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Filed Pursuant to Rule 424(b)3
Registration No. 333-187778

 

The information in this prospectus supplement is not complete and may be changed. This prospectus supplement and the accompanying prospectus are not an offer to sell these securities and are not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus Supplement dated April 8, 2013

PROSPECTUS    SUPPLEMENT

(To prospectus dated April 8, 2013)

1,500,000 Shares

 

Credit Acceptance Corporation

Common Stock

 

 

The selling shareholders identified in this prospectus supplement are selling 1,500,000 shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling shareholders.

Our shares trade on The NASDAQ Global Select Market under the symbol “CACC.” On April 5, 2013, the last sale price of the shares as reported on The NASDAQ Global Select Market was $117.25 per share.

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page S-14 of this prospectus supplement and in any risk factors described in the documents referenced herein.

 

 

 

		Per Share				Total
Public offering price		$				$
Underwriting discount		$				$
Proceeds, before expenses, to the selling shareholders		$				$

The underwriters may also exercise their option to purchase up to an additional 225,000 shares from the selling shareholders at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus supplement to cover the underwriters’ option to purchase additional shares.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2013.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch		Credit Suisse

 

 

Co-Manager

BMO Capital Markets

The date of this prospectus supplement is                     , 2013

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TABLE OF CONTENTS

Prospectus Supplement

 

		Page
Summary			S-1
Risk Factors			S-14
Cautionary Statement Regarding Forward-Looking Statements			S-26
Use of Proceeds			S-29
Price Range of Common Stock			S-29
Dividend Policy			S-29
Capitalization			S-30
Selected Financial and Other Data			S-32
Management’s Discussion and Analysis of Financial Condition and Results of Operations			S-37
Business			S-56
Management and Board of Directors			S-68
Common Stock Ownership of Certain Beneficial Owners and Management			S-70
Selling Shareholders			S-72
Description of Our Capital Stock			S-75
Shares Eligible for Future Sale			S-78
U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock			S-80
Underwriting			S-83
Legal Matters			S-89
Experts			S-89

Prospectus dated April 8, 2013

 

		Page
About this Prospectus			ii
About Credit Acceptance Corporation			1
Risk Factors			2
Cautionary Statement Regarding Forward-Looking Statements			3
Use of Proceeds			5
Ratio of Earnings to Fixed Charges			5
Description of Our Capital Stock			6
Description of Our Debt Securities			9
Description of Our Warrants			12
Selling Securityholders			14
Plan of Distribution			14
Legal Matters			15
Experts			15
Where You Can Find More Information			15

You should rely only on the information contained or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not, and the underwriters and the selling shareholders have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling shareholders are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where such offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement, the accompanying prospectus and the documents incorporated by reference is accurate only as of the date of the document in which it appears, unless otherwise indicated. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

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ABOUT THIS PROSPECTUS SUPPLEMENT

This document is comprised of two parts. The first part is the prospectus supplement, which describes the specific terms of this offering. The second part is the accompanying prospectus, which describes more general information, some of which does not apply to this offering. Generally, when we refer to the prospectus, we are referring to both this prospectus supplement and the accompanying prospectus combined. To the extent any inconsistency or conflict exists between the information included or incorporated by reference in this prospectus supplement, on the one hand, and the information included in the accompanying prospectus, on the other hand, the information included or incorporated by reference in this prospectus supplement updates and supersedes the information in the accompanying prospectus. You should read both this prospectus supplement and the accompanying prospectus, together with the additional information described under “Where You Can Find More Information”.

Unless the context otherwise requires, the terms “Credit Acceptance,” “the Company,” “we,” “us” or “our” or similar terms each refer to Credit Acceptance Corporation, together with its consolidated subsidiaries.

This document may only be used where it is legal to sell the shares of common stock. Certain jurisdictions may restrict the distribution of this document and the offering of the shares of common stock. We require persons receiving this document to inform themselves about and to observe any such restrictions. We have not taken any action that would permit an offering of the shares of common stock or the distribution of these documents in any jurisdiction that requires such action.

MARKET AND INDUSTRY DATA AND FORECASTS

Any market or industry data and statistical information contained in this prospectus supplement, the accompanying prospectus or in the information incorporated by reference herein or therein are based on a variety of sources, including internal data and estimates, independent industry publications, government publications, reports by market research firms or other published independent sources. Industry publications and other published sources generally state that the information contained therein has been obtained from third-party sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such included information. Our internal data and estimates are based upon information obtained from our Dealers, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions, and such information has not been verified by any independent sources. Accordingly, investors should not place undue reliance on such data and information.

WHERE YOU CAN FIND MORE INFORMATION

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy these documents at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain further information on the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers like Credit Acceptance Corporation that file electronically with the SEC.

This prospectus supplement and the accompanying prospectus are part of a registration statement on Form S-3 filed by us with the SEC under the Securities Act. This prospectus supplement and the accompanying prospectus do not contain all of the information set forth in the registration statement. You can obtain a copy of the registration statement from the SEC as described above.

 

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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

We have “incorporated by reference” into this prospectus supplement and the accompanying prospectus certain information that we have previously filed with the SEC or that we may file in the future. This means that we are disclosing important business, financial and other information by referring you to other documents that are or will be available to you on the website of the SEC. The information we incorporate by reference is deemed to be a part of this prospectus supplement and the accompanying prospectus, and all references to this prospectus supplement are meant to include references to the incorporated information as if it was physically included herein. Information incorporated by reference is considered to be part of this prospectus supplement and the accompanying prospectus, and information in documents that we file later with the SEC will automatically update and supersede information in this prospectus supplement and the accompanying prospectus. We incorporate by reference the documents listed below into this prospectus supplement and the accompanying prospectus, and any future filings made by us with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act until we close this offering. We hereby incorporate by reference the following documents:

 

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our Annual Report on Form 10-K for the year ended December 31, 2012 (our “2012 Form 10-K”), including the information specifically incorporated therein from our Definitive Proxy Statement on Schedule 14A (filed with the SEC on April 4, 2013) (our “Proxy Statement”);

 

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our Current Reports on Form 8-K filed with the SEC on January 3, 2013, March 13, 2013, April 5, 2013 and April 8, 2013; and

 

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the description of our common stock which is contained in our registration statement on Form 8-A filed with the SEC on May 12, 1992 including any amendment or reports filed for the purpose of updating such description.

We are not incorporating by reference any information furnished under Items 2.02 or 7.01 (or corresponding information furnished under Item 9.01 or included as an exhibit) in any past or future current report on Form 8-K that we file with the SEC, unless otherwise specified in such report.

You may obtain any of the documents incorporated by reference through the SEC or the SEC’s website as described above. You may also obtain copies of these documents, other than exhibits, free of charge by contacting our investor relations department at our principal offices at 25505 West Twelve Mile Road, Southfield, Michigan 48034-8339, or at (248) 353-2700.

Any statement contained in a document incorporated by reference in this prospectus supplement and the accompanying prospectus is modified or superseded for purposes of this prospectus supplement to the extent that a statement contained in this prospectus supplement or in any subsequently filed document that also is incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded does not, except as so modified or superseded, constitute a part of this prospectus supplement and the accompanying prospectus.

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider the following risk factors, as well as other information that is contained in or incorporated by reference in this prospectus supplement or the accompanying prospectus. The occurrence of any of these risks and uncertainties, as well as other risks and uncertainties, could materially affect our business and our financial condition and results of operations may be materially harmed, in which case the market price of our common stock could decline. The risks described below are not the only ones that could affect us or the value of our common stock. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations. As a result of any of these risks, known or unknown, you may lose all or a part of your investment in our common stock.

Risks Relating to Our Business

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

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

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

Our financial position, liquidity and results of operations depend on management’s ability to execute our business strategy. Key factors involved in the execution of our business strategy include achieving our desired Consumer Loan assignment volume, continued and successful use of CAPS and pricing strategy, the use of effective credit risk management techniques and servicing strategies, continued investment in technology to support operating efficiency and continued access to funding and liquidity sources. Although our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints, there can be no assurance that this strategy will have its intended effect. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consumer Loan Volume.” Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity and results of operations.

 

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

We use debt financing to fund new Loans and pay Dealer Holdback. We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) Senior Notes. We cannot guarantee that the revolving secured line of credit or the Warehouse facilities will continue to be available beyond their current maturity dates, on acceptable terms, or at all, or that we will be able to obtain additional financing on acceptable terms or at all. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, our financial position, our results of operations, and the capacity for additional borrowing under our existing financing arrangements. If our various financing alternatives were to become limited or unavailable, we may be unable to maintain or grow Consumer Loan volume at the level that we anticipate and our operations could be materially adversely affected.

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

The agreements that govern our debt contain covenants that restrict our ability to, among other things:

 

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incur and guarantee debt;

 

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pay dividends or make other distributions on or redeem or repurchase our stock;

 

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make investments or acquisitions;

 

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create liens on our assets;

 

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sell assets;

 

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merge with or into other companies; and

 

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enter into transactions with shareholders and other affiliates.

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

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

 

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

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

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

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

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

We have a substantial amount of debt. The substantial amount of our debt could have important consequences, including the following:

 

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our ability to obtain additional financing for Consumer Loan assignments, working capital, debt refinancing or other purposes could be impaired;

 

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a substantial portion of our cash flows from operations will be dedicated to paying principal and interest on our debt, reducing funds available for other purposes;

 

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we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility, bear interest at variable rates;

 

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we could be more vulnerable to adverse developments in our industry or in general economic conditions;

 

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we may be restricted from taking advantage of business opportunities or making strategic acquisitions; and

 

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we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

 

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

The automobile finance market for consumers who do not qualify for conventional automobile financing is large and highly competitive. The market is served by a variety of companies including “buy here, pay here” dealerships. The market is also currently served by banks, captive finance affiliates of automobile manufacturers, credit unions and independent finance companies both publicly and privately owned. Many of these companies are much larger and have greater financial resources than are available to us, and many have long standing relationships with automobile dealerships. Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and consumers. During 2012, due to increasing competition in the automobile finance market, the average loan volume per our active Dealers declined approximately 20%. During 2012, we also increased the advance rate on Dealer Loans as a result of increased competition. We may be unable to compete successfully in the automobile finance market or, due to the intense competition in this market, our results of operations, cash flows and financial condition may be adversely affected as we adjust our business in response to competitive pressures. Increasing advance rates on Dealer Loans has the impact of reducing the return on capital we expect to earn on Loans. Additionally, if we are unsuccessful in maintaining and expanding our relationships with Dealers, we may be unable to accept Consumer Loans in the volume and on the terms that we anticipate.

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

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

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

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

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

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

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

Although the terms of our debt instruments contain restrictions on our ability to incur additional debt, we are able to incur a substantial amount of additional debt within these restrictions. In addition, our debt instruments do not prevent us from incurring liabilities that do not constitute indebtedness as defined for

 

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purposes of those debt instruments. If new debt or other liabilities are added to our current debt levels, the risks associated with our having substantial debt could intensify.

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

Our business is subject to laws and regulations, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and various other state and federal laws and regulations. These laws and regulations, among other things, require licensing and qualification; limit interest rates, fees and other charges associated with the Consumer Loans assigned to us; require specified disclosures by Dealers to consumers; govern the sale and terms of ancillary products; and define the rights to repossess and sell collateral. Failure to comply with these laws or regulations could have a material adverse effect on us by, among other things, limiting the jurisdictions in which we may operate, restricting our ability to realize the value of the collateral securing the Consumer Loans, making it more costly or burdensome to do business or resulting in potential liability. The volume of new or modified laws and regulations has increased in recent years and has increased significantly in response to issues arising with respect to consumer lending. From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand permissible activities or affect the competitive balance among financial services providers. Proposals to change the laws and regulations governing the operations and taxation of financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures and by various regulatory agencies. This legislation may change our operating environment in substantial and unpredictable ways and may have a material adverse effect on our business.

In July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted, and a number of its provisions became effective in July 2011. The Dodd-Frank Act restructured and enhanced the regulation and supervision of the financial services industry and created the Consumer Financial Protection Bureau (the “CFPB”). The CFPB has rulemaking and enforcement authority over certain non-depository institutions, including us. The CFPB is specifically authorized, among other things, to take actions to prevent companies providing consumer financial products or services and their service providers from engaging in unfair, deceptive or abusive acts or practices in connection with consumer financial products and services, and to issue rules requiring enhanced disclosures for consumer financial products or services. Under the Dodd-Frank Act, the CFPB also may restrict the use of pre-dispute mandatory arbitration clauses in contracts between covered persons and consumers for a consumer financial product or service. The CFPB also has authority to interpret, enforce, and issue regulations implementing enumerated consumer laws, including certain laws that apply to our business. Further, the CFPB has issued rules allowing it to supervise non-depository “larger participants” in certain markets for consumer financial services and products, and may in the future issue rules to supervise non-depository larger participants in the indirect auto lending business, which may include us.

The Dodd-Frank Act and regulations promulgated thereunder, including by the CFPB, are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the competitive balance within our industry and market areas and could have a material adverse effect on us. For example, on March 21, 2013, the CFPB issued Bulletin 2013-02 addressing Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act, in which the CFPB stated that policies of indirect auto lenders that allow auto dealers to mark up lender-established buy rates and that compensate dealers for those markups in the form of dealer reserve could present a risk that they will result in impermissible pricing disparities on the basis of race, national origin, and potentially other prohibited bases. Our management continues to assess the Dodd-Frank Act’s probable impact on our business, financial condition and results of operations, and to monitor developments involving the entities charged with promulgating regulations thereunder. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on us in particular, is uncertain at this time.

In addition, governmental regulations which would deplete the supply of used vehicles, such as environmental protection regulations governing emissions or fuel consumption, could have a material adverse effect on us.

 

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

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

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

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

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

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

As a result of the consumer-oriented nature of the industry in which we operate and uncertainties with respect to the application of various laws and regulations in some circumstances, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud and breach of contract. As the assignee of Consumer Loans originated by Dealers, we may also be

 

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named as a co-defendant in lawsuits filed by consumers principally against Dealers. We may also have disputes and litigation with Dealers relating to our Dealer servicing and related agreements, including claims for, among other things, breach of contract or other duties purportedly owed to the Dealers. The damages and penalties that may be claimed by consumers or Dealers in these types of matters can be substantial. The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages, and plaintiffs may seek treatment as purported class actions. A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

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

We are subject to income tax in many of the various jurisdictions in which we operate. Increases in statutory income tax rates and other adverse changes in applicable law in these jurisdictions could have an adverse effect on our results of operations. In the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Uncertain Tax Positions.” We adjust these liabilities as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. Such payments could have a material adverse effect on our results of operations and cash flows from operations.

Our dependence on technology could have a material adverse effect on our business.

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

Our systems, and the equipment, software and Internet access on which they depend, may be subject to cyber attacks, security breaches and other cybersecurity incidents. Although the cybersecurity incidents we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that cybersecurity incidents will not have a material adverse effect on us in the future.

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

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

 

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

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

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

Our senior management average over 12 years of experience with us. Our success is dependent upon the management and the leadership skills of this team. In addition, competition from other companies to hire our team members possessing the necessary skills and experience required could contribute to an increase in team member turnover. The loss of any of these individuals or an inability to attract and retain additional qualified team members could adversely affect us. There can be no assurance that we will be able to retain our existing senior management or attract additional qualified team members.

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

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

The concentration of our Dealers in several states could adversely affect us.

Dealers are located throughout the United States. During the year ended December 31, 2012, our five largest states (measured by advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program) contained 31.7% of our Dealers. While we believe we have a diverse geographic presence, for the near term, we expect that significant amounts of Consumer Loan assignments will continue to be generated by Dealers in these five states due to the number of Dealers in these states and currently prevailing economic, demographic, regulatory, competitive and other conditions in these states. Changes to conditions in these states could lead to an increase in Dealer attrition or a reduction in demand for our service that could materially adversely affect our financial position, liquidity and results of operations.

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

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and personally identifiable information of our customers and employees, on our computer networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy.

 

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

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to secure online transmission of confidential consumer information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend capital and other resources to protect against, or alleviate problems caused by, security breaches or other cybersecurity incidents. Although we have experienced cybersecurity incidents from time to time that have not had a material effect on our business, financial condition or results of operations, there can be no assurance that a cyber attack, security breach or other cybersecurity incident will not have a material adverse effect on us in the future. Our security measures are designed to protect against security breaches, but our failure to prevent security breaches could subject us to liability, decrease our profitability and damage our reputation.

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

We outsource certain business functions to third party service providers, which increases our operational complexity and decreases our control. We rely on these service providers to provide a high level of service and support, which subjects us to risks associated with inadequate or untimely service. In addition, if these outsourcing arrangements were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider or provide them using our internal resources. We may be unable to replace, or be delayed in replacing these sources and there is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner. In the future, we may outsource additional business functions. If any of these or other risks related to outsourcing were realized, our financial position, liquidity and results of operations could be adversely affected.

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

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

Risks Relating to Investing in Our Common Stock

A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

As of March 21, 2013, based on filings made with the SEC and other information made available to us, our Chairman and founder owned approximately 48.5% of our common stock and Prescott General Partners,

 

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LLC and its affiliates owned approximately 17.0% of our common stock. As a result, these few shareholders are able to significantly influence matters presented to shareholders, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs, including executive compensation arrangements. Their interests may conflict with the interests of our other security holders.

We may experience volatility in the market price of our common stock due to the low trading volume and limited public ownership of our common stock.

The market price of our common stock has fluctuated significantly in the past and is likely to continue to be highly volatile. In particular, the volatility of our shares is influenced by low trading volume and limited public ownership. For example, during 2012, our closing stock price fluctuated from a low of $78.47 a share to a high of $106.50 a share. Because 68.1% of our outstanding shares were owned by affiliates as of March 21, 2013, our stock is relatively less liquid and therefore more susceptible to large price fluctuations than many other companies’ shares. As a result, you may be unable to sell your shares of common stock at or above the offering price.

In addition to the other risk factors discussed elsewhere in this prospectus, the price of our common stock may fluctuate significantly in response to the following factors, among others, some of which are beyond our control:

 

•

general market conditions;

 

•

actual or anticipated fluctuations in our annual or quarterly results of operations or those of other companies in our industry;

 

•

changes in our business, operations, or prospects;

 

•

changes in our capital structure, such as future issuances of common stock or other securities or the incurrence of additional debt;

 

•

changes in the regulatory environment;

 

•

developments in our business or in our industry generally;

 

•

the hiring or departure of key personnel;

 

•

announcements of strategic actions, developments or other material events (such as new products or services, acquisitions, dispositions, restructurings or financings) by us or our competitors;

 

•

financial results that fail to meet public market analysts’ expectations and changes in stock market analysts’ recommendations regarding us, other auto finance companies, or the auto finance industry in general;

 

•

changes in market valuations of other companies in our industry;

 

•

adverse judgments or settlements obligating us to pay damages;

 

•

acts of war, terrorism, or national calamities;

 

•

changes in industry, domestic and international market and economic conditions;

 

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•

actual or anticipated sales of our common stock by existing shareholders, whether in the market or in subsequent public offerings; and

 

•

decisions by investors to de-emphasize investment categories, groups or strategies that include our company or industry.

In addition, the stock market has recently experienced significant price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company’s stock drops significantly, shareholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business.

Future sales of our common stock by us or our existing shareholders could cause our stock price to decline.

The market price of our common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering. These sales, or the perception that these sales might occur, could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

As of March 21, 2013, stock options for a total of 70,000 shares of our common stock were outstanding under our equity incentive plans, of which options for a total of 70,000 shares were currently exercisable at a weighted average exercise price of $17.25 per share. All of the shares issuable on exercise of such vested options would be eligible for sale in the public market. Additionally, as of March 21, 2013, 1,091,910 shares of our common stock are subject to currently outstanding restricted stock units and 322,415 shares of our common stock are reserved for future issuance under our equity-based compensation plans.

As of March 21, 2013, pursuant to a Voting and Divestiture Agreement dated December 6, 2001, Donald A. Foss had sole voting power and dispositive power over (i) 2,878,752 shares owned beneficially and of record by Karol A. Foss and (ii) 3,813,898 shares owned beneficially and of record by Jill Foss Watson. The Voting and Divestiture Agreement dated December 6, 2001 expires on December 6, 2013, at which time decision-making authority regarding the sale of such shares will no longer be held by Mr. Foss. Ms. Foss and Ms. Foss Watson will each be able to exercise sole voting and dispositive power over their respective shares owned beneficially and of record, and as a result, will be able to make independent determinations as to timing and volume of sales of such shares of common stock of the Company. See “Shares Eligible for Future Sale.”

In addition, we currently have the ability to offer and sell common stock, preferred stock, warrants, debt and convertible securities under a currently effective universal shelf registration statement. We may issue equity securities in the future, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Sales of a substantial number of shares of our common stock or other equity securities could be substantially dilutive to our shareholders. These sales may have a harmful effect on prevailing market prices for our common stock and our ability to raise additional capital in the financial markets at a time and price favorable to us. Moreover, to the extent that we issue restricted stock units, restricted stock, options, or warrants to purchase our common stock in the future and those options or warrants are exercised or as the restricted stock units and restricted stock vest, our shareholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase a pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders. Our articles of incorporation provide that we have authority to issue 80,000,000 shares of common stock and 1,000,000 shares of preferred stock.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our stock price and trading volume could decline.

The trading market for our common stock depends in part on research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. Lack of research coverage could negatively impact the market for our common stock. In the event additional securities or industry analysts do initiate coverage of our company and one or more of these analysts downgrade our stock or publish inaccurate or unfavorable research about us, our stock price would likely decline.

We do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid any dividends on our common stock, and we have no current plans to pay quarterly or annual dividend payments to our shareholders. Future dividend payments, if any, will depend on our results of operations, financial condition, capital expenditure plans and other obligations and circumstances, and will be at the sole discretion of our board of directors. Our credit agreement contains financial covenants that require a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. These covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1 for the two most recently ended fiscal quarters. The indenture governing our senior notes also contains covenants that limit the maximum ratio of our funded debt to tangible net worth and also require a minimum collateral coverage ratio. Some of these debt covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock. Therefore, you should not anticipate receiving any cash dividends on our common stock in the foreseeable future.

Our corporate documents and Michigan law contain provisions that may make it more difficult for us to be acquired.

The Michigan Business Corporation Act (“MBCA”) and our Articles of Incorporation and Bylaws contain provisions that may have the effect of discouraging transactions involving an actual or threatened change of control. These provisions could protect the continuity of our directors and management and possibly deprive our shareholders of any opportunity to sell their shares of common stock at prices higher than the prevailing market prices. See “Description of our Capital Stock—Provisions That May Discourage Takeovers.”

Our board of directors has the authority, without shareholder approval, to issue shares of preferred stock and to fix the rights, preferences, privileges and restrictions of these shares without any further vote or action by our shareholders. Our board of directors also has the authority to increase its own size and fill the resulting vacancies until the next annual meeting of the shareholders. Chapter 7A of the MBCA contains provisions that make it more difficult for a 10% shareholder, or its officers, to acquire a company. We are currently not governed by the provisions of Chapter 7A but may opt in at any time by resolution of our board of directors. These provisions of our charter, bylaws and Michigan law may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. This effect could occur even if our shareholders consider the change in control to be in their best interest.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectus and the documents incorporated by reference herein and therein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of operations. When we use any of the words “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “assume,” “forecast,” “estimate,” “intend,” “plan,” “target” or similar expressions, we are making forward-looking statements. These forward-looking statements represent our outlook only as of the date of this prospectus supplement. While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include the following:

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

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•

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

 

•

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

 

•

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

 

•

Our dependence on technology could have a material adverse effect on our business.

 

•

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

 

•

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

 

•

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

 

•

The concentration of our Dealers in several states could adversely affect us.

 

•

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

 

•

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

 

•

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

 

•

A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

 

•

We may experience volatility in the market price of our common stock due to the low trading volume and limited public ownership of our common stock.

 

•

Future sales of our common stock by us or our existing shareholders could cause our stock price to decline.

 

•

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our stock price and trading volume could decline.

 

•

We do not anticipate paying any cash dividends in the foreseeable future.

 

•

Our corporate documents and Michigan law contain provisions that may make it more difficult for us to be acquired.

 

•

The other factors described under “Risk Factors.”

 

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For a more detailed description of these risks and uncertainties and other factors you should consider before purchasing our common stock, see the section entitled “Risk Factors” beginning on page S-14 of this prospectus supplement and beginning on page 2 of the accompanying prospectus dated April 8, 2013 for important factors that could cause our actual results to differ materially from the forward-looking statements included or incorporated by reference in this prospectus supplement and the accompanying prospectus and presented elsewhere by our management from time to time. Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements. Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain, and accordingly, you should not place undue reliance on forward-looking statements.

Other factors not currently anticipated by management may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.

PRICE RANGE OF COMMON STOCK

Our common stock trades on The NASDAQ Global Select Market under the symbol “CACC.” As of March 21, 2013, there were 23,587,496 shares of our common stock outstanding. As of March 21, 2013, there were 159 shareholders of record and approximately 4,100 beneficial holders of our common stock based upon securities position listings furnished to us. The following table provides the high and low intraday sales prices per share during the periods indicated as reported on The NASDAQ Global Select Market.

 

		High				Low
Year ended December 31, 2013
Second quarter (through April 5, 2013)		$	121.85			$	116.74
First quarter			128.90				95.54
Year ended December 31, 2012
Fourth quarter			102.58				80.40
Third quarter			104.97				83.82
Second quarter			101.81				80.00
First quarter			107.09				76.95
Year ended December 31, 2011
Fourth quarter			93.10				60.09
Third quarter			86.87				56.55
Second quarter			84.50				71.00
First quarter			72.55				53.04
Year ended December 31, 2010
Fourth quarter			63.58				54.12
Third quarter			63.45				47.18
Second quarter			49.65				41.24
First quarter			53.97				38.57

On April 5, 2013, the last sale price of our common stock as reported on The NASDAQ Global Select Market was $117.25.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock, and we have no current plans to pay quarterly or annual dividend payments to our shareholders. Future dividend payments, if any, will depend on our results of operations, financial condition, capital expenditure plans and other obligations and circumstances, and will be at the sole discretion of our board of directors. Our credit agreement contains financial covenants that require a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. These covenants also limit the ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1 for the two most recently ended fiscal quarters. The indenture governing our senior notes also contains covenants that limit the maximum ratio of our funded debt to tangible net worth and also require a minimum collateral coverage ratio. Some of these debt covenants may indirectly limit the repurchase of our common stock or payment of dividends on our common stock. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2012. You should read this table in conjunction with “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto appearing in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

 

(In millions, except share and per share data)		As of December 31, 2012
		(Audited)
Cash and cash equivalents		$	9.0
Long-term debt, including current portion:
Revolving secured line of credit facility (1)		$	43.5
Revolving secured warehouse facilities (2)			118.9
Asset-backed secured financings			734.1
Mortgage note (3)			4.0
Senior notes (4)			350.3
Total long-term debt, including current portion			1,250.8
Shareholders’ equity:
Preferred stock ($.01 par value, 1,000,000 shares authorized, none issued)			—
Common stock ($.01 par value, 80,000,000 shares authorized; 24,114,896 shares issued and outstanding)			0.2
Paid-in capital			53.4
Retained earnings			568.4
Accumulated other comprehensive loss			(0.1	)
Total shareholders’ equity			621.9
Total capitalization		$	1,872.7

 

(1)

Our revolving secured line of credit facility provides for up to $235.0 million of borrowings, subject to borrowing base limitations and other specified terms and conditions, and has a maturity date of June 22, 2015. As of December 31, 2012, total borrowings under our revolving credit facility were $43.5 million, and the interest rate on those borrowings was 2.08% per annum.

 

(2)

We have three warehouse facilities with total borrowing capacity of $475.0 million. Each of the facilities is with a different institutional investor, and the facility limits are $325.0 million for Warehouse Facility II and $75 million for each of Warehouse Facility III and IV. During the second quarter of 2012, we extended the date on which Warehouse Facility III will cease to revolve from September 10, 2013 to September 10, 2015. During the fourth quarter of 2012, we extended the date on which Warehouse Facility II will cease to revolve from June 17, 2014 to December 27, 2015. During the second quarter of 2013, we extended the date on which Warehouse Facility IV will cease to revolve from February 19, 2014 to April 5, 2016. The interest rate on borrowings under the facility was decreased from LIBOR plus 2.75% to LIBOR plus 2.25%. There were no other material changes to the terms of the facility.

As of December 31, 2012, total borrowings under our $325.0 million secured Warehouse Facility II were $81.3 million, and the interest rate on those borrowings was 2.22% per annum. Our $325.0 million secured warehouse facility ceases to revolve on December 27, 2015.

As of December 31, 2012, there were no borrowings under our $75.0 million secured Warehouse Facility III. Our $75.0 million secured warehouse facility ceases to revolve on September 10, 2015.

As of December 31, 2012, total borrowings under our $75.0 million secured Warehouse Facility IV were $37.6 million, and the interest rate on those borrowings was 2.96% per annum. Our $75.0 million secured warehouse facility ceases to revolve on April 5, 2016.

 

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(3)	As of December 31, 2012, we had $4.0 million outstanding on the mortgage note on our Southfield, Michigan headquarters.

 

(4)	Represents $350.0 million aggregate principal amount of our 9.125% First Priority Senior Secured Notes due 2017, net of unamortized debt premium.

 

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SELECTED FINANCIAL AND OTHER DATA

Our selected historical consolidated statement of income and other financial data for the years ended December 31, 2012, 2011 and 2010, and our summary historical consolidated balance sheet data as of December 31, 2012 and 2011, are derived from our audited consolidated financial statements appearing in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement. Our selected historical consolidated statement of income and other financial data for the years ended December 31, 2009 and 2008, and our summary historical consolidated balance sheet data as of December 31, 2010, 2009 and 2008, are derived from our audited consolidated financial statements not included or incorporated by reference in this prospectus supplement.

The selected financial data presented below represents or is derived from portions of our financial statements and is not complete. You should read this information in conjunction with, and it is qualified in its entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto appearing in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

Historical results are not necessarily indicative of future performance or results of operations. Amounts are in millions, except share and per share data.

 

		Years Ended December 31,
		2012				2011				2010				2009				2008
Income Statement Data:
Revenue		$	609.2			$	525.2			$	442.1			$	380.7			$	312.2
Costs and expenses:
Salaries and wages			82.2				63.0				61.3				66.9				69.0
General and administrative			30.5				25.6				26.4				30.4				27.5
Sales and marketing			31.2				23.6				19.7				14.8				16.8
Provision for credit losses			24.0				29.0				10.0				(12.2	)			46.0
Interest			63.4				57.2				47.8				32.4				43.2
Provision for claims			34.8				30.4				23.4				19.3				2.7
Total costs and expenses			266.1				228.8				188.6				151.6				205.2
Income from continuing operations before provision for income taxes			343.1				296.4				253.5				229.1				107.0
Provision for income taxes			123.4				108.4				83.4				83.0				39.9
Income from continuing operations			219.7				188.0				170.1				146.1				67.1
Gain from discontinued operations			—				—				—				0.2				0.1
Net income		$	219.7			$	188.0			$	170.1			$	146.3			$	67.2
Net income per share:
Basic		$	8.65			$	7.15			$	5.79			$	4.78			$	2.22
Diluted		$	8.58			$	7.07			$	5.67			$	4.62			$	2.16
Income from continuing operations per share:
Basic		$	8.65			$	7.15			$	5.79			$	4.77			$	2.22
Diluted		$	8.58			$	7.07			$	5.67			$	4.61			$	2.16
Gain from discontinued operations per share:
Basic		$	—			$	—			$	—			$	0.01			$	—
Diluted		$	—			$	—			$	—			$	0.01			$	—
Weighted average shares outstanding:
Basic			25,409,655				26,302,289				29,393,309				30,590,142				30,249,783
Diluted			25,598,956				26,600,855				29,984,819				31,668,895				31,105,043

 

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		Years Ended December 31,
		2012				2011				2010				2009				2008
Balance Sheet Data (end of period):
Loans receivable, net(1)		$	1,933.5			$	1,598.6			$	1,218.0			$	1,050.0			$	1,017.9
All other assets			199.7				160.0				125.5				126.2				121.5
Total assets		$	2,133.2			$	1,758.6			$	1,343.5			$	1,176.2			$	1,139.4
Total debt		$	1,250.8			$	997.9			$	685.6			$	507.0			$	641.7
Other liabilities			260.5				220.7				183.4				171.0				159.9
Total liabilities			1,511.3				1,218.6				869.0				678.0				801.6
Shareholders’ equity(2)			621.9				540.0				474.5				498.2				337.8
Total liabilities and shareholders’ equity		$	2,133.2			$	1,758.6			$	1,343.5			$	1,176.2			$	1,139.4
Other Financial and Operating Data:
Net cash provided by operating activities		$	308.6			$	275.7			$	200.7			$	160.4			$	159.8
Adjusted return on capital(3)(4)			14.7	%			16.8	%			17.7	%			14.6	%			11.3	%
Economic profit(4)(5)		$	159.6			$	143.1			$	112.7			$	79.1			$	47.0
Adjusted return on equity(4)(6)			36.5	%			40.5	%			32.5	%			29.6	%			26.4	%
Return on equity(6)			38.2	%			40.1	%			33.9	%			35.4	%			22.3	%

 

(1)

At December 31, 2012, 2011, 2010, 2009 and 2008, Loans receivable, net includes Loans receivable, net of $1,064.9 million, $874.9 million, $417.6 million, $571.6 million and $792.5 million, respectively, that have been sold for legal purposes in connection with our Term ABS financings and Warehouse facilities, which sales, however, do not satisfy the requirements for accounting sale treatment. These Loans receivable are available only for payment of the related Term ABS financings and other obligations issued or arising in the applicable Term ABS financing transaction; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to the excess cash flows not needed to pay the Term ABS financings issued or arising in our Term ABS financings and Warehouse facilities. See Note 8, Debt, in the notes to our consolidated financial statements appearing in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

 

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

 

(3)	Adjusted return on capital is defined as adjusted net income plus adjusted interest expense after-tax divided by adjusted average capital. The derivation of each of adjusted net income, adjusted interest expense after-tax and adjusted average capital is set forth in footnote 4.

 

(4)

Adjusted financial results are provided to help investors understand our financial performance. The financial data below is not consistent with GAAP, unless labeled otherwise. We use adjusted financial information internally to measure financial performance and to determine incentive compensation. The table below shows our results following adjustments to reflect non-GAAP accounting methods. Material adjustments are explained in the footnotes to that table and the footnote to the subsequent table, relating to Floating Yield Adjustment and Program Fee Yield Adjustment. Measures such as adjusted average capital, adjusted net income, adjusted net income per diluted share, adjusted net income plus interest expense after-tax, adjusted return on capital, adjusted return on equity, adjusted interest expense after-tax, adjusted average shareholders’ equity and economic profit are all non-GAAP financial measures. These non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

 

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Adjusted financial results for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 include the following:

 

		For the Years Ended December 31,
		2012				2011				2010				2009				2008
Economic profit		$	159.6			$	143.1			$	112.7			$	79.1			$	47.0
Adjusted average capital		$	1,742.8			$	1,371.1			$	1,074.2			$	998.7			$	975.0
Adjusted return on equity			36.5	%			40.5	%			32.5	%			29.6	%			26.4	%
Adjusted net income		$	216.2			$	194.1			$	160.5			$	125.1			$	82.8
Adjusted interest expense after-tax		$	39.9			$	36.0			$	30.1			$	20.9			$	27.0
Adjusted net income plus adjusted interest expense after-tax		$	256.1			$	230.1			$	190.6			$	146.0			$	109.8
Adjusted return on capital			14.7	%			16.8	%			17.7	%			14.6	%			11.3	%
Cost of capital (a)			5.5	%			6.4	%			7.2	%			6.7	%			6.4	%
Adjusted average shareholders’ equity		$	592.4			$	478.8			$	493.1			$	423.2			$	314.2
GAAP diluted weighted average shares outstanding			25,598,956				26,600,855				29,984,819				31,668,895				31,105,043
Adjusted net income per diluted share		$	8.45			$	7.30			$	5.35			$	3.95			$	2.66

 

(a)

The cost of capital includes both a cost of equity and a cost of debt. The cost of equity capital is determined based on a formula that considers the risk of the business and the risk associated with our use of debt. The formula utilized for determining the cost of equity capital is as follows: (the average 30 year treasury rate + 5%) + [(1 – tax rate) x (the average 30 year treasury rate + 5% – pre-tax average cost of debt rate) x average debt/(average equity + average debt x tax rate)]. For the periods presented, the average 30 year treasury rate and the adjusted pre-tax average cost of debt were as follows:

 

		For the Years Ended December 31,
		2012				2011				2010				2009				2008
Average 30 year treasury rate			2.9	%			3.9	%			4.2	%			4.0	%			4.3	%
Adjusted pre-tax average cost of debt			5.5	%			6.4	%			8.2	%			5.8	%			6.5	%

The following table provides a reconciliation of the non-GAAP measures set forth above to GAAP measures. All after-tax adjustments are calculated using a 37% tax rate as we estimate that to be our long term average effective tax rate. Certain amounts do not recalculate due to rounding.

 

		Years Ended December 31,
		2012				2011				2010				2009				2008
Economic profit
Adjusted return on capital			14.7	%			16.8	%			17.7	%			14.6	%			11.3	%
Cost of capital			5.5	%			6.4	%			7.2	%			6.7	%			6.4	%
Adjusted return on capital in excess of cost of capital			9.2	%			10.4	%			10.5	%			7.9	%			4.9	%
Adjusted average capital		$	1,742.8			$	1,371.1			$	1,074.2			$	998.7			$	975.0
Economic profit		$	159.6			$	143.1			$	112.7			$	79.1			$	47.0
Adjusted average capital
GAAP average debt		$	1,150.4			$	892.3			$	581.1			$	575.5			$	660.8
GAAP average shareholders’ equity			581.3				469.7				488.4				411.0				302.8
Floating yield adjustment(a)			11.1				9.4				5.2				13.2				13.8
Program fee yield adjustment(b)			—				(0.3	)			(0.5	)			(1.0	)			(2.4	)
Adjusted average capital		$	1,742.8			$	1,371.1			$	1,074.2			$	998.7			$	975.0
Adjusted net income
GAAP net income		$	219.7			$	188.0			$	170.1			$	146.3			$	67.2
Floating yield adjustment (after-tax)(a)			—				7.1				0.5				(19.6	)			13.1
Program fee yield adjustment (after-tax)(b)			—				0.3				0.3				0.8				2.1
Adjustment to record taxes at 37%			(3.5	)			(1.3	)			(10.4	)			(1.8	)			0.3
Other (Discontinued Operations & Interest expense on interest rate swaps)			—				—				—				(0.6	)			0.1
Adjusted net income		$	216.2			$	194.1			$	160.5			$	125.1			$	82.8

 

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		Years Ended December 31,
		2012				2011				2010				2009				2008
Adjusted interest expense (after-tax)
GAAP interest expense		$	63.4			$	57.2			$	47.8			$	32.4			$	43.2
Adjustment to record tax effect at 37%			(23.5	)			(21.2	)			(17.7	)			(12.3	)			(15.9	)
Other (Interest expense on interest rate swaps $0.8)			—				—				—				0.8				(0.3	)
Adjusted interest expense (after-tax)		$	39.9			$	36.0			$	30.1			$	20.9			$	27.0
Adjusted return on capital
Adjusted net income		$	216.2			$	194.1			$	160.5			$	125.1			$	82.8
Adjusted interest expense (after-tax)			39.9				36.0				30.1				20.9				27.0
Adjusted net income plus interest expense (after-tax)		$	256.1			$	230.1			$	190.6			$	146.0			$	109.8
Adjusted return on capital			14.7	%			16.8	%			17.7	%			14.6	%			11.3	%
Adjusted average shareholders’ equity
GAAP average shareholders’ equity		$	581.3			$	469.7			$	488.4			$	411.0			$	302.8
Floating yield adjustment(a)			11.1				9.4				5.2				13.2				13.8
Floating yield adjustment(b)			—				(0.3	)			(0.5	)			(1.0	)			(2.4	)
Adjusted average shareholders’ equity		$	592.4			$	478.8			$	493.1			$	423.2			$	314.2

 

(a)

Floating Yield Adjustment

The purpose of this adjustment is to modify the calculation of our GAAP-based finance charge revenue so that favorable and unfavorable changes in expected cash flows from Loans receivable are treated consistently. To make the adjustment understandable, we must first explain how GAAP requires us to account for finance charge revenue, our primary revenue source.

The finance charge revenue we will recognize over the life of the loan equals the cash inflows from our Loan portfolio less cash outflows to acquire the Loans. Our GAAP finance charge revenue is based on estimates of future cash flows and is recognized on a level-yield basis over the estimated life of the Loan. With the level-yield approach, the amount of finance charge revenue recognized from a Loan in a given period, divided by the loan asset, is a constant percentage. Under GAAP, favorable changes in expected cash flows are treated as increases to the yield and are recognized over time, while unfavorable changes are recorded as a current period expense. The non-GAAP methodology that we use (the “floating yield” method) is identical to the GAAP approach except that, under the “floating yield” method, all changes in expected cash flows (both positive and negative) are treated as yield adjustments and therefore impact earnings over time. The GAAP treatment always results in a lower carrying value of the Loan receivable asset, but may result in either higher or lower earnings for any given period depending on the timing and amount of expected cash flow changes.

We believe adjusted earnings, which include the floating yield adjustment, are a more accurate reflection of the performance of our business, since both favorable and unfavorable changes in estimated cash flows are treated consistently.

 

(b)

Program Fee Yield Adjustment

The purpose of this adjustment is to make the results for program fee revenue comparable across time periods. In 2001, the Company had begun charging Dealers a monthly program fee. In accordance with GAAP, this fee was being recorded as revenue in the month the fee was charged. However, based on feedback from field sales personnel and Dealers, the Company concluded that structuring the fee in this way was contributing to increased dealer attrition. To address the problem, the Company changed its method for collecting these fees.

As of January 1, 2007, the Company began to take the program fee out of future Dealer Holdback payments instead of collecting it in the current period. The change reduced per unit profitability, since cash that previously was collected immediately is now collected over time. In addition, the change required us to modify our GAAP accounting method for program fees. Starting January 1, 2007, the Company began to record program fees for GAAP purposes as an adjustment to the loan yield, effectively recognizing the fees over the term of the Dealer Loan. This revised GAAP treatment is more consistent with the cash economics. To allow for proper comparisons, the program fee adjustment applies the revised GAAP treatment to all pre-2007 periods. (Starting in 2012, this adjustment is no longer required since all pre-2007 program fees have now been fully recognized.)

 

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(5)	Economic profit is the product of (x) the adjusted return on capital in excess of the cost of capital and (y) the adjusted average capital. The derivation of each of adjusted return on capital, cost of capital and adjusted average capital is set forth in footnote 4.

 

(6)

Adjusted return on equity is defined as adjusted net income divided by adjusted average shareholders’ equity. The derivation of each of adjusted net income and adjusted average shareholders’ equity is set forth in footnote 4. Return on equity is defined as net income divided by average shareholders’ equity.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

Overview

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

For the year ended December 31, 2012, consolidated net income was $219.7 million, or $8.58 per diluted share, compared to $188.0 million, or $7.07 per diluted share, for the same period in 2011 and $170.1 million, or $5.67 per diluted share, for the same period in 2010. The growth in 2012 and 2011 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio.

Critical Success Factors

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

Access to Capital

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio is 2.0:1 as of December 31, 2012. We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) Senior Notes.

Consumer Loan Performance

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

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

 

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compares our forecast of Consumer Loan collection rates as of December 31, 2012, with the forecasts as of December 31, 2011, as of December 31, 2010, and at the time of assignment, segmented by year of assignment:

 

		Forecasted Collection Percentage as of																Variance in Forecasted Collection Percentage from
Consumer Loan Assignment Year		December 31, 2012				December 31, 2011				December 31, 2010				Initial Forecast				December 31, 2011				December 31, 2010				Initial Forecast
2003			73.8	%			73.7	%			73.7	%			72.0	%			0.1	%			0.1	%			1.8	%
2004			73.0	%			73.0	%			73.0	%			73.0	%			0.0	%			0.0	%			0.0	%
2005			73.6	%			73.6	%			73.7	%			74.0	%			0.0	%			-0.1	%			-0.4	%
2006			69.9	%			70.0	%			70.2	%			71.4	%			-0.1	%			-0.3	%			-1.5	%
2007			68.0	%			68.1	%			67.9	%			70.7	%			-0.1	%			0.1	%			-2.7	%
2008			70.3	%			70.0	%			69.9	%			69.7	%			0.3	%			0.4	%			0.6	%
2009			79.5	%			79.4	%			78.5	%			71.9	%			0.1	%			1.0	%			7.6	%
2010			77.3	%			76.8	%			75.8	%			73.6	%			0.5	%			1.5	%			3.7	%
2011			74.1	%			73.2	%			—				72.5	%			0.9	%			—				1.6	%
2012			72.2	%			—				—				71.4	%			—				—				0.8	%

Consumer Loans assigned in 2003 and 2009 through 2011 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2006 and 2007 have yielded forecasted collection results materially worse than our initial estimates. For all other assignment years presented, actual results have been very close to our initial estimates. For the year ended December 31, 2012, forecasted collection rates improved for Consumer Loans assigned during 2008 and 2010 through 2012 and were generally consistent with expectations at the start of the period for all other assignment years presented.

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

The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate) and the percentage of the forecasted collections that had been realized as of December 31, 2012. All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

 

		As of December 31, 2012
Consumer Loan Assignment Year		Forecasted Collection %				Advance % (1)				Spread %				% of Forecast Realized (2)
2003			73.8	%			43.4	%			30.4	%			99.7	%
2004			73.0	%			44.0	%			29.0	%			99.6	%
2005			73.6	%			46.9	%			26.7	%			99.5	%
2006			69.9	%			46.6	%			23.3	%			98.9	%
2007			68.0	%			46.5	%			21.5	%			98.0	%
2008			70.3	%			44.6	%			25.7	%			96.8	%
2009			79.5	%			43.9	%			35.6	%			94.9	%
2010			77.3	%			44.7	%			32.6	%			78.6	%
2011			74.1	%			45.5	%			28.6	%			50.9	%
2012			72.2	%			46.3	%			25.9	%			18.1	%

 

(1)

Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

 

(2)	Presented as a percentage of total forecasted collections.

 

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The risk of a material change in our forecasted collection rate declines as the Consumer Loans age. For 2009 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections. Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate declined during the 2004 through 2007 period as we increased advance rates during this period in response to a more difficult competitive environment. During 2008 and 2009, the spread increased as the competitive environment improved and we reduced advance rates. In addition, during 2009, the spread was positively impacted by better than expected Consumer Loan performance. During the 2010 through 2012 period, the spread decreased as we again increased advance rates in response to the competitive environment.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2012 for Dealer Loans and Purchased Loans separately. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

 

		Consumer Loan Assignment Year				Forecasted Collection %				Advance % (1)				Spread %
Dealer Loans			2007				67.9	%			45.8	%			22.1	%
			2008				70.7	%			43.3	%			27.4	%
			2009				79.5	%			43.5	%			36.0	%
			2010				77.3	%			44.4	%			32.9	%
			2011				74.0	%			45.2	%			28.8	%
			2012				72.1	%			46.0	%			26.1	%
Purchased Loans			2007				68.4	%			49.1	%			19.3	%
			2008				69.7	%			46.7	%			23.0	%
			2009				79.5	%			45.3	%			34.2	%
			2010				77.1	%			46.4	%			30.7	%
			2011				74.4	%			48.2	%			26.2	%
			2012				73.0	%			49.5	%			23.5	%

 

(1)

Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans. Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

 

The advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between Dealer and Purchased Loans. Under our Portfolio Program, certain events may result in Dealers forfeiting their rights to Dealer Holdback. We transfer the Dealer’s Consumer Loans from the Dealer Loan portfolio to the Purchased Loan portfolio in the period this forfeiture occurs.

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

 

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Consumer Loan Volume

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

 

		Year over Year Percent Change
For the Year Ended December 31,		Unit Volume				Dollar Volume (1)
2010			23.2	%			43.3	%
2011			30.2	%			43.5	%
2012			6.7	%			7.1	%

 

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

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our product, (2) the amount of capital available to fund new Loans, and (3) our assessment of the volume that our infrastructure can support. Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.

Unit and dollar volumes grew 6.7% and 7.1%, respectively, during 2012 as the number of active Dealers grew 33.0% and average volume per active Dealer declined 19.8%. We believe the decline in volume per Dealer is the result of increased competition. We increased advance rates throughout 2012, 2011 and 2010, which positively impacted unit and dollar volumes while reducing the return on capital we expect to earn on new assignments. We believe these advance rate increases had a positive impact on economic profit as we believe the positive impact of the increased dollar volume exceeded the negative impact of the reduced return on capital.

The following table summarizes the changes in Consumer Loan unit volume and active Dealers:

 

		For the Years Ended December 31,												% Change
		2012				2011				2010				2012 to 2011				2011 to 2010
Consumer Loan unit volume			190,023				178,074				136,813				6.7	%			30.2	%
Active Dealers (1)			5,319				3,998				3,206				33.0	%			24.7	%
Average volume per active Dealer			35.7				44.5				42.7				-19.8	%			4.2	%

 

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

The following table provides additional information on the changes in Consumer Loan unit volume and active Dealers:

 

		For the Years Ended December 31,												For the Years Ended December 31,
		2012				2011				% Change				2011				2010				% Change
Consumer Loan unit volume from Dealers active both periods			157,735				168,314				-6.3	%			154,447				128,635				20.1	%
Dealers active both periods			3,192				3,192				—				2,548				2,548				—
Average volume per Dealers active both periods			49.4				52.7				-6.3	%			60.6				50.5				20.1	%
Consumer Loan unit volume from new Dealers			31,705				22,419				41.4	%			22,419				17,023				31.7	%
New active Dealers (1)			2,070				1,403				47.5	%			1,403				926				51.5	%
Average volume per new active Dealers			15.3				16.0				-4.4	%			16.0				18.4				-13.0	%
Attrition (2)			-5.5	%			-6.0	%							-6.0	%			-11.8	%

 

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(1)	New active Dealers are Dealers who enrolled in our program and have received funding for their first Loan from us during the period.

 

(2)

Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from Dealers who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.

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

 

		For the Years Ended December 31,
		2012				2011				2010
Dealer Loan unit volume as a percentage of total unit volume			93.7	%			92.5	%			90.9	%
Dealer Loan dollar volume as a percentage of total dollar volume (1)			92.0	%			90.4	%			88.7	%

 

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

For the year ended December 31, 2012, Dealer Loan unit and dollar volume as a percentage of total unit and dollar volume were generally consistent with the same periods in 2011 and 2010.

As of December 31, 2012 and 2011, the net Dealer Loans receivable balance was 88.0% and 85.4%, respectively, of the total net Loans receivable balance

 

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Results of Operations

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

 

(In millions, except share and per share data)
		For the Years Ended December 31,												% Change
		2012				2011				2010				2012 to 2011				2011 to 2010
Revenue:
Finance charges		$	538.2			$	460.6			$	388.0				16.8	%			18.7	%
Premiums earned			47.1				40.0				32.7				17.8	%			22.5	%
Other income			23.9				24.6				21.4				-2.8	%			14.6	%
Total revenue			609.2				525.2				442.1				16.0	%			18.8	%
Costs and expenses:
Salaries and wages			82.2				63.0				61.3				30.5	%			2.8	%
General and administrative			30.5				25.6				26.4				19.1	%			-3.1	%
Sales and marketing			31.2				23.6				19.7				32.2	%			19.6	%
Provision for credit losses			24.0				29.0				10.0				-17.2	%			188.5	%
Interest			63.4				57.2				47.8				10.8	%			19.9	%
Provision for claims			34.8				30.4				23.4				14.5	%			29.7	%
Total costs and expenses			266.1				228.8				188.6				16.3	%			21.3	%
Income before provision for income taxes			343.1				296.4				253.5				15.8	%			16.9	%
Provision for income taxes			123.4				108.4				83.4				13.8	%			30.0	%
Net income		$	219.7			$	188.0			$	170.1				16.9	%			10.6	%
Net income per share:
Basic		$	8.65			$	7.15			$	5.79				21.0	%			23.5	%
Diluted		$	8.58			$	7.07			$	5.67				21.4	%			24.7	%
Weighted average shares outstanding:
Basic			25,409,655				26,302,289				29,393,309				-3.4	%			-10.5	%
Diluted			25,598,956				26,600,855				29,984,819				-3.8	%			-11.3	%

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table highlights changes in net income for the year ended December 31, 2012, as compared to 2011:

 

(In millions)
		Change
Net income for the year ended December 31, 2011		$	188.0
Increase in finance charges			77.6
Increase in premiums earned			7.1
Decrease in other income			(0.7	)
Increase in operating expenses (1)			(31.7	)
Decrease in provision for credit losses			5.0
Increase in interest			(6.2	)
Increase in provision for claims			(4.4	)
Increase in provision for income taxes			(15.0	)
Net income for the year ended December 31, 2012		$	219.7

 

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

 

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Finance Charges. For the year ended December 31, 2012, finance charges increased $77.6 million, or 16.8%, as compared to 2011. The increase was primarily the result of an increase in the average net Loans receivable balance partially offset by a decrease in the average yield on our Loan portfolio, as follows:

 

(Dollars in millions)
		For the Years Ended December 31,
		2012				2011				Change
Average net Loans receivable balance		$	1,797.0			$	1,425.1			$	371.9
Average yield on our Loan portfolio			30.0	%			32.3	%			-2.3	%

The following table summarizes the impact each component had on the increase in finance charges for the year ended December 31, 2012:

 

(In millions)		For the Year Ended December 31, 2012
Impact on finance charges:
Due to an increase in the average net Loans receivable balance		$	120.2
Due to a decrease in the average yield			(42.6	)
Total increase in finance charges		$	77.6

The increase in the average net Loans receivable balance was primarily due to growth in new Loan volume throughout 2011 and 2012, which was primarily a result of increases in active Dealers. The average yield on our Loan portfolio for the year ended December 31, 2012 decreased as compared to the same period in 2011 due to lower yields on new Loans, partially offset by improvements in forecasted collection rates throughout 2011 and 2012.

Premiums Earned. For the year ended December 31, 2012, premiums earned increased $7.1 million, or 17.8%, as compared to 2011. The increase is primarily due to growth in the size of our reinsurance portfolio which resulted from growth in new Consumer Loan assignments throughout 2011 and 2012.

Other Income. For the year ended December 31, 2012, other income decreased $0.7 million, or 2.8%, as compared to 2011. The decrease in other income was primarily the result of the following:

 

•

A $5.5 million decrease in GAP profit sharing income, which was a result of the following:

 

•

Additional income recognized during 2011 as a result of a change we made to our revenue recognition during 2011 to begin recognizing this income as earned over the life of the GAP contracts.

 

•

A change made to our profit sharing income arrangement during 2012 that increased the total amount of income earned per GAP contract but reduced the amount recognized as other income. This reduction was more than offset by a higher fee per GAP contract that is recognized as finance charges.

 

•

A $3.9 million increase in GPS-SID fee income due to increases in both the fee earned per unit and the number of units purchased by dealers from TPPPs.

 

•

A $1.1 million increase in vehicle service contract profit sharing income as a result of a new profit sharing arrangement we entered into with one of our TPPPs during 2012.

 

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Operating Expenses. For the year ended December 31, 2012, operating expenses increased $31.7 million, or 28.3%, as compared to the same period in 2011. The change in operating expenses is due to the following:

 

•

An increase in salaries and wages expense of $19.2 million, or 30.5%, which included a $10.3 million increase in stock-based compensation expense primarily attributable to the 15 year stock award granted to our Chief Executive Officer during the first quarter of 2012 and a $2.0 million increase in fringe benefits, primarily related to medical claims. Salaries and wages, excluding the increase in stock-based compensation and fringe benefits, increased $6.9 million including an increase of $4.2 million in loan servicing, $2.2 million for support functions and $0.5 million in loan originations.

 

•

An increase in sales and marketing expense of $7.6 million, or 32.2%, primarily as a result of the increase in the size of the field sales force.

 

•

An increase in general and administrative expense of $4.9 million, or 19.1%, primarily due to a $1.2 million increase in information technology expenses, a $1.1 million expense related to the termination of our relationship with a TPPP during the fourth quarter of 2012, a $1.1 million increase in legal expenses and $0.9 million in higher taxes primarily as a result of a property tax refund recognized in the first quarter of 2011.

Provision for Credit Losses. For the year ended December 31, 2012, the provision for credit losses decreased $5.0 million, or 17.2%, as compared to 2011. Under GAAP, when the present value of forecasted future cash flows decline relative to our expectations at the time of assignment, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established. For purposes of calculating the required allowance, Dealer Loans are grouped by Dealer and Purchased Loans are grouped by month of purchase. As a result, regardless of the overall performance of the portfolio of Consumer Loans, a provision can be required if any individual Loan pool performs worse than expected. Conversely, a previously recorded provision can be reversed if any previously impaired individual Loan pool experiences an improvement in performance.

During the year ended December 31, 2012, overall Consumer Loan performance exceeded our expectations at the start of the year. However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $24.0 million for the year ended December 31, 2012, of which $27.1 million related to Dealer Loans partially offset by a reversal of provision of $3.1 million related to Purchased Loans. The provision for credit losses related to Dealer Loans includes $2.8 million in expense related to an enhancement made to the computations used to account for Dealer Loans during the fourth quarter of 2012. For additional information, see Note 5 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement. During the year ended December 31, 2011 overall Consumer Loan performance exceeded our expectations at the start of the year. However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $29.0 million for the year ended December 31, 2011, of which $29.7 million related to Dealer Loans partially offset by a reversal of provision of $0.7 million related to Purchased Loans.

 

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Interest. For the year ended December 31, 2012, interest expense increased $6.2 million, or 10.8%, as compared to 2011. The following table shows interest expense, the average outstanding debt balance, and the average cost of debt for the year ended December 31, 2012:

 

(Dollars in millions)		For the Years Ended December 31,
		2012				2011
Interest expense		$	63.4			$	57.2
Average outstanding debt balance			1,150.4				892.3
Average cost of debt			5.5	%			6.4	%

For the year ended December 31, 2012, the increase in interest expense is primarily due to the increase in the average outstanding debt balance, partially offset by a decline in our average cost of debt. The average outstanding debt balance increased compared to the same period in 2011 due to the use of the debt proceeds to fund the growth in new Consumer Loan assignments and stock repurchases. The decline in our average cost of debt was primarily a result of a change in the mix of our outstanding debt.

Provision for Claims. For the year ended December 31, 2012, provision for claims increased $4.4 million, or 14.5%, as compared to 2011. The increase was due to an increase in the size of our reinsurance portfolio partially offset by a decrease in claims paid per reinsured vehicle service contract.

Provision for Income Taxes. For the year ended December 31, 2012, the effective tax rate of 36.0% was generally consistent with the effective tax rate of 36.6% in 2011.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

The following table highlights changes in net income for the year ended December 31, 2011, as compared to 2010:

 

(In millions)		Change
Net income for the year ended December 31, 2010		$	170.1
Increase in finance charges			72.6
Increase in premiums earned			7.3
Increase in other income			3.2
Increase in operating expenses (1)			(4.8	)
Increase in provision for credit losses			(19.0	)
Increase in interest			(9.4	)
Increase in provision for claims			(7.0	)
Increase in provision for income taxes			(25.0	)
Net income for the year ended December 31, 2011		$	188.0

 

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

Finance Charges. For the year ended December 31, 2011, finance charges increased $72.6 million, or 18.7%, as compared to 2010. The increase was primarily the result of an increase in the average net Loans receivable balance partially offset by a decrease in the average yield on our Loan portfolio, as follows:

 

(Dollars in millions)		For the Years Ended December 31,
		2011				2010				Change
Average net Loans receivable balance		$	1,425.1			$	1,128.0			$	297.1
Average yield on our Loan portfolio			32.3	%			34.4	%			-2.1	%

 

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The following table summarizes the impact each component had on the increase in finance charges for the year ended December 31, 2011:

 

(In millions)		For the Year Ended December 31, 2011
Impact on finance charges:
Due to an increase in the average net Loans receivable balance		$	102.2
Due to a decrease in the average yield			(29.6	)
Total increase in finance charges		$	72.6

The increase in the average net Loans receivable balance was primarily due to growth in new Loan volume throughout 2010 and 2011, which was primarily a result of increases in active Dealers, the size of the average consumer loan assignment and advance rates. The average yield on our Loan portfolio for the year ended December 31, 2011 decreased as compared to the same period in 2010 due to lower yields on new Loans, partially offset by improvements in forecasted collection rates throughout 2010 and 2011.

Premiums Earned. For the year ended December 31, 2011, premiums earned increased $7.3 million, or 22.5%, as compared to 2010. The increase is primarily due to growth in the size of our reinsurance portfolio which resulted from growth in new Consumer Loan assignments throughout 2010 and 2011 that was partially offset by the termination of our arrangement with one of our TPPPs during the fourth quarter of 2009.

Other Income. For the year ended December 31, 2011, other income increased $3.2 million, or 14.6%, as compared to 2010. The increase in other income is primarily due to an increase in GAP profit sharing income and Dealer enrollment fees. The increase in GAP profit sharing income of $7.1 million was the result of an increase in the annual profit sharing payment received and recognized during the first quarter of 2011 and an acceleration in our revenue recognition for this income beginning in the second quarter of 2011. Under our arrangement with one of our TPPPs, we receive annual profit sharing payments based on the performance of our GAP program. Prior to the second quarter of 2011, we received and recognized GAP profit sharing payments annually in the first quarter of each year. During the second quarter of 2011, we began recognizing this income over the life of the GAP contracts.

These increases were partially offset by $5.4 million of income recognized during 2010 related to discontinued arrangements with a TPPP and a vendor that processes payments. We have not recognized any income related to these arrangements since the second quarter of 2010.

Operating Expenses. For the year ended December 31, 2011, operating expenses increased $4.8 million, or 4.4%, as compared to the same period in 2010. The change in operating expenses is due to the following:

 

•

An increase in sales and marketing expense of $3.9 million, or 19.6%, primarily due to increased sales commissions resulting from our growth in Consumer Loan assignment volume and the expansion of our sales force.

 

•

An increase in salaries and wages expense of $1.7 million, or 2.8%, resulting from higher servicing expenses associated with increased staffing levels needed to manage the greater volume of Consumer Loans in our portfolio, partially offset by reduced support expenses associated with information technology activities.

 

•

A decrease in general and administrative expense of $0.8 million, or 3.1%, primarily due to decreased support expenses, including consulting fees related to the development of software, a refund received in the current year from the successful appeal of a property tax assessment, and legal costs.

 

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Provision for Credit Losses. For the year ended December 31, 2011, the provision for credit losses increased $19.0 million, or 188.5%, as compared to 2010. Under GAAP, when the present value of forecasted future cash flows decline relative to our expectations at the time of assignment, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established. For purposes of calculating the required allowance, Dealer Loans are grouped by Dealer and Purchased Loans are grouped by month of purchase. As a result, regardless of the overall performance of the portfolio of Consumer Loans, a provision can be required if any individual Loan pool performs worse than expected. Conversely, a previously recorded provision can be reversed if any previously impaired individual Loan pool experiences an improvement in performance.

During the year ended December 31, 2011, overall Consumer Loan performance exceeded our expectations at the start of the year. However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $29.0 million for the year ended December 31, 2011, of which $29.7 million related to Dealer Loans partially offset by a reversal of provision of $0.7 million related to Purchased Loans. During the year ended December 31, 2010, overall Consumer Loan performance exceeded our expectations at the start of the year. However, the performance of certain Loan pools declined from our expectations during the year, resulting in a provision for credit losses of $10.0 million for the year ended December 31, 2010, of which $5.1 million related to Dealer Loans and $4.9 million related to Purchased Loans.

Interest. For the year ended December 31, 2011, interest expense increased $9.4 million, or 19.9%, as compared to 2010. The following table shows interest expense, the average outstanding debt balance, and the average cost of debt for the year ended December 31, 2011:

 

(Dollars in millions)		For the Years Ended December 31,
		2011				2010
Interest expense		$	57.2			$	47.8
Average outstanding debt balance			892.3				581.1
Average cost of debt			6.4	%			8.2	%

For the year ended December 31, 2011, the increase in interest expense is primarily due to the increase in the average outstanding debt balance, partially offset by a decline in our average cost of debt. The average outstanding debt balance increased compared to the same period in 2010 due to the use of the debt proceeds to fund the growth in new Consumer Loan assignments and stock repurchases. The decline in our average cost of debt resulted from a reduction in fixed fees as a percentage of average outstanding debt and a change in the mix of our outstanding debt.

Provision for Claims. For the year ended December 31, 2011, provision for claims increased $7.0 million, or 29.7%, as compared to 2010. The increase was due to an increase in the size of our reinsurance portfolio and an increase in claims paid per reinsured vehicle service contract.

Provision for Income Taxes. For the year ended December 31, 2011, the effective tax rate increased to 36.6%, from 32.9% compared to 2010. The increase is primarily due to the impact of the lower effective tax rate in the prior year resulting from the reversal of certain reserves for uncertain tax positions that were resolved and settled with the Internal Revenue Service (“IRS”) and adjustments to our state tax liability.

Liquidity and Capital Resources

We need capital to maintain and grow our business. Our primary sources of capital are cash flows from operating activities, collections of Consumer Loans and borrowings under: (1) a revolving secured line of credit; (2) Warehouse facilities; (3) Term ABS financings; and (4) Senior Notes. There are various restrictive debt

 

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covenants for each financing arrangement, and we are in compliance with those covenants as of December 31, 2012. For information regarding these financings and the covenants included in the related documents, see Note 8 to the consolidated financial statements contained in our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

During the first quarter of 2012, we completed a $201.3 million Term ABS financing which was used to repay outstanding indebtedness. The financing has an expected annualized cost of approximately 2.8% (including the initial purchaser’s fees and other costs) and it will revolve for 24 months after which it will amortize based upon the cash flows on the contributed loans.

During the second quarter of 2012, we commenced a tender offer to repurchase 1.0 million shares of our common stock at a price of $84.45 per share. Upon expiration of the tender offer during the second quarter of 2012, we repurchased 1.0 million common shares at a cost of $84.5 million. The settlement during the third quarter of 2012 was financed by borrowing under our revolving secured line of credit facility.

During the second quarter of 2012, we extended the maturity of our revolving secured line of credit facility from June 22, 2014 to June 22, 2015. Additionally, the amount of the facility was increased from $205.0 million to $235.0 million. The interest rate on borrowings under the facility was decreased from the prime rate plus 1.25% or the LIBOR rate plus 2.25%, at our option, to the prime rate plus 0.875% or the LIBOR rate plus 1.875%, at our option.

During the second quarter of 2012, we extended the date on which Warehouse Facility III will cease to revolve from September 10, 2013 to September 10, 2015. The maturity of the facility was also extended from September 10, 2014 to September 10, 2017. There were no other material changes to the terms of the facility.

During the third quarter of 2012, we completed a $252.0 million Term ABS financing which was used to repay outstanding indebtedness. The financing has an expected annualized cost of approximately 2.0% (including the initial purchaser’s fees and other costs) and it will revolve for 24 months after which it will amortize based upon the cash flows on the contributed loans.

During the fourth quarter of 2012, we extended the date on which Warehouse Facility II will cease to revolve from June 17, 2014 to December 27, 2015. The interest rate on borrowings under the facility was decreased from the commercial paper rate plus 2.75% to the commercial paper rate plus 2.00%. There were no other material changes to the terms of the facility.

During the second quarter of 2013, we extended the date on which Warehouse Facility IV will cease to revolve from February 19, 2014 to April 5, 2016. The interest rate on borrowings under the facility was decreased from LIBOR plus 2.75% to LIBOR plus 2.25%. There were no other material changes to the terms of the facility.

Cash and cash equivalents increased to $9.0 million as of December 31, 2012 from $4.7 million as of December 31, 2011. Our total balance sheet indebtedness increased to $1,250.8 million as of December 31, 2012 from $997.9 million as of December 31, 2011 due to the growth in new Consumer Loan assignments and stock repurchases.

Restricted cash and cash equivalents decreased to $92.4 million as of December 31, 2012 from $104.7 million as of December 31, 2011. The following table summarizes restricted cash and cash equivalents:

 

(In millions)		As of December 31,
		2012				2011
Cash related to secured financings		$	90.2			$	62.5
Cash held in trusts for future vehicle service contract claims (1)			2.2				42.2
Total restricted cash and cash equivalents		$	92.4			$	104.7

 

(1)

The unearned premium and claims reserve associated with the trusts are included in accounts payable and accrued liabilities in the consolidated balance sheets. As of December 31, 2012, the outstanding cash balance includes $2.2 million related to VSC Re. As of December 31, 2011, the outstanding cash balance includes $42.1 million related to VSC Re and $0.1 million related to a discontinued profit sharing arrangement.

 

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As of December 31, 2012 and 2011, restricted securities available for sale were $46.1 million and $0.8 million, respectively. Restricted securities available for sale consist of amounts held in accordance with vehicle service contract trust agreements.

Contractual Obligations

A summary of the total future contractual obligations requiring repayments as of December 31, 2012 is as follows:

 

(In millions)		Payments Due by Period
		Total				Less than 1 Year				1-3 Years				3-5 Years				More than 5 Years				Other
Long-term debt, including current maturities (1)		$	1,250.5			$	150.2			$	669.0			$	431.3			$	—			$	—
Dealer Holdback (2)			581.1				107.4				252.9				148.3				72.5				—
Operating lease obligations			4.9				1.0				1.8				1.8				0.3				—
Purchase obligations (3)			0.8				0.8				—				—				—				—
Other future obligations (4)			11.0				—				—				—				—				11.0
Total contractual obligations		$	1,848.3			$	259.4			$	923.7			$	581.4			$	72.8			$	11.0

 

(1)

Long-term debt obligations included in the above table consist solely of principal repayments. The amounts are presented on a gross basis to exclude the net unamortized debt premium of $0.3 million. We are also obligated to make interest payments at the applicable interest rates, as discussed in Note 8 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement. Based on the actual amounts outstanding under our revolving secured line of credit, our Warehouse facilities, and our Senior Notes as of December 31, 2012, the forecasted amounts outstanding on all other debt and the actual interest rates in effect as of December 31, 2012, interest is expected to be approximately $51.3 million during 2013; $44.1 million during 2014; and $83.9 million during 2015 and thereafter.

 

(2)	We have contractual obligations to pay Dealer Holdback to our Dealers. Payments of Dealer Holdback are contingent upon the receipt of consumer payments and the repayment of advances. The amounts presented represent our forecast as of December 31, 2012.

 

(3)	Purchase obligations consist primarily of contractual obligations related to our information system and facility needs.

 

(4)	Other future obligations included in the above table consist solely of reserves for uncertain tax positions. Payments are contingent upon examination and would occur in the periods in which the uncertain tax positions are settled.

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

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

 

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Our significant accounting policies are discussed in Note 2 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and involve a high degree of subjective or complex judgment, and the use of different estimates or assumptions could produce materially different financial results.

Finance Charge Revenue &

Allowance for Credit Losses

Balance Sheet Captions:

Loans receivable Allowance for credit losses

 

Income Statement Captions:

Finance charges Provision for credit losses

 

Nature of Estimates Required:

Estimating the amount and timing of future collections and Dealer Holdback payments.

 

Assumptions and Approaches Used:

For accounting purposes, we are not considered to be an originator of Consumer Loans, but instead are considered to be a lender to our Dealers for Consumer Loans assigned under our Portfolio Program, and a purchaser of Consumer Loans assigned under our Purchase Program. As a result of this classification, our accounting policies for recognizing finance charge revenue and determining our allowance for credit losses may be different from other lenders in our market, who, based on their different business models, may be considered to be a direct lender to consumers for accounting purposes. For additional information regarding our classification as a lender to our Dealers for accounting purposes, see Note 1 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

 

We recognize finance charges under the interest method such that revenue is recognized on a level-yield basis based upon forecasted cash flows. For Dealer Loans, finance charge revenue and the allowance for credit losses are calculated after first aggregating Dealer Loans outstanding for each Dealer. For the same purpose, Purchased Loans are aggregated according to the month the Loan was purchased. An allowance for credit losses is maintained at an amount that reduces the net asset value (Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment. The discounted value of future cash flows is comprised of estimated future collections on the Loans, less any estimated Dealer Holdback payments related to Dealer Loans. We write off Loans once there are no forecasted future collections on any of the associated Consumer Loans.

 

Actual cash flows from any individual Dealer Loan or pool of Purchased Loans are often different than estimated cash flows at the time of assignment. If such difference is favorable, the difference is recognized prospectively into income over the remaining life of the Dealer Loan or pool of Purchased Loans through a yield adjustment. If such difference is unfavorable, a provision for credit losses is

 

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recorded immediately as a current period expense and a corresponding allowance for credit losses is established. Because differences between estimated cash flows at the time of assignment and actual cash flows occur often, an allowance is required for a significant portion of our Loan portfolio. An allowance for credit losses does not necessarily indicate that a Dealer Loan or pool of Purchased Loans is unprofitable, and in recent years, very seldom are cash flows from a Dealer Loan or pool of Purchased Loans insufficient to repay the initial amounts advanced or paid to the Dealer.

 

Future collections on Dealer and Purchased Loans are forecasted based on the historical performance of Consumer Loans with similar characteristics, adjusted for recent trends in payment patterns. Dealer Holdback is forecasted based on the expected future collections and current advance balance of each Dealer Loan.

 

During the fourth quarter of 2012, we enhanced the computations used to account for Dealer Loans. The enhanced computations utilize a more sophisticated approach for determining the yields established at the time of assignment, future net cash flow streams and the present value of future cash flow streams. While the enhanced computations did not change these estimates significantly at the overall Dealer Loan portfolio level, we believe they improved the precision of these estimates at the individual Dealer level. Implementation of the enhanced computations reduced 2012 net income by $1.2 million.

 

Key Factors:

Variances in the amount and timing of future net cash flows from current estimates could materially impact earnings in future periods. A 1% decline in the forecasted future net cash flows on Loans as of December 31, 2012 would have reduced 2012 net income by approximately $7.7 million.

 

Premiums Earned

Balance Sheet Caption:

Accounts payable and accrued liabilities

 

Income Statement Caption:

Premiums earned

 

Nature of Estimates Required:

Estimating the pattern of future claims on vehicle service contracts.

 

Assumptions and Approaches Used:

Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to the expected costs of servicing those contracts. Expected costs are determined based on our historical claims experience. In developing our cost expectations, we stratify our historical claims experience into groupings based on contractual term, as this characteristic has led to different patterns of cost incurrence in the past. We will continue to update our analysis of historical costs under the vehicle service contract program as appropriate, including the consideration of other characteristics that may have led to different patterns of cost incurrence, and revise our revenue recognition timing for any changes in the pattern of our expected costs as they are identified.

 

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Key Factors:

Variances in the pattern of future claims from our current estimates would impact the timing of premiums recognized in future periods. A 10% change in premiums earned for the year ended December 31, 2012 would have affected 2012 net income by approximately $3.0 million.

 

Stock-Based Compensation Expense

Balance Sheet Caption:

Paid-in capital

 

Income Statement Caption:

Salaries and Wages

 

Nature of Estimates Required:

Stock-based compensation expense is based on the fair value on the date the equity instrument is granted or awarded by us, and is recognized over the expected vesting period of the equity instrument. We also estimate expected forfeiture rates of restricted stock awards.

 

Assumptions and Approaches Used:

In recognizing restricted stock-based compensation expense, we make assumptions regarding the expected forfeiture rates of the restricted stock awards. We also make assumptions regarding the expected vesting dates of performance-based restricted stock awards.

 

The fair value of restricted stock awards are estimated as if they were vested and issued on the grant date and are recognized over the expected vesting period of the restricted stock award. For additional information, see Notes 2 and 14 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which are incorporated by reference in this prospectus supplement.

 

Key Factors:

Changes in the expected vesting dates of performance-based restricted stock awards and expected forfeiture rates would impact the amount and timing of stock-based compensation expense recognized in future periods. A 10% change in stock-based compensation expense for the year ended December 31, 2012 would have affected 2012 net income by approximately $0.8 million.

 

Litigation and Contingent Liabilities

Balance Sheet Caption:

Accounts payable and accrued liabilities

 

Income Statement Caption:

General and administrative expense

 

Nature of Estimates Required:

Estimating the likelihood of adverse legal judgments and any resulting damages owed.

 

Assumptions and Approaches Used:

With assistance from our legal counsel, we determine if the likelihood of an adverse judgment for various claims and litigation is remote, reasonably possible, or probable. To the extent we believe an adverse judgment is probable and the amount of the judgment is estimable, we recognize a liability. For information regarding the potential various claims against us, see Note 17 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

 

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Key Factors:

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

 

Uncertain Tax Positions

Balance Sheet Captions:

Income taxes receivable

Accounts payable and accrued liabilities

 

Income Statement Caption:

Provision for income taxes

 

Nature of Estimates Required:

Estimating the impact of an uncertain income tax position on the income tax return.

 

Assumptions and Approaches Used:

We follow a two-step approach for recognizing uncertain tax positions. First, we evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more-likely-than-not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. Second, for positions that we determine are more-likely-than-not to be sustained, we recognize the tax benefit as the largest benefit that has a greater than 50% likelihood of being sustained. We establish a reserve for uncertain tax positions liability that is comprised of unrecognized tax benefits and related interest. We adjust this liability in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or more information becomes available.

 

On June 7, 2010, we reached a settlement with the IRS which concluded the examination of our federal income tax returns for 2004 through 2008 and closed the respective years. As a result of the settlement, we agreed to pay a total of $7.6 million in federal and state taxes and interest related to these years. The settlement includes $6.2 million of taxes that represent an acceleration of taxes already provided for in prior periods and the payment did not have an impact on our net income during the reporting periods. We also concluded that all 2004 through 2008 uncertain federal jurisdiction tax positions taken in previous periods are effectively settled and we recorded a reversal of corresponding accrued reserves and interest. This reversal increased 2010 net income by $6.2 million. For additional information, see Note 11 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

 

Key Factors:

To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in future periods could be materially affected.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Market Risk

We are exposed primarily to market risks associated with movements in interest rates. Our policies and procedures prohibit the use of financial instruments for speculative purposes. A discussion of our accounting policies for derivative instruments is included in Note 2 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

Interest Rate Risk. We rely on various sources of financing, some of which contain floating rates of interest and expose us to risks associated with increases in interest rates. We manage such risk primarily by entering into interest rate cap and interest rate swap agreements.

As of December 31, 2012, we had $43.5 million of floating rate debt outstanding on our revolving secured line of credit, without interest rate protection. For every 1.0% increase in rates on our revolving secured line of credit, annual after-tax earnings would decrease by approximately $0.3 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2012, we had $81.3 million in floating rate debt outstanding under Warehouse Facility II covered by an interest rate cap with a cap rate of 6.75% on the underlying benchmark rate. Based on the difference between the underlying benchmark rate on Warehouse Facility II as of December 31, 2012 and the interest rate cap rate, the interest rate on Warehouse Facility II could increase by a maximum of 6.53%. This maximum interest rate increase would reduce annual after-tax earnings by approximately $3.3 million, assuming we maintain a level amount of floating rate debt.

As of December 31, 2012, we had two interest rate cap agreements outstanding to manage the interest rate risk on Warehouse Facility III. However, as of December 31, 2012, there was no floating rate debt outstanding under this facility.

As of December 31, 2012, we had $37.6 million in floating rate debt outstanding under Warehouse Facility IV covered by an interest rate cap with a cap rate of 5.50% on the underlying benchmark rate. Based on the difference between the underlying benchmark rate on Warehouse Facility IV as of December 31, 2012 and the interest rate cap rate, the interest rate on Warehouse Facility IV could increase by a maximum of 5.29%. This maximum interest rate increase would reduce annual after-tax earnings by approximately $1.3 million, assuming we maintain a level amount of floating rate debt.

New Accounting Updates

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-26, which amends Topic 944 (Financial Services—Insurance). ASU No. 2010-26 is intended to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. The amendments specify which costs incurred in the acquisition of new and renewal contracts should be capitalized. ASU No. 2010-26 is effective for fiscal years beginning after December 15, 2011. While the guidance in this ASU is required to be applied prospectively upon adoption, retrospective application is also permitted (to all prior periods presented). Early adoption is also permitted, but only at the beginning of an entity’s annual reporting period. The adoption of ASU No. 2010-26 on January 1, 2012 did not have a material impact on our consolidated financial statements.

 

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Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May 2011, the FASB issued ASU No. 2011-04 which amends Topic 820 (Fair Value Measurement). ASU No. 2011-04 is intended to provide a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments in ASU No. 2011-04 include changes regarding how and when the valuation premise of highest and best use applies, the application of premiums and discounts, and new required disclosures. ASU No. 2011-04 is to be applied prospectively upon adoption and is effective for interim and annual periods beginning after December 15, 2011 with early adoption prohibited. The adoption of ASU No. 2011-04 on January 1, 2012 did not have a material impact on our consolidated financial statements, but expanded our disclosures related to fair value measurements.

Presentation of Comprehensive Income. In June 2011, the FASB issued ASU No. 2011-05 which amends Topic 220 (Comprehensive Income). ASU No. 2011-05 is intended to enhance comparability between entities that report under US GAAP and those that report under IFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. ASU No. 2011-05 eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The amended guidance allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-05 is to be applied retrospectively upon adoption and is effective for interim and annual periods beginning after December 15, 2011 with early adoption permitted. The adoption of ASU No. 2011-05 during the fourth quarter of 2011 changed the presentation of our consolidated financial statements.

 

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BUSINESS

General

Since 1972, we have offered automobile dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history. Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

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

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

Consumers and Dealers benefit from our programs as follows:

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

Dealers. Our programs increase Dealers’ profits in the following ways:

 

•

Enables Dealers to sell cars to consumers who may not be able to obtain financing without our programs. In addition, consumers often become repeat customers by financing future vehicle purchases either through our programs or, after they have successfully established or reestablished their credit, through conventional financing.

 

•

Allows Dealers to share in the profit, not only from the sale of the vehicle, but also from its financing.

 

•

Enables Dealers to attract consumers by advertising “guaranteed credit approval”, where allowed by law. The consumers will often use other services of the Dealers and refer friends and relatives to them.

 

•

Enables Dealers to attract consumers who mistakenly assume they do not qualify for conventional financing.

Business Segment Information

We currently operate in one reportable segment which represents our core business of offering Dealers financing programs and related products and services that enable them to sell vehicles to consumers, regardless

 

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of their credit history. For information regarding our one reportable segment and related entity-wide disclosures, see Note 16 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

Principal Business

We have two programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to Dealers, which we refer to as a Dealer Loan, in exchange for the right to service the underlying Consumer Loans. Under the Purchase Program, we buy the Consumer Loans from the Dealers, which we refer to as a Purchased Loan, and keep all amounts collected from the consumer. We refer to Dealer Loans and Purchased Loans collectively as Loans. The following table shows the percentage of Consumer Loans assigned to us based on unit volumes under each of the programs for each of the last three years:

 

For the Years Ended December 31,		Portfolio Program				Purchase Program
2010			90.9	%			9.1	%
2011			92.5	%			7.5	%
2012			93.7	%			6.3	%

Portfolio Program

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

 

•

a down payment from the consumer;

 

•

a cash advance from us; and

 

•

after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee, referred to as Dealer Holdback.

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

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

 

•

First, to reimburse us for certain collection costs;

 

•

Second, to pay us our servicing fee, which generally equals 20% of collections;

 

•

Third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer to us; and

 

•

Fourth, to the Dealer as payment of Dealer Holdback.

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

 

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Dealers have an opportunity to receive an accelerated Dealer Holdback payment each time 100 Consumer Loans have been assigned to us. The amount paid to the Dealer is calculated using a formula that considers the forecasted collections and the advance balance on the related Consumer Loans.

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

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

Purchase Program

The Purchase Program differs from our Portfolio Program in that the Dealer receives a one-time payment from us at the time of assignment to purchase the Consumer Loan instead of a cash advance at the time of assignment and future Dealer Holdback payments. For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer and then purchased by us.

Program Enrollment

Dealers may enroll in our program by choosing one of our two enrollment options, referred to as Option A and Option B. In recent years, the terms of Option A have remained consistent while the terms of Option B have varied. The following table summarizes the terms of our enrollment options for the three year period ending December 31, 2012:

 

Effective Period		Option A		Option B
Since June 1, 2011		Upfront, one-time fee of $9,850		Agreement to allow us to retain 50% of their first accelerated Dealer Holdback payment
Prior to June 1, 2011		Upfront, one-time fee of $9,850		Upfront, one-time fee of $1,950 and agreement to allow us to retain 50% of their first accelerated Dealer Holdback payment

For Dealers enrolling in our program, access to the Purchase Program is typically only granted after the first accelerated Dealer Holdback payment has been received under the Portfolio Program.

Revenue Sources

Credit Acceptance derives its revenues from the following principal sources:

 

•

Finance charges, which are comprised of: (1) servicing fees earned as a result of servicing Consumer Loans assigned to us by Dealers under the Portfolio Program, (2) finance charge income from Purchased Loans, (3) fees earned from our third party ancillary product offerings, (4) monthly program fees of $599, charged to Dealers under the Portfolio Program; and (5) fees associated with certain Loans;

 

•

Premiums earned on the reinsurance of vehicle service contracts; and

 

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•

Other income, which primarily consists of: Dealer support products and services, vendor fees, Dealer enrollment fees and ancillary product profit sharing income. For additional information, see Note 2 to the consolidated financial statements contained in Item 8 of our 2012 Form 10-K, which is incorporated by reference in this prospectus supplement.

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		2012				2011				2010
Finance charges			88.3	%			87.7	%			87.8	%
Premiums earned			7.7	%			7.6	%			7.4	%
Other income			4.0	%			4.7	%			4.8	%
Total revenue			100.0	%			100.0	%			100.0	%

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

Operations

Sales and Marketing. Our target market is approximately 53,000 independent and franchised automobile dealers in the United States. We have market area managers located throughout the United States that market our programs to prospective Dealers, enroll new Dealers, and support active Dealers. The number of Dealer enrollments and active Dealers for each of the last three years are presented in the table below:

 

For the Years Ended December 31,		Dealer Enrollments				Active Dealers (1)
2010			1,263				3,206
2011			1,953				3,998
2012			2,519				5,319

 

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

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

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

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

 

•

the Dealer’s refusal to allow us to audit its records relating to the Consumer Loans assigned to us;

 

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•

the Dealer, without our consent, is dissolved; merges or consolidates with an entity not affiliated with the Dealer; or sells a material part of its assets outside the course of its business to an entity not affiliated with the Dealer; or

 

•

the appointment of a receiver for, or the bankruptcy or insolvency of, the Dealer.

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

 

•

any unreimbursed collection costs on Dealer Loans;

 

•

any unpaid advances and all amounts owed by the Dealer to us; and

 

•

a termination fee equal to 15% of the then outstanding amount of the Consumer Loans assigned to us.

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

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

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

 

•

the consumer and Dealer have signed a Consumer Loan contract;

 

•

we have received the original Consumer Loan contract and supporting documentation;

 

•

we have approved all of the related stipulations for funding; and

 

•

we have provided funding to the Dealer in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.

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

All Consumer Loans submitted to us for assignment are processed through our Credit Approval Processing System, or CAPS. CAPS allows Dealers to input a consumer’s credit application and view the response from us via the Internet. CAPS allows Dealers to: (1) receive a quick approval from us; (2) interact with our proprietary credit scoring system to optimize the structure of each transaction prior to delivery; and (3) create and print Consumer Loan documents. All responses include the amount of funding (advance for a Dealer Loan or purchase price for a Purchased Loan), as well as any stipulations required for funding. The amount of funding is determined using a

 

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formula which considers a number of factors including the timing and amount of cash flows expected on the related Consumer Loan and our target return on capital at the time the Consumer Loan is submitted to us for assignment. The estimated future cash flows are determined based upon our proprietary credit scoring system, which considers numerous variables, including attributes contained in the consumer’s credit bureau report, data contained in the consumer’s credit application, the structure of the proposed transaction, vehicle information and other factors, to calculate a composite credit score that corresponds to an expected collection rate. Our proprietary credit scoring system forecasts the collection rate based upon the historical performance of Consumer Loans in our portfolio that share similar characteristics. The performance of our proprietary credit scoring system is evaluated monthly by comparing projected to actual Consumer Loan performance. Adjustments are made to our proprietary credit scoring system as necessary. For additional information on adjustments to forecasted collection rates, please see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Critical Accounting Estimates” contained elsewhere in this prospectus.

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

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

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

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

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

 

		For the Years Ended December 31,
Average Consumer Loan Data		2012				2011				2010
Average size of Consumer Loan accepted		$	15,468			$	15,686			$	14,480