
14, 1998, a Consolidated Class Action Complaint, consolidating the claims
asserted in those cases, was filed. The Complaint generally alleges that the
Company's financial statements issued during the period August 14, 1995 through
October 22, 1997 did not accurately reflect the Company's true financial
condition and results of operations because such reported results failed to be
in accordance with generally accepted accounting principles and that such
results contained material accounting irregularities in that they failed to
reflect adequate reserves for credit losses. The Complaint further alleges that
the Company issued public statements during the alleged class period which
fraudulently created the impression that the Company's accounting practices were
proper. The Company intends to vigorously defend this action and, while
management believes that meritorious defenses exist and has filed a motion to
dismiss the Complaint, the ultimate disposition of this litigation could have a
material adverse impact on the Company's financial position, liquidity and
results of operations.

The frequency of litigation has increased as the Company's business
activities have expanded. The Company believes that the structure of its dealer
program and the ancillary products, including the terms and conditions of its
Servicing Agreement with dealers, may mitigate its risk of loss in any such
litigation. Management believes the Company has taken prudent steps to address
the litigation risks associated with its business activities.

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

None

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PART II

ITEM 5. MARKET PRICE AND DIVIDEND INFORMATION

The Company's Common Stock is traded on The Nasdaq Stock Market(R) under
the symbol CACC. The high and low sale prices for the Common Stock for each
quarter during the two year period ending December 31, 1998 as reported by the
National Association of Securities Dealers, Inc., are set forth in the following
table.

1997 1998
---------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ -----

March 31....................................... $26.00 $17.00 $ 9.63 $5.25
June 30........................................ 18.50 9.38 12.38 8.38
September 30................................... 16.88 11.25 9.19 5.56
December 31.................................... 13.63 2.50 7.75 4.63

As of December 31, 1998, the approximate number of beneficial holders and
shareholders of record of the Common Stock was 4,500 based upon securities
position listings furnished to the Company.

Other than the dividend paid in connection with the Company's conversion
from S corporation status to C corporation status during 1992, the Company has
never paid and has no present plans to pay any cash dividends on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business. The Company's credit agreements contain certain
covenants which prohibit the payment of dividends under certain circumstances
and other covenants pertaining to the Company's tangible net worth which may
indirectly limit the payment of dividends on Common Stock.

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ITEM 6. SELECTED FINANCIAL DATA

The selected income statement and balance sheet data presented below for
and as of each of the five years ended December 31, 1998 are derived from the
Company's audited consolidated financial statements. The selected financial data
presented below as of December 31, 1997 and 1998 and for the years ended
December 31, 1996, 1997 and 1998 should be read in conjunction with the
Company's consolidated audited financial statements and notes thereto and "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Report.

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------

INCOME STATEMENT DATA:
Revenue:
Finance charges.................... $ 44,550 $ 66,276 $ 92,944 $ 117,020 $ 98,007
Premiums earned.................... 3,756 6,504 9,653 11,304 10,904
Dealer enrollment fees............. 1,950 2,810 5,028 7,313 3,614
Gain on sale of Advance
receivables, net................ -- -- -- -- 685
Other income....................... 4,219 9,491 16,309 28,598 29,139
---------- ---------- ---------- ---------- ----------
Total revenue................. 54,475 85,081 123,934 164,235 142,349
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses................. 15,045 21,716 30,627 45,911 59,004
Provision for credit losses........ 3,603 7,066 13,071 85,472 16,405
Provision for claims............... 1,582 1,964 3,060 3,911 3,734
Interest........................... 2,651 8,785 13,568 27,597 25,565
---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 22,881 39,531 60,326 162,891 104,708
---------- ---------- ---------- ---------- ----------
Operating income..................... 31,594 45,550 63,608 1,344 37,641
Foreign exchange gain (loss)....... -- (57) 27 (41) (116)
---------- ---------- ---------- ---------- ----------
Income before income taxes........... 31,594 45,493 63,635 1,303 37,525
Provision (credit) for income
taxes........................... 11,024 15,921 22,126 (234) 12,559
---------- ---------- ---------- ---------- ----------
Net income........................... $ 20,570 $ 29,572 $ 41,509 $ 1,537 $ 24,966
========== ========== ========== ========== ==========
Net income per common share(A):
Basic.............................. $ .50 $ .70 $ .91 $ .03 $ .54
========== ========== ========== ========== ==========
Diluted............................ $ .49 $ .68 $ .89 $ .03 $ .53
========== ========== ========== ========== ==========
Weighted average shares
outstanding(A):
Basic.............................. 41,270,984 42,385,262 45,605,159 46,081,804 46,190,208
Diluted............................ 42,316,105 43,527,770 46,623,655 46,754,713 46,960,290
BALANCE SHEET DATA:
Installment contracts receivable,
net................................ $ 402,379 $ 652,452 $1,029,951 $1,036,699 $ 664,693
Floor plan receivables............... 7,115 13,249 15,493 19,800 14,071
Notes receivables.................... 2,459 3,232 2,663 1,231 2,278
All other assets..................... 13,953 17,507 26,311 57,880 70,887
---------- ---------- ---------- ---------- ----------
Total assets.................. $ 425,906 $ 686,440 $1,074,418 $1,115,610 $ 751,929
========== ========== ========== ========== ==========
Dealer holdbacks, net................ $ 251,997 $ 363,519 $ 496,434 $ 439,554 $ 222,275
Total debt........................... 79,652 95,780 288,899 391,666 218,798
Other liabilities.................... 18,517 28,166 42,942 35,399 34,593
---------- ---------- ---------- ---------- ----------
Total liabilities............. 350,166 487,465 828,275 866,619 475,666
Shareholders' equity(B).............. 75,740 198,975 246,143 248,991 276,263
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity.......................... $ 425,906 $ 686,440 $1,074,418 $1,115,610 $ 751,929
========== ========== ========== ========== ==========

(A) On September 29, 1995 the Company consummated a public offering of 3,900,000
shares of its Common Stock.

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

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

GENERAL

The Company is a specialized financial services company providing funding,
receivables management, collection, sales training and related products and
services to automobile dealers located in the United States, the United Kingdom,
Ireland and Canada. The Company assists such dealers by providing them with an
indirect source of financing for buyers of used vehicles with limited access to
traditional sources of consumer credit. In addition, but to a significantly
lesser extent, the Company provides floor plan financing and secured working
capital loans to dealers, secured by the related vehicle inventory and any
future cash collections owed to the dealer on contracts accepted under the
Company's program.

The Company's relationship with a dealer is defined by: (i) the servicing
agreement which sets forth the terms and conditions associated with the
Company's acceptance of a contract from a dealer; and (ii) the contract, which
is a retail installment sales contract between a dealer and a purchaser of a
used vehicle, providing for payment over a specified term. The dealer assigns
title to the contract and the security interest in the vehicle to the Company.
Thereafter, the rights and obligations of the Company and the dealer are defined
by the servicing agreement, which provides that a contract is assigned to the
Company as nominee for the dealer for purposes of administration, servicing and
collection of the amount due under the assigned contract, as well as for
security purposes. The Company takes title to the contract as nominee and
records the gross amount of the contract as a gross installment contract
receivable and the amount of its "servicing fee" (see below) as an unearned
finance charge which, for balance sheet purposes, is netted from the gross
amount of the contract. The Company records the remaining portion of the
contract (the gross amount of the contract less the unearned finance charge) as
a "dealer holdback". For balance sheet purposes, dealer holdbacks are shown net
of any Advances made by the Company to the dealer in connection with accepting
the assignment of a contract.

The Company's program allows dealers to establish the interest rate on
contracts, which typically is the maximum rate allowable by the state or country
in which the dealer is doing business. As the majority of the Company's revenue
is derived from the servicing fee it receives on the gross amount due under the
contract (typically 20% of the principal and interest), the Company's revenues
from servicing fees are not materially impacted by changes in interest rates.
The Company's revenue is principally dependent upon the gross value of contracts
accepted, which is determined by the number of contracts accepted and the amount
of the average contract. The contracts assigned to the Company are: (i) secured
by the related vehicle; and (ii) short-term in duration (generally maturing in
24 to 36 months, with an initial average maturity of approximately 31 months).
The interest rates charged on floor plan financing typically range from 12% to
18% per annum and interest rates charged on secured working capital loans are
typically prime plus 4%.

The Company's subsidiaries provide additional services to dealers. One such
subsidiary is primarily engaged in the business of reinsuring credit life and
disability insurance policies issued to borrowers under contracts originated by
dealers. Credit life and disability insurance premiums are ceded to the
subsidiary on both an earned and written basis and are earned over the life of
the contracts using pro rata and sum-of-digits methods. Another subsidiary
administers short-term limited extended service contracts offered by dealers. In
connection therewith, the subsidiary bears the risk of loss for any repairs
covered under the service contract. Revenue is recognized on a straight-line
basis over the life of the service contracts. In addition, the subsidiary has
relationships with third party service contract providers which pay the
subsidiary a fee on service contracts included on installment contracts financed
through participating dealers. The subsidiary does not bear the risk of loss for
covered claims on these third party service contracts. The income from the
non-refundable fee is recognized upon acceptance of the installment contract. A
third subsidiary is engaged in the business of reinsuring collateral protection
insurance coverage issued to borrowers under contracts originated by dealers.
Premiums are ceded to the subsidiary on both an earned and written basis and are
earned over the life of the contracts using pro rata and sum-of-digits methods.
In addition, the Company's credit reporting subsidiary provides credit
information and consumer reports to companies servicing the Non-Prime consumer
market. Furthermore, the Company's auction service subsidiary provides vehicle
suppliers with a full range of services to process and sell vehicles to buyers
at the auctions.

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RESULTS OF OPERATIONS

The following table sets forth the percent relationship of certain items to
total revenue for the periods indicated.

FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
PERCENT OF TOTAL REVENUES 1996 1997 1998
------------------------- ----- ----- -----

Finance charges.......................................... 75.0% 71.2% 68.9%
Premiums earned.......................................... 7.7 6.9 7.7
Dealer enrollment fees................................... 4.1 4.5 2.5
Gain on sale of Advance receivables, net................. -- -- 0.5
Other income............................................. 13.2 17.4 20.4
----- ----- -----
Total revenue............................................ 100.0 100.0 100.0
----- ----- -----
Operating expenses....................................... 24.6 28.0 41.5
Provision for credit losses.............................. 10.5 52.0 11.5
Provision for claims..................................... 2.5 2.4 2.6
Interest................................................. 10.9 16.8 18.0
----- ----- -----
Total costs and expenses............................... 48.5 99.2 73.6
----- ----- -----
Operating income......................................... 51.5 0.8 26.4
Foreign exchange loss.................................. -- -- (0.1)
----- ----- -----
Income before income taxes............................... 51.5 0.8 26.3
Provision (credit) for income taxes.................... 18.0 (0.1) 8.8
----- ----- -----
Net income............................................... 33.5% 0.9% 17.5%
===== ===== =====

Year Ended December 31, 1997 Compared To Year Ended December 31, 1998

Total Revenue. Total revenue decreased from $164.2 million in 1997 to
$142.3 million in 1998, a decrease of $21.9 million or 13.3%. This decrease was
primarily due to the decrease in finance charge revenue resulting from a
decrease in the average installment contracts receivable balance. The decrease
in gross installment contracts receivable is primarily the result of collections
on and charge offs of installment contracts exceeding contract originations for
the period. The Company's volume of contract originations decreased in the
fourth quarter of 1997 and in 1998 as the Company has implemented more
conservative Advance programs and has limited business with marginally
profitable and unprofitable dealers. These changes were made primarily as a
result of the Company's enhanced analysis made possible by the Company's loan
servicing system which became operational in the third quarter of 1997. Based on
this review of dealer profitability, the Company has discontinued relationships
with certain dealers and continues to monitor its relationships with dealers and
make adjustments to these relationships as required. It is expected that the
volume of contract originations will continue at lower levels than those
experienced prior to the implementation of these changes.

The average yield on the Company's installment contract portfolio,
calculated using finance charge revenue divided by average installment contracts
receivable, was approximately 10.4% and 11.4% in 1997 and 1998, respectively.
The increase in the average yield is due to a decrease in the percentage of
installment contracts which were in non-accrual status as well as improvements
in collection levels on non-accrual installment contracts. The percentage of
installment contracts which were in non-accrual status was 37.6% and 32.4% as of
December 31, 1997 and 1998, respectively.

Premiums earned increased, as a percentage of total revenue, from 6.9% in
1997 to 7.7% in 1998. Premiums on the Company's service contract program are
earned on a straight-line basis over the life of the service contracts. Premiums
reinsured under the Company's credit life and collateral protection insurance
programs are earned over the life of the contracts using the pro rata and
sum-of-digits methods. As a result of these revenue recognition methods,
premiums earned decreased at a slower rate than the decrease in finance

15
17

charges. In addition, the increase is due to an increase in the penetration rate
on the Company's service contract and credit life insurance programs.

Earned dealer enrollment fees decreased, as a percentage of total revenue,
from 4.5% to 2.5% for the years ended 1997 and 1998, respectively. The decrease
is due to a decline in the number of new dealers enrolling in the Company's
financing program. The Company has become more selective with respect to the
enrollment of new dealers in an effort to improve the performance of its
portfolio of installment contracts receivable.

In July 1998, the Company recognized a net gain on sale of advance
receivables of approximately $685,000. The gain resulted from the securitization
of dealer Advances having a carrying value of approximately $56 million. See
"Liquidity and Capital Resources". The gain represents the difference between
the sale proceeds to the Company, net of transaction costs, and the Company's
carrying amount of the dealers Advances, plus the present value of the estimated
cash flows to be received by the Company. In determining the gain on sale of
receivables, the Company assumed an excess cash flow discount rate of 15%,
cumulative credit losses of 14% and an interest rate on the underlying debt of
7.5%. The present value of such estimated excess cash flows has been recorded by
the Company as a retained interest in securitization of $13.2 million as of
December 31, 1998. The installment contracts supporting the dealer Advances
include contracts with origination dates ranging from July 1990 to June 1998,
with a weighted average age of 15 months. The amount of such contracts included
on the Company's balance sheet as of June 30, 1998 was $98.6 million, of which
$43.8 million was in non-accrual status. In addition, the Advances are supported
by installment contracts which had been previously written off for financial
statement purposes. The excess cash flows result from the amount by which
projected collections on the installment contracts exceeds i) the principal and
interest to be paid on the commercial paper and ii) the amount of dealer
holdback due to dealers.

In the securitization, the Company retained servicing responsibilities and
subordinated interests. The Company receives monthly servicing fees of 4% of the
collections on the installment contracts receivable, and rights to future cash
flows arising after the investors in the commercial paper received the return
for which they are contracted. The investors have no recourse to the Company's
other assets for failure of debtors to pay when due. The Company's retained
interests are generally restricted until investors have been fully paid and are
subordinate to investors' interests. Their value is subject to substantial
credit and interest rate risk and the timing of projected collections on the
transferred financial assets.

Other income increased, as a percent of total revenue, from 17.4% in 1997
to 20.4% in 1998. The increase is primarily due to i) revenues from the
Company's auction services business which the Company began operating in June
1998; ii) an increase in revenues from the Company's credit reporting subsidiary
and iii) servicing fees and interest earned on the retained interest in
securitization resulting from the Company's securitization of advance
receivables in July 1998. The increase is offset by a decrease in fees earned on
third party service contract products offered by dealers on installment
contracts, as the volume of this business has declined proportionately with the
decline in contract originations.

Operating Expenses. Operating expenses, as a percent of total revenue,
increased from 28.0% in 1997 to 41.5% in 1998. Operating expenses consist
primarily of salaries and wages, general and administrative, and sales and
marketing expenses.

The increase for the period is due in part to an increase in salaries and
wages. Salaries and wages increased due to i) increases in the Company's average
wage rates necessary to attract and retain quality personnel; ii) the Company's
purchase of the auction services business in June 1998; iii) information
technology personnel added to maintain the Company's new computer systems and
applications and; iv) severance compensation paid to or accrued for an executive
who terminated employment in 1998.

A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the "Affiliated
Company"), based upon the percentage of time spent working for the Affiliated
Company. The Company charged the Affiliated Company approximately $208,000 and
$226,000 in 1997 and 1998, respectively. Shared employees devote between 30% and
90% of their time to

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the Company, depending on their responsibilities. The Company believes that the
amounts charged by the Company are representative of the respective employees'
activities.

In addition, the increase in operating expenses is due to an increase in
general and administrative expenses. These expenses were higher in 1998
primarily due to increases in i) legal fees and settlement provisions resulting
from an increase in the frequency and magnitude of litigation against the
Company (See Item 3. "Legal Proceedings"); ii) depreciation and amortization
primarily resulting from the addition of new computer systems in 1997 and; iii)
audit fees charged by the Company's independent auditors. Also, the increase
results from general and administrative expenses at the Company's auction
services subsidiary.

Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, decreased from 52.0% in 1997 to 11.5% in 1998. The
provision for the year ended December 31, 1997 included a charge recorded to
reflect the enhancements in the Company's methodology for estimating its reserve
for Advances made possible by a new loan servicing system implemented by the
Company. Utilizing the new information made available upon the successful
implementation of this new system, the Company undertook an extensive review of
its exposure related to dealer Advances using a static pool analysis on a per
dealer basis. In order to reflect the impact of this analysis on the Company's
Advance reserve, additional provisions were recorded in 1997.

The provision for credit losses consists of two components: i) a provision
for loan losses for the earned but unpaid servicing fees or finance charges
recognized on contractually delinquent installment contracts and ii) a provision
for losses on Advances to dealers that are not expected to be recovered through
collections on the related installment contract receivable portfolio. The
decreases were primarily due to lower provisions needed for Advance losses,
based on the Company's static pool analysis. Advance balances are continually
reviewed by management utilizing the Company's loan servicing system which
allows management to estimate future collections for each dealer pool using
historical loss experience and a dealer by dealer static pool analysis. In
addition, the decreases were also due to lower provisions needed for loan losses
primarily resulting from a decrease in the percent of non-accrual installment
contracts receivable, which were 37.6% and 32.4% of gross receivables as of
December 31, 1997 and 1998, respectively.

Provision for Claims. The amount provided for insurance and service
contract claims, as a percent of total revenue, was 2.4% and 2.6% in 1997 and
1998, respectively. The increase corresponds with the increase, as a percent of
total revenue, in premiums earned from 6.9% in 1997 to 7.7% in 1998.

The Company has established claims reserves on accumulated estimates of
claims reported but unpaid plus estimates of incurred but unreported claims. The
Company believes the reserves are adequate to cover future claims associated
with the programs.

Interest Expense. Interest expense, as a percent of total revenue,
increased from 16.8% in 1997 to 18.0% in 1998. Total interest expense decreased
from $27.6 million in 1997 to $25.6 million in 1998. The $2.0 million decrease
in interest expense for 1998 is primarily the result of a decrease in the amount
of average outstanding borrowings, which resulted from i) the positive cash flow
generated primarily from collections on installment contracts receivable
exceeding cash Advances to dealers and payments of dealer holdbacks and ii)
$49.3 million raised in July 1998 from the securitization of advance
receivables. The decrease for 1998 was partially offset by higher average
interest rates during the year. The increase in the average interest rate is
primarily the result of increases in the Company's Eurocurrency-based borrowing
and facility fee margins under its credit agreement with a commercial bank
syndicate, due to the downgrade of the Company's credit rating with Moody's
Investor Service from Baa3 to Ba2, and with Standard and Poor's from BBB- to BB
effective October 22, 1997, and a further downgrade by Moody's Investor Service
on June 24, 1998 from Ba2 to Ba3. Additionally, the increase in the average
interest rate is due to increases in the interest rate on outstanding borrowings
under the Company's note purchase agreements resulting from amendments due to
the Company's securitization of advance receivables.

Operating Income. As a result of the aforementioned factors, operating
income increased from $1.3 million in 1997 to $37.6 million in 1998, a increase
of $36.3 million.

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Foreign Exchange Loss. The Company incurred a foreign exchange loss of
$41,000 and $116,000 in 1997 and 1998, respectively. The losses were the result
of exchange rate fluctuations between the U.S. dollar and foreign currency on
unhedged intercompany balances between the Company and subsidiaries which
operate outside the United States.

Provision (Credit) for Income Taxes. The provision (credit) for income
taxes increased from ($0.2) million in 1997 to $12.6 million in 1998. The
increase is due to higher pretax profits in 1998. For 1998, the effective tax
rate was 33.5%. The Company provides income taxes on its foreign earnings at the
statutory rate in effect for the applicable country where such earnings arise.
The principal foreign earnings of the Company arise from its operations in the
United Kingdom, where the statutory rate is lower than the U.S. statutory tax
rate.

Year Ended December 31, 1996 Compared To Year Ended December 31, 1997

Total Revenue. Total revenue increased from $123.9 million in 1996 to
$164.2 million in 1997, an increase of $40.3 million or 32.5%. This increase was
primarily due to the increase in finance charge revenue resulting from an
increase in the average installment contracts receivable balance. The increase
in gross installment contracts receivable was primarily the result of contract
originations for the period exceeding the sum of collections on installment
contracts and charge offs of installment contracts for the period.

The average yield on the Company's portfolio, calculated using finance
charge revenue divided by average net installment contracts receivable, was
approximately 10.9% and 11.2% in 1996 and 1997, respectively. The increase in
the average yield principally resulted from the Company changing its accounting
policy relating to the write-off of installment contracts receivable. The
revised policy requires write-off of delinquent installment contracts receivable
at nine months on a recency basis compared to one year under the old policy.
This change was partially offset by an increase in the percent of non-accrual
installment contracts (which were 34.1% and 37.6% of contracts as of December
31, 1996 and 1997, respectively). The increase in the percent of non-accrual
contracts was principally due to a change in the Company's non-accrual policy in
1997 to 90 days measured on a recency basis from 120 days measured on a
contractual basis, as well as a maturing of the installment contract receivable
portfolio due to lower origination growth. The Company implemented the change in
the non-accrual policy in an effort to more quickly identify unprofitable dealer
relationships.

Also contributing to the increase in total revenue was vehicle service
contract fees and other income which increased as a percent of total revenue
from 13.2% in 1996 to 17.4% in 1997. This increase was primarily due to fees
earned from the sale of third party service contract and credit life products
offered by dealers, which increased from $6.5 million in 1996 to $15.8 million
in 1997, and an increase in interest earned on floor plan financing which
resulted from increased floor plan balances in 1997. Earned dealer enrollment
fees increased, as a percent of total revenue, from 4.1% in 1996 to 4.5% in
1997. This increase was due to the continued increase in the number of new
dealers enrolling in the Company's financing program, particularly during 1996,
as these fees are deferred and amortized over the estimated repayment term of
the outstanding dealer Advance. Premiums earned decreased, as a percent of total
revenue, from 7.7% in 1996 to 6.9% in 1997. This decrease was primarily the
result of decreases, as a percent of total revenue, in premiums reinsured under
the Company's service contract and credit life insurance programs.

Operating Expenses. Operating Expenses, as a percentage of total revenue,
increased from 24.6% in 1996 to 28.0% in 1997. Operating expenses consist
primarily of salaries and wages, general and administrative, and sales and
marketing.

The increase for the period was due in part to an increase in salaries and
wages expense. Salaries and wages increased due to increases in employee
headcount, particularly collection personnel added to service the Company's
larger installment contract portfolio. To a lesser extent, the increase is due
to increases in the Company's average wage rates.

A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the "Affiliated
Company"), based upon the percentage of time spent working for the Affiliated
Company. The Company charged the Affiliated Company approximately $311,000

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20

and $208,000 in 1996 and 1997, respectively. Shared employees devote between 30%
and 90% of their time to the Company, depending on their responsibilities. The
Company believes that the amounts charged by the Company are representative of
the respective employees' activities.

In addition, the increase in operating expenses was due to an increase in
general and administrative expenses. These expenses were higher in 1997
primarily due to: (i) an increase in depreciation and amortization resulting
from the addition of new computer systems which became operational in 1997 and
(ii) an increase in legal expenses resulting from the increase in the frequency
and severity of litigation in 1997. In addition, this increase was due to the
$500,000 write-off of computer software in 1997 no longer used in the Company's
operations.

To a lesser extent, the increase in the operating expense was due to an
increase in the sales and marketing expenses. The increase corresponds with the
increase in earned dealer enrollment fees, as the sales commissions paid for
dealer enrollments are deferred and amortized to expense over the estimated
repayment term of the outstanding dealer Advance. In addition, the increase was
also the result of increases in advertising and other promotions in 1997.

Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, increased from 10.5% in 1996 to 52.0% in 1997. This
increase was primarily the result of a charge recorded to reflect the
enhancements in the Company's methodology for estimating its reserve for
Advances made possible by a new loan servicing system implemented by the
Company. Utilizing the new information made available upon the successful
implementation of this new system, the Company undertook an extensive review of
its exposure related to dealer Advances using a static pool analysis on a per
dealer basis. In order to reflect the impact of this analysis on the Company's
Advance reserve additional provisions were recorded in 1997.

Provision for Claims. The amount provided for insurance and service
contract claims, as a percent of total revenue, decreased from 2.5% in 1996 to
2.4% in 1997. This decrease corresponds with decreases, as a percent of total
revenue, in premiums earned from 7.7% in 1996 to 6.9% in 1997.

The Company has established claims reserves based on accumulated estimates
of claims reported but unpaid, plus estimates of incurred but unreported claims.
The Company believes the reserves are adequate to cover future claims associated
with the programs.

Interest Expense. Interest expense, as a percent of total revenue,
increased from 10.9% in 1996 to 16.8% in 1997. This increase was a result of an
increase in the amount of average outstanding borrowings. To a lesser extent,
interest expense increased due to a higher average interest rate. The increase
in the average interest rate is primarily the result of the sale of $71.75
million in senior notes, at a fixed rate of interest, in March 1997. The
increase was also attributable to the downgrade of the Company's credit rating
with Moody's Investor Service from Baa3 to Ba2 and with Standard and Poor's from
BBB- to BB effective October 22, 1997. As a result of these downgrades, the
Company's Eurocurrency-based borrowing margins under the $250 million credit
agreement were increased from 82.5 basis points to 120 basis points in
accordance with the terms of the credit agreement.

Operating Income. As a result of the aforementioned factors, operating
income decreased from $63.6 million in 1996 to $1.3 million in 1997, a decrease
of $62.3 million or 97.9%.

Foreign Exchange Gain (Loss). The Company incurred a foreign exchange gain
of $27,000 in 1996 and a foreign exchange loss of $41,000 in 1997. The gain and
loss were the result of exchange rate fluctuations between the U.S. dollar and
foreign currency on unhedged intercompany balances between the Company and
subsidiaries which operate outside the United States.

Provision (Credit) for Income Taxes. The provision (credit) for income
taxes decreased from $22.1 million in 1996 to ($0.2) million in 1997. The
decrease was due to lower pretax profits in 1997.

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21

CREDIT LOSS POLICY AND EXPERIENCE

When an installment contract is originated, the Company generally pays a
cash Advance to the dealer. These Advance balances represent the Company's
primary risk of loss related to the funding activity with the dealers.

The Company maintains a reserve against Advances to dealers that are not
expected to be recovered through collections on the related contract portfolio.
For purposes of establishing the reserve, future collections are reduced to
present-value in order to achieve a level yield over the remaining term of the
Advance equal to the expected yield at the origination of the impaired Advance.
During 1997, the Company implemented a new loan servicing system which allows
the Company to better estimate future collections for each dealer pool using
historical loss experience and a dealer by dealer static pool analysis. The
Company took a non-cash charge during 1997 to reflect the impact of this
enhancement in the Company's methodology for estimating the Advance reserve.
Future reserve requirements will depend in part on the magnitude of the variance
between management's prediction of future collections and the actual collections
that are realized. Ultimate losses may vary from current estimates and the
amount of provision, which is a current expense, may be either greater or less
than actual charge offs. The Company charges off dealer Advances against the
reserve at such time and to the extent that the Company's static pool analysis
determines that the Advance is completely or partially impaired.

The Company also maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected future losses in the
portfolio of receivables. The risk of loss to the Company related to the
installment contracts receivable balances relates primarily to the earned but
unpaid servicing fee or finance charge recognized on contractually delinquent
accounts.

Servicing fees, which are booked as finance charges, are recognized under
the interest method of accounting until the underlying obligation is 90 days
past due on a recency basis. At such time, the Company suspends the accrual of
revenue and makes a provision for credit losses equal to the earned but unpaid
revenue. In all cases, contracts on which no material payment has been received
for nine months are charged off against dealer holdbacks, unearned finance
charges and the allowance for credit losses.

During the third quarter of 1997, the Company changed its non-accrual
policy from 120 days on a contractual basis to 90 days on a recency basis and,
during the fourth quarter of 1997, changed its charge off policy to nine months
on a recency basis from one year. The Company believes these changes will allow
for earlier identification of underperforming dealer pools.

The following table sets forth information relating to charge offs, the
allowance for credit losses, the reserve on Advances, and dealer holdbacks. 1998
and 1997 charge offs are based on nine month recency method; 1996 charge offs
are based on one year recency method.

(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------

Provision for credit losses -- installment
contracts..................................... $ 7,222 $ 11,072 $ 3,432
Provision for credit losses -- Advances......... 5,849 74,400 12,973
Charged against dealer holdbacks................ 103,497 374,646 359,846
Charged against unearned finance charges........ 23,045 82,748 81,632
Charged against allowance for credit losses..... 2,863 10,138 8,392
-------- -------- --------
Total contracts charged off..................... $129,405 $467,532 $449,870
======== ======== ========
Net charge off against the reserve on
Advances...................................... $ 444 $ 71,391 $ 9,744
======== ======== ========

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AS OF DECEMBER 31,
--------------------
CREDIT RATIOS 1996 1997 1998
- ------------- ---- ---- ----

Allowance for credit losses as a percent of gross
installment contracts receivable.......................... 1.0% 1.0% 0.9%
Reserve on Advances as a percent of Advances................ 1.7% 2.8% 4.6%
Gross dealer holdbacks as a percent of gross installment
contracts receivable...................................... 79.8% 79.9% 79.8%

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal need for capital is to fund cash Advances made to
dealers in connection with the acceptance of installment contracts and for the
payment of dealer holdbacks to dealers who have repaid their Advance balances.
These cash outflows to dealers decreased from $520.6 million in 1997 to $290.6
million in 1998. These amounts have historically been funded from cash
collections on installment contracts, cash provided by operating activities and
draws under the Company's credit agreements. During 1998, the Company paid down
approximately $133.7 million on its credit agreements and repaid $39.0 million
on its outstanding senior notes. The positive cash flow during 1998 is primarily
a result of collections on installment contracts receivable exceeding cash
Advances to dealers and payments of dealer holdbacks. In addition, the Company
raised approximately $49.3 million through the securitization of dealer Advances
during the third quarter of 1998. To a lesser extent, the positive cash flow is
a result of refunds received from the overpayment of 1997 U.S. federal income
taxes. During the fourth quarter of 1997 and in 1998, the Company implemented
more conservative Advance programs and reduced business with marginally
profitable and unprofitable dealers in order to improve the performance of its
portfolio of installment contracts. These changes have resulted in reduced
levels of originations and cash Advances to dealers in the fourth quarter of
1997 and in 1998, a trend which is expected to continue in future periods. To
the extent that this trend continues, the Company could continue to experience a
decrease in its need for capital in future periods.

The Company has a $125 million credit agreement with a commercial bank
syndicate. The facility has a commitment period through June 15, 1999 and is
subject to annual extensions for additional one year periods at the request of
the Company with the consent of each of the banks in the facility. The agreement
provides that interest is payable at the Eurocurrency rate plus 140 basis
points, or at the prime rate. The Eurocurrency borrowings may be fixed for
periods up to six months. The credit agreement has certain restrictive
covenants, including limits on the ratio of the Company's debt-to-equity, debt
to Advances, debt to gross installment contracts receivable, Advances to
installment contracts receivable, fixed charges to net income, limits on the
Company's investment in its foreign subsidiaries and requirements that the
Company maintain a specified minimum level of net worth. Borrowings under the
credit agreement are secured through a lien on most of the Company's assets on
an equal and ratable basis with the Company's senior notes. As of December 31,
1998, there was approximately $79.0 million outstanding under this facility.

In July, 1998, the Company completed a $50 million securitization of
advance receivables. Pursuant to this transaction, the Company contributed
dealer Advances having a carrying amount of approximately $56 million and
received approximately $49.3 million in financing from an institutional
investor. The financing, which is nonrecourse to the Company, bears interest at
a floating rate equal to the thirty day commercial paper rate plus 1% with a
maximum of 7.5% and is anticipated to fully amortize within thirty months. The
Company receives a monthly servicing fee equal to 4% of the collections of the
contributed installment contracts receivable. Except for the servicing fee, the
Company will not receive any portion of collections on the installment contracts
receivable until the underlying indebtedness has been repaid in full. The
proceeds of the securitization were used to reduce indebtedness under the
Company's credit agreement.

When borrowing to fund the operations of its foreign subsidiaries, the
Company's policy is to borrow funds denominated in the currency of the country
in which the subsidiary operates, thus mitigating the Company's exposure to
foreign exchange fluctuations.

The Company maintains a significant dealer holdback on installment
contracts accepted which assists the Company in funding its long-term cash flow
requirements.

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As the Company's $125 million credit facility expires on June 15, 1999, the
Company will be required to renew the facility or refinance any amounts
outstanding under this facility on or before such date. As of March 24, 1999,
there was approximately $48.0 million outstanding under this facility. In
addition, in 1999, the Company will have $42.2 million of principal maturing on
its senior notes and $3.5 million maturing on a mortgage loan. The Company
believes that the $125 million credit facility will be renewed with similar
terms and a similar commitment amount and that the mortgage loan will be
refinanced.

Pending the appeal of the Missouri Litigation, the Company may be required
to post a bond or letter of credit, which would reduce availability under the
Company's credit agreement. Based upon anticipated cash flows, management
believes that amounts available under its credit agreement, cash flow from
operations and various financing alternatives available will provide sufficient
financing for current debt maturities and for future operations. Failure to
complete the refinancing or failure to obtain other financing alternatives may
have a material adverse effect on the Company's operations.

MARKET RISK

The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix and developments
in the financial markets.

The Company is exposed primarily to market risks associated with movements
in interest rates and foreign currency exchange rates. The Company believes that
it takes the necessary steps to appropriately reduce the potential impact of
interest rate and foreign exchange exposures on the Company's financial position
and operating performance.

Interest Rate Risk. The Company requires substantial amounts of cash to
fund cash Advances to dealers in connection with the acceptance of installment
contracts. 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. The
Company manages such risk by converting portions of its floating rate debt to
long-term fixed rates on a periodic basis, as deemed necessary.

As of December 31, 1998, the Company had $ 79.1 million of floating rate
debt outstanding. For every 1% increase in interest rates, annual after-tax
earnings would decrease by approximately $500,000, assuming the Company
maintains a level amount of floating rate debt and assuming an immediate
increase in rates.

Foreign Currency Risk. The Company is exposed to foreign currency risk from
the possibility of 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. It is the Company's policy to borrow and lend in local
currencies to mitigate such risks. For an immediate, hypothetical 10% decrease
in quoted foreign currency exchange rates, annual after tax earnings would have
declined by approximately $700,000 at December 31, 1998. The potential loss in
net asset values from such a decrease would be approximately $6 million as of
December 31, 1998. Immediate changes in interest rates and foreign currency
exchange rates discussed in the proceeding paragraphs are hypothetical rate
scenarios, used to calibrate risk, and do not currently represent management's
view of future market developments.

YEAR 2000 UPDATE

The year 2000 issue is the result of computer programs and microprocessors
using two digits rather than four to define the applicable year (the "Year 2000
Issue"). Such programs or microprocessors may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations leading to disruptions in the Company's activities and
operations. If the Company or third parties with which it has a significant
relationship fail to make necessary modifications, conversions and contingency
plans on a timely basis, the Year 2000 Issue could have a material adverse
effect on the Company's business, financial condition and results of operations.
However, the effect cannot be quantified at

22
24

this time because the Company cannot accurately estimate the magnitude, duration
or ultimate impact of noncompliance by its systems or those of vendors and other
third parties. The Company believes that its competitors face a similar risk.
Although the risk is not presently quantifiable, the following disclosure is
intended to summarize the Company's actions to minimize its risk from the Year
2000 Issue. Programs that will operate in the year 2000 unaffected by the change
in year from 1999 to 2000 are referred to herein as "year 2000 compliant."

State of Readiness. The Company employs three major computer systems in its
U.S. Operations: (i) the Application and Contract System (ACS) which is used
from the time a dealer faxes an application to the Company until the contract is
received and funded, (ii) the Loan Servicing System (LSS) which contains all
loan and payment information and is the primary source for management
information reporting, and (iii) the Collection System (CS) which is used by the
Company's collections personnel to track and service all active customer
accounts. The ACS and LSS went into production in 1997 and were developed by the
Company in Oracle 7.3 and Oracle Forms 4.5 which are year 2000 compliant. The CS
is a third party software package which has been upgraded to be year 2000
compliant.

The Company employs one major computer system in its United Kingdom
operations which is a third party software package. The vendor has certified to
the Company that the system is year 2000 compliant. The Company has finished
testing on this system as well as all other mission critical systems to ensure
year 2000 compliance. All non-mission critical systems are anticipated to be
year 2000 compliant by June 30, 1999.

The Company has completed a comprehensive inventory of all other computer
hardware, software, third party vendors and other non-information technology
systems. All items identified were prioritized and assigned to a responsible
party to investigate and ensure that the item becomes year 2000 compliant by the
end of 1999. While modifications and testing of all mission critical and
non-mission critical systems is substantially complete, these systems will
undergo additional testing in 1999.

Costs. The Company expects that all software installations or other
modifications will be expensed as incurred, while the cost for new software will
be capitalized and amortized over the software's useful life. At this time, the
Company anticipates spending no more than $50,000 in its efforts to become year
2000 compliant, of which approximately $25,000 has been spent to date. Estimates
of time, cost and risks are based on currently available information.
Developments that could affect estimates include, without limitation, the
availability of trained personnel, the ability to locate and correct all
non-compliant systems, cooperation and remediation success of third parties
material to the Company, and the ability to correctly anticipate risks and
implement suitable contingency plans in the event of system failures at the
Company or third parties.

Risks. Because the Company expects that the systems within its control will
be year 2000 compliant before the end of 1999, the Company believes that the
most reasonably likely worst case scenario is a compliance failure by a third
party upon which the Company relies. Such a failure would likely have an effect
on the Company's business, financial condition and results of operations. The
magnitude of that effect however, cannot be quantified at this time because of
variables such as the type and importance of the third party, the possible
effect on the Company's operations and the Company's ability to respond. Thus,
there can be no assurance that there will not be a material adverse effect on
the Company if such third parties do not remediate their systems in a timely
manner. In addition, it is possible that the Company could experience a failure
of a non-mission critical system for a period of time, which could result in a
minor disruption in some internal operations.

Contingency Plans. Contingency planning is an integral part of the
Company's year 2000 readiness project. The Company has and is continuing to
develop contingency plans, which document the processes necessary to maintain
critical business functions should a significant third party system or mission
critical internal system fail. These contingency plans generally include the
repair of existing systems and, in some instances, the use of alternative
systems or procedures.

The disclosure in this section contains information regarding Year 2000
readiness which constitutes "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act. Readers are

23
25

cautioned that forward-looking statements contained in the Year 2000 Update
should be read in conjunction with the Company's disclosures under the heading
"Forward-Looking Statements".

FORWARD-LOOKING STATEMENTS

The foregoing discussion and analysis contains a number of forward looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, both as amended with respect to expectations for future
periods which are subject to various risks and uncertainties. The risks and
uncertainties are detailed from time to time in reports filed by the Company
with the Securities and Exchange Commission, including forms 8-K, 10-Q, and
10-K, and include, among others, competition from traditional financing sources
and from non-traditional lenders, availability of funding at competitive rates
of interest, adverse changes in applicable laws and regulations, adverse changes
in economic conditions, year 2000 compliance by the Company or third parties to
the Company, adverse changes in the automobile or finance industries or in the
non-prime consumer finance market, the Company's ability to maintain or increase
the volume of installment contracts accepted and historical collection rates and
the Company's ability to complete various financing alternatives.

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.

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Credit Acceptance Corporation:

We have audited the accompanying consolidated balance sheet of Credit
Acceptance Corporation and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.

In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Detroit, Michigan
January 27, 1999

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors and Shareholders
Credit Acceptance Corporation:

We have audited the accompanying consolidated balance sheet of Credit
Acceptance Corporation (a Michigan corporation) and subsidiaries as of December
31, 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1997. 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 generally accepted auditing
standards. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Credit
Acceptance Corporation and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Detroit, Michigan
February 2, 1998

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
1997 1998
---------- --------

ASSETS:
Cash and cash equivalents................................. $ 349 $ 13,775
Investments -- held to maturity........................... 9,973 10,191
Installment contracts receivable.......................... 1,049,818 671,768
Allowance for credit losses............................... (13,119) (7,075)
---------- --------
Installment contracts receivable, net.................. 1,036,699 664,693
---------- --------
Floor plan receivables:
Nonaffiliated companies................................ 8,137 9,455
Affiliated companies................................... 11,663 4,616
---------- --------
19,800 14,071
---------- --------
Notes receivable:
Nonaffiliated companies................................ 700 1,627
Affiliated companies................................... 531 651
---------- --------
1,231 2,278
---------- --------
Retained interest in securitization....................... -- 13,229
Property and equipment, net............................... 20,839 20,627
Other assets.............................................. 26,719 13,065
---------- --------
Total Assets........................................... $1,115,610 $751,929
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Senior notes.............................................. $ 175,150 $136,165
Lines of credit........................................... 212,717 79,067
Mortgage loan payable to bank............................. 3,799 3,566
Income taxes payable...................................... -- 776
Accounts payable and accrued liabilities.................. 20,362 22,423
Deferred dealer enrollment fees, net...................... 421 296
Dealer holdbacks, net..................................... 439,554 222,275
Deferred income taxes, net................................ 14,616 11,098
---------- --------
Total Liabilities...................................... 866,619 475,666
---------- --------
CONTINGENCIES (NOTE 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued................................
Common stock, $.01 par value, 80,000,000 shares
authorized, 46,113,115 and 46,291,487 shares issued and
outstanding in 1997 and 1998, respectively............. 461 463
Paid-in capital........................................... 128,336 129,914
Retained earnings......................................... 118,023 142,989
Accumulated other comprehensive income-cumulative
translation adjustment................................. 2,171 2,897
---------- --------
Total Shareholders' Equity............................. 248,991 276,263
---------- --------
Total Liabilities and Shareholders' Equity............. $1,115,610 $751,929
========== ========

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, EXCEPT FOR INCOME PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
----------- ----------- -----------

REVENUE:
Finance charges................................... $ 92,944 $ 117,020 $ 98,007
Premiums earned................................... 9,653 11,304 10,904
Dealer enrollment fees............................ 5,028 7,313 3,614
Gain on sale of advance receivables, net.......... -- -- 685
Other income...................................... 16,309 28,598 29,139
----------- ----------- -----------
Total revenue.................................. 123,934 164,235 142,349
----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses................................ 30,627 45,911 59,004
Provision for credit losses....................... 13,071 85,472 16,405
Provision for claims.............................. 3,060 3,911 3,734
Interest.......................................... 13,568 27,597 25,565
----------- ----------- -----------
Total costs and expenses....................... 60,326 162,891 104,708
----------- ----------- -----------
Operating income.................................... 63,608 1,344 37,641
Foreign exchange gain (loss)...................... 27 (41) (116)
----------- ----------- -----------
Income before provision for income taxes............ 63,635 1,303 37,525
Provision (credit) for income taxes............... 22,126 (234) 12,559
----------- ----------- -----------
Net income.......................................... $ 41,509 $ 1,537 $ 24,966
=========== =========== ===========
Net income per common share:
Basic............................................. $ .91 $ .03 $ .54
=========== =========== ===========
Diluted........................................... $ .89 $ .03 $ .53
=========== =========== ===========
Weighted average shares outstanding:
Basic............................................. 45,605,159 46,081,804 46,190,208
Diluted........................................... 46,623,655 46,754,713 46,960,290

See accompanying notes to consolidated financial statements.

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30

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

(DOLLARS IN THOUSANDS)
ACCUMULATED
TOTAL OTHER
SHAREHOLDERS' COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
EQUITY INCOME STOCK CAPITAL EARNINGS INCOME
------------- ------------- ------ ------- -------- -------------

Balance -- December 31, 1995....... $198,975 $455 $123,878 $ 74,977 $ (335)
Comprehensive income:
Net income..................... 41,509 $41,509 41,509
-------
Other comprehensive income:
Foreign currency translation
adjustment................ 4,136 4,136 4,136
Tax on other comprehensive
income.................... (1,448)
-------
Other comprehensive income... 2,688
-------
Total comprehensive income....... 44,197
=======
Stock options exercised.......... 1,528 1 1,527
Issuance of 200,000 common shares
for acquisition of
subsidiary..................... (5) 2 (7)
-------- ---- -------- -------- -------
Balance -- December 31, 1996....... 246,143 458 125,398 116,486 3,801
Comprehensive income:
Net income..................... 1,537 1,537 1,537
-------
Other comprehensive income:
Foreign currency translation
adjustment................ (1,630) (1,630) (1,630)
Tax on other comprehensive
income.................... 570
-------
Other comprehensive income..... (1,060)
-------
Total comprehensive income....... 477
=======
Stock options exercised.......... 2,874 3 2,871
Dealer stock option plan
expense........................ 67 67
-------- ---- -------- -------- -------
Balance -- December 31, 1997....... 248,991 461 128,336 118,023 2,171
Comprehensive income:
Net income..................... 24,966 24,966 24,966
-------
Other comprehensive income:
Foreign currency translation
adjustment................ 726 726 726
Tax on other comprehensive
income.................... (254)
-------
Other comprehensive income... 472
-------
Total comprehensive income....... $25,438
=======
Stock options exercised.......... 1,430 2 1,428
Dealer stock option plan
expense........................ 150 150
-------- ---- -------- -------- -------
Balance-- December 31, 1998........ $276,263 $463 $129,914 $142,989 $ 2,897
======== ==== ======== ======== =======

See accompanying notes to consolidated financial statements

29
31

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------

Cash Flows From Operating Activities:
Net Income............................................... $ 41,509 $ 1,537 $ 24,966
Adjustments to reconcile cash provided by operating
activities --
Provision (credit) for deferred income taxes.......... 964 5,628 (3,518)
Depreciation.......................................... 1,369 2,550 3,793
Gain on sale of advance receivables, gross............ -- -- (1,261)
Amortization of retained interest in securitization... -- -- (951)
Loss on retirement of property and equipment.......... -- 512 --
Provision for credit losses........................... 13,071 85,472 16,405
Dealer stock option plan expense...................... -- 67 150
Change in operating assets and liabilities --
Accounts payable and accrued liabilities.............. 10,842 (8,759) 2,061
Income taxes payable.................................. 2,355 (2,569) 776
Unearned insurance premiums, insurance reserves and
fees................................................ 2,371 1,450 (238)
Deferred dealer enrollment fees, net.................. 615 (1,843) (125)
Other assets.......................................... (165) (21,915) 13,654
--------- --------- ---------
Net cash provided by operating activities........... 72,931 62,130 55,712
--------- --------- ---------
Cash Flows From Investing Activities:
Principal collected on installment contracts
receivable............................................ 280,051 370,059 368,873
Advances to dealers and payments of dealer holdbacks..... (540,077) (520,609) (290,605)
Net proceeds from sale of advance receivables............ -- -- 49,275
Purchase of investments held to maturity................. (3,795) (3,653) (218)
Decrease (increase) in floor plan
receivables -- affiliated companies................... (815) 140 7,047
Increase in floor plan receivables -- non-affiliated
companies............................................. (1,429) (4,447) (1,318)
Increases in notes receivable -- affiliated companies.... (600) (363) (309)
Decreases in notes receivable -- affiliated companies.... 298 1,049 189
Increases in notes receivable -- non-affiliated
companies............................................. (903) (345) (1,254)
Decreases in notes receivable -- non-affiliated
companies............................................. 1,774 1,091 327
Issuance of common shares for acquisition................ (5) -- --
Purchases of property and equipment...................... (5,985) (8,943) (3,581)
--------- --------- ---------
Net cash provided by (used in) investing
activities....................................... (271,486) (166,021) 128,426
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from sale of senior notes....................... 70,000 71,750 --
Repayment of senior notes................................ (6,600) (20,000) (38,985)
Net borrowings (repayments) under line of credit
agreements............................................ 129,923 51,235 (133,650)
Repayment of other debt.................................. (204) (218) (233)
Proceeds from stock options exercised.................... 1,528 2,874 1,430
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 194,647 105,641 (171,438)
--------- --------- ---------
Effect of exchange rate changes on cash............. 4,136 (1,630) 726
--------- --------- ---------
Net increase in cash and cash equivalents........... 228 120 13,426
Cash and cash equivalents beginning of period.............. 1 229 349
--------- --------- ---------
Cash and Cash Equivalents End of Period.................... $ 229 $ 349 $ 13,775
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................. $ 11,114 $ 27,464 $ 23,142
========= ========= =========
Cash paid during the period for income taxes............. $ 18,280 $ 14,887 $ 17,812
========= ========= =========

See accompanying notes to consolidated financial statements.

30
32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Principal Business. Credit Acceptance Corporation and its subsidiaries
("CAC" or the "Company") is a specialized financial services company which
provides funding, receivables management, collection, sales training and related
products and services to automobile dealers located in the United States, the
United Kingdom, Canada and Ireland. The Company assists such dealers by
providing an indirect source of financing for buyers with limited access to
traditional sources of consumer credit due to past credit history. Installment
contracts originated and assigned to the Company by automobile dealers are
generally considered to have a high risk of default. To a significantly lesser
extent, CAC provides inventory floor plan financing and working capital loans
for dealers secured by inventory and the related cash collections owed to the
dealer by CAC.

Credit Acceptance Corporation UK, Ltd., CAC of Canada, Ltd., and Credit
Acceptance Corporation of Ireland Ltd. are all wholly-owned subsidiaries of the
Company which operate in their respective countries. These subsidiary companies
offer essentially the same dealer programs as are offered in the United States.

The dealer assigns title to the installment contract and the security
interest in the vehicle to the Company. At the time it accepts the assignment of
a contract, CAC records the gross amount of the contract as a gross installment
contract receivable. The Company records the amount of its servicing fee as an
unearned finance charge with the remaining portion recorded as a dealer
holdback. At the time of acceptance, contracts which meet certain criteria are
eligible for a cash advance, which is computed on a formula basis. Advances are
non-interest bearing and are secured by the cash collections on all of the
installment contracts receivable assigned from an individual dealer. Dealer
advances are netted against dealer holdbacks in the accompanying consolidated
financial statements, as dealer holdbacks are not paid until such time as all
advances related to such dealer have been recovered.

CAC collects the scheduled monthly payments based on contractual
arrangements with the consumer. Monthly cash collections are remitted to the
dealer subject to the Company first: (i) being reimbursed for certain collection
costs associated with all installment contracts originated by such dealer; (ii)
reducing the collections by the Company's servicing fee; and (iii) recovering
the aggregate advances made to such dealer.

Upon enrollment into the Company's financing program, the dealer enters
into a servicing agreement with CAC which defines the rights and obligations of
CAC and the dealer. The servicing agreement may be terminated by the Company or
by the dealer (so long as there is no event of default or an event which with
the lapse of time, giving of notice or both, would become an event of default)
upon 30 days prior written notice. The Company may also terminate the servicing
agreement immediately in the case of an event of default by the dealer. Upon any
termination by the dealer or in the event of a default, the dealer must
immediately pay the Company: (i) any unreimbursed collection costs; (ii) any
unpaid advances and all amounts owed by the dealer to the Company; and (iii) a
termination fee equal to the unearned finance charge of the then outstanding
amount of the installment contracts originated by such dealer and accepted by
the Company.

Ancillary Products and Services. Credit Acceptance Corporation Life
Insurance Company ("CAC Life"), Buyers Vehicle Protection Plan, Inc. ("BVPP")
and Credit Acceptance Reinsurance, LTD. ("CAC Reinsurance"), all wholly-owned
subsidiaries of the Company, provide additional services to participating
dealers.

CAC Life is engaged primarily in the business of reinsuring credit life and
disability insurance policies issued to borrowers under installment contracts
originated by participating dealers. CAC advances to dealers an amount equal to
the credit life and disability insurance premium on contracts 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
installment contract for the outstanding balance payable in the event of death
or disability of the debtor. Premiums are ceded to CAC Life on both an earned
and written basis and are earned over the life of the contracts using pro rata
and sum-of-digits methods. CAC Life bears the risk of loss attendant to claims
under the coverages ceded to it.
31
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
BVPP administers short-term limited extended service contracts offered by
participating dealers. In connection therewith, BVPP bears the risk of loss for
any repairs covered under the service contract. Income is recognized on a
straight-line basis over the life of the service contracts. In addition, BVPP
has relationships with third party service contract providers which pay BVPP a
fee on service contracts included on installment contracts financed through
participating dealers. BVPP does not bear any risk of loss for covered claims on
these third party service contracts. The income from the non-refundable fee is
recognized upon acceptance of the installment contract. The Company advances to
dealers an amount equal to the purchase price of the vehicle service contract on
contracts accepted by the Company which include vehicle service contracts.

CAC has arrangements with insurance carriers and a third party
administrator to market and provide claims administration for a dual interest
collateral protection program. This insurance program, which insures the
financed vehicle against physical damage up to the lesser of the cost to repair
the vehicle or the unpaid balance owed on the related installment contract, is
made available to borrowers who finance vehicles through participating dealers.
If desired by a borrower, collateral protection insurance coverage is written
under group master policies issued by unaffiliated insurance carriers to the
Company. As part of the program, the insurance carriers cede insurance coverages
and premiums (less a fee) to CAC Reinsurance, which acts as a reinsurer of such
coverages. As a result, CAC Reinsurance bears the risk of loss attendant to
claims under the coverages ceded to it, and earns revenues resulting from
premiums ceded and the investment of such funds.

Other Services. Montana Investment Group, Inc. ("Montana") and Arlington
Investment Company ("Arlington"), wholly-owned subsidiaries of the Company,
provide additional sources of revenue to the Company. Montana supplies risk
assessment and fraud alert information and computerized skiptracing services
regarding borrowers to companies serving the Non-prime Consumer market.
Arlington provides a full range of auction services to vehicle suppliers to
process and sell vehicles to buyers at auctions.

Significant accounting policies are described in the following paragraphs.

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 units: North American
automotive finance, U.K./ Ireland automotive finance, credit reporting services,
and auction services. See Note 12 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 such estimation
techniques include the reserve against advances and the allowances for credit
losses. Actual results could differ from those estimates.

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 accumulated as a separate
component of shareholders' equity.

32
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
On January 1, 1999, 11 of 15 member countries of the European Monetary
Union established fixed conversion rates between their existing currencies and
adopted the euro as their new common currency. The euro trades on currency
exchanges and the legacy currencies remain legal tender in the participating
countries for a transition period until January 1, 2002. Beginning on January 1,
2002, euro denominated bills and coins will be issued and legacy currencies will
be withdrawn from circulation.

The Company will assess and address the potential impact to CAC that may
result from the euro conversion, as the Company has operations in both the
United Kingdom and Ireland. These issues include, but are not limited to: 1) the
technical challenges to adapt information systems to accommodate euro
transactions; 2) the impact on currency exchange rate risks; 3) the impact on
existing contracts; and 4) tax and accounting implications. The Company expects
that the euro conversion will not have a material adverse impact on its
consolidated financial condition or results of operations.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of readily marketable securities with original
maturities of three months or less.

INVESTMENTS

Investments consist principally of short-term money market funds and U.S.
Treasury Securities which the Company has both the intent and the ability to
hold to maturity.

INSTALLMENT CONTRACTS RECEIVABLE

Installment contracts receivable are collateralized by vehicle titles, and
the Company has the right to repossess the vehicle in the event that the
consumer defaults on the payment terms of the contract. Repossessed collateral
is valued at the lower of the carrying amount of the receivable or estimated
fair value, less estimated costs of disposition, and is classified in
installment contracts receivable on the balance sheets. At December 31, 1998 and
1997, repossessed assets totaled approximately $10.2 million and $13.8 million,
respectively.

The Company changed its policy relating to non-accrual loans in the third
quarter of 1997 to 90 days measured on a recency basis from 120 days measured on
a contractual basis. The Company believes this change allows for earlier
identification of underperforming dealer pools.

During the fourth quarter of 1997, the Company changed its accounting
policies relating to the write-off of installment contracts receivable based on
data available from the Company's new loan servicing system. The revised policy
requires write-off of delinquent installment contracts at nine months on a
recency basis compared to one year under the old policy.

ALLOWANCE FOR CREDIT LOSSES

The Company maintains an allowance for credit losses which, in the opinion
of management, adequately reserves against credit losses on installment
contracts that are considered to be impaired. The risk of loss to the Company
related to the installment contracts receivable balances relates primarily to
the earned but unpaid servicing fee or finance charge recognized on
contractually delinquent accounts. To the extent that the Company does not
collect the gross amount of the contract balance, the remaining gross
installment contract receivable balance is charged off against dealer holdbacks,
unearned finance charges and the allowance for credit losses. Ultimate losses
may vary from current estimates and the amount of the provision, which is
current expense, may be either greater or less than actual charge-offs.

33
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RESERVE ON ADVANCES

When an installment contract is accepted, the Company generally pays a cash
advance to the dealer. These advance balances represent the Company's primary
risk of loss related to the funding activity with the dealers. The Company
maintains a reserve on advances to dealers which reflects advance balances that
are not expected to be recovered through collections on the related installment
contract receivable portfolio. To serve as a basis for evaluating the reserve
requirement, management reviews delinquencies, charge-off experience factors,
the payment performance of loan pools, changes in collateral value, economic
conditions and trends and other information. For purposes of establishing the
reserve, future collections (including the anticipated proceeds from repossessed
collateral) are reduced to present-value in order to achieve a level yield over
the remaining term of the advance equal to the expected yield at the origination
of the impaired advance.

Future reserve requirements will depend in part on the magnitude of the
variance between management's prediction of future collections and the actual
collections that are realized. Estimating cash collections from the installment
contracts receivable is complicated by the unusual payment patterns of the
borrowers who generally cannot obtain traditional financing. The evaluation of
the reserve against advances considers such factors as current delinquencies,
the characteristics of the accounts, the value of the underlying collateral, the
location of the borrower, general economic conditions and trends among other
information. Although the Company uses many resources to assess the adequacy of
the reserve against advances, actual losses may vary significantly from current
estimates and the amount of provision, which is a current expense, may be either
greater or less than actual charge offs.

FLOOR PLAN RECEIVABLES

CAC finances used vehicle inventories for both affiliated dealers and
nonaffiliated dealers. Amounts loaned are secured by the related inventories and
any future cash collections owed to the dealer on outstanding contracts.

NOTES RECEIVABLE

Notes receivable are primarily working capital loans to dealers and are due
on demand. These notes receivable are secured by all assets of the dealer
including any future cash collections owed to the dealer on outstanding
contracts.

ADVANCE RECEIVABLE SALES

When the Company sells advance receivables in securitizations, it retains
interest-only strips and servicing rights all of which are retained interests in
the securitized assets. Gain or loss on sale of the advance receivables depends
in part on the previous carrying amount of retained interests in advances,
allocated in proportion to their fair value. To obtain fair values, quoted
market prices are used if available. However, quotes are generally not available
for retained interests, so the Company generally estimates fair value based on
the present value of future cash flows expected under management's best
estimates of the key assumptions -- credit losses, timing of projected
collections, and discount rates commensurate with the risks involved.

The Company evaluates the fair value and potential impairment of its
retained interest in securitization on a quarterly basis utilizing the
methodology described above.

PROPERTY AND EQUIPMENT

Additions to property and equipment are recorded at cost. Depreciation is
generally provided on a straight-line basis over the estimated useful lives
(primarily five to forty years) of the assets. The cost of assets sold or
retired and the related accumulated depreciation are removed from the accounts
at the time of

34
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.

GOODWILL

The Company's goodwill represents the excess of cost over the fair value of
assets acquired and is amortized using the straight-line method over ten years.
Based on management's review of the goodwill, the Company believes that no
material impairment of the asset exists. Goodwill, net of amortization of
$181,000, is recorded in other assets at $2,919,000 at December 31, 1998. Prior
to 1998, no goodwill was recorded in the financial statements.

DEALER HOLDBACKS

As part of the dealer servicing agreement, the Company establishes a dealer
holdback to protect the Company from potential losses associated with
installment contracts. This dealer holdback is not paid until such time as all
advances related to such dealer have been recovered.

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.

REVENUE RECOGNITION

Finance Charges. The Company computes its servicing fee based upon the
gross amount due under the installment contract. 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.

Premiums Earned. Credit life and disability premiums are ceded to CAC Life
and collision premiums are ceded to CAC Reinsurance on both an earned and
written basis and are earned over the life of the contracts using the pro rata
and sum-of-digits methods. Premiums on BVPP warranties are earned on a
straight-line basis over the life of the service contracts.

Dealer Enrollment Fees. Enrollment fees are paid by each dealer in the
United States and Canada signing a servicing agreement and are nonrefundable.
These fees and the related direct incremental costs of originating these fees
are deferred and amortized on a straight-line basis over the estimated repayment
term of the outstanding dealer advance.

Other Income. Dealers are charged an initial fee to floor plan a vehicle.
Interest is charged based on the number of days a vehicle remains on the floor
plan. Interest rates typically range from 12% to 18% per annum.

Interest on notes receivable is charged based on the outstanding monthly
balance and is typically 4% above prime per annum, generally with a minimum rate
of 12% per annum.

Fees received by the Company for the sale of third party vehicle service
contracts are recognized upon acceptance of the related installment contract
receivable as the Company bears no further obligation.

NEW ACCOUNTING STANDARDS

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes standards for reporting and displaying comprehensive income and
its components in annual financial statements. The Company's other comprehensive
income consists of foreign currency transaction adjustments.

35
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of consolidated operations or financial position of the
Company, but did affect the disclosure of segment information as illustrated in
Note 12.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The new standard requires that all
derivatives be recognized as either assets or liabilities on the consolidated
balance sheets and that those instruments be measured fair value. If certain
conditions are met, a derivative may be specifically designated as a hedging
instrument. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company does not believe that
adoption of SFAS 133 will have a material effect on the Company's consolidated
financial position or results of operations.

In the first quarter of 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 provides guidance on the capitalization of
software for internal use. CAC adopted SOP 98-1 effective January 1, 1999, as
required. Management is currently assessing the impact of this SOP on the
consolidated financial statements of the Company.

RECLASSIFICATION

Certain amounts for the prior periods have been reclassified to conform to
the current presentation.

(2) FINANCIAL INSTRUMENTS

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. The carrying amount of cash and cash equivalents
approximate the fair values due to the short maturity of these instruments.

Investments. The fair values of U.S. Treasury securities are based on
quoted market prices. The carrying amount of money market funds approximates the
fair value due to the short maturity.

Installment Contracts Receivable and Net Dealer Holdbacks. As the majority
of the Company's revenue is derived from the servicing fee it receives on the
gross amount due under the installment contract (typically 20% of the principal
and interest), the Company's revenues from servicing fees are not materially
impacted by changes in interest rates. As such, the carrying amounts recorded on
a historical cost basis for installment contracts receivable and net dealer
holdbacks in the financial statements related to the financing and service
program which the Company provides to dealers approximates fair value.

Floor Plan and Notes Receivable. The fair values of floor plan and note
receivables are estimated by discounting the future cash flows using applicable
current interest rates.
36
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) FINANCIAL INSTRUMENTS -- (CONCLUDED)
Retained Interest in Securitization. The fair value of the retained
interest in securitization is estimated by discounting expected future excess
cash flows utilizing current assumptions as described in Note 4.

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

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

YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998
----------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- ----------

Cash and cash equivalents........................ $ 349 $ 349 $ 13,775 $ 13,775
Investments -- held to maturity.................. 9,973 9,991 10,191 10,193
Installment contracts receivable, net............ 1,036,699 1,036,699 664,693 664,693
Floor plan receivable............................ 19,800 19,800 14,071 14,071
Notes receivable................................. 1,231 1,231 2,278 2,278
Retained interest in securitization.............. -- -- 13,229 13,229
Senior notes..................................... 175,150 180,200 136,165 135,529
Lines of credit.................................. 212,717 212,717 79,067 79,067
Mortgage loan payable to bank.................... 3,799 3,799 3,566 3,566
Dealer holdbacks, net............................ 439,554 439,554 222,275 222,275

CERTAIN DEBT AND MARKETABLE SECURITIES

The Company's portfolio of investment securities includes short-term money
market instruments and U.S. Treasury securities. All investments are categorized
as held-to-maturity and are stated at amortized cost. Pursuant to reinsurance
agreements, the Company is required to hold investment securities in a trust
account. The restricted investment securities totaled approximately $9.4 million
and $8.9 million at December 31, 1997 and 1998, respectively.

A summary of investments held by the Company consist of the following (in
thousands):

YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1998
------------------------------ --------------------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
COST GAINS VALUE COST GAINS VALUE
------ ---------- ------ ------- ---------- -------

Money market funds..................... $1,759 $-- $1,759 $ 9,466 $-- $ 9,466
U.S. Treasury securities............... 8,214 18 8,232 725 2 727
------ --- ------ ------- --- -------
Total investments.................... $9,973 $18 $9,991 $10,191 $ 2 $10,193
====== === ====== ======= === =======

(3) INSTALLMENT CONTRACTS RECEIVABLE

Installment contracts generally have initial terms ranging from 24 to 36
months and are collateralized by the related vehicles. Contractual maturities of
contracts by year have not been presented as this information is not meaningful
due to the uneven payment patterns of non-prime consumers. The initial average
term of an installment contract was approximately 30 months in 1996 and 31
months in 1997 and in 1998. As of December 31, 1997 and 1998, the accrual of
finance charge revenue has been suspended, and fully reserved

37
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) INSTALLMENT CONTRACTS RECEIVABLE -- (CONCLUDED)
for, on approximately $471.8 million and $257.5 million of delinquent
installment contracts, respectively. Installment contracts receivable consisted
of the following (in thousands):

AS OF DECEMBER 31,
----------------------
1997 1998
---------- ---------

Gross installment contracts receivable................. $1,254,858 $ 794,831
Unearned finance charges............................... (196,357) (114,617)
Unearned insurance premiums, insurance reserves and
fees................................................. (8,683) (8,446)
---------- ---------
Installment contracts receivable....................... $1,049,818 $ 671,768
========== =========
Non-accrual installment contracts as a percent of total
gross installment contracts.......................... 37.6% 32.4%
========== =========

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

YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------

Balance -- beginning of period............. $ 790,607 $1,251,139 $1,254,858
Gross amount of installment contracts
accepted................................. 965,690 983,459 580,578
Gross installment contracts underlying
advance receivables securitized.......... -- -- (98,591)
Cash collections on installment contracts
accepted................................. (388,328) (505,925) (493,900)
Charge offs................................ (129,405) (467,532) (449,870)
Currency translation....................... 12,575 (6,283) 1,756
---------- ---------- ----------
Balance -- end of period................... $1,251,139 $1,254,858 $ 794,831
========== ========== ==========

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

YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- -------

Balance -- beginning of period.................... $ 7,757 $ 12,195 $13,119
Provision for loan losses......................... 7,222 11,072 3,432
Allowance on installment contracts underlying
advance receivables securitized................. -- -- (1,107)
Charge offs, net.................................. (2,863) (10,138) (8,392)
Currency translation.............................. 79 (10) 23
------- -------- -------
Balance -- end of period.......................... $12,195 $ 13,119 $ 7,075
======= ======== =======

Recoveries related to charged off contracts are primarily the result of the
recovery of earned but unpaid finance charges and are netted against
charge-offs.

The Company's financing and service program allows dealers to establish the
interest rate on contracts, which typically is the maximum rate allowable by the
state or country in which the dealer is doing business.

(4) ADVANCE RECEIVABLE SALES

On July 8, 1998, the Company completed a $50 million securitization of
advance receivables. Pursuant to this transaction, the Company contributed
dealer advances having a carrying value of approximately $56 million and
received approximately $49.3 million in financing from an institutional
investor. The debt is

38
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) ADVANCE RECEIVABLE SALES -- (CONCLUDED)
non-recourse to the Company, bears interest at the thirty day commercial paper
rate with a maximum of 7.5% and is anticipated to fully amortize within 30
months. The Company recognized a gain on the transaction of approximately
$685,000 which represents the difference between the sale proceeds to the
Company, net of transaction costs, and the Company's carrying amount of the
dealer advances, plus the present value of the estimated cash flows to be
received by the Company. In determining the gain on the sale of receivables and
the estimated fair value of the Company's retained interest in securitization,
the Company assumed an excess cash flow discount rate of 15%, cumulative credit
losses of 14% and an interest rate of 7.5% on the underlying debt. The excess
cash flows result from the amount by which projected collections on the
installment contracts exceeds i) the principal and interest to be paid on the
commercial paper and ii) the amount of dealer holdback due to dealers.

In the securitization, the Company retained servicing responsibilities and
subordinated interests. The Company receives monthly servicing fees of 4% of the
collections on the installment contracts receivable, and rights to future cash
flows arising after the investors in the commercial paper received the return
for which they are contracted. The present value of such estimated cash flows
has been recorded by the Company as a retained interest in securitization of
$13.2 million as of December 31, 1998. The investors have no recourse to the
Company's other assets for failure of debtors to pay when due. The Company's
retained interests are generally restricted until investors have been fully paid
and are subordinate to investors' interests. Their value is subject to
substantial credit and interest rate risk and the timing of projected
collections on the transferred financial assets.

The installment contracts supporting the dealer advances that were sold
include contracts with origination dates ranging from July 1990 to June 1998,
with a weighted average age of 15 months. The amount of such contracts included
on the Company's balance sheet as of June 30, 1998 was $98.6 million, of which
$43.8 million was in non-accrual status.

(5) PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31 (in
thousands):

1997 1998
------- -------

Land....................................................... $ 2,577 $ 2,587
Building and improvements.................................. 6,761 6,968
Data processing equipment.................................. 14,814 17,460
Office furniture & equipment............................... 2,061 2,648
Leasehold improvements..................................... 711 781
------- -------
26,924 30,444
Less accumulated depreciation.............................. 6,085 9,817
------- -------
$20,839 $20,627
======= =======

The depreciation expense on the property and equipment was $1,369,000,
$2,550,000 and $3,793,000 in 1996, 1997 and 1998, respectively.

(6) LEASED PROPERTIES

PROPERTY LEASED TO OTHERS

The Company leases part of its headquarters to outside parties as
non-cancelable operating leases, which is not a significant part of its business
activities. Rental income, which is included in other income, is recognized on a
straight-line basis over the related lease term. Rental income on leased
property was $1,255,000, $991,000 and $997,000 for 1996, 1997 and 1998,
respectively.

39
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) LEASED PROPERTIES -- (CONCLUDED)
PROPERTY LEASED FROM OTHERS

The Company utilizes leases in its day to day operations for administrative
offices, auction facilities and office equipment. Management expects that in the
normal course of business, leases will be renewed or replaced by other leases.
One of the auction facility leases expires in June 1999 and the Company has an
option to purchase the property.

Total rental expense on all operating leases was $175,000, $242,000 and
$388,000 for 1996, 1997 and 1998, respectively. Contingent rentals under the
operating leases were insignificant. Minimum future lease commitments under
operating leases are as follows:

1999........................................................ $ 500,000
2000........................................................ 380,000
2001........................................................ 358,000
2002........................................................ 358,000
2003........................................................ 358,000
2004 and beyond............................................. 744,000
----------
Total minimum lease commitments...................... $2,698,000
==========

(7) DEBT

SENIOR NOTES

On November 7, 1994, the Company completed the sale of its $60 million
8.87% Senior Notes due November 1, 2001 to various insurance companies. On July
1, 1998, the interest rate on these notes was increased to 9.12%. The Notes are
secured and require semi-annual interest payments and annual payments of
principal.

On August 29, 1996, the Company completed the sale of its $70 million 7.99%
Senior Notes due July 1, 2001 to various insurance companies. On July 1, 1998,
the interest rate on these notes was increased to 8.24%. The Notes are secured
and require semi-annual interest payments and annual payments of principal.

On March 25, 1997, the Company completed the sale of its $71.75 million
7.77% Senior Notes due October 1, 2001 to various insurance companies. On July
1, 1998, the interest rate on these notes was increased to 8.02%. The Notes are
secured and require semi-annual payments of interest and annual payments of
principal commencing on October 1, 1998.

MORTGAGE LOAN PAYABLE

The Company has a loan from its principal commercial bank secured by a
mortgage on the Company's headquarters building. The loan bears interest at 6.5%
and is secured by a first mortgage lien on the building and an assignment of all
leases, rents, revenues and profits under all present and future leases. There
was $3,799,000 and $3,566,000 outstanding on this loan as of December 31, 1997
and 1998, respectively. The loan matures on May 1, 1999.

LINES OF CREDIT

The Company has a $125 million credit agreement with a commercial bank
syndicate with a commitment period through June 15, 1999 subject to annual
extensions for additional one year periods at the request of the Company and
with the consent of each of the banks in the facility. The borrowings are
secured by a lien on most of the Company's assets, including a pledge of the
stock in its United Kingdom subsidiary, with interest payable at the
Eurocurrency rate plus 1.4% or at the prime rate (7.75% as of December 31,
1998). The Eurocurrency borrowings may be fixed for periods of up to six months.
The Company must pay an agent's fee

40
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) DEBT -- (CONCLUDED)
of $48,000 annually and a commitment fee of .60% quarterly on the amount of the
commitment. As of December 31, 1998, there was approximately $79.0 million
outstanding under this facility. The maximum amount outstanding was
approximately $213.4 million and $210.2 million in 1997 and 1998, respectively.
The weighted average balance outstanding was $172.5 million and $143.4 million
in 1997 and 1998, respectively.

The Company also has a $1,000,000 Canadian dollar line of credit with a
commercial bank in Canada, which is used to fund the day to day cash flow
requirements of the Company's Canadian subsidiary. The borrowings are unsecured,
guaranteed by the Company, with interest payable at the Libor rate plus 1.4% or
at the Canadian bank's prime rate (6.75% at December 31, 1998). As of December
31, 1998, there was approximately $125,000 Canadian dollars ($80,000 U.S.
dollars) outstanding under the facility.

The Company also has a $1,200,000 line of credit with a commitment period
through May 16, 1999 with a commercial bank which is used to fund the day to day
operations of its auction services subsidiary. The borrowings are secured by the
assets of the Company's auction services subsidiary and by a $500,000 letter of
credit issued by the Company's principal commercial bank, with interest payable
at the bank's prime rate. As of December 31, 1998, there was approximately
$1,000,000 outstanding under the facility.

The weighted average interest rate on line of credit borrowings outstanding
was 7.34% and 6.89% as of December 31, 1997 and 1998, respectively.

PRINCIPAL DEBT MATURITIES

The principal maturities of the Company's total debt at December 31, 1998
are as follows (in thousands):

1999........................................................ $124,868
2000........................................................ 45,410
2001........................................................ 48,520
--------
$218,798
========

DEBT COVENANTS

The Company must comply with various restrictive debt covenants which
require the maintenance of certain financial ratios and other financial
conditions. The most restrictive covenants limit the ratio of the Company's
debt-to-equity, limit the ratio of the Company's fixed charges to net income,
limit the Company's investment in its foreign subsidiaries, limit the ratio of
debt to advances, limit the ratio of debt to gross installment contracts
receivable, limit the ratio of advances to installment contracts receivable, and
require that the Company maintain specified minimum levels of net worth.

(8) DEALER HOLDBACKS AND RESERVE ON ADVANCES

Dealer holdbacks consisted of the following (in thousands):

AS OF
DECEMBER 31,
-----------------------
1997 1998
---------- ---------

Dealer holdbacks....................................... $1,002,033 $ 634,102
Less: advances (net of reserve of $16,369 and $19,954
in 1997 and 1998, respectively)...................... (562,479) (411,827)
---------- ---------
Dealer holdbacks, net.................................. $ 439,554 $ 222,275
========== =========

During 1997, the Company implemented a new loan servicing system which
allows the Company to better estimate future collections for each dealer pool
using historical loss experience and a dealer by dealer

41
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) DEALER HOLDBACKS AND RESERVE ON ADVANCES -- (CONCLUDED)
static pool analysis. The Company took a charge during 1997 to reflect the
impact of this enhancement in the Company's methodology for estimating the
reserve. During the fourth quarter of 1997, the Company reevaluated the timing
of the charge off of advances to dealers and concluded that it was appropriate
to accelerate the recognition of charge offs since the static pool analysis
demonstrated that the advances were uncollectible.

A summary of the change in the reserve against advances (classified with
dealer holdbacks, net in the accompanying balance sheets) is as follows (in
thousands):

YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------ -------- -------

Balance -- beginning of period..................... $3,214 $ 8,754 $16,369
Provision for advance losses....................... 5,849 74,400 12,973
Advance reserve fees............................... 4,673 181
Charge offs, net................................... (444) (71,391) (9,744)
Currency translation............................... 135 (67) 175
------ -------- -------
Balance -- end of period........................... $8,754 $ 16,369 $19,954
====== ======== =======

(9) RELATED PARTY TRANSACTIONS

In the normal course of its business, the Company regularly accepts
assignments of installment contracts originated by affiliated dealers owned by
the Company's majority shareholder. Installment contracts accepted from
affiliated dealers were approximately $25.6 million, $13.4 million and $10.0
million in 1996, 1997 and 1998, respectively. Remaining installment contracts
receivable from affiliated dealers represented approximately 3.9% and 1.6% of
the gross installment contracts receivable balance as of December 31, 1997 and
1998, respectively. The Company accepted installment contracts from affiliated
dealers and nonaffiliated dealers on the same terms. Dealer holdbacks from
contracts accepted from affiliated dealers were approximately $20.5 million,
$10.7 million and $8.0 million in 1996, 1997 and 1998, respectively.

The Company receives interest income and fees from affiliated dealers on
floor plan receivables and notes receivable. Total income earned was $1,409,000,
$1,564,000 and $1,187,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.

The Company shares certain expenses including payroll and related benefits,
occupancy costs and insurance with its affiliated company owned by the Company's
majority shareholder. For the years ended December 31, 1996, 1997 and 1998, the
Company charged its affiliated company approximately $311,000, $247,000 and
$248,000, and was charged $97,000, $45,000 and $80,000 by the affiliated company
for such shared expenses incurred in its operations. This arrangement is covered
under a services agreement. The agreement has an indefinite term, but may be
terminated upon 30 days written notice by either party.

42
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) INCOME TAXES

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

YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------

Income (loss) before provision (benefit) for income taxes:
Domestic.................................................. $54,329 $(9,285) $26,635
Foreign................................................... 9,306 10,588 10,890
------- ------- -------
$63,635 $ 1,303 $37,525
======= ======= =======
Domestic provision (benefit) for income taxes:
Current................................................... $18,044 $(6,516) $12,507
Deferred.................................................. 1,009 2,799 (3,179)
Foreign provision (benefit) for income taxes:
Current................................................... 3,118 654 3,570
Deferred.................................................. (45) 2,829 (339)
------- ------- -------
Provision (credit) for income taxes......................... $22,126 $ (234) $12,559
======= ======= =======

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

AS OF DECEMBER 31,
------------------
1997 1998
------- -------

Deferred tax assets:
Allowance for credit losses............................... $11,165 $12,080
Reserve on advances....................................... 1,731 5,451
Deferred dealer enrollment fees........................... 166 110
Accrued warranty claims................................... 646 713
Other, net................................................ 48 813
------- -------
Total deferred tax assets.............................. 13,756 19,167
------- -------
Deferred tax liabilities:
Unearned finance charges.................................. 27,233 28,204
Gain on sale of advance receivables....................... -- 853
Accumulated depreciation.................................. 642 775
Deferred credit life and warranty costs................... 497 433
------- -------
Total deferred tax liabilities......................... 28,372 30,265
------- -------
Net deferred tax liability............................. $14,616 $11,098
======= =======

No valuation allowances were considered necessary in the calculation of
deferred tax assets as of December 31, 1997 and 1998.

The Company's effective income tax rate was approximately equal to the
domestic and foreign statutory rates in 1996, 1997 and 1998.

Deferred U.S. federal income taxes and withholding taxes have not been
provided on the undistributed earnings of the Company's foreign subsidiaries as
such amounts are considered to be permanently reinvested. The cumulative
undistributed earnings at December 31, 1998 on which the Company had not
provided additional national income taxes and withholding taxes were
approximately $21.1 million.

43
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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 which would have a dilutive effect.

The share effect is as follows:

YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------

Weighted average common shares outstanding............... 45,605,159 46,081,804 46,190,208
Common stock equivalents................................. 1,018,496 672,909 770,082
---------- ---------- ----------
Weighted average common shares and common stock
equivalents............................................ 46,623,655 46,754,713 46,960,290
========== ========== ==========

CAPITAL STOCK TRANSACTIONS

On December 11, 1996, the Company acquired all of the outstanding shares of
Montana Investment Group, Inc. in exchange for a total of 200,000 shares of the
Company's common stock which were issued to two shareholders of Montana. The
acquisition has been accounted for under the pooling of interests method. The
impact of this acquisition was not significant to the Company's financial
statements. The issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act of 1933. On May 19, 1997, CAC's Board of
Directors and shareholders approved an amendment to the Articles of
Incorporation of the Company increasing the number of authorized Common shares
to 80,000,000.

STOCK OPTION PLANS

Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the
Company has reserved 5,000,000 shares of its common stock for the future
granting of options to officers and other employees. The exercise price of the
options is equal to the fair market value on the date of the grant. Options
under the 1992 Plan become exercisable over a three to five year period, or
immediately upon a change of control. Nonvested options are forfeited upon
termination of employment and otherwise expire ten years from the date of grant.
Shares available for future grants totaled 1,179,559, 967,066 and 115,559 as of
December 31, 1996, 1997 and 1998, respectively.

Pursuant to the Company's Stock Option Plan for dealers (the "Dealer Plan")
the Company has reserved 1,000,000 shares of its common stock for the future
granting of options to participating dealers. Options are generally granted to
participating dealers based on the Company accepting a minimum of 100 retail
installment contracts from the dealer in a calendar year. Upon the Company's
acceptance of 100 contracts from a dealer, the dealer receives an option to
purchase 1,000 shares of the Company's Common Stock. The dealer receives an
option to purchase an additional 200 shares for each additional 100 contracts
accepted by the Company. The exercise price of the options is equal to the fair
market value on the date of grant. The options become exercisable over a three
year period. Nonvested options are forfeited upon the termination of the
dealer's servicing agreement by the Company or the dealer and otherwise expire
five years from the date of grant. Shares available for future grants totaled
235,600, 185,600 and 478,385 as of December 31, 1996, 1997 and 1998,
respectively. Effective January 1, 1999, the Company suspended the granting of
future options under the Dealer Plan.

44
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) CAPITAL TRANSACTIONS -- (CONTINUED)
The Company accounts for the 1992 Plan under APB Opinion No. 25, under
which no compensation cost has been recognized Had compensation cost for the
1992 Plan been recognized, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:

YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------

Net income (loss)
As reported...................................... $41,509 $ 1,537 $24,966
Pro forma........................................ 36,972 (2,519) 22,346
Net income (loss) per common share:
As reported -- basic............................. $ 0.91 $ 0.03 $ 0.54
As reported -- diluted........................... 0.89 0.03 0.53
Pro forma -- basic............................... 0.81 (0.05) 0.48
Pro forma -- diluted............................. 0.79 (0.05) 0.48

The Company accounts for the compensation costs related to its grants under
the Dealer Plan in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The sales and
marketing cost that has been charged against income for the non-employee Dealer
Plan was $67,000 and $150,000 in 1997 and 1998, respectively. No costs were
charged against income for 1996. Because the SFAS 123 method of accounting has
not been applied to options granted prior to January 1, 1995 (December 15, 1995
for the Dealer Plan), the resulting cost is not necessarily indicative of costs
which may be recognized in future years.

The fair value of each option granted included in the above calculations is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used:

FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1992 PLAN 1996 1997 1998
--------- --------- --------- ---------

Risk-free interest rate......................... 6.42% 6.50% 5.25%
Expected life................................... 7.0 years 6.0 years 6.0 years
Expected volatility............................. 37.73% 43.97% 56.47%
Dividend yield.................................. 0% 0% 0%

YEARS ENDED DECEMBER 31,
-----------------------------------
DEALER PLAN 1996 1997 1998
----------- --------- --------- ---------

Risk-free interest rate......................... 6.21% 5.89% 4.59%
Expected life................................... 3.5 years 5.0 years 5.0 years
Expected volatility............................. 37.73% 48.40% 56.25%
Dividend yield.................................. 0% 0% 0%

45
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) CAPITAL TRANSACTIONS -- (CONTINUED)
Additional information relating to the Stock Option Plans are as follows:

1992 PLAN DEALER PLAN
------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF OPTIONS PER SHARE OF OPTIONS PER SHARE
---------- ---------------- ---------- ----------------

Outstanding at December 31, 1995......... 1,813,334 $10.63 548,912 $17.75
Options granted........................ 606,275 21.60 205,600 24.37
Options exercised...................... (103,000) 3.44 (34,948) 13.00
Options forfeited...................... (18,334) 20.50 (1,000) 23.88
---------- --------
Outstanding at December 31, 1996......... 2,298,275 13.73 718,564 18.60
Options granted........................ 3,020,129 9.42 173,400 11.49
Options exercised...................... (266,532) 4.11 (3,597) 13.95
Options forfeited...................... (1,807,636) 20.70 (123,400) 21.35
---------- --------
Outstanding at December 31, 1997......... 3,244,236 6.63 764,967 17.76
Options granted........................ 1,420,965 8.71 75,800 7.54
Options exercised...................... (178,372) 2.56 -- --
Options forfeited...................... (569,458) 6.28 (368,585) 18.45
---------- --------
Outstanding at December 31, 1998......... 3,917,371 $ 7.62 472,182 $15.60
========== ========
Exercisable at:
December 31,
1996................................ 795,988 $10.49 260,762 $17.10
1997................................ 894,167 7.95 481,318 17.90
1998................................ 1,251,152 7.91 296,407 17.85

Options granted and options forfeited under the 1992 Plan for 1997 include
1,713,577 options which were repriced on November 3, 1997. The options which
were repriced were originally granted between September 30, 1995 and September
2, 1997 with original exercise prices between $12.75 and $27.50. These options
were cancelled on November 3, 1997 and reissued at an exercise price of $6.00
per share with a new three year vesting period.

The weighted average fair value of options granted during 1996, 1997 and
1998 was $10.92, $4.68 and $5.09 respectively, for the 1992 Plan and $8.88,
$4.06 and $3.98, respectively, for the Dealer Plan.

46
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) CAPITAL TRANSACTIONS -- (CONCLUDED)
The following tables summarize information about options outstanding at
December 31, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE
EXERCISABLE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
------------------ ----------- ---------------- ---------------- ----------- ----------------

1992 PLAN
- ---------
$ 2.16 - 5.63........ 390,750 4.0 Years $ 2.41 369,517 $ 2.25
6.00 - 7.75........ 2,219,119 9.0 6.36 508,634 6.02
8.00 - 11.07........ 929,501 9.4 9.37 0 --
$11.50 - 22.25........ 378,001 5.7 16.14 373,001 16.11
--------- --- ------ --------- ------
Totals................ 3,917,371 8.3 $ 7.62 1,251,152 $ 7.91
========= =========

DEALER PLAN
- -----------
$ 6.34 - 9.35........ 118,000 4.5 Years $ 7.50 14,844 $ 7.53
11.18 - 17.63........ 187,514 1.6 14.07 146,778 14.15
$18.25 - 27.63........ 166,668 2.3 23.06 134,785 23.03
--------- --- ------ --------- ------
Totals................ 472,182 2.6 $15.60 296,407 $17.85
========= =========

(12) BUSINESS SEGMENT INFORMATION

As described in Note 1, the Company adopted SFAS 131 effective January 1,
1998. Prior year segment information has been restated on a basis consistent
with the 1998 presentation. The Company has two reportable business segments:
North American automotive finance and U.K./Ireland automotive finance.

REPORTABLE SEGMENT OVERVIEW

The North American automotive finance operations consist of the Company's
U.S. and Canadian automotive finance and services businesses, including the
Company's reinsurance activities and automotive service contract programs. These
businesses have been aggregated into one reportable segment because they have
similar operating and economic characteristics. The North American automotive
finance segment provided funding, receivables management, collection, sales
training and related products and services to automobile dealers located in the
United States and Canada. The U.K./Ireland automotive finance operations provide
substantially the same products and services as the Company's North American
automotive finance operations to dealers located in the United Kingdom and
Ireland. The Company's credit reporting and auction services businesses do not
constitute reportable operating segments as they do not meet the quantitative
thresholds prescribed by SFAS 131, and have therefore been disclosed in the "all
other" category in the following table.

47
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) BUSINESS SEGMENT INFORMATION -- (CONCLUDED)
MEASUREMENT

The Company allocates resources to and evaluates the performance of its
segments primarily based on finance charges, other revenue, segment earnings
before interest and taxes (EBIT), and segment assets. The table below presents
this information for each reportable segment (in thousands):

NORTH AMERICAN U.K./IRELAND
AUTOMOTIVE AUTOMOTIVE ALL TOTAL
FINANCE FINANCE OTHER COMPANY
-------------- ------------ ------- ----------

Year Ended December 31, 1998
Finance charges.............................. $ 80,330 $ 17,677 $ -- $ 98,007
Other revenue................................ 29,699 3,528 11,115 44,342
EBIT......................................... 47,766 11,501 3,823 63,090
Segment assets............................... 621,418 122,819 7,692 751,929
Year Ended December 31, 1997
Finance charges.............................. $ 92,660 $ 24,360 $ -- $ 117,020
Other revenue................................ 39,627 4,433 3,155 47,215
EBIT......................................... 14,695 13,210 995 28,900
Segment assets............................... 952,259 162,154 1,197 1,115,610
Year Ended December 31, 1996
Finance charges.............................. $ 79,321 $ 13,623 $ -- $ 92,944
Other revenue................................ 27,832 2,979 179 30,990
EBIT......................................... 67,032 10,121 50 77,203
Segment assets............................... 932,383 141,349 686 1,074,418

INFORMATION ABOUT PRODUCTS AND SERVICES

The Company manages its product and service offerings primarily through
those reportable segments. Therefore, pursuant with the provisions of SFAS 131,
no enterprise-wide disclosures of information about products and services are
necessary.

MAJOR CUSTOMERS

The Company did not have any customer which provided 10% or more of any
segment's revenue during 1996, 1997, or 1998.

(13) LITIGATION AND CONTINGENT LIABILITIES

In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth in lending, credit availability,
credit reporting, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations. The Company, as the assignee of
finance contracts originated by dealers, may also be named as a co-defendant in
lawsuits filed by consumers principally against dealers. Many of these cases are
filed as purported class actions and seek damages in large dollar amounts.

The Company is currently a defendant in a class action proceeding commenced
on October 15, 1996 in the United States District Court for the Western District
of Missouri seeking money damages resulting for alleged violations of a number
of state and federal consumer protection laws (the "Missouri Litigation"). On
October 9, 1997, the Court certified two classes on the claims brought against
the Company. On August 4, 1998, the Court granted partial summary judgment on
liability in favor of the plaintiffs based upon the Court's

48
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) LITIGATION AND CONTINGENT LIABILITIES -- (CONCLUDED)
finding of certain violations but denied summary judgment on certain other
claims. The Court also entered a number of permanent injunctions, which among
other things, restrain the Company from collecting the amounts found to be
uncollectible. 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 as of right, the Company has appealed the summary judgment order to
the United States Court of Appeals for the Eighth Circuit and the Company
believes that its appeal has substantial merit. Plaintiffs have filed a cross
appeal. A trial on the remaining claims, as well as on damages, is not expected
to be scheduled until after the appeal has been concluded. Should the Company's
appeal be unsuccessful, the potential damages could have a material adverse
impact on the Company's financial position, liquidity and results of operations.

During the first quarter of 1998, several putative class action complaints
were filed against the Company and certain officers and directors of the Company
in the United States District Court for the Eastern District of Michigan seeking
money damages for alleged violations of the federal securities laws. On August
14, 1998, a Consolidated Class Action Complaint, consolidating the claims
asserted in those cases, was filed. The Complaint generally alleges that the
Company's financial statements issued during the period August 14, 1995 through
October 22, 1997 did not accurately reflect the Company's true financial
condition and results of operations because such reported results failed to be
in accordance with generally accepted accounting principles and that such
results contained material accounting irregularities in that they failed to
reflect adequate reserves for credit losses. The Complaint further alleges that
the Company issued public statements during the alleged class period which
fraudulently created the impression that the Company's accounting practices were
proper. The Company intends to vigorously defend this action and, while
management believes that meritorious defenses exist and has filed a motion to
dismiss the Complaint, the ultimate disposition of this litigation could have a
material adverse impact on the Company's financial position, liquidity and
results of operations.

The Company is currently being examined by the Internal Revenue Service.
While the outcome of the examination is undeterminable at this time, management
does not believe that the ultimate outcome will have a material adverse impact
on the Company's financial position, liquidity or results of operations.

49
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of quarterly financial position and results of
operations for the years ended December 31, 1997 and 1998.

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
---------- ---------- ---------- ----------

BALANCE SHEETS
Installment contracts receivable, net......... $1,119,314 $1,171,036 $1,205,331 $1,036,699
Floor plan receivables........................ 15,667 16,320 19,359 19,800
Notes receivables............................. 1,746 1,818 1,589 1,231
All other assets.............................. 28,529 30,776 46,770 57,880
---------- ---------- ---------- ----------
Total assets............................. $1,165,256 $1,219,950 $1,273,049 $1,115,610
========== ========== ========== ==========
Dealer holdbacks, net......................... $ 534,162 $ 552,840 $ 618,443 $ 439,554
Total debt.................................... 326,487 354,834 379,269 391,666
Other liabilities............................. 45,540 40,112 32,624 35,399
---------- ---------- ---------- ----------
Total liabilities........................ 906,189 947,786 1,030,336 866,619
Shareholders' equity.......................... 259,067 272,164 242,713 248,991
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity................................. $1,165,256 $1,219,950 $1,273,049 $1,115,610
========== ========== ========== ==========
INCOME STATEMENTS
Revenue:
Finance charges............................. $ 30,691 $ 32,602 $ 28,956 $ 24,771
Premiums earned............................. 2,383 2,625 3,111 3,185
Dealer enrollment fees...................... 1,790 2,132 1,750 1,641
Other income................................ 6,905 7,494 7,076 7,123
---------- ---------- ---------- ----------
Total revenue............................ 41,769 44,853 40,893 36,720
---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses.......................... 9,887 11,635 11,294 13,095
Provision for credit losses................. 7,053 7,669 64,071 6,679
Provision for claims........................ 803 878 1,095 1,135
Interest.................................... 5,669 6,808 7,162 7,958
---------- ---------- ---------- ----------
Total costs and expenses................. 23,412 26,990 83,622 28,867
---------- ---------- ---------- ----------
Operating Income (Loss)....................... 18,357 17,863 (42,729) 7,853
Foreign exchange gain (loss)................ (20) 5 (7) (19)
---------- ---------- ---------- ----------
Income (loss) before income taxes............. 18,337 17,868 (42,736) 7,834
Provision (credit) for income taxes......... 6,299 5,818 (15,028) 2,677
---------- ---------- ---------- ----------
Net Income (Loss)............................. $ 12,038 $ 12,050 $ (27,708) $ 5,157
========== ========== ========== ==========
Net income (loss) per common share
Basic.................................... $ 0.26 $ 0.26 $ (0.60) $ 0.11
========== ========== ========== ==========
Diluted.................................. $ 0.26 $ 0.26 $ (0.60) $ 0.11
========== ========== ========== ==========
Weighted average shares outstanding
Basic.................................... 46,076 46,112 46,113 46,113
Diluted.................................. 46,902 46,595 46,113 46,679

50
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONCLUDED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
----------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
---------- -------- -------- --------

BALANCE SHEETS
Installment contracts receivable, net.............. $ 947,506 $865,488 $726,127 $664,693
Floor plan receivables............................. 19,674 18,457 15,846 14,071
Notes receivables.................................. 1,422 1,574 1,894 2,278
All other assets................................... $ 49,437 $ 44,636 $ 65,992 $ 70,887
---------- -------- -------- --------
Total assets.................................. $1,018,039 $930,155 $809,859 $751,929
========== ======== ======== ========
Dealer holdbacks, net.............................. $ 361,260 $306,539 $253,495 $222,275
Total debt......................................... 351,055 314,486 244,599 218,798
Other liabilities.................................. 49,954 44,834 40,111 34,593
---------- -------- -------- --------
Total liabilities............................. 762,269 665,859 538,205 475,666
Shareholders' equity............................... 255,770 264,296 271,654 276,263
---------- -------- -------- --------
Total liabilities and shareholders' equity.... $1,018,039 $930,155 $809,859 $751,929
========== ======== ======== ========
INCOME STATEMENTS
Revenue:
Finance charges.................................. $ 28,055 $ 27,894 $ 21,708 $ 20,350
Premiums earned.................................. 2,923 2,630 2,741 2,610
Dealer enrollment fees........................... 1,450 1,014 693 457
Gain on sale of advance receivables, net......... -- -- 685 --
Other income..................................... 6,882 6,298 7,401 8,558
---------- -------- -------- --------
Total revenue................................. 39,310 37,836 33,228 31,975
---------- -------- -------- --------
Costs and Expenses:
Operating expenses............................... 14,621 14,019 14,706 15,658
Provision for credit losses...................... 5,796 4,666 3,438 2,505
Provision for claims............................. 1,035 937 896 866
Interest......................................... 7,346 6,829 5,923 5,467
---------- -------- -------- --------
Total costs and expenses...................... 28,798 26,451 24,963 24,496
---------- -------- -------- --------
Operating Income................................... 10,512 11,385 8,265 7,479
Foreign exchange gain (loss)..................... 12 (7) (77) (44)
---------- -------- -------- --------
Income before income taxes......................... 10,524 11,378 8,188 7,435
Provision for income taxes....................... 3,637 3,935 2,577 2,410
---------- -------- -------- --------
Net Income......................................... $ 6,887 $ 7,443 $ 5,611 $ 5,025
========== ======== ======== ========
Net income per common share
Basic............................................ $ 0.15 $ 0.16 $ 0.12 $ 0.11
========== ======== ======== ========
Diluted.......................................... $ 0.15 $ 0.16 $ 0.12 $ 0.11
========== ======== ======== ========
Weighted average shares outstanding
Basic............................................ 46,113 46,113 46,243 46,291
Diluted.......................................... 46,950 47,410 46,897 46,584

51
53

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

Not Applicable.

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" 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

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.

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.

PART IV

ITEM 14. 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 "Item 8 -- Financial Statements and Supplementary
Data."
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS:
-- Consolidated Balance Sheets as of December 31, 1997 and
1998
-- Consolidated Income Statements for the years ended
December 31, 1996, 1997 and 1998
-- Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998
-- Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998
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.

52
54

(3) The Exhibits filed in response to Item 601 of Regulation S-K
are listed in the Exhibit Index. Included in such list as
Item 10(f)(3) (Stock Option Plans) and 10(n)(5) (Management
Incentive Plans) are the Company's management contracts and
compensatory plans and arrangements which are required to be
filed as exhibits to this Form 10-K.
(b) The Company was not required to file a current report on
Form 8-K during the quarter ended December 31, 1998 and none
were filed during that period.

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.

EXHIBIT
NO. DESCRIPTION
------- -----------

3(a)(1) 9 Articles of Incorporation, as amended July 1, 1997
3(b) 3 Bylaws of the Company, as amended
4(a) 2 Note Purchase Agreement dated October 1, 1994 between
various insurance companies and the Company and related form
of note.
4(a)(1) 4 First Amendment dated November 15, 1995 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(2) 6 Second Amendment dated August 29, 1996 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(3) 10 Third Amendment dated December 12, 1997 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(4) 12 Fourth Amendment dated July 1, 1998 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company
4(a)(5) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 9.12% Senior Notes due November 1, 2001 Issued
Under Note Purchase Agreement dated as of October 1, 1994
4(b) 6 Note Purchase Agreement dated August 1, 1996 between various
insurance companies and the Company and the related form of
note.
4(b)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company.
4(b)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company
4(b)(3) 12 Limited Waiver dated July 12, 1998 to First Amended and
Restated 8.24% Senior Notes due July 1, 2001 Issued Under
Note Purchase Agreement dated as of August 1, 1996
4(c) 7 Second Amended and Restated $150,000,000 Line of Credit and
$100,000,000 Revolving Credit Agreement dated December 4,
1996 between the Company, Comerica Bank as agent and LaSalle
National Bank and The Bank of New York as co-agents, and
various commercial banks.
4(c)(1) 9 First Amendment and Consent, dated June 4, 1997, to Second
Amended and Restated Credit Agreement dated as of December
4, 1996 and a memorandum evidencing extension of maturity
dates.
4(c)(2) 10 Second Amendment dated December 12, 1997 to Second Amended
and Restated Credit Agreement dated as of December 4, 1996.
4(c)(3) 11 Third Amendment dated May 11, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(c)(4) 12 Fourth Amendment dated July 30, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(e) 8 Note Purchase Agreement dated March 25, 1997 between various
insurance companies and the Company and related form of
note.

53
55

EXHIBIT
NO. DESCRIPTION
------- -----------

4(e)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(3) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 8.02% Senior Notes due October 1, 2001 Issued Under
Note Purchase Agreement dated as of March 25, 1997
4(f) 12 Note Purchase Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp. and NationsBank, N.A.
4(f)(1) 12 Security Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp., the Company and
NationsBank, N.A.
4(f)(2) 12 Servicing Agreement dated July 7, 1998 between CAC Funding
Corp. and the Company
4(f)(3) 12 Contribution Agreement dated July 7, 1998 between the
Company and CAC Funding Corp.
4(g)(1) 14 Security Agreement dated December 15, 1998 between Comerica
Bank, as Collateral Agent, and the Company
4(g)(2) 14 Intercreditor Agreement dated as of December 15, 1998 among
Comerica Bank, as Collateral Agent, and various lenders and
note holders
4(g)(3) 14 Deed of Charge, dated December 17, 1998 between Comerica
Bank, as Collateral Agent, and the Company
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Company or its subsidiaries have not been filed because (i)
in each case the total amount of long-term debt permitted
thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will
furnish such instruments, notes and extracts to the
Securities and Exchange Commission upon its request.
10(b)(1) 5 Amended and Restated Services Agreement dated April 17, 1996
between the Company and Larry Lee's Auto Finance Center,
Inc. d/b/a Dealer Enterprise Group.
10(d)(4) 2 Form of Addendum 3 to Servicing Agreement (Multiple Lots).
10(d)(5) 4 Prior form of Servicing Agreement, including form of
Addendum 1 to Servicing Agreement (CAC Life) and form of
Addendum 2 to Servicing Agreement (BVPP, Inc.).
10(d)(6) 14 Current form of Servicing Agreement, including Addendum 1
and Addendum 2.
10(e) 1 Promissory Notes dated various dates, to the Company, from
various affiliated companies.
10(f)(3) 9 Credit Acceptance Corporation 1992 Stock Option Plan, as
amended and restated May 1997.
10(g) 1 Promissory Note dated May 3, 1991 to the Company from
Richard E. Beckman and related assignment.
10(n)(5) 10 Credit Acceptance Corporation Management Incentive
Plan -- Fiscal Year 1998
10(o)(1) 7 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended January 22, 1997
10(o)(2) 13 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended and restated September 21, 1998.
21(1) 14 Schedule of Credit Acceptance Corporation Subsidiaries
23(1) 14 Consent of Deloitte and Touche LLP
23(2) 14 Consent of Arthur Andersen LLP
27 14 Financial Data Schedule

1 Reference to the Company's Registration Statement on Form S-1, File No.
33-46772.

54
56

2 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1994, and incorporated herein by reference.

3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, and incorporated herein by reference.

4 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1995, and incorporated herein by reference.

5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, 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, 1996 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, 1996, and incorporated herein by reference.

8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.

9 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.

10 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1997, and incorporated herein by reference.

11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1998 and incorporated herein by reference.

12 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1998, and incorporated herein by reference.

13 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1998, and incorporated herein by reference.

14 Filed herewith

55
57

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, on March 24, 1999.

CREDIT ACCEPTANCE CORPORATION

By: /s/ DONALD A. FOSS
------------------------------------
Donald A. Foss
Chairman of the Board, President
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on March 24, 1999 on behalf of
the registrant and in the capacities indicated.

SIGNATURE TITLE
--------- -----

/s/ DONALD A. FOSS Chairman of the Board, President and
- -------------------------------------------------------- Chief Executive Officer (Principal
Donald A. Foss Executive Officer)

/s/ BRETT A. ROBERTS Executive Vice President and Chief
- -------------------------------------------------------- Financial Officer (Principal Financial
Brett A. Roberts Officer)

/s/ JOHN P. CAVANAUGH Corporate Controller and Assistant
- -------------------------------------------------------- Secretary (Principal Accounting Officer)
John P. Cavanaugh

/s/ HARRY E. CRAIG Director
- --------------------------------------------------------
Harry E. Craig

/s/ THOMAS A. FITZSIMMONS Director
- --------------------------------------------------------
Thomas A. FitzSimmons

/s/ DAVID T. HARRISON Director
- --------------------------------------------------------
David T. Harrison

/s/ SAM M. LAFATA Director
- --------------------------------------------------------
Sam M. LaFata

56
58

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
------- -----------

3(a)(1) 9 Articles of Incorporation, as amended July 1, 1997
3(b) 3 Bylaws of the Company, as amended
4(a) 2 Note Purchase Agreement dated October 1, 1994 between
various insurance companies and the Company and related form
of note.
4(a)(1) 4 First Amendment dated November 15, 1995 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(2) 6 Second Amendment dated August 29, 1996 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(3) 10 Third Amendment dated December 12, 1997 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(4) 12 Fourth Amendment dated July 1, 1998 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company
4(a)(5) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 9.12% Senior Notes due November 1, 2001 Issued
Under Note Purchase Agreement dated as of October 1, 1994
4(b) 6 Note Purchase Agreement dated August 1, 1996 between various
insurance companies and the Company and the related form of
note.
4(b)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company.
4(b)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company
4(b)(3) 12 Limited Waiver dated July 12, 1998 to First Amended and
Restated 8.24% Senior Notes due July 1, 2001 Issued Under
Note Purchase Agreement dated as of August 1, 1996
4(c) 7 Second Amended and Restated $150,000,000 Line of Credit and
$100,000,000 Revolving Credit Agreement dated December 4,
1996 between the Company, Comerica Bank as agent and LaSalle
National Bank and The Bank of New York as co-agents, and
various commercial banks.
4(c)(1) 9 First Amendment and Consent, dated June 4, 1997, to Second
Amended and Restated Credit Agreement dated as of December
4, 1996 and a memorandum evidencing extension of maturity
dates.
4(c)(2) 10 Second Amendment dated December 12, 1997 to Second Amended
and Restated Credit Agreement dated as of December 4, 1996.
4(c)(3) 11 Third Amendment dated May 11, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(c)(4) 12 Fourth Amendment dated July 30, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(e) 8 Note Purchase Agreement dated March 25, 1997 between various
insurance companies and the Company and related form of
note.
4(e)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(3) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 8.02% Senior Notes due October 1, 2001 Issued Under
Note Purchase Agreement dated as of March 25, 1997

59

EXHIBIT
NO. DESCRIPTION
------- -----------

4(f) 12 Note Purchase Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp. and NationsBank, N.A.
4(f)(1) 12 Security Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp., the Company and
NationsBank, N.A.
4(f)(2) 12 Servicing Agreement dated July 7, 1998 between CAC Funding
Corp. and the Company
4(f)(3) 12 Contribution Agreement dated July 7, 1998 between the
Company and CAC Funding Corp.
4(g)(1) 14 Security Agreement dated December 15, 1998 between Comerica
Bank, as Collateral Agent, and the Company
4(g)(2) 14 Intercreditor Agreement dated as of December 15, 1998 among
Comerica Bank, as Collateral Agent, and various lenders and
note holders
4(g)(3) 14 Deed of Charge, dated December 17, 1998 between Comerica
Bank, as Collateral Agent, and the Company
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Company or its subsidiaries have not been filed because (i)
in each case the total amount of long-term debt permitted
thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will
furnish such instruments, notes and extracts to the
Securities and Exchange Commission upon its request.
10(b)(1) 5 Amended and Restated Services Agreement dated April 17, 1996
between the Company and Larry Lee's Auto Finance Center,
Inc. d/b/a Dealer Enterprise Group.
10(d)(4) 2 Form of Addendum 3 to Servicing Agreement (Multiple Lots).
10(d)(5) 4 Prior form of Servicing Agreement, including form of
Addendum 1 to Servicing Agreement (CAC Life) and form of
Addendum 2 to Servicing Agreement (BVPP, Inc.).
10(d)(6) 14 Current form of Servicing Agreement, including Addendum 1
and Addendum 2.
10(e) 1 Promissory Notes dated various dates, to the Company, from
various affiliated companies.
10(f)(3) 9 Credit Acceptance Corporation 1992 Stock Option Plan, as
amended and restated May 1997.
10(g) 1 Promissory Note dated May 3, 1991 to the Company from
Richard E. Beckman and related assignment.
10(n)(5) 10 Credit Acceptance Corporation Management Incentive
Plan -- Fiscal Year 1998
10(o)(1) 7 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended January 22, 1997
10(o)(2) 13 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended and restated September 21, 1998.
21(1) 14 Schedule of Credit Acceptance Corporation Subsidiaries
23(1) 14 Consent of Deloitte and Touche LLP
23(2) 14 Consent of Arthur Andersen LLP
27 14 Financial Data Schedule

1 Reference to the Company's Registration Statement on Form S-1, File No.
33-46772.

2 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1994, and incorporated herein by reference.

3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, and incorporated herein by reference.

4 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1995, and incorporated herein by reference.
60

5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, 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, 1996 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, 1996, and incorporated herein by reference.

8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.

9 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.

10 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1997, and incorporated herein by reference.

11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1998 and incorporated herein by reference.

12 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1998, and incorporated herein by reference.

13 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1998, and incorporated herein by reference.

14 Filed herewith