UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q10-Q/A
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2003September 30, 2002
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10667
AmeriCredit Corp.
(Exact name of registrant as specified in its charter)
Texas | 75-2291093 | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
801 Cherry Street, Suite 3900, Fort Worth, Texas 76102
(Address of principal executive offices, including Zip Code)
(817) 302-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx No¨
There were 156,281,125152,870,245 shares of common stock, $0.01 par value outstanding as of April 30, 2003.October 31, 2002.
EXPLANATORY NOTE
AmeriCredit Corp. (the “Company”) hereby amends the Company’s Quarterly Report on the Form 10-Q for the three months ended September 30, 2002, filed with the Securities and Exchange Commission on November 14, 2002.
The financial information for the three months ended September 30, 2002, has been restated. A review of the accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for certain interest rate swap agreements that were entered into prior to fiscal 2001 and used to hedge interest rate risk on a portion of the Company’s cash flows from credit enhancement assets indicated that the Company should have reclassified additional accumulated other comprehensive losses into earnings since the combination of the derivative instrument and the hedged item resulted in net unrealized losses that were not expected to be recovered in future periods. See Note 2 to the Consolidated Financial Statements.
Part I. | FINANCIAL INFORMATION | |||||||
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Consolidated Balance Sheets – |
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Item 6. | Exhibits and Reports on Form 8-K | 49 | ||||||
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Part I. FINANCIALI.FINANCIAL INFORMATION
AMERICREDIT CORP.
(Unaudited, Dollars in Thousands)
September 30, 2002 | June 30, 2002 | |||||||||||||||
March 31, 2003 | June 30, 2002 | (Restated) | (Restated) | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 238,133 |
| $ | 92,349 |
| $ | 70,087 | $ | 92,349 | ||||||
Finance receivables, net |
| 4,742,859 |
|
| 2,198,391 |
| 2,041,316 | 2,198,391 | ||||||||
Interest-only receivables from Trusts |
| 375,590 |
|
| 514,497 |
| 556,285 | 506,583 | ||||||||
Investments in Trust receivables |
| 769,492 |
|
| 691,065 |
| 742,464 | 691,065 | ||||||||
Restricted cash—gain on sale Trusts |
| 334,124 |
|
| 343,570 |
| ||||||||||
Restricted cash—securitization notes payable |
| 54,688 |
| |||||||||||||
Restricted cash—warehouse credit facilities |
| 538,561 |
|
| 56,479 |
| ||||||||||
Restricted cash | 386,499 | 343,570 | ||||||||||||||
Restricted cash – warehouse credit facilities | 226,465 | 56,479 | ||||||||||||||
Property and equipment, net |
| 130,147 |
|
| 120,505 |
| 118,874 | 120,505 | ||||||||
Other assets |
| 337,725 |
|
| 208,075 |
| 225,112 | 208,075 | ||||||||
Total assets | $ | 7,521,319 |
| $ | 4,224,931 |
| $ | 4,367,102 | $ | 4,217,017 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Liabilities: | ||||||||||||||||
Warehouse credit facilities | $ | 2,263,547 |
| $ | 1,751,974 |
| $ | 1,820,409 | $ | 1,751,974 | ||||||
Whole loan purchase facility |
| 875,000 |
| |||||||||||||
Securitization notes payable |
| 1,675,106 |
| |||||||||||||
Senior notes |
| 379,050 |
|
| 418,074 |
| 381,676 | 418,074 | ||||||||
Other notes payable |
| 65,914 |
|
| 66,811 |
| 64,534 | 66,811 | ||||||||
Funding payable |
| 23,082 |
|
| 126,893 |
| 138,508 | 126,893 | ||||||||
Accrued taxes and expenses |
| 193,534 |
|
| 194,260 |
| 228,855 | 194,260 | ||||||||
Derivative financial instruments |
| 82,962 |
|
| 85,922 |
| 85,072 | 85,922 | ||||||||
Deferred income taxes |
| 50,567 |
|
| 148,681 |
| 147,207 | 145,634 | ||||||||
Total liabilities |
| 5,608,762 |
|
| 2,792,615 |
| 2,866,261 | 2,789,568 | ||||||||
Commitments and contingencies (Note 11) | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock, $0.01 par value per share; 20,000,000 shares authorized, none issued | ||||||||||||||||
Common stock, $0.01 par value per share; 230,000,000 shares authorized; 160,269,486 and 91,716,416 shares issued |
| 1,603 |
|
| 917 |
| ||||||||||
Common stock, $0.01 par value per share; 230,000,000 shares authorized; 91,749,486 and 91,716,416 shares issued | 917 | 917 | ||||||||||||||
Additional paid-in capital |
| 1,062,982 |
|
| 573,956 |
| 581,448 | 573,956 | ||||||||
Accumulated other comprehensive (loss) income |
| (12,515 | ) |
| 42,797 |
| ||||||||||
Accumulated other comprehensive income | 61,075 | 70,843 | ||||||||||||||
Retained earnings |
| 872,519 |
|
| 832,446 |
| 875,201 | 799,533 | ||||||||
| 1,924,589 |
|
| 1,450,116 |
| 1,518,641 | 1,445,249 | |||||||||
Treasury stock, at cost (3,989,361 and 5,899,241 shares) |
| (12,032 | ) |
| (17,800 | ) | ||||||||||
Treasury stock, at cost (5,899,241 shares) | (17,800 | ) | (17,800 | ) | ||||||||||||
Total shareholders’ equity |
| 1,912,557 |
|
| 1,432,316 |
| 1,500,841 | 1,427,449 | ||||||||
Total liabilities and shareholders’ equity | $ | 7,521,319 |
| $ | 4,224,931 |
| $ | 4,367,102 | $ | 4,217,017 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
AMERICREDIT CORP.
Consolidated Statements of Income and Comprehensive Income
(Unaudited, Dollars in Thousands, Except Per Share Data)
Three Months Ended September 30, | ||||||||||||||||||||||||
Three Months Ended March 31, | Nine Months Ended March 31, | 2002 | 2001 | |||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | (Restated) | (Restated) | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Finance charge income | $ | 185,857 |
| $ | 82,188 |
| $ | 410,429 |
| $ | 259,012 |
| $ | 90,629 | $ | 96,797 | ||||||||
Gain on sale of receivables | 132,084 | 92,930 | ||||||||||||||||||||||
Servicing fee income |
| 96,646 |
|
| 97,362 |
|
| 228,507 |
|
| 277,168 |
| 116,934 | 81,121 | ||||||||||
Gain on sale of receivables |
| 124,112 |
|
| 132,084 |
|
| 325,732 |
| |||||||||||||||
Other income |
| 5,230 |
|
| 3,067 |
|
| 15,863 |
|
| 9,317 |
| 5,020 | 2,873 | ||||||||||
| 287,733 |
|
| 306,729 |
|
| 786,883 |
|
| 871,229 |
| 344,667 | 273,721 | |||||||||||
Costs and expenses | ||||||||||||||||||||||||
Operating expenses |
| 82,347 |
|
| 107,885 |
|
| 300,516 |
|
| 315,651 |
| 115,826 | 99,376 | ||||||||||
Provision for loan losses |
| 77,109 |
|
| 16,739 |
|
| 229,785 |
|
| 48,248 |
| 65,784 | 14,842 | ||||||||||
Interest expense |
| 51,550 |
|
| 33,123 |
|
| 131,453 |
|
| 99,270 |
| 40,019 | 35,590 | ||||||||||
Restructuring charges |
| 53,071 |
|
| 59,970 |
| ||||||||||||||||||
| 264,077 |
|
| 157,747 |
|
| 721,724 |
|
| 463,169 |
| 221,629 | 149,808 | |||||||||||
Income before income taxes |
| 23,656 |
|
| 148,982 |
|
| 65,159 |
|
| 408,060 |
| 123,038 | 123,913 | ||||||||||
Income tax provision |
| 9,107 |
|
| 57,358 |
|
| 25,086 |
|
| 157,103 |
| 47,370 | 47,707 | ||||||||||
Net income |
| 14,549 |
|
| 91,624 |
|
| 40,073 |
|
| 250,957 |
| 75,668 | 76,206 | ||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||
Unrealized losses on credit enhancement assets |
| (9,071 | ) |
| (6,807 | ) |
| (84,960 | ) |
| (5,829 | ) | ||||||||||||
Unrealized gains (losses) on cash flow hedges |
| 4,291 |
|
| 27,611 |
|
| (10,344 | ) |
| 4,068 |
| ||||||||||||
Canadian currency translation adjustment |
| 6,421 |
|
| 53 |
|
| 3,300 |
|
| (2,008 | ) | ||||||||||||
Income tax benefit (provision) |
| 1,841 |
|
| (8,009 | ) |
| 36,692 |
|
| 679 |
| ||||||||||||
Other comprehensive loss | ||||||||||||||||||||||||
Unrealized gains (losses) on credit enhancement assets | 513 | (5,222 | ) | |||||||||||||||||||||
Unrealized losses on cash flow hedges | (10,825 | ) | (40,388 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | (3,426 | ) | (1,640 | ) | ||||||||||||||||||||
Income tax benefit | 3,970 | 17,560 | ||||||||||||||||||||||
Other comprehensive income (loss) |
| 3,482 |
|
| 12,848 |
|
| (55,312 | ) |
| (3,090 | ) | ||||||||||||
Other comprehensive loss | (9,768 | ) | (29,690 | ) | ||||||||||||||||||||
Comprehensive income (loss) | $ | 18,031 |
| $ | 104,472 |
| $ | (15,239 | ) | $ | 247,867 |
| ||||||||||||
Comprehensive income | $ | 65,900 | $ | 46,516 | ||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | $ | 0.09 |
| $ | 1.08 |
| $ | 0.31 |
| $ | 2.97 |
| $ | 0.88 | | $ | 0.91 | | ||||||
Diluted | $ | 0.09 |
| $ | 1.02 |
| $ | 0.30 |
| $ | 2.81 |
| $ | 0.87 | $ | 0.85 | ||||||||
Weighted average shares outstanding |
| 155,492,651 |
|
| 84,988,165 |
|
| 131,268,991 |
|
| 84,470,535 |
| 85,839,717 | 83,888,338 | ||||||||||
Weighted average shares and assumed incremental shares |
| 155,494,768 |
|
| 89,509,209 |
|
| 131,677,520 |
|
| 89,334,924 |
| 87,063,187 | 89,836,898 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements
AMERICREDIT CORP.
Consolidated Statements of Cash Flows
(Unaudited, Dollars in Thousands)
Three Months Ended September 30, | ||||||||||||||||
Nine Months Ended March 31, | 2002 | 2001 | ||||||||||||||
2003 | 2002 | (Restated) | (Restated) | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 40,073 |
| $ | 250,957 |
| $ | 75,668 | $ | 76,206 | ||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||||||||||
Depreciation and amortization |
| 36,353 |
|
| 27,875 |
| 11,153 | 8,313 | ||||||||
Provision for loan losses |
| 229,785 |
|
| 48,248 |
| 65,784 | 14,842 | ||||||||
Deferred income taxes |
| (61,008 | ) |
| 26,446 |
| 5,561 | 40,008 | ||||||||
Accretion of present value discount |
| (89,271 | ) |
| (121,535 | ) | (52,353 | ) | (32,864 | ) | ||||||
Impairment of credit enhancement assets |
| 96,738 |
|
| 38,918 |
| 18,309 | 9,136 | ||||||||
Non-cash gain on sale of receivables |
| (124,831 | ) |
| (307,752 | ) | ||||||||||
Non-cash restructuring charges |
| 38,546 |
| |||||||||||||
Non-cash gain on sale of auto receivables | (124,831 | ) | (89,678 | ) | ||||||||||||
Other |
| 3,860 |
| 6,029 | ||||||||||||
Distributions from Trusts |
| 144,602 |
|
| 182,826 |
| ||||||||||
Distributions from Trusts, net of swap payments | 63,262 | 70,733 | ||||||||||||||
Initial deposits to credit enhancement assets |
| (58,101 | ) |
| (303,500 | ) | (58,101 | ) | (80,750 | ) | ||||||
Changes in assets and liabilities: | ||||||||||||||||
Other assets |
| 3,386 |
|
| (38,809 | ) | (24,724 | ) | (27,117 | ) | ||||||
Accrued taxes and expenses |
| (7,614 | ) |
| 109,415 |
| 34,877 | 15,914 | ||||||||
Purchases of receivables held for sale |
| (647,647 | ) |
| (6,494,174 | ) | ||||||||||
Principal collections and recoveries on receivables held for sale |
| 74,370 |
|
| 175,365 |
| ||||||||||
Net proceeds from sale of receivables |
| 2,495,353 |
|
| 5,919,517 |
| ||||||||||
Purchases of auto receivables held for sale | (647,647 | ) | (2,014,193 | ) | ||||||||||||
Principal collections and recoveries on auto receivables | 74,370 | 61,335 | ||||||||||||||
Net proceeds from sale of auto receivables | 2,495,353 | 1,705,429 | ||||||||||||||
Net cash provided (used) by operating activities |
| 2,174,594 |
|
| (486,203 | ) | 1,942,710 | (242,686 | ) | |||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of receivables |
| (5,223,167 | ) | |||||||||||||
Principal collections and recoveries on receivables |
| 435,976 |
| |||||||||||||
Purchases of finance receivables | (1,822,523 | ) | ||||||||||||||
Purchases of property and equipment |
| (38,898 | ) |
| (14,916 | ) | (2,841 | ) | (10,533 | ) | ||||||
Change in restricted cash—securitization notes payable |
| (54,469 | ) | |||||||||||||
Change in restricted cash—warehouse credit facilities |
| (482,090 | ) |
| (10,667 | ) | ||||||||||
Change in restricted cash – warehouse credit facilities | (170,010 | ) | (10,650 | ) | ||||||||||||
Change in other assets |
| (131,714 | ) |
| (15,991 | ) | 4,233 | (36,423 | ) | |||||||
Net cash used by investing activities |
| (5,494,362 | ) |
| (41,574 | ) | (1,991,141 | ) | (57,606 | ) | ||||||
Cash flows from financing activities | ||||||||||||||||
Net change in warehouse credit facilities |
| 511,886 |
|
| 388,328 |
| 69,332 | 253,563 | ||||||||
Proceeds from whole loan purchase facility |
| 875,000 |
| |||||||||||||
Issuance of securitization notes |
| 1,837,591 |
| |||||||||||||
Payments on securitization notes |
| (171,720 | ) | |||||||||||||
Senior notes swap settlement |
| 9,700 |
| 9,700 | ||||||||||||
Retirement of senior notes |
| (39,631 | ) | (39,631 | ) | |||||||||||
Borrowings under credit enhancement facility |
| 182,500 |
| 46,250 | ||||||||||||
Debt issuance costs |
| (23,267 | ) |
| (16,386 | ) | (9,230 | ) | (1,911 | ) | ||||||
Net change in notes payable |
| (14,006 | ) |
| (12,340 | ) | (4,279 | ) | 2,595 | |||||||
Net proceeds from issuance of common stock |
| 479,748 |
|
| 15,357 |
| ||||||||||
Proceeds from issuance of common stock | 372 | 10,509 | ||||||||||||||
Net cash provided by financing activities |
| 3,465,301 |
|
| 557,459 |
| 26,264 | 311,006 | ||||||||
Net increase in cash and cash equivalents |
| 145,533 |
|
| 29,682 |
| ||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents |
| 251 |
|
| 190 |
| ||||||||||
Net (decrease) increase in cash and cash equivalents | (22,167 | ) | 10,714 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (95 | ) | 38 | |||||||||||||
Cash and cash equivalents at beginning of period |
| 92,349 |
|
| 45,016 |
| 92,349 | 45,016 | ||||||||
Cash and cash equivalents at end of period | $ | 238,133 |
| $ | 74,888 |
| $ | 70,087 | $ | 55,768 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
AMERICREDIT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1—1 – BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AmeriCredit Corp. and its wholly-owned subsidiaries (the “Company”). All significant intercompany accounts have been eliminated in consolidation.
The consolidated financial statements as of March 31, 2003,September 30, 2002, and for the ninethree months ended March 31, 2003September 30, 2002 and 2002,2001, are unaudited, but in management’s opinion include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentationstatement of the results for such interim periods. Certain prior year amounts, have been reclassified to conform to the current period presentation, including the reclassification of:of certain cash accounts on the consolidated balance sheets andas well as initial deposits to credit enhancement assets as well asand purchases, sales, and principal collections and recoveries on receivables held for sale onin the consolidated statements of cash flows.flows, have been reclassified to conform to the current period presentation. The results for interim periods are not necessarily indicative of results for a full year.
The interim period financial statements, including the notes thereto, are condensed and do not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”).America. These interim period financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended June 30, 2002 that are included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002.2003.
NOTE 2—LIQUIDITY2 – RESTATEMENT
With respectOn August 25, 2003, the Company issued a press release reporting a restatement of its financial statements for the year ended June 30, 2002, and for the first three quarters of the year ended June 30, 2003, as a result of a review of the accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) for certain interest rate swap agreements that were entered into prior to the Company’s securitization transactions covered by2001 and used to hedge interest rate risk on a financial guaranty insurance policy, agreements with the insurers provide that if portfolio performance ratios (delinquency, default or net loss triggers) in a Trust’s poolportion of receivables exceed certain targets, the specified credit enhancement levels would be increased. If a targeted portfolio performance ratio was exceeded in any Financial Security Assurance, Inc. (“FSA”) insured securitization and a waiver was not granted by FSA, excessits cash flows from all of the Company’s FSA-insured securitizations could be used by the insurer to increase credit enhancement for the securitization in which a ratio was exceeded to higher specified levels rather than being distributed to the Company. If a targeted portfolio performance ratio was exceeded for an extended period of time in larger or multiple securitizations requiring a greater amount of additional credit enhancement, there would be a material adverse effect on the Company’s liquidity.
In March 2003, the Company exceeded its targeted net loss triggers in three FSA-insured securitization transactions. A waiver was not granted by FSA. Accordingly, $19.0 million of cash generated by FSA-insured securitization transactions otherwise distributable by the Trusts in March 2003 was used to
fund increased credit enhancement levels for the securitizations that breached their net loss triggers. The Company believes that it is probable that net loss triggers on additional FSA-insured securitization Trusts will exceed targeted levels during calendar 2003 and possible that net loss performance triggers may be exceeded in 2004 on additional FSA-insured securitization Trusts.assets.
The Company does not expect waiversenters into interest rate swap agreements to hedge the variability in future excess cash flows attributable to fluctuations in interest rates on floating rate securities issued in connection with its securitizations accounted for as sales. The cash flows are expected to be granted by FSA inreceived over the future with respect to securitizations that breach net loss triggers and estimates that cash otherwise distributable by the Trusts on FSA-insured securitization transactions will continue to be used to increase credit enhancement for FSA-insured transactions through fiscal 2004 rather than released to the Company.
The prolonged weakness in the economy has resulted in the Company experiencing lower payment rates in late-stage delinquencies. Accordingly, the Company has implemented a more aggressive strategy for repossessing and liquidating these delinquent accounts. The Company anticipates that its new strategy should result in delinquency ratios being maintained below targeted levels. If there is continued instability or further deterioration in the economy, targeted delinquency levels could be exceeded in certain FSA-insured securitization Trusts. However, should targeted delinquency levels be exceeded, there would be further increases in required credit enhancement levels only for securitization transactions that have not yet breached their net loss triggers.
Agreements with the Company’s financial guaranty insurance providers contain additional specified targeted portfolio performance ratios which are higher than the limits referred to in the preceding paragraphs. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured trust were to exceed these additional levels, provisionslife of the agreements permit the Company’s financial guaranty insurance providerssecuritizations. Prior to terminate the Company’s servicing rights to the receivables sold to that Trust. In addition, the servicing agreements on certain insured securitization Trusts are cross-defaulted so that a default under one servicing agreement would allow the guaranty insurance provider to terminate the Company’s servicing rights under all servicing agreements concerning securitization Trusts in which they issued a financial guaranty insurance policy. Although the Company has never exceeded these additional targeted portfolio performance ratios, nor does it believe that the portfolio will exceed these limits, there can be no assurance that the Company’s servicing rights with respect to the automobile receivables in such Trusts or any other Trust which exceeds the specified levels in future periods will not be terminated.
In February 2003, the Company implemented an operating plan designed to preserve and strengthen its capital and liquidity position. The plan includes a decrease in targeted loan origination volume to approximately $750.0 million per quarter by June 2003 and a reduction of operating expenses through downsizing its workforce and consolidating its branch office network. Subject to continued access to
the whole loan sale and securitization markets, the Company believes that it has sufficient liquidity to operate under its new plan through calendar 2003.
In April 2003, Fitch Ratings downgraded the Company’s credit rating to ‘B’. This downgrade did not have an impact on the Company’s financial or liquidity position.
The Company’s warehouse credit facilities contain various default covenants requiring certain minimum financial ratios and cumulative net loss, delinquency and repossession ratios. As of March 31, 2003, none of the Company’s warehouse credit facilities had financial ratios or performance ratios in excess of the targeted levels.
Within the next twelve months, $950.0 million of the Company’s warehouse credit facilities are up for renewal. In order to realign the Company’s warehouse capacity with lower future loan origination volume, the Company anticipates that certain warehouse facilities will not be renewed or will be cancelled. In accordance with this strategy, the Company intends to repay the facility and exercise its right to cancel its $500.0 million warehouse credit facility that matures in December 2003 during the quarter ending June 30, 2003. The Company believes the capacity available under the remaining warehouse credit facilities will be sufficient to meet the Company’s warehouse funding needs for calendar 2003.
In March 2003,2001, the Company entered into a whole loan purchase facility under which the Company transferred $1.0 billion of finance receivables to a special purpose finance subsidiaryinterest rate swap agreements outside of the Companysecuritization Trusts, at the corporate level. Upon implementation of SFAS 133 on July 1, 2000, the swap agreements were valued and received an advance of $875 million. Underrecorded separately from the purchase facility, during a revolving period ending in September 2003, the Company will transfer additional receivables to the special purpose finance subsidiary to replenish the amount of principal amortized and to replace delinquent receivables. Subsequent to the revolving period, the noteholders will determine the ultimate disposition of the receivables; under certain circumstances, the Company has the right, but not the obligation, to repurchase the receivables.
In April 2003, the Company entered into a $1.0 billion securitization transaction involving the purchase of a financial guaranty insurance policy. Initial credit enhancement for this transaction was 10.5% of the original receivable pool balance and credit enhancement levels must reach 18% of the receivable pool balance before cash is distributed to the Company. Initial and targeted required credit enhancement levels are higher than the Company’s prior securitization transactions. The Company believes that additional securitizations completed in calendar 2003 will require these higher credit enhancement levels.
The Company will continue to require the execution of additional securitization or whole loan purchase transactions in order to fund its lending activities through calendar 2003. In addition, the Company believes that it must utilize a securitization structure involving the purchase of a financial guaranty insurance policy in order to execute such securitization
transactions based on current market conditions. FSA has indicated to the Company that it is unlikely to provide insurance for the Company’s securitizations for the first half of calendar 2003. Accordingly, the Company will continue to purchase financial guaranty insurance policies from other providers as it did for its April 2003 securitization transaction. There can be no assurance that funding will be available to the Company through the execution of securitization or whole loan purchase transactions or, if available, that the funding will be on acceptable terms. If the Company is unable to execute securitization or whole loan purchase transactions on a regular basis, it would not have sufficient funds to finance new loan originations and, in such event, the Company would be required to further revise the scale of its business, including possible discontinuation of loan origination activities, which would have a material adverse effect on the Company’s ability to achieve its business and financial objectives.
NOTE 3—SECURITIZATIONS
Prior to October 1, 2002, the Company structured its securitization transactions to meet the criteria for sales of finance receivables under GAAP and, accordingly, recorded a gain on sale of receivables when it sold auto receivables in a securitization transaction.
The Company has changed the structure of its securitization transactions, beginning with transactions closed subsequent to September 30, 2002, to no longer meet the criteria for sale of finance receivables. Accordingly, following a securitization, the finance receivables and the related securitization notes payable remainassets on the consolidated balance sheet. The Company recognizes finance charge and feesheets, with changes in the fair value of the interest rate swap agreements recorded in other comprehensive income.
Unrealized losses or gains related to the interest rate swap agreements were reclassified from accumulated other comprehensive income into earnings as accretion was recorded on the receivableshedged cash flows of the credit enhancement assets. However, as unrealized gains related to the credit enhancement assets declined due to worse than expected credit losses and unrealized losses related to the interest expenserate swap agreements increased due to a declining interest rate environment, a combined net unrealized loss position developed in accumulated other comprehensive income. Previously, the Company reclassified amounts from accumulated other comprehensive income into earnings based upon the cash flows of the credit enhancement assets utilizing a discount rate which resulted in all of the remaining unrealized loss in accumulated other comprehensive income being reclassified into earnings in the same period when the remaining accretion on the securities issuedcredit enhancement assets was projected to be realized. A review of this accounting treatment indicated that the Company should have reclassified additional accumulated other comprehensive losses into earnings since the combination of the derivative instrument and the hedged item resulted in net unrealized losses that were not expected to be recovered in future periods.Accordingly, the securitization transaction,Company restated its financial statements for the year ended June 30, 2002, and records a provision for loanthe first three quarters of the year ended June 30, 2003, to reclassify additional unrealized losses to cover probable loannet income from accumulated other comprehensive income. Additionally, in conjunction with the reclassification of unrealized losses onto net income, the receivables. This change has significantly impactedCompany also recorded an other-than-temporary impairment during the Company’s results of operations compared to its historical results because no gain on sale was recorded for receivables securitized after September 30, 2002.
A summary of the Company’s securitization activity and cash flows from special purpose entities used for securitizations (the “Trusts”) is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
Receivables securitized: | ||||||||||||
Sold | $ | 2,400,000 | $ | 2,507,906 | $ | 6,049,997 | ||||||
Secured financing |
| 2,032,287 | ||||||||||
Net proceeds from securitization: | ||||||||||||
Sold |
| 2,340,923 |
| 2,495,353 |
| 5,919,517 | ||||||
Secured financing |
| 1,837,591 | ||||||||||
Gain on sale of receivables |
| 124,112 |
| 132,084 |
| 325,732 | ||||||
Servicing fees: | ||||||||||||
Sold | $ | 75,134 |
| 75,995 |
| 235,974 |
| 199,535 | ||||
Secured financing |
| 10,494 |
| 19,135 | ||||||||
Distributions from Trusts: | ||||||||||||
Sold |
| 33,484 |
| 54,963 |
| 144,602 |
| 182,826 | ||||
Secured financing |
| 48,385 |
| 75,481 |
The Company retains an interestJune 2002 quarter that resulted in the receivables sold in the forma write down of credit enhancement assets.assets and a $4.9 million, net of tax, decrease in shareholders’ equity at June 30, 2002. The Company also retains servicing responsibilities for receivables transferred to the Trusts. The Company earns a monthly base servicing fee of 2.25% per annumrestatement had no effect on the outstanding principal balancecash flows of its domestic serviced receivables and supplemental fees (such as late charges) for servicingsuch transactions.
The restatement resulted in the receivables sold. The Company believes that servicing fees received on its domestic securitization pools would fairly compensate a substitute servicer should one be required, and, accordingly, the Company records neither a servicing asset nor a servicing liability. The Company recorded a servicing liability relatedfollowing changes to the servicing of its Canadian securitization pool because it does not receive a monthly servicing fee for its servicing obligations. The servicing liability is included in accrued taxes and expenses on the Company’s consolidated balance sheet. As of March 31, 2003 and June 30, 2002, the Company was servicing $12,662.9 million and $12,500.7 million, respectively, of finance receivables that have been transferred to the Trusts.prior period financial statements (in thousands, except per share data):
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Servicing fee income: | ||||||
Previous | $ | 108,075 | $ | 85,235 | ||
As restated | 116,934 | 81,121 | ||||
Income before income taxes: | ||||||
Previous | $ | 114,179 | $ | 128,027 | ||
As restated | 123,038 | 123,913 | ||||
Net income: | ||||||
Previous | $ | 70,220 | $ | 78,737 | ||
As restated | 75,668 | 76,206 | ||||
Diluted earnings per share: | ||||||
Previous | $ | 0.81 | $ | 0.88 | ||
As restated | 0.87 | 0.85 | ||||
September 30, 2002 | June 30, 2002 | |||||
Credit enhancement assets: | ||||||
Previous | $ | 1,685,248 | $ | 1,549,132 | ||
As restated | 1,685,248 | 1,541,218 | ||||
Accumulated other comprehensive income: | ||||||
Previous | $ | 33,610 | $ | 42,797 | ||
As restated | 61,075 | 70,843 | ||||
Shareholder’s equity: | ||||||
Previous | $ | 1,500,841 | $ | 1,432,316 | ||
As restated | 1,500,841 | 1,427,449 |
NOTE 4—3 – FINANCE RECEIVABLESRECEIVABLE
Finance receivables consist of the following (in thousands):
March 31, 2003 | June 30, 2002 | |||||||
Finance receivables owned | $ | 3,185,974 |
| $ | 2,261,718 |
| ||
Finance receivables securitized |
| 1,842,757 |
| |||||
Less nonaccretable acquisition fees |
| (98,376 | ) |
| (40,618 | ) | ||
Less allowance for loan losses |
| (187,496 | ) |
| (22,709 | ) | ||
$ | 4,742,859 |
| $ | 2,198,391 |
| |||
Auto receivables Less nonaccretable acquisition fees Less allowance for loan losses September 30,
2002 June 30,
2002 $ 2,156,471 $ 2,261,718 (40,259 ) (40,618 ) (74,896 ) (22,709 ) $ 2,041,316 $ 2,198,391
Because of the Company’s decision to change the structure of its future securitization transactions to no longer meet the criteria for sales of finance receivables (see Note 3)4), finance receivables are carried at amortized cost at March 31, 2003.September 30, 2002. At June 30, 2002, finance receivables were classified as held“held for salesale” and carried at the lower of cost or fair value.
Finance receivables securitized represent receivables transferred to the Company’s securitization Trusts in transactions accounted for as secured borrowings. Finance receivables owned includes $2,027.0 million pledged under the Company’s warehouse credit facilities and $999.6 million transferred to the whole loan purchase facility.
ProvisionsProvision for loan losses areis charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses on finance receivables. The Company reviews charge-off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends, such as unemployment rates, and other information in order to make the necessary judgments as to probable credit losses on finance receivables. Receivables are charged-off to the allowance for loan losses when the Company repossesses and disposes of the collateral or the account is otherwise deemed uncollectable.
A summary of the nonaccretable acquisition fees and allowance for loan losses is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2002 | 2001 | |||||||||||||||||||
Balance at beginning of period | $ | 218,433 |
| $ | 65,770 |
| $ | 63,327 |
| $ | 52,363 |
| $ | 63,327 | $ | 52,363 | ||||||||
Provision for loan losses |
| 77,109 |
|
| 16,739 |
|
| 229,785 |
|
| 48,248 |
| 65,784 | 14,842 | ||||||||||
Nonaccretable acquisition fees |
| 23,026 |
|
| 46,386 |
|
| 102,523 |
|
| 126,334 |
| ||||||||||||
Allowance related to receivables sold to Trusts |
| (46,105 | ) |
| (44,766 | ) |
| (122,347 | ) | |||||||||||||||
Acquisition fees | 44,406 | 41,174 | ||||||||||||||||||||||
Allowance and acquisition fees related to receivables sold to Trusts | (44,766 | ) | (38,891 | ) | ||||||||||||||||||||
Net charge-offs |
| (32,696 | ) |
| (16,579 | ) |
| (64,997 | ) |
| (38,387 | ) | (13,596 | ) | (8,263 | ) | ||||||||
Balance at end of period | $ | 285,872 |
| $ | 66,211 |
| $ | 285,872 |
| $ | 66,211 |
| $ | 115,155 | $ | 61,225 | ||||||||
NOTE 5—CREDIT ENHANCEMENT ASSETS4 – SECURITIZATIONS
The Company has historically structured its securitization transactions to meet the criteria for sales of finance receivables under generally accepted accounting principles in the United States of America. Thus, the Company recorded a gain on sale of receivables when it sold auto receivables in a securitization transaction.
The Company has made a decision to change the structure of its future securitization transactions, beginning with transactions closed subsequent to September 30, 2002, to no longer meet the criteria for sale of finance receivables. Accordingly, following a securitization, the receivables and the related securitization indebtedness will remain on the consolidated balance sheet. The Company will recognize finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction, and will record a provision for loan losses to cover probable losses on the receivables. This change will significantly impact the Company’s future results of operations compared to its historical results.
A summary of the Company’s securitization activity and cash inflows and outflows from special purpose entities used for securitizations (the “Trusts”) is as follows (in thousands):
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Receivables sold | $ | 2,507,906 | $ | 1,724,999 | ||
Net proceeds from sale of receivables | 2,495,353 | 1,705,429 | ||||
Gain on sale of receivables | 132,084 | 92,930 | ||||
Servicing fees | 82,890 | 57,393 | ||||
Distributions from Trusts | 63,262 | 70,733 |
The Company retains servicing responsibilities and interests in the receivables sold in the form of credit enhancement assets. As of September 30, 2002, and June 30, 2002, the Company was servicing $13,590.7 million and $12,500.7 million, respectively, of auto receivables that have been sold to the Trusts.
The Trusts and the investors in and insurers of the asset-backed securities sold by the Trusts have no recourse to the Company’s assets other than the credit enhancement assets. The credit enhancement assets are subordinate to the interests of the investors in and insurers of the Trusts and the value of such assets is subject to the credit risks related to the receivables sold to the Trusts. Credit enhancement assets would be drawn down to cover monthly principal and interest payments to the investors and administrative fees in the event that cash generated from the securitization Trusts was not sufficient to cover these payments.
Credit enhancement assets consist of the following (in thousands):
March 31, 2003 | June 30, 2002 | |||||
Gain on sale Trusts: | ||||||
Interest-only receivables from Trusts | $ | 375,590 | $ | 514,497 | ||
Investments in Trust receivables |
| 769,492 |
| 691,065 | ||
Restricted cash |
| 334,124 |
| 343,570 | ||
$ | 1,479,206 | $ | 1,549,132 | |||
Secured financing Trusts: | ||||||
Restricted cash | $ | 54,688 | ||||
Finance receivables—securitized | $ | 1,842,757 | ||||
Less: Securitization notes payable |
| 1,675,106 | ||||
Overcollateralization | $ | 167,651 | ||||
September 30, 2002 | June 30, 2002 | |||||
Interest-only receivables from Trusts | $ | 556,285 | $ | 506,583 | ||
Investments in Trust receivables | 742,464 | 691,065 | ||||
Restricted cash | 386,499 | 343,570 | ||||
$ | 1,685,248 | $ | 1,541,218 | |||
A summary of activity in the credit enhancement assets related to the gain on sale Trusts is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2002 | 2001 | |||||||||||||||||||
Balance at beginning of period | $ | 1,504,286 |
| $ | 1,500,674 |
| $ | 1,549,132 |
| $ | 1,151,275 |
| $ | 1,541,218 | $ | 1,151,275 | ||||||||
Initial deposits to credit enhancement assets |
| 48,000 |
|
| 58,101 |
|
| 303,500 |
| 58,101 | 80,750 | |||||||||||||
Non-cash gain on sale of receivables |
| 118,215 |
|
| 124,831 |
|
| 307,752 |
| |||||||||||||||
Non-cash gain on sale of auto receivables | 124,831 | 89,678 | ||||||||||||||||||||||
Payments on credit enhancement facility |
| (26,824 | ) |
| (51,843 | ) | (15,827 | ) | ||||||||||||||||
Distributions from Trusts |
| (33,484 | ) |
| (54,963 | ) |
| (144,602 | ) |
| (182,826 | ) | (78,376 | ) | (83,353 | ) | ||||||||
Accretion of present value discount |
| 30,476 |
|
| 51,300 |
|
| 84,110 |
|
| 121,535 |
| 53,772 | 15,217 | ||||||||||
Other-than-temporary impairment |
| (4,904 | ) |
| (24,949 | ) |
| (96,738 | ) |
| (38,918 | ) | (18,309 | ) | (9,136 | ) | ||||||||
Decrease in unrealized gain |
| (18,855 | ) |
| (6,807 | ) |
| (96,410 | ) |
| (5,829 | ) | ||||||||||||
Canadian currency translation adjustment |
| 1,687 |
|
| 782 |
| ||||||||||||||||||
Change in unrealized gain | 5,033 | 16,213 | ||||||||||||||||||||||
Foreign currency translation adjustment | (1,022 | ) | ||||||||||||||||||||||
Balance at end of period | $ | 1,479,206 |
| $ | 1,604,646 |
| $ | 1,479,206 |
| $ | 1,604,646 |
| $ | 1,685,248 | $ | 1,244,817 | ||||||||
At the time of securitizationsale of finance receivables, the Company is required to pledge assets equal to a specified percentage of the securitization pool to support the securitization transaction. Typically, the assets pledged consist ofare cash deposited to a restricted account and additional receivables delivered to the Trust, which createthus creating overcollateralization. These assets represent initial deposits to credit enhancement assets. IfAlso at the securitization is accounted for as atime of sale of receivables, a non-cash gain on sale of receivables is recognized consisting of interest-only receivables from Trusts net of theand a present value discount related to the assets pledged as initial deposits to credit enhancement assets. The interest-only receivables from Trusts
Trust represent the present value of the estimated future excess cash flows expected to be received by the Company over the life of the securitization.
The securitization transactions require the percentage of assets pledged to support the transaction to increase thereafter until a specified level is attained. Excess cash flows generated by the Trusts are added to the restricted cash account or used to pay down outstanding debt in the Trusts creating overcollateralization until the required percentage level of assets has been reached. Collections of excess cash flows reduce the interest-only receivables from Trusts, and are retained by the Trusts to increaseadditional assets pledged represent increases in restricted cash orand investments in Trust receivables (overcollateralization).receivables. Once the targeted percentage level of assets is reached, additional excess cash flows generated by the Trusts are released to the Company as distributions from Trusts. The required percentage level of assets will increase if targeted portfolio performance ratios are exceeded (see Note 2). Additionally, as the balance of the securitization pool declines, the amount of pledged assets needed to maintain the required percentage level is reduced. Assets in excess of the required percentage level are released to the Company as distributions from Trusts.
Accretion of present value discount represents accretion of the excess of the estimated present value of future distributions from Trusts over the book value of the credit enhancement assets using the interest method over the expected life of the securitization; the accretion of present value discountsecuritization and is included in servicing fee income. The Company does not accrete
Accretion of present value discount and other also includes other than temporary impairment charges of $18.3 million and $9.1 million as of September 30, 2002 and 2001, respectively, since the increase in cumulative credit loss assumptions decreased the present value discount in a period when such accretion would cause an other-than-temporary impairment in a securitization pool.of anticipated cash flows below the carrying value of the credit enhancement assets.
Unrealized gains (losses) generally represent changes in the fair value of credit enhancement assets as a result of favorable differences between actual securitization pool performance and the original assumptions for such performance or changes in those assumptions as to future securitization pool performance. An other-than-temporary impairment results when the present value of anticipated cash flows is below the carrying value of the credit enhancement assets. Other-than-temporary impairments are included in servicing fee income on the consolidated statements of income.
Significant assumptions used in determining the gain on sale of auto receivables were as follows:
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||
2002 | 2003 | 2002 | 2002 | 2001 | ||||||||
Cumulative credit losses (including unrealized gains at time of sale) | 12.5% | 12.5% | 12.5% | 12.5 | % | 12.5 | % | |||||
Discount rate used to estimate present value: | ||||||||||||
Interest-only receivables from Trusts | 14.0% | 14.0% | 14.0% | 14.0 | % | 14.0 | % | |||||
Investments in Trust receivables | 9.8% | 9.8% | 9.8% | 9.8 | % | 9.8 | % | |||||
Restricted cash | 9.8% | 9.8% | 9.8% | 9.8 | % | 9.8 | % |
Significant assumptions used in measuring the fair value of credit enhancement assets related to the gain on sale Trusts at the balance sheet dates are as follows:
March 31, 2003 | June 30, 2002 | September 30, 2002 | June 30, 2002 | |||||||
Cumulative credit losses (including remaining unrealized gains at time of sale) | 10.9%–13.9% | 10.4%–12.7% | 11.1% – 12.5 | % | 10.4% – 12.7 | % | ||||
Discount rate used to estimate present value: | ||||||||||
Interest-only receivables from Trusts | 14.0% | 14.0% | 14.0% | 14.0% | ||||||
Investments in Trust receivables | 9.8% | 9.8% | 9.8% | 9.8% | ||||||
Restricted cash | 9.8% | 9.8% | 9.8% | 9.8% |
The Company has not presented the expected weighted average life and prepayment assumptions used in determining the gain on sale and in measuring the fair value of credit enhancement assets due to the stability of these two attributes over time. A significant portion of the Company’s prepayment experience relates to defaults that are considered in the cumulative credit loss assumption. The Company’s voluntary prepayment experience on its receivables portfolio typically has not fluctuated with changes in market interest rates or other economic or market factors.
Subsequent to September 30, 2002, the Company’s securitization transactions were structured as secured financings. Accordingly, credit enhancement assets are not characterized as interest-only receivables from Trusts, investments in Trust receivables and restricted cash—gain on sale Trusts. Cash pledged to support the securitization transaction is deposited to a restricted account and recorded on the Company’s consolidated balance sheet as restricted cash – securitization notes payable. Additionally, investments in Trust receivables, or overcollateralization, is calculated as the difference between finance
receivables securitized and securitization notes payable. Under the secured financing securitization structure, interest-only receivables from Trusts are not reflected as an asset but will be recognized through earnings in future periods.
NOTE 6—5 – WAREHOUSE CREDIT FACILITIES
As of March 31, 2003, warehouseWarehouse credit facilities consist of the following (in millions)thousands):
Maturity | Facility Amount | Advances Outstanding | Finance Receivables Pledged | Restricted Cash Pledged (e) | ||||||||
September 2003 (a) | $ | 250.0 | $ | 0.5 | ||||||||
December 2003 (a)(b)(d) |
| 500.0 | $ | 500.0 | $ | 521.8 |
| 31.3 | ||||
June 2004 (a)(b) |
| 750.0 |
| 750.0 |
| 789.2 |
| 47.0 | ||||
February 2005 (a)(b) |
| 500.0 |
| 500.0 |
| 143.0 |
| 373.6 | ||||
March 2005 (a)(c) |
| 1,950.0 |
| 513.5 |
| 573.0 |
| 17.5 | ||||
$ | 3,950.0 | $ | 2,263.5 | $ | 2,027.0 | $ | 469.9 | |||||
September 30, 2002 | June 30, 2002 | |||||
Medium term notes | $ | 1,750,000 | $ | 1,750,000 | ||
Canadian credit agreement | 70,409 | 1,974 | ||||
$ | 1,820,409 | $ | 1,751,974 |
The Company’s warehouse credit facilities are administered byCompany has three separate funding agreements with administrative agents on behalf of institutionally managed commercial paper or medium term note conduits. conduits and bank groups with aggregate structured warehouse financing availability of approximately $3,295.0 million. One facility provides for available structured warehouse financing of $250.0 million through September 2003. Another facility provides for multi-year structured warehouse financing with availability of $500.0 million through November 2003. The third facility provides for available structured warehouse financing of $2,545.0 million, of which $380.0 million matures in March 2003 and the remaining $2,165.0 million matures in March 2005.
Under these funding agreements, the Company transfers financeauto receivables to special purpose finance subsidiaries of the Company. TheseCompany, and these subsidiaries in turn issue notes, to the agents, collateralized by such financeauto receivables, and cash.to the agents. The agents provide funding under the notes to the subsidiaries pursuant to an advance formula and the subsidiaries forward the funds to the Company in consideration for the transfer of auto receivables. While these subsidiaries are included in the Company’s consolidated financial statements, these subsidiaries are separate legal entities and the financeauto receivables and other assets held by thesethe subsidiaries are legally owned by these subsidiaries and are not available to creditors of AmeriCredit Corp. or its other subsidiaries. Advances under the funding agreements bear interest at commercial paper, London Interbank Offered Rates (“LIBOR”)LIBOR or prime rates plus specified fees depending upon the source of funds provided by the agents. The funding agreements contain various covenants requiring certain minimum financial ratios and cumulative net loss, delinquency and repossession ratios. As of March 31, 2003, none of the
Company’s warehouse credit facilities had financial ratios or performance ratios in excess of the targeted levels.results. The Company isfunding agreements also requiredrequire certain funds to hold certain fundsbe held in restricted cash accounts to provide additional collateral for borrowings under the facilities.
NOTE 7—WHOLE LOAN PURCHASE FACILITY
In March 2003, As of September 30 and June 30, 2002, these restricted cash accounts totaled $1.0 million and $1.6 million, respectively, and are included in other assets in the Company entered into a whole loan purchase facility under which the Company transferred $1.0 billionconsolidated balance sheets. As of September 30 and June 30, 2002, no finance receivables to a special purpose finance subsidiary of the Company and received an advance of $875.0 million. Under the purchase facility, during a revolving period ending in September 2003, the Company will transfer additional receivables to the special purpose finance subsidiary to replenish the amount of principal amortized and to replace delinquent receivables. Subsequent to the revolving period, the noteholders will determine the ultimate disposition of the receivables. Amounts outstanding on the whole loan purchase facility bear interest at the prime rate plus specified fees. Prior to the ultimate disposition of the receivables, the Company retains certain rights to the receivables which causes the transaction to be accounted for as a secured financing.
NOTE 8—SECURITIZATION NOTES PAYABLEwere pledged under these funding agreements.
The Company also has changedthree funding agreements with administrative agents on behalf of institutionally managed medium term note conduits under which $500.0 million, $750.0 million and $500.0 million, respectively, of proceeds are available through the structureterms of its securitization transactions to no longer meet the criteria for sale of finance receivables. Accordingly, following a securitization,agreements. Under these arrangements, the finance receivables, transferredconduits sold medium term notes and delivered the proceeds to special purpose finance subsidiaries of the Company. These subsidiaries in turn issued notes, collateralized by auto receivables and cash, to the agents. The funding
agreements allow for the substitution of auto receivables (subject to an overcollateralization formula) for cash, and vice versa, during the term of the agreements, thus allowing the Company to use the medium term note proceeds to finance auto receivables on a revolving basis. The agreements mature in December 2003, June 2004 and related securitization notes payable remain onFebruary 2005, respectively. While the consolidated balance sheet. While thesespecial purpose finance subsidiaries are included in the Company’s consolidated financial statements, thesethe subsidiaries are separate legal entities and the financeauto receivables and other assets held by themthe subsidiaries are legally owned by thesethe subsidiaries and are not available to creditors of AmeriCredit Corp. or its other subsidiaries. The notes issued by the subsidiaries under the funding agreements bear interest at LIBOR plus specified fees. The funding agreements contain various covenants requiring certain minimum financial ratios and results. The funding agreements also require certain funds to be held in restricted cash accounts to provide additional collateral under the notes. As of September 30 and June 30, 2002, these restricted cash accounts totaled $198.5 million and $27.8 million, respectively, and are included in other assets in the consolidated balance sheets. As of September 30 and June 30, 2002, $1,686.0 million and $1,831.8 million, respectively, of finance receivables were pledged under these funding agreements.
Securitization transactions structured as secured financingsThe Company’s Canadian subsidiary has a revolving credit agreement, under which the subsidiary may borrow up to $150.0 million Cdn., subject to a defined borrowing base. This agreement matures in August 2003. Borrowings under the credit agreement are as follows (dollarscollateralized by certain Canadian auto receivables and bear interest at the Canadian Bankers Acceptance Rate plus specified fees. Additionally, the Company’s Canadian subsidiary has a warehouse credit facility with availability of $100.0 million Cdn. subject to a defined borrowing base. The warehouse credit facility expires in millions):May 2003. The Canadian facilities contain various covenants requiring certain minimum financial ratios and results. As of September 30 and June 30, 2002, $153.2 million Cdn. and $4.0 million Cdn., respectively, of finance receivables were pledged under the credit agreement.
Transaction | Date | Original Note Amount | Original Weighted Average Interest Rate | Receivables Pledged at March 31, 2003 | Note Balance at March 31, 2003 | |||||||||
2002-EM | October 2002 | $ | 1,700.0 | 3.2 | % | $ | 1,669.7 | $ | 1,545.1 | |||||
C2002-1 Canada (a) | November 2002 |
| 137.0 | 5.5 | % |
| 173.1 |
| 130.0 | |||||
$ | 1,837.0 | $ | 1,842.8 | $ | 1,675.1 | |||||||||
NOTE 9—6 – SENIOR NOTES
In July 2002, the Company used a portion of the proceeds from the issuance of $175.0 million 9.25% senior notes due in May 2009 to redeem the remaining $39.6 million 9.25% senior notes due in May 2004.
NOTE 10—RESTRUCTURING CHARGES7 – WARRANTS
Agreements with the insurer of the Company’s securitization transactions covered by financial guaranty insurance policies provide for an increase in credit enhancement requirements when specified delinquency rates and other portfolio performance measures are exceeded. In February 2003,September 2002, the Company announcedentered into an agreement with its insurer to raise the specified delinquency levels through and including the March 2003 distribution date. This agreement reduces the likelihood that credit enhancement requirements would increase as a revised operating plan designedresult of expected seasonal and economic impacts on delinquency levels in certain insured securitization transactions. In consideration for this
agreement, the Company agreed to preserve and strengthen its capital and liquidity position. The plan included a decrease in targeted loan origination volumeissue to approximately $750.0 millionthe insurer five-year warrants to purchase 1,287,691 shares of the Company’s common stock at $9.00 per quarter by June 2003 and a reduction of operating expenses through downsizing its workforce and consolidating its branch office network. The workforce reduction eliminated approximately 850 positions and resulted in the closing/consolidation of 141 branch offices.share. The Company also vacated certain floor space in its corporate headquarters as partrecorded interest expense of $6.6 million related to this agreement.
NOTE 8 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest costs and income taxes consist of the revised operating plan.following (in thousands):
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Interest costs (none capitalized) | $ | 37,583 | $ | 36,052 | ||
Income taxes | 17,362 | 157 |
A restructuring charge of $53.1 million representing the total incurred costs associated with the plan was recorded during
During the three months ended March 31, 2003. Personnel-related costs consisted primarily of severance costs of identified workforce reductions related toSeptember 30, 2002 and 2001, the consolidation/closing of branch offices including the closing of the Company’s Canadian lending operations. Contract termination costs included expenses incurred to terminate facilityCompany entered into capital lease agreements for property and equipment leases prior to their termination date. Contract termination costs also included estimated costs that will continue to be incurred under facilityof $2.1 million and equipment contracts for their remaining terms without economic benefit to the Company. The Company estimated this cost by discounting the future cash to be paid under the contracts, net of any assumed proceeds on sublease rentals. As part of the revised operating plan, the Company discontinued the development of its customer relationship management system, which was designed to provide operational scalability and marketing benefits in a high-growth environment. The discontinuation of this project resulted in a charge of $20.8$11.8 million, which was included in other associated costs. As of March 31, 2003, total costs incurred to date in connection with the restructuring includes $16.4 million in personnel-related costs, $12.5 million in contract termination costs and $24.2 million in other associated costs.respectively.
NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of March 31, 2003, all affected employees have been notifiedSeptember 30 and June 30, 2002, the Company had interest rate swap agreements with underlying notional amounts of their termination. Certain contractual payments associated with the revised operating plan will extend through the remaining terms$1,178.8 million and $1,595.7 million, respectively. These agreements had unrealized losses of leases that have not been terminated. A liability of $12.8approximately $52.0 million related to the restructuring charge is recorded in accrued taxes and expenses on the Company’s consolidated balance sheet$41.2 million as of March 31, 2003.
A summary of the liability for the restructure charge for the three months ended March 31, 2003, is as follows (in thousands):
Personnel- Related Costs | Contract Termination Costs | Other Associated Costs | Total | |||||||||||||
Restructuring charges | $ | 16,451 |
| $ | 12,467 |
| $ | 24,153 |
| $ | 53,071 |
| ||||
Cash settlements |
| (15,619 | ) |
| (686 | ) |
| (88 | ) |
| (16,393 | ) | ||||
Non cash settlements |
| (214 | ) |
| (23,688 | ) |
| (23,902 | ) | |||||||
Balance at end of period | $ | 832 |
| $ | 11,567 |
| $ | 377 |
| $ | 12,776 |
| ||||
NOTE 11—COMMITMENTS AND CONTINGENCIES
Guarantees of Indebtedness
The Company has guaranteed the timely payment of principal and interest on the Class E tranches of the asset-backed securities issued in its 2000-1, 2001-1 and 2002-1 securitization transactions. The total outstanding balance of the subordinated asset-backed securities guaranteed by the Company was $39.6 million and $78.3 million at March 31, 2003September 30 and June 30, 2002, respectively. Subordinated asset-backed securities guaranteedThe ineffectiveness related to the interest rate swap agreements was not material for the period ended September 30, 2002. The Company estimates approximately $22.6 million of unrealized losses included in other comprehensive income will be reclassified into earnings within the next twelve months. Under the terms of its derivative financial instruments, the Company is required to pledge certain funds to be held in restricted cash accounts if the market value of the derivative financial instruments exceeds an agreed upon amount. As of September 30 and June 30, 2002, these restricted cash accounts totaled $52.9 million and $56.5 million, respectively, and are included in other assets in the consolidated balance sheets.
NOTE 10 – EARNINGS PER SHARE
A reconciliation of weighted average shares used to compute basic and diluted earnings per share is as follows (dollars in thousands, except per share amounts):
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Weighted average shares outstanding | 85,839,717 | 83,888,338 | ||||
Incremental shares resulting from assumed conversions: | ||||||
Stock options | 1,208,675 | 5,948,560 | ||||
Warrants | 14,795 | |||||
1,223,470 | 5,948,560 | |||||
Weighted average shares and assumed incremental shares | 87,063,187 | 89,836,898 | ||||
Net income | $ | 75,668 | $ | 76,206 | ||
Earnings per share: | ||||||
Basic | $ | 0.88 | $ | 0.91 | ||
Diluted | $ | 0.87 | $ | 0.85 | ||
Basic earnings per share have been computed by dividing net income by weighted average shares outstanding.
Diluted earnings per share have been computed by dividing net income by the weighted average shares and assumed incremental shares. Assumed incremental shares were computed using the treasury stock method. The average common stock market price for the period was used to determine the number of incremental shares.
Options to purchase approximately 8.3 million and 0.4 million shares of common stock were outstanding at September 30, 2002 and 2001, respectively, but were not included in the computation of earnings per share because the option exercise price was greater than the market price of the common shares and, therefore, the effect would be antidilutive.
NOTE 11 – LIQUIDITY
The Company are expectedbelieves that it will continue to maturerequire the execution of securitization transactions in order to fund its liquidity needs in fiscal 2003. There can be no assurance that funding will be available to the Company through this source or, if available, that it will be on terms acceptable to it. If the Company is unable to execute securitization transactions on a regular basis, it may be required to significantly decrease loan origination activities and implement expense reductions, all of which may have a material
adverse effect on the Company’s ability to achieve its business and financial objectives.
With respect to the Company’s securitization transactions covered by a financial guaranty policy, agreements with the insurer provide that if delinquency, default and net loss ratios in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased. If a targeted ratio was exceeded in any insured securitization and a waiver was not granted by the endinsurer, excess cash flows from all of calendar 2004. Becausethe Company’s insured securitizations could be used by the insurer to increase credit enhancement for the securitization in which a ratio was exceeded to higher specified levels rather than being distributed to the Company. If a targeted ratio was exceeded for an extended period of time in larger securitizations requiring a greater amount of additional credit enhancement, there could be a material adverse effect on the Company’s liquidity.
As of September 30, 2002, none of the Company’s securitizations had delinquency, default or net loss ratios in excess of the targeted levels. However, as a result of expected seasonal increases in delinquency levels through February 2003 and the prospects for continued economic weakness, the Company believes that it is likely that the initially targeted delinquency ratios would have been exceeded in certain of its securitizations during that time period. In September 2002, the insurer agreed to revise the targeted delinquency trigger levels through and including the March 2003 distribution date. As a result, the Company does not expect to exceed the guaranteesrevised delinquency targets with respect to any Trusts. The Company anticipates that expected seasonal improvements in delinquency levels after February 2003 should result in the ratios being reduced below applicable target levels. However, if expected seasonal improvements do not materialize or if there is continued instability or further deterioration in the economy, targeted delinquency levels could be funded priorexceeded in certain securitization Trusts.The Company also believes that it is possible that net loss ratios on certain of its securitization Trusts will exceed targeted levels if current economic conditions persist or worsen. If targeted levels were exceeded and a waiver was not granted, the Company estimates that $80.0 million to expiration, no liability is recorded on$100.0 million of cash otherwise distributable from the consolidated balance sheetTrusts would be used to reflect estimatesincrease credit enhancements for the insurer instead of futurebeing released to the Company. Although the Company believes it has sufficient liquidity in the event that cash flowsdistributions from the Trusts are curtailed as described above, the Company may be required to decrease loan origination activities, and implement other expense reductions, if securitization distributions are materially decreased for settlementa prolonged period of the guarantees.time.
The paymentOn September 12, 2002, Moody’s Investors Service announced its intention to review the Company for a potential credit rating downgrade. In the event of principal and interest on the Company’s senior notes is guaranteed bya downgrade, certain of the Company’s subsidiaries (see Note 18). As of March 31, 2003,derivative collateral lines would be reduced. The Company anticipates that the carrying value of the senior notes was $379.1 million.reductions in these derivative collateral lines would require it to pledge an additional $18.0 million to $40.0 million in cash to maintain its open derivative positions.
Additionally, the Company and its primary operating subsidiary, AmeriCredit Financial Services, Inc., guarantee the payment of principal and interest under a construction loan for one of the Company’s loan servicing centers. As of March 31, 2003, the amount of outstanding debt under this loan was $24.7 million and is recorded in other notes payable on the Company’s consolidated balance sheets. The construction loan was repaid in full in April 2003.
Legal ProceedingsNOTE 12 – LITIGATION
As a consumer finance company, the Company is 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. Some litigation against the Company could take the form of class action complaints by consumers. As the assignee of finance contracts originated by dealers, the Company may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The
damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages.
Several complaints have been filed by shareholders against the Company and certain of the Company’s officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The lawsuits, all of which seek class action status, have been consolidated into one action pending in the United States District Court located in Fort Worth, Texas. The consolidated lawsuit claims that deferments were improperly granted by the Company to avoid delinquency triggers in securitization transactions and enhance cash flow, thereby causing the Company to misrepresent its financial performance throughout the alleged class period. The Company believes that its granting of deferments, which is a common practice within the auto finance industry, complied at all times with the covenants contained in its securitization and warehouse financing documents, and that its deferment activities were properly disclosed to all constituents, including shareholders, asset-backed investors, creditors and credit enhancement providers. In the opinion of management, the consolidated lawsuit is without merit and the Company intends to vigorously defend against it.
Additionally, on February 27, 2003, the Company was served with a shareholder’s derivative action filed in the United States District Court for the Northern District of Texas, Fort Worth Division, entitled Mildred Rosenthal, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. This lawsuit alleges that certain officers and directors of the Company breached their respective fiduciary duties by causing the Company to make improper deferments, violated federal and state securities laws and issued misleading financial statements. The substantive allegations are essentially the same as those in the above-referenced class actions.
The Company believes that it has taken prudent steps to address the litigation risks associated with its business activities. InAs of September 30, 2002, there were no lawsuits pending or, to the opinion of management, the resolutionbest knowledge of the litigation pending orCompany, threatened against it, the Company, including the proceedings specifically described in this section,outcome of which will not have a material effectaffect on the Company’s financial condition, results of operations or cash flows.
NOTE 12—STOCK OPTIONS
The Company has certain stock-based compensation plans for employees, non-employee directors and key executive officers. The Company has elected not to adopt the fair value-based method of accounting for stock-based awards and, accordingly, no compensation expense has been recognized for options granted under these plans.
The following table illustrates the effect on net income and earnings per share had compensation expense for the Company’s plans been determined using the fair value-based method (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income, as reported | $ | 14,549 |
| $ | 91,624 |
| $ | 40,073 |
| $ | 250,957 |
| ||||
Deduct: Stock-based compensation expense, determined under fair value-based method, net of related tax effects |
| (5,527 | ) |
| (6,423 | ) |
| (16,551 | ) |
| (17,442 | ) | ||||
Pro forma net income | $ | 9,022 |
| $ | 85,201 |
| $ | 23,522 |
| $ | 233,515 |
| ||||
Earnings per share: | ||||||||||||||||
Basic—as reported | $ | 0.09 |
| $ | 1.08 |
| $ | 0.31 |
| $ | 2.97 |
| ||||
Basic—pro forma | $ | 0.06 |
| $ | 1.00 |
| $ | 0.18 |
| $ | 2.76 |
| ||||
Diluted—as reported | $ | 0.09 |
| $ | 1.02 |
| $ | 0.30 |
| $ | 2.81 |
| ||||
Diluted—pro forma | $ | 0.06 |
| $ | 0.95 |
| $ | 0.18 |
| $ | 2.61 |
| ||||
The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||
2003 | 2002 | 2003 | 2002 | |||||
Expected dividends | 0 | 0 | 0 | 0 | ||||
Expected volatility | 78.5% | 101.0% | 78.7% | 101.0% | ||||
Risk-free interest rate | 2.91% | 4.28% | 2.97% | 4.28% | ||||
Expected life | 5 years | 5 years | 5 years | 5 years |
NOTE 13—COMMON STOCK13 – SUBSEQUENT EVENT
On October 1, 2002, the Company completed a secondary offering of 67,000,000 shares of common stock at a price of $7.50 per share. On November 13, 2002, an additional 1,500,000 shares were issued to cover over-allotments. The net proceeds of the secondary offering were approximately $481.0$480.9 million. The Company intends to use the proceeds of the secondary offering for initial credit enhancement deposits in securitization transactions subsequent to September 30, 2002, and for other working capital needs and general corporate purposes.
NOTE 14—WARRANTS
Agreements with FSA, an insurer of certain of the Company’s securitization transactions, provide for an increase in credit enhancement requirements when specified delinquency ratios or other portfolio performance measures are exceeded. In September 2002, the Company entered into an agreement with FSA to raise the specified delinquency levels through and including the March 2003
distribution date. In consideration for this agreement, the Company issued to FSA five-year warrants to purchase 1,287,691 shares of the Company’s common stock at $9.00 per share. The Company recorded interest expense of $6.6 million related to this agreement during the three months ended September 30, 2002.
NOTE 15—EARNINGS PER SHARE
A reconciliation of weighted average shares used to compute basic and diluted earnings per share is as follows (dollars in thousands, except per share amounts):
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||
Weighted average shares outstanding |
| 155,492,651 |
| 84,988,165 |
| 131,268,991 |
| 84,470,535 | ||||
Incremental shares resulting from assumed conversions: | ||||||||||||
Stock options |
| 2,117 |
| 4,521,044 |
| 403,597 |
| 4,864,389 | ||||
Warrants |
| 4,932 | ||||||||||
| 2,117 |
| 4,521,044 |
| 408,529 |
| 4,864,389 | |||||
Weighted average shares and assumed incremental shares |
| 155,494,768 |
| 89,509,209 |
| 131,677,520 |
| 89,334,924 | ||||
Net income | $ | 14,549 | $ | 91,624 | $ | 40,073 | $ | 250,957 | ||||
Earnings per share: | ||||||||||||
Basic | $ | 0.09 | $ | 1.08 | $ | 0.31 | $ | 2.97 | ||||
Diluted | $ | 0.09 | $ | 1.02 | $ | 0.30 | $ | 2.81 | ||||
Basic earnings per share have been computed by dividing net income by weighted average shares outstanding.
Diluted earnings per share have been computed by dividing net income by the weighted average shares and assumed incremental shares. Assumed incremental shares were computed using the treasury stock method. The average common stock market price for the period was used to determine the number of incremental shares.
Options to purchase approximately 11.1 million and 8.0 million shares of common stock at March 31, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares.
NOTE 16—SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest costs and income taxes consist of the following (in thousands):
Nine Months Ended March 31, | ||||||
2003 | 2002 | |||||
Interest costs ($345 capitalized in 2002) | $ | 119,626 | $ | 105,187 | ||
Income taxes |
| 110,648 |
| 75,197 |
During the nine months ended March 31, 2003 and 2002, the Company entered into capital lease agreements for property and equipment of $13.0 million and $47.8 million, respectively.
NOTE 17—DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of March 31, 2003 and June 30, 2002, the Company had interest rate swap agreements with underlying notional amounts of $2,011.2 million and $1,595.7 million, respectively. These agreements had unrealized losses of approximately $77.2 million and $66.9 million as of March 31, 2003 and June 30, 2002, respectively. The ineffectiveness related to the interest rate swap agreements was not material for the three and nine month periods ended March 31, 2003. The Company estimates approximately $38.4 million of unrealized losses included in other comprehensive income will be reclassified into earnings within the next twelve months. The fair market value of the Company’s interest rate cap assets of $33.8 million and $16.7 million as of March 31, 2003 and June 30, 2002, respectively, are included in other assets on the consolidated balance sheets. The fair market value of the Company’s interest rate cap liabilities of $16.8 million and $19.1 million as of March 31, 2003 and June 30, 2002, respectively, are included in derivative financial instruments on the consolidated balance sheets. Under the terms of its derivative financial instruments, the Company is required to pledge certain funds to be held in restricted cash accounts if the market value of the derivative financial instruments exceeds an agreed upon amount. As of March 31, 2003 and June 30, 2002, these restricted cash accounts totaled $77.1 million and $56.5 million, respectively, and are included in other assets on the consolidated balance sheets.
NOTE 18—14 – GUARANTOR CONSOLIDATING FINANCIAL STATEMENTS
The payment of principal and interest on the Company’s senior notes is guaranteed by certain of the Company’s subsidiaries (the “Subsidiary Guarantors”). The separate financial statements of the Subsidiary Guarantors are not included herein because the Subsidiary Guarantors are wholly-owned consolidated subsidiaries of the Company and are jointly, severally and unconditionally liable for the obligations represented by the senior notes. The Company believes that the condensed consolidating financial information for the Company, the combined Subsidiary Guarantors and the combined Non-Guarantor
Subsidiaries provides information that is more meaningful in understanding the financial position of the Subsidiary Guarantors than separate financial statements of the Subsidiary Guarantors.
The following consolidating financial statement schedules present consolidating financial data for (i) AmeriCredit Corp. (on a parent only basis), (ii) the combined Subsidiary Guarantors, (iii) the combined Non-Guarantor Subsidiaries, (iv) an elimination column for adjustments to arrive at the information for the
Company and its subsidiaries on a consolidated basis and (v) the Company and its subsidiaries on a consolidated basis.
Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Results of operationsEarnings of subsidiaries are therefore reflected in the parent company’s investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.
AmeriCredit Corp.
Consolidating Balance Sheet
March 31, 2003September 30, 2002
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 238,133 |
| $ | 238,133 |
| $ | 70,087 | $ | 70,087 | ||||||||||||||||||||||||||||
Finance receivables, net |
| 103,245 |
| $ | 4,639,614 |
| 4,742,859 |
| 335,048 | $ | 1,706,268 | 2,041,316 | ||||||||||||||||||||||||||
Interest-only receivables from Trusts |
| 4,062 |
|
| 371,528 |
| 375,590 |
| 4,957 | 551,328 | 556,285 | |||||||||||||||||||||||||||
Investments in Trust receivables |
| 17,095 |
|
| 752,397 |
| 769,492 |
| 19,416 | 723,048 | 742,464 | |||||||||||||||||||||||||||
Restricted cash—gain on sale Trusts |
| 2,843 |
|
| 331,281 |
| 334,124 |
| ||||||||||||||||||||||||||||||
Restricted cash—securitization notes payable |
| 54,688 |
| 54,688 |
| |||||||||||||||||||||||||||||||||
Restricted cash—warehouse credit facilities |
| 538,561 |
| 538,561 |
| |||||||||||||||||||||||||||||||||
Restricted cash | 2,793 | 383,706 | 386,499 | |||||||||||||||||||||||||||||||||||
Restricted cash – warehouse credit facilities | 226,465 | 226,465 | ||||||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 349 |
|
| 129,798 |
|
| 130,147 |
| $ | 349 | 118,525 | 118,874 | |||||||||||||||||||||||||
Other assets |
| 8,743 |
|
| 202,188 |
|
| 126,794 |
| 337,725 |
| 10,237 | 190,924 | 23,951 | 225,112 | |||||||||||||||||||||||
Due (to) from affiliates |
| 1,339,506 |
|
| (6,118,328 | ) |
| 4,778,822 | ||||||||||||||||||||||||||||||
Due from affiliates | 937,996 | 1,697,649 | $ | (2,635,645 | ) | |||||||||||||||||||||||||||||||||
Investment in affiliates |
| 957,662 |
|
| 6,522,882 |
|
| 52,426 | $ | (7,532,970 | ) | 1,035,656 | 3,223,107 | 20,465 | (4,279,228 | ) | ||||||||||||||||||||||
Total assets | $ | 2,306,260 |
| $ | 1,101,918 |
| $ | 11,646,111 | $ | (7,532,970 | ) | $ | 7,521,319 |
| $ | 1,984,238 | $ | 3,964,857 | $ | 5,332,880 | $ | (6,914,873 | ) | $ | 4,367,102 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||
Warehouse credit facilities | $ | 2,263,547 | $ | 2,263,547 |
| $ | 1,820,409 | $ | 1,820,409 | |||||||||||||||||||||||||||||
Whole loan purchase facility |
| 875,000 |
| 875,000 |
| |||||||||||||||||||||||||||||||||
Securitization notes payable |
| 1,695,479 | $ | (20,373 | ) |
| 1,675,106 |
| ||||||||||||||||||||||||||||||
Senior notes | $ | 379,050 |
|
| 379,050 |
| $ | 381,676 | 381,676 | |||||||||||||||||||||||||||||
Other notes payable |
| 63,094 |
| $ | 2,820 |
|
| 65,914 |
| 61,580 | $ | 2,954 | 64,534 | |||||||||||||||||||||||||
Funding payable |
| 21,886 |
|
| 1,196 |
| 23,082 |
| 137,526 | 982 | 138,508 | |||||||||||||||||||||||||||
Accrued taxes and expenses |
| 19,148 |
|
| 162,426 |
|
| 11,960 |
| 193,534 |
| 69,384 | 156,528 | 2,943 | 228,855 | |||||||||||||||||||||||
Derivative financial instruments |
| 82,962 |
|
| 82,962 |
| 85,072 | 85,072 | ||||||||||||||||||||||||||||||
Due to affiliates | 2,635,645 | $ | (2,635,645 | ) | ||||||||||||||||||||||||||||||||||
Deferred income taxes |
| (67,589 | ) |
| (99,882 | ) |
| 218,038 |
| 50,567 |
| (29,243 | ) | (12,072 | ) | 188,522 | 147,207 | |||||||||||||||||||||
Total liabilities |
| 393,703 |
|
| 170,212 |
|
| 5,065,220 |
| (20,373 | ) |
| 5,608,762 |
| 483,397 | 3,005,653 | 2,012,856 | (2,635,645 | ) | 2,866,261 | ||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||||||||||||||||||||
Common stock |
| 1,603 |
|
| 37,719 |
|
| 92,166 |
| (129,885 | ) |
| 1,603 |
| 917 | 32,779 | 83,408 | (116,187 | ) | 917 | ||||||||||||||||||
Additional paid-in capital |
| 1,062,982 |
|
| 26,237 |
|
| 5,242,581 |
| (5,268,818 | ) |
| 1,062,982 |
| 581,448 | 26,237 | 2,046,619 | (2,072,856 | ) | 581,448 | ||||||||||||||||||
Accumulated other comprehensive (loss) income |
| (12,515 | ) |
| (45,159 | ) |
| 36,684 |
| 8,475 |
|
| (12,515 | ) | ||||||||||||||||||||||||
Accumulated other comprehensive income (loss) | 61,075 | (19,631 | ) | 108,258 | (88,627 | ) | 61,075 | |||||||||||||||||||||||||||||||
Retained earnings |
| 872,519 |
|
| 912,909 |
|
| 1,209,460 |
| (2,122,369 | ) |
| 872,519 |
| 875,201 | 919,819 | 1,081,739 | (2,001,558 | ) | 875,201 | ||||||||||||||||||
| 1,924,589 |
|
| 931,706 |
|
| 6,580,891 |
| (7,512,597 | ) |
| 1,924,589 |
| 1,518,641 | 959,204 | 3,320,024 | (4,279,228 | ) | 1,518,641 | |||||||||||||||||||
Treasury stock |
| (12,032 | ) |
| (12,032 | ) | (17,800 | ) | (17,800 | ) | ||||||||||||||||||||||||||||
Total shareholders’ equity |
| 1,912,557 |
|
| 931,706 |
|
| 6,580,891 |
| (7,512,597 | ) |
| 1,912,557 |
| 1,500,841 | 959,204 | 3,320,024 | (4,279,228 | ) | 1,500,841 | ||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,306,260 |
| $ | 1,101,918 |
| $ | 11,646,111 | $ | (7,532,970 | ) | $ | 7,521,319 |
| $ | 1,984,238 | $ | 3,964,857 | $ | 5,332,880 | $ | (6,914,873 | ) | $ | 4,367,102 | |||||||||||||
AmeriCredit Corp.
Consolidating Balance Sheet
June 30, 2002
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 90,806 |
| $ | 1,543 | $ | 92,349 |
| $ | 90,806 | $ | 1,543 | $ | 92,349 | ||||||||||||||||||||||||
Receivables held for sale, net |
| 430,573 |
|
| 1,767,818 |
| 2,198,391 |
| 430,573 | 1,767,818 | 2,198,391 | |||||||||||||||||||||||||||
Interest-only receivables from Trusts |
| 7,828 |
|
| 506,669 |
| 514,497 |
| 7,828 | 498,755 | 506,583 | |||||||||||||||||||||||||||
Investments in Trust receivables |
| 15,609 |
|
| 675,456 |
| 691,065 |
| 15,609 | 675,456 | 691,065 | |||||||||||||||||||||||||||
Restricted cash—gain on sale Trusts |
| 2,906 |
|
| 340,664 |
| 343,570 |
| ||||||||||||||||||||||||||||||
Restricted cash | 2,906 | 340,664 | 343,570 | |||||||||||||||||||||||||||||||||||
Restricted cash—warehouse credit facilities |
| 56,479 |
| 56,479 |
| 56,479 | 56,479 | |||||||||||||||||||||||||||||||
Property and equipment, net | $ | 349 |
|
| 120,156 |
|
| 120,505 |
| $ | 349 | 120,156 | 120,505 | |||||||||||||||||||||||||
Other assets |
| 16,748 |
|
| 173,383 |
|
| 17,944 |
| 208,075 |
| 16,748 | 173,383 | 17,944 | 208,075 | |||||||||||||||||||||||
Due (to) from affiliates |
| 985,354 |
|
| (2,751,456 | ) |
| 1,766,102 | ||||||||||||||||||||||||||||||
Due from affiliates | 985,354 | 1,766,102 | $ | (2,751,456 | ) | |||||||||||||||||||||||||||||||||
Investment in affiliates |
| 966,339 |
|
| 3,181,643 |
|
| 21,269 | $ | (4,169,251 | ) | 961,472 | 3,181,643 | 21,269 | (4,164,384 | ) | ||||||||||||||||||||||
Total assets | $ | 1,968,790 |
| $ | 1,271,448 |
| $ | 5,153,944 | $ | (4,169,251 | ) | $ | 4,224,931 |
| $ | 1,963,923 | $ | 4,022,904 | $ | 5,146,030 | $ | (6,915,840 | ) | $ | 4,217,017 | |||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||
Warehouse credit facilities | $ | 1,751,974 | $ | 1,751,974 |
| $ | 1,751,974 | $ | 1,751,974 | |||||||||||||||||||||||||||||
Senior notes | $ | 418,074 |
|
| 418,074 |
| $ | 418,074 | 418,074 | |||||||||||||||||||||||||||||
Other notes payable |
| 63,569 |
| $ | 3,242 |
|
| 66,811 |
| 63,569 | $ | 3,242 | 66,811 | |||||||||||||||||||||||||
Funding payable |
| 126,091 |
|
| 802 |
| 126,893 |
| 126,091 | 802 | 126,893 | |||||||||||||||||||||||||||
Accrued taxes and expenses |
| 39,925 |
|
| 151,106 |
|
| 3,229 |
| 194,260 |
| 39,925 | 151,106 | 3,229 | 194,260 | |||||||||||||||||||||||
Derivative financial Instruments |
| 85,922 |
|
| 85,922 |
| ||||||||||||||||||||||||||||||||
Derivative financial instruments | 85,922 | 85,922 | ||||||||||||||||||||||||||||||||||||
Due to affiliates | 2,751,456 | $ | (2,751,456 | ) | ||||||||||||||||||||||||||||||||||
Deferred income taxes |
| 14,906 |
|
| 20,062 |
|
| 113,713 |
| 148,681 |
| 14,906 | 20,062 | 110,666 | 145,634 | |||||||||||||||||||||||
Total liabilities |
| 536,474 |
|
| 386,423 |
|
| 1,869,718 |
| 2,792,615 |
| 536,474 | 3,137,879 | 1,866,671 | (2,751,456 | ) | 2,789,568 | |||||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||||||||||||||||||||
Common stock |
| 917 |
|
| 32,779 |
|
| 83,408 | $ | (116,187 | ) |
| 917 |
| 917 | 32,779 | 83,408 | (116,187 | ) | 917 | ||||||||||||||||||
Additional paid-in capital |
| 573,956 |
|
| 26,237 |
|
| 2,126,942 |
| (2,153,179 | ) |
| 573,956 |
| 573,956 | 26,237 | 2,126,942 | (2,153,179 | ) | 573,956 | ||||||||||||||||||
Accumulated other comprehensive income (loss) |
| 42,797 |
|
| (40,501 | ) |
| 84,864 |
| (44,363 | ) |
| 42,797 |
| 70,843 | (7,588 | ) | 112,910 | (105,322 | ) | 70,843 | |||||||||||||||||
Retained earnings |
| 832,446 |
|
| 866,510 |
|
| 989,012 |
| (1,855,522 | ) |
| 832,446 |
| 799,533 | 833,597 | 956,099 | (1,789,696 | ) | 799,533 | ||||||||||||||||||
1,445,249 | 885,025 | 3,279,359 | (4,164,384 | ) | 1,445,249 | |||||||||||||||||||||||||||||||||
| 1,450,116 |
|
| 885,025 |
|
| 3,284,226 |
| (4,169,251 | ) |
| 1,450,116 |
| |||||||||||||||||||||||||
Treasury stock |
| (17,800 | ) |
| (17,800 | ) | (17,800 | ) | (17,800 | ) | ||||||||||||||||||||||||||||
Total shareholders’ equity |
| 1,432,316 |
|
| 885,025 |
|
| 3,284,226 |
| (4,169,251 | ) |
| 1,432,316 |
| 1,427,449 | 885,025 | 3,279,359 | (4,164,384 | ) | 1,427,449 | ||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 1,968,790 |
| $ | 1,271,448 |
| $ | 5,153,944 | $ | (4,169,251 | ) | $ | 4,224,931 |
| $ | 1,963,923 | $ | 4,022,904 | $ | 5,146,030 | $ | (6,915,840 | ) | $ | 4,217,017 | |||||||||||||
AmeriCredit Corp.
Consolidating Income Statement
NineThree Months Ended March 31, 2003September 30, 2002
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||||||||||||
Finance charge income | $ | 56,009 |
| $ | 354,420 |
| $ | 410,429 | $ | 18,439 | $ | 72,190 | $ | 90,629 | |||||||||||||||||||||||
Gain on sale of receivables | 1,737 | 130,347 | 132,084 | ||||||||||||||||||||||||||||||||||
Servicing fee income |
| 248,624 |
|
| (20,117 | ) |
| 228,507 | 93,516 | 23,418 | 116,934 | ||||||||||||||||||||||||||
Gain on sale of receivables |
| 1,737 |
|
| 130,347 |
|
| 132,084 | |||||||||||||||||||||||||||||
Other income | $ | 40,199 |
|
| 597,898 |
|
| 1,356,443 |
| $ | (1,978,677 | ) |
| 15,863 | $ | 8,282 | 136,221 | 305,776 | $ | (445,259 | ) | 5,020 | |||||||||||||||
Equity in income of affiliates |
| 43,785 |
|
| 223,062 |
|
| (266,847 | ) | 81,881 | 129,981 | (211,862 | ) | ||||||||||||||||||||||||
| 83,984 |
|
| 1,127,330 |
|
| 1,821,093 |
|
| (2,245,524 | ) |
| 786,883 | 90,163 | 379,894 | 531,731 | (657,121 | ) | 344,667 | ||||||||||||||||||
Costs and expenses | |||||||||||||||||||||||||||||||||||||
Operating expenses |
| 7,483 |
|
| 274,165 |
|
| 18,868 |
|
| 300,516 | 1,416 | 108,495 | 5,915 | 115,826 | ||||||||||||||||||||||
Provision for loan losses |
| 133,048 |
|
| 96,737 |
|
| 229,785 | 53,591 | 12,193 | 65,784 | ||||||||||||||||||||||||||
Interest expense |
| 38,752 |
|
| 724,342 |
|
| 1,347,036 |
|
| (1,978,677 | ) |
| 131,453 | 16,967 | 158,980 | 309,331 | (445,259 | ) | 40,019 | |||||||||||||||||
Restructuring charges |
| 59,970 |
|
| 59,970 | ||||||||||||||||||||||||||||||||
18,383 | 321,066 | 327,439 | (445,259 | ) | 221,629 | ||||||||||||||||||||||||||||||||
| 46,235 |
|
| 1,191,525 |
|
| 1,462,641 |
|
| (1,978,677 | ) |
| 721,724 | ||||||||||||||||||||||||
Income (loss) before income taxes |
| 37,749 |
|
| (64,195 | ) |
| 358,452 |
|
| (266,847 | ) |
| 65,159 | |||||||||||||||||||||||
Income before income taxes | 71,780 | 58,828 | 204,292 | (211,862 | ) | 123,038 | |||||||||||||||||||||||||||||||
Income tax (benefit) provision |
| (2,324 | ) |
| (110,594 | ) |
| 138,004 |
|
| 25,086 | (3,888 | ) | (27,394 | ) | 78,652 | 47,370 | ||||||||||||||||||||
Net income | $ | 40,073 |
| $ | 46,399 |
| $ | 220,448 |
| $ | (266,847 | ) | $ | 40,073 | $ | 75,668 | $ | 86,222 | $ | 125,640 | $ | (211,862 | ) | $ | 75,668 | ||||||||||||
AmeriCredit Corp.
Consolidating Income Statement
NineThree Months Ended March 31, 2002September 30, 2001
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||||||
Finance charge income | $ | 74,858 |
| $ | 184,154 | $ | 259,012 | $ | 23,208 | $ | 73,589 | $ | 96,797 | |||||||||||||||||||||||
Gain on sale of receivables | 3,855 | 89,075 | 92,930 | |||||||||||||||||||||||||||||||||
Servicing fee income |
| 214,622 |
|
| 62,546 |
| 277,168 | 63,000 | 18,121 | 81,121 | ||||||||||||||||||||||||||
Gain on sale of receivables |
| 22,474 |
|
| 303,258 |
| 325,732 | |||||||||||||||||||||||||||||
Other income | $ | 33,789 |
|
| 399,606 |
|
| 238,404 | $ | (662,482 | ) |
| 9,317 | $ | 11,263 | 133,122 | 79,316 | $ | (220,828 | ) | 2,873 | |||||||||||||||
Equity in income of affiliates |
| 254,828 |
|
| 265,617 |
|
| (520,445 | ) | 76,992 | 84,877 | (161,869 | ) | |||||||||||||||||||||||
| 288,617 |
|
| 977,177 |
|
| 788,362 |
| (1,182,927 | ) |
| 871,229 | 88,255 | 308,062 | 260,101 | (382,697 | ) | 273,721 | ||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||||||||||||
Operating expenses |
| 7,530 |
|
| 290,503 |
|
| 17,618 |
| 315,651 | 2,508 | 91,003 | 5,865 | 99,376 | ||||||||||||||||||||||
Provision for loan losses |
| 9,504 |
|
| 38,744 |
| 48,248 | 2,172 | 12,670 | 14,842 | ||||||||||||||||||||||||||
Interest expense |
| 32,554 |
|
| 429,094 |
|
| 300,104 |
| (662,482 | ) |
| 99,270 | 10,034 | 142,831 | 103,553 | (220,828 | ) | 35,590 | |||||||||||||||||
| 40,084 |
|
| 729,101 |
|
| 356,466 |
| (662,482 | ) |
| 463,169 | 12,542 | 236,006 | 122,088 | (220,828 | ) | 149,808 | ||||||||||||||||||
Income before income taxes |
| 248,533 |
|
| 248,076 |
|
| 431,896 |
| (520,445 | ) |
| 408,060 | 75,713 | 72,056 | 138,013 | (161,869 | ) | 123,913 | |||||||||||||||||
Income tax (benefit) provision |
| (2,424 | ) |
| (6,752 | ) |
| 166,279 |
| 157,103 | (493 | ) | (4,936 | ) | 53,136 | 47,707 | ||||||||||||||||||||
Net income | $ | 250,957 |
| $ | 254,828 |
| $ | 265,617 | $ | (520,445 | ) | $ | 250,957 | $ | 76,206 | $ | 76,992 | $ | 84,877 | $ | (161,869 | ) | $ | 76,206 | ||||||||||||
AmeriCredit Corp.
Consolidating Statement of Cash Flows
NineThree Months Ended March 31, 2003September 30, 2002
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 40,073 |
| $ | 46,399 |
| $ | 220,448 |
| $ | (266,847 | ) | $ | 40,073 |
| $ | 75,668 | $ | 86,222 | $ | 125,640 | $ | (211,862 | ) | $ | 75,668 | ||||||||||||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
| 3,027 |
|
| 20,011 |
|
| 13,315 |
|
| 36,353 |
| 1,021 | 6,414 | 3,718 | 11,153 | ||||||||||||||||||||||||
Provision for loan losses |
| 133,048 |
|
| 96,737 |
|
| 229,785 |
| 53,591 | 12,193 | 65,784 | ||||||||||||||||||||||||||||
Deferred income taxes |
| (82,279 | ) |
| (115,483 | ) |
| 136,754 |
|
| (61,008 | ) | (44,037 | ) | (29,053 | ) | 78,651 | 5,561 | ||||||||||||||||||||||
Accretion of present value discount |
| 29,661 |
|
| (118,932 | ) |
| (89,271 | ) | 6,101 | (58,454 | ) | (52,353 | ) | ||||||||||||||||||||||||||
Impairment of credit enhancement assets |
| 96,738 |
|
| 96,738 |
| 18,309 | 18,309 | ||||||||||||||||||||||||||||||||
Non-cash gain on sale of receivables |
| 160 |
|
| (124,991 | ) |
| (124,831 | ) | |||||||||||||||||||||||||||||||
Non-cash restructuring charges |
| 38,546 |
|
| 38,546 |
| ||||||||||||||||||||||||||||||||||
Non-cash gain on sale of auto receivables | 160 | (124,991 | ) | (124,831 | ) | |||||||||||||||||||||||||||||||||||
Other |
| 3,226 |
|
| 673 |
|
| (39 | ) |
| 3,860 |
| 6,029 | 6,029 | ||||||||||||||||||||||||||
Distributions from Trusts |
| (36,551 | ) |
| 181,153 |
|
| 144,602 |
| |||||||||||||||||||||||||||||||
Distributions from Trusts, net of swap payments | (15,114 | ) | 78,376 | 63,262 | ||||||||||||||||||||||||||||||||||||
Initial deposits to credit enhancement assets |
| (58,101 | ) |
| (58,101 | ) | (58,101 | ) | (58,101 | ) | ||||||||||||||||||||||||||||||
Equity in income of affiliates |
| (43,785 | ) |
| (223,062 | ) |
| 266,847 |
| (81,881 | ) | (129,981 | ) | 211,862 | ||||||||||||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||
Other assets |
| 1,256 |
|
| 17,944 |
|
| (15,814 | ) |
| 3,386 |
| 583 | (23,597 | ) | (1,710 | ) | (24,724 | ) | |||||||||||||||||||||
Accrued taxes and expenses |
| (13,067 | ) |
| (3,148 | ) |
| 8,601 |
|
| (7,614 | ) | 29,459 | 5,700 | (282 | ) | 34,877 | |||||||||||||||||||||||
Purchases of receivables held for sale |
| (647,647 | ) |
| (2,513,384 | ) |
| 2,513,384 |
|
| (647,647 | ) | ||||||||||||||||||||||||||||
Principal collections and recoveries on receivables held for sale |
| 7,928 |
|
| 66,442 |
|
| 74,370 |
| |||||||||||||||||||||||||||||||
Net proceeds from sale of receivables |
| 2,513,384 |
|
| 2,495,353 |
|
| (2,513,384 | ) |
| 2,495,353 |
| ||||||||||||||||||||||||||||
Purchases of auto receivables held for sale | (647,647 | ) | (2,513,384 | ) | 2,513,384 | (647,647 | ) | |||||||||||||||||||||||||||||||||
Principal collections and recoveries on auto receivables | 7,928 | 66,442 | 74,370 | |||||||||||||||||||||||||||||||||||||
Net proceeds from sale of auto receivables | 2,513,384 | 2,495,353 | (2,513,384 | ) | 2,495,353 | |||||||||||||||||||||||||||||||||||
Net cash (used) provided by operating activities |
| (91,549 | ) |
| 1,781,863 |
|
| 484,280 |
|
| 2,174,594 |
| (13,158 | ) | 1,834,108 | 121,760 | 1,942,710 | |||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Purchases of receivables |
| (5,223,167 | ) |
| (3,409,809 | ) |
| 3,409,809 |
|
| (5,223,167 | ) | ||||||||||||||||||||||||||||
Principal collections and recoveries on receivables |
| 25,014 |
|
| 410,962 |
|
| 435,976 |
| |||||||||||||||||||||||||||||||
Net proceeds from sale of receivables |
| 3,409,809 |
|
| (3,409,809 | ) | ||||||||||||||||||||||||||||||||||
Purchases of finances receivables | (1,822,523 | ) | (1,822,523 | ) | ||||||||||||||||||||||||||||||||||||
Purchases of property and equipment |
| (38,898 | ) |
| (38,898 | ) | (2,841 | ) | (2,841 | ) | ||||||||||||||||||||||||||||||
Change in restricted cash—securitization notes payable |
| (54,469 | ) |
| (54,469 | ) | ||||||||||||||||||||||||||||||||||
Change in restricted cash—warehouse credit facilities |
| (482,090 | ) |
| (482,090 | ) | (170,010 | ) | (170,010 | ) | ||||||||||||||||||||||||||||||
Change in other assets |
| (42,061 | ) |
| (89,653 | ) |
| (131,714 | ) | 3,610 | 623 | 4,233 | ||||||||||||||||||||||||||||
Net change in investment in affiliates |
| (6,150 | ) |
| (3,112,261 | ) |
| (31,157 | ) |
| 3,149,568 |
| 1,356 | 79,520 | 803 | (81,679 | ) | |||||||||||||||||||||||
Net cash used by investing activities |
| (6,150 | ) |
| (4,981,564 | ) |
| (3,656,216 | ) |
| 3,149,568 |
|
| (5,494,362 | ) | |||||||||||||||||||||||||
Net cash provided (used) by investing activities | 1,356 | (1,742,234 | ) | (168,584 | ) | (81,679 | ) | (1,991,141 | ) | |||||||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Net change in warehouse credit facilities |
| 511,886 |
|
| 511,886 |
| 69,332 | 69,332 | ||||||||||||||||||||||||||||||||
Proceeds from whole loan purchase facility |
| 875,000 |
|
| 875,000 |
| ||||||||||||||||||||||||||||||||||
Issuance of securitization notes |
| 1,856,612 |
|
| (19,021 | ) |
| 1,837,591 |
| |||||||||||||||||||||||||||||||
Payments on securitization notes |
| (171,720 | ) |
| (171,720 | ) | ||||||||||||||||||||||||||||||||||
Senior note swap settlement |
| 9,700 |
|
| 9,700 |
| 9,700 | 9,700 | ||||||||||||||||||||||||||||||||
Retirement of senior notes |
| (39,631 | ) |
| (39,631 | ) | (39,631 | ) | (39,631 | ) | ||||||||||||||||||||||||||||||
Debt issuance costs |
| (791 | ) |
| (6,508 | ) |
| (15,968 | ) |
| (23,267 | ) | (581 | ) | (8,649 | ) | (9,230 | ) | ||||||||||||||||||||||
Net change in notes payable |
| (13,500 | ) |
| (506 | ) |
| (14,006 | ) | (4,115 | ) | (164 | ) | (4,279 | ) | |||||||||||||||||||||||||
Net proceeds from issuance of common stock |
| 479,748 |
|
| 4,940 |
|
| 3,124,397 |
|
| (3,129,337 | ) |
| 479,748 |
| |||||||||||||||||||||||||
Proceeds from issuance of common stock | 372 | (80,323 | ) | 80,323 | 372 | |||||||||||||||||||||||||||||||||||
Net change in due (to) from affiliates |
| (341,127 | ) |
| 3,348,966 |
|
| (3,009,778 | ) |
| 1,939 |
| 49,484 | (112,189 | ) | 64,923 | (2,218 | ) | ||||||||||||||||||||||
Net cash provided by financing activities |
| 94,399 |
|
| 3,346,892 |
|
| 3,170,429 |
|
| (3,146,419 | ) |
| 3,465,301 |
| |||||||||||||||||||||||||
Net cash provided (used) by financing activities | 15,229 | (112,353 | ) | 45,283 | 78,105 | 26,264 | ||||||||||||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents |
| (3,300 | ) |
| 147,191 |
|
| (1,507 | ) |
| 3,149 |
|
| 145,533 |
| |||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 3,427 | (20,479 | ) | (1,541 | ) | (3,574 | ) | (22,167 | ) | |||||||||||||||||||||||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents |
| 3,300 |
|
| 136 |
|
| (36 | ) |
| (3,149 | ) |
| 251 |
| |||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (3,427 | ) | (240 | ) | (2 | ) | 3,574 | (95 | ) | |||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period |
| 90,806 |
|
| 1,543 |
|
| 92,349 |
| 90,806 | 1,543 | 92,349 | ||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ |
|
| $ | 238,133 |
| $ |
|
| $ |
|
| $ | 238,133 |
| $ | $ | 70,087 | $ | $ | $ | 70,087 | ||||||||||||||||||
AmeriCredit Corp.
Consolidating Statement of Cash Flows
NineThree Months Ended March 31, 2002September 30, 2001
(Restated)
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non– Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 250,957 |
| $ | 254,828 |
| $ | 265,617 |
| $ | (520,445 | ) | $ | 250,957 |
| $ | 76,206 | $ | 76,992 | $ | 84,877 | $ | (161,869 | ) | $ | 76,206 | ||||||||||||||
Adjustments to reconcile net income to net cash used by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization |
| 4,727 |
|
| 17,870 |
|
| 5,278 |
|
| 27,875 |
| 729 | 5,937 | 1,647 | 8,313 | ||||||||||||||||||||||||
Provision for loan losses |
| 9,504 |
|
| 38,744 |
|
| 48,248 |
| 2,172 | 12,670 | 14,842 | ||||||||||||||||||||||||||||
Deferred income taxes |
| (133,082 | ) |
| 3,672 |
|
| 155,856 |
|
| 26,446 |
| (8,192 | ) | 5,488 | 42,712 | 40,008 | |||||||||||||||||||||||
Accretion of present value discount |
| (121,535 | ) |
| (121,535 | ) | (32,864 | ) | (32,864 | ) | ||||||||||||||||||||||||||||||
Impairment of credit enhancement assets |
| 38,918 |
|
| 38,918 |
| 9,136 | 9,136 | ||||||||||||||||||||||||||||||||
Non-cash gain on sale of receivables |
| (307,752 | ) |
| (307,752 | ) | ||||||||||||||||||||||||||||||||||
Distributions from Trusts |
| 182,826 |
|
| 182,826 |
| ||||||||||||||||||||||||||||||||||
Non-cash gain on sale of auto receivables | (89,678 | ) | (89,678 | ) | ||||||||||||||||||||||||||||||||||||
Distributions from Trusts, net of swap payments | (12,620 | ) | 83,353 | 70,733 | ||||||||||||||||||||||||||||||||||||
Initial deposits to credit enhancement assets |
| (303,500 | ) |
| (303,500 | ) | (80,750 | ) | (80,750 | ) | ||||||||||||||||||||||||||||||
Equity in income of affiliates |
| (254,828 | ) |
| (265,617 | ) |
| 520,445 |
| (76,992 | ) | (84,877 | ) | 161,869 | ||||||||||||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||
Other assets |
| (1,291 | ) |
| (35,607 | ) |
| (1,911 | ) |
| (38,809 | ) | 905 | (23,814 | ) | (4,208 | ) | (27,117 | ) | |||||||||||||||||||||
Accrued taxes and expenses |
| 54,409 |
|
| 55,928 |
|
| (922 | ) |
| 109,415 |
| 5,540 | 12,178 | (1,804 | ) | 15,914 | |||||||||||||||||||||||
Purchases of receivables held for sale |
| (6,494,174 | ) |
| (6,412,262 | ) |
| 6,412,262 |
|
| (6,494,174 | ) | ||||||||||||||||||||||||||||
Principal collections and recoveries on receivables held for sale |
| 14,611 |
|
| 160,754 |
|
| 175,365 |
| |||||||||||||||||||||||||||||||
Net proceeds from sale of receivables |
| 6,412,262 |
|
| 5,919,517 |
|
| (6,412,262 | ) |
| 5,919,517 |
| ||||||||||||||||||||||||||||
Net cash used by operating activities |
| (79,108 | ) |
| (26,723 | ) |
| (380,372 | ) |
| (486,203 | ) | ||||||||||||||||||||||||||||
Purchases of auto receivables | (2,014,193 | ) | (2,086,733 | ) | 2,086,733 | (2,014,193 | ) | |||||||||||||||||||||||||||||||||
Principal collections and recoveries on auto receivables | (5,008 | ) | 66,343 | 61,335 | ||||||||||||||||||||||||||||||||||||
Net proceeds from sale of auto receivables | 2,086,733 | 1,705,429 | (2,086,733 | ) | 1,705,429 | |||||||||||||||||||||||||||||||||||
Net cash (used) provided by operating activities | (1,804 | ) | 48,988 | (289,870 | ) | (242,686 | ) | |||||||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Purchases of property and | ||||||||||||||||||||||||||||||||||||||||
equipment |
| (14,916 | ) |
| (14,916 | ) | ||||||||||||||||||||||||||||||||||
Change in restricted cash—warehouse credit facilities |
| (10,667 | ) |
| (10,667 | ) | ||||||||||||||||||||||||||||||||||
Purchases of property and equipment | (10,533 | ) | (10,533 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash— warehouse credit facilities | (1,749 | ) | (8,901 | ) | (10,650 | ) | ||||||||||||||||||||||||||||||||||
Change in other assets |
| (15,157 | ) |
| (834 | ) |
| (15,991 | ) | (28,701 | ) | (7,722 | ) | (36,423 | ) | |||||||||||||||||||||||||
Net change in investment in affiliates |
| (33,702 | ) |
| (424,774 | ) |
| (4,275 | ) |
| 462,751 |
| (6,265 | ) | (319,005 | ) | 21,542 | 303,728 | ||||||||||||||||||||||
Net cash used by investing activities |
| (33,702 | ) |
| (454,847 | ) |
| (15,776 | ) |
| 462,751 |
|
| (41,574 | ) | |||||||||||||||||||||||||
Net cash (used) provided by investing activities | (6,265 | ) | (359,988 | ) | 4,919 | 303,728 | (57,606 | ) | ||||||||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Net change in warehouse credit facilities |
| 62,123 |
|
| 326,205 |
|
| 388,328 |
| 17,129 | 236,434 | 253,563 | ||||||||||||||||||||||||||||
Borrowings under credit enhancement facility |
| 182,500 |
|
| 182,500 |
| 46,250 | 46,250 | ||||||||||||||||||||||||||||||||
Debt issuance costs |
| (253 | ) |
| (402 | ) |
| (15,731 | ) |
| (16,386 | ) | (58 | ) | (1,853 | ) | (1,911 | ) | ||||||||||||||||||||||
Net change in notes payable |
| (12,357 | ) |
| 17 |
|
| (12,340 | ) | 2,595 | 2,595 | |||||||||||||||||||||||||||||
Net proceeds from issuance of common stock |
| 15,357 |
|
| 36,382 |
|
| 427,452 |
|
| (463,834 | ) |
| 15,357 |
| |||||||||||||||||||||||||
Proceeds from issuance of common stock | 10,509 | (10,339 | ) | 315,768 | (305,429 | ) | 10,509 | |||||||||||||||||||||||||||||||||
Net change in due (to) from affiliates |
| 112,071 |
|
| 412,259 |
|
| (524,330 | ) | (3,337 | ) | 314,985 | (311,648 | ) | ||||||||||||||||||||||||||
Net cash provided by financing activities |
| 114,818 |
|
| 510,379 |
|
| 396,096 |
|
| (463,834 | ) |
| 557,459 |
| 9,709 | 321,775 | 284,951 | (305,429 | ) | 311,006 | |||||||||||||||||||
Net increase (decrease) in cash and cash equivalents |
| 2,008 |
|
| 28,809 |
|
| (52 | ) |
| (1,083 | ) |
| 29,682 |
| |||||||||||||||||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents |
| (2,008 | ) |
| 1,063 |
|
| 52 |
|
| 1,083 |
|
| 190 |
| |||||||||||||||||||||||||
Net increase (decrease) in cash cash and cash equivalents | 1,640 | 10,775 | (1,701 | ) | 10,714 | |||||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,640 | ) | (23 | ) | 1,701 | 38 | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period |
| 45,016 |
|
| 45,016 |
| 45,016 | 45,016 | ||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ |
|
| $ | 74,888 |
| $ |
|
| $ |
|
| $ | 74,888 |
| $ | $ | 55,768 | $ | $ | $ | 55,768 | ||||||||||||||||||
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company generates revenueearnings and cash flows primarily from finance charge income earned on finance receivables held on its balance sheetthe purchase, securitization and from servicing securitized finance receivables accounted for as a sale.of auto receivables. The Company purchases auto finance receivablescontracts from franchised and select independent automobile dealerships and, to a lesser extent, makes auto loans directly to consumers. As used herein, “loans” include auto finance receivablescontracts originated by dealers and purchased by the Company as well as extensions of credit made directly by the Company to consumer borrowers. To fund the acquisition of finance receivables prior to securitization, the Company utilizes borrowings under its warehouse credit facilities. The Company earns finance charge income on the financeits receivables pending securitization and pays interest expense on borrowings under its warehouse credit facilities.
The Company periodically transferssells receivables to securitization trusts (“Trusts”) that, in turn, sell asset-backed securities to investors. Prior to October 1, 2002,Historically, the Company has recognized a gain on the sale of receivables to the Trusts, which represents the difference between the sale proceeds to the Company, net of transaction costs, and the Company’s net carrying value of the receivables, plus the present value of the estimated future excess cash flows expected to be received by the Company over the life of the securitization. Excess cash flows result from the difference between the finance chargesinterest received from the obligors on the receivables and the interest paid to investors in the asset-backed securities, net of credit losses and expenses.
Excess cash flows from the Trusts are initially utilized to fund credit enhancement requirements in order to attain specific credit ratings for the asset-backed securities issued by the Trusts. Once predetermined credit enhancement requirements are reached and maintained, excess cash flows are distributed to the Company. Credit enhancement requirements will increase if targeted portfolio performance ratios are exceeded (see Liquidity and Capital Resources section). In addition to excess cash flows, the Company earns monthly base servicing fee income of 2.25% per annum on the outstanding principal balance of domestic receivables securitized (“serviced receivables”) and collects other fees such as late charges as servicer for those Trusts.
The Company has changedmade a decision to change the structure of its future securitization transactions beginning with transactions closed subsequent to September 30, 2002, to no longer meet the criteria for sales of finance receivables. Accordingly, following a securitization, the finance receivables and the related securitization notes payableindebtedness will remain on the consolidated balance sheet. The Company recognizeswill recognize finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction, and recordswill record a provision for loan losses to cover probable loan losses on the receivables. This change haswill significantly impactedimpact the Company’s reportedfuture results of operations compared to its historical results. Therefore, historical results because there is no
gain on saleand management’s discussion of receivables subsequent to September 30, 2002. Historicalsuch results may not be indicative of the Company’s future results.
RECENT DEVELOPMENTS
On August 25, 2003, the Company issued a press release reporting a restatement of its financial statements for the year ended June 30, 2002, and for the first three quarters of the year ended June 30, 2003, as a result of a review of the accounting treatment under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) for certain interest rate swap agreements that were entered into prior to 2001 and used to hedge interest rate risk on a portion of its cash flows from credit enhancement assets.
On April 23, 2003,The Company enters into interest rate swap agreements to hedge the Board of Directorsvariability in future excess cash flows attributable to fluctuations in interest rates on floating rate securities issued in connection with its securitizations accounted for as sales. The cash flows are expected to be received over the life of the securitizations. Prior to calendar 2001, the Company announced the reorganizationentered into interest rate swap agreements outside of the Company’s executive management team. Michael R. Barrington stepped down as presidentsecuritization Trusts, at the corporate level. Upon implementation of SFAS 133 on July 1, 2000, the swap agreements were valued and chief executive officer and Michael T. Miller stepped down as chief operating officer. Clifton H. Morris, Jr., chairmanrecorded separately from the credit enhancement assets on the consolidated balance sheets, with changes in the fair value of the Board, assumedinterest rate swap agreements recorded in other comprehensive income. Unrealized losses or gains related to the chief executive officer position. Daniel E. Berceinterest rate swap agreements were reclassified from accumulated other comprehensive income into earnings as accretion was promotedrecorded on the hedged cash flows of the credit enhancement assets. However, as unrealized gains related to the credit enhancement assets declined due to worse than expected credit losses and unrealized losses related to the interest rate swap agreements increased due to a declining interest rate environment, a combined net unrealized loss position developed in accumulated other comprehensive income. Previously, the Company reclassified amounts from chiefaccumulated other comprehensive income into earnings based upon the cash flows of the credit enhancement assets utilizing a discount rate which resulted in all of the remaining unrealized loss in accumulated other comprehensive income being reclassified into earnings in the same period when the remaining accretion on the credit enhancement assets was projected to be realized. A review of this accounting treatment indicated that the Company should have reclassified additional accumulated other comprehensive losses into earnings since the combination of the derivative instrument and the hedged item resulted in net unrealized losses that were not expected to be recovered in future periods.Accordingly, the Company restated its financial officerstatements for the year ended June 30, 2002, and for the first three quarters of the year ended June 30, 2003, to president. Preston A. Miller was promotedreclassify additional unrealized losses to chiefnet income from accumulated other comprehensive income. Additionally, in conjunction with the reclassification of unrealized losses to net income, the Company also recorded an other-than-temporary impairment during the June 2002 quarter that resulted in a write down of credit enhancement assets and a $4.9 million, net of tax, decrease in shareholders’ equity at June 30, 2002. The restatement had no effect on the cash flows of such transactions.
The restatement resulted in the following changes to prior period financial officer and Mark Floyd was promoted to chief operating officer.statements (in thousands, except per share data):
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Servicing fee income: | ||||||
Previous | $ | 108,075 | $ | 85,235 | ||
As restated | 116,934 | 81,121 | ||||
Income before income taxes: | ||||||
Previous | $ | 114,179 | $ | 128,027 | ||
As restated | 123,038 | 123,913 | ||||
Net income: | ||||||
Previous | $ | 70,220 | $ | 78,737 | ||
As restated | 75,668 | 76,206 | ||||
Diluted earnings per share: | ||||||
Previous | $ | 0.81 | $ | 0.88 | ||
As restated | 0.87 | 0.85 | ||||
September 30, 2002 | June 30, 2002 | |||||
Credit enhancement assets: | ||||||
Previous | $ | 1,685,248 | $ | 1,549,132 | ||
As restated | 1,685,248 | 1,541,218 | ||||
Accumulated other comprehensive income: | ||||||
Previous | $ | 33,610 | $ | 42,797 | ||
As restated | 61,075 | 70,843 | ||||
Shareholder’s equity: | ||||||
Previous | $ | 1,500,841 | $ | 1,432,316 | ||
As restated | 1,500,841 | 1,427,449 |
CRITICAL ACCOUNTING ESTIMATESPOLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the amount of revenue and costs and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. The accounting estimatespolicies that the Company believes are the most critical to understanding and evaluating the Company’s reported financial results include the following:
Gain on sale of receivables
The Company periodically transferssells receivables to Trusts that, in turn, sell asset-backed securities to investors. Prior to October 1, 2002,Historically, the Company has recognized a gain on the sale of receivables to the Trusts, which represents the difference between the sale proceeds to the Company, net of transaction costs, and the Company’s net carrying value of the receivables, plus the present value of the
estimated future excess cash flows to be received by the Company over the life of the securitization. The Company has made assumptions in order to determine the present value of the estimated future excess cash flows to be generated by the pool of receivables sold. The most significant assumptions made are the cumulative net credit losses to be incurred on the pool of receivables sold the timing of those losses and the rate at which the estimated future excess cash flows are discounted. The assumptions used represent the Company’s best estimates. The use of different assumptions wouldcould produce different financial results.
Fair value measurements
Certain of the Company’s assets, including the Company’s derivative financial instruments and credit enhancement assets, related to gain on sale Trusts, are recorded at fair value. Fair values for derivative financial instruments are based on third-party quoted market prices, where possible. However, market prices are not readily available for the Company’s credit enhancement assets
and, accordingly, fair value is determined using discounted cash flow models. The most significant assumptions made are the cumulative net credit losses to be incurred on the pool of receivables sold the timing of those losses and the rate at which estimated future excess cash flows are discounted. The assumptions used represent the Company’s best estimates. The use of different assumptions would result incould produce different carrying values for the Company’s credit enhancement assets and a change in the accretion of present value discount and impairment of credit enhancement assets recognized through the consolidated statements of income. Additionally, if actual cumulative net credit losses exceed the Company’s estimate, additional impairment of credit enhancement assets could result.financial results.
Allowance for loan losses
The Company reviews historical origination and charge-off relationships, charge-off experience factors, collection data, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic conditions and trends such as unemployment rates, and other information in order to make the necessary judgments as to probable creditthe appropriateness of the provision for loan losses on finance receivables.and the allowance for loan losses. Receivables are charged-off to the allowance for loan losses when the Company repossesses and disposes of the collateral or the account is otherwise deemed uncollectable. As of March 31, 2003, theThe Company believes that the allowance for loan losses is adequate to cover probable losses inherent in its receivables; however, because the allowance for loan losses is based on estimates, there can be no assurance that the ultimate charge-off amount will not exceed such estimates.
Derivative financial instruments
The Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133,” Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133” and Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 133”), on July 1, 2000. Unrealized gains and losses on derivatives that arose prior to the initial application of SFAS 133 and that were previously deferred as adjustments of the carrying amount of hedged items were not adjusted. Accordingly, the Company did not record a transition adjustment from the adoption of SFAS 133.
The Company sells fixed rate auto receivables to Trusts that, in turn, sell either fixed rate or floating rate securities to investors. The interest rates on the floating rate securities issued by the Trusts are indexed to various London Interbank Offered Rates (“LIBOR”). The Company utilizes interest rate swap agreements to convert floating rate exposures on securities issued by the Trusts to fixed rates, hedging the variability in future excess cash flows to be received by the Company over the life of the securitization attributable to interest rate risk. These interest rate swap agreements are designated as cash flow hedges and are highly effective in hedging the Company’s exposure to interest rate risk from both an accounting and economic perspective.
The fair value of the interest rate swap agreements is included in the Company’s consolidated balance sheets, and the related unrealized gains or losses on these agreements are deferred and included in shareholders’ equity as a component of accumulated other comprehensive income. These unrealized gains or losses are recognized as an adjustment to income over the same period in which cash flows from the related credit enhancement assets affect earnings. However, if the Company expects the continued reporting of a loss in accumulated other comprehensive income would lead to recognizing a net loss on the combination of the interest rate swap agreements and the hedged asset, the loss is reclassified to earnings for the amount that is not expected to be recovered. Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts are recognized in income.
During fiscal 2002, the Company also utilized an interest rate swap agreement to hedge the change in fair value of certain of its fixed rate senior notes. The change in fair value of the interest rate swap agreement and the senior notes were recognized in income. The interest rate swap agreement has been terminated and the previous adjustments to the carrying value of the senior notes are being amortized into interest expense over the expected life of the senior notes on an effective yield basis.
The Company formally documents all relationships between interest rate swap agreements and the underlying asset, liability or cash flows being hedged, as well as its risk management objective and strategy for undertaking the hedge transactions. At hedge inception and at least quarterly, the Company also formally assesses whether the interest rate swap agreements that are used in hedging transactions have been highly effective in offsetting changes in the cash flows or fair value of the hedged items and whether those interest rate swap agreements may be expected to remain highly effective in future periods. The Company will discontinue hedge accounting prospectively when it is determined that an interest rate swap agreement has ceased to be highly effective as a hedge.
The Company also utilizes interest rate cap agreements as part of its interest rate risk management strategy for securitization transactions as well as for warehouse credit facilities. The Trusts and the Company’s wholly-owned special purpose finance subsidiaries typically purchase interest rate cap agreements to limit variability in excess cash flows from receivables sold to the Trusts or financed under warehouse credit facilities due to potential increases in interest rates. The purchaser of the interest rate cap agreement pays a premium in return for the right to receive the difference in the interest cost at any time a specified index of market interest rates rises above the stipulated “cap” rate. The interest rate cap agreement purchaser bears no obligation or liability if interest rates fall below the “cap” rate. The Company’s special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements as credit enhancement in connection with securitization transactions and warehouse credit facilities. As part of the Company’s interest rate risk management strategy and when economically feasible, the Company may simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid to purchase the interest rate cap agreement and thus retain the interest rate risk. The fair value of the interest rate cap agreements purchased and sold by the Company is included in other assets and derivative financial instruments, respectively, on the Company’s consolidated balance sheets. The intrinsic value of the interest rate cap agreements purchased by the Trusts is reflected in the valuation of the credit enhancement assets.
The Company does not hold any interest rate cap or swap agreements for trading purposes.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003September 30, 2002 as compared to
Three Months Ended March 31, 2002September 30, 2001
Revenue:
The Company’s average managed receivables outstanding consisted of the following (in thousands):
Three Months Ended March 31, | ||||||
2003 | 2002 | |||||
On-book | $ | 4,651,309 | $ | 1,697,140 | ||
Gain on sale |
| 11,551,091 |
| 11,293,534 | ||
Total managed | $ | 16,202,400 | $ | 12,990,674 | ||
Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Owned | $ | 1,958,487 | $ | 1,962,955 | ||
Serviced | 13,339,527 | 8,794,923 | ||||
$ | 15,298,014 | $ | 10,757,878 | |||
Average managed receivables outstanding increased by 25%42% as a result of thehigher loan purchase of loans in excess of collections and charge-offs.volume. The Company purchased $1,317.6$2,419.1 million of auto loans during the three months ended March 31, 2003,September 30, 2002, compared to purchases of $2,432.4$2,035.2 million during the three months ended March 31, 2002.September 30, 2001. This decreasegrowth resulted from a reduction in the numberincreased loan production at branches open during both periods as well as expansion of
the Company’s branch network. Loan purchases at branch offices in connection withopened prior to September 30, 2000, were 8% higher for the Company’s revised operating plan implemented in February 2003.twelve months ended September 30, 2002, versus the twelve months ended September 30, 2001. The Company operated 91251 auto lending branch offices as of March 31, 2003,September 30, 2002, compared to 252248 as of March 31, 2002.September 30, 2001.
The average new loan size was $17,011$16,742 for the three months ended March 31, 2003,September 30, 2002, compared to $16,418$16,294 for the three months ended March 31, 2002. The increase in average new loan size was due to a change in the mix of business towards financing later model vehicles.September 30, 2001. The average annual percentage rate for finance receivables purchased during the three months ended March 31, 2003,September 30, 2002, was 16.2%17.3%, compared to 17.6%18.2% during the three months ended March 31, 2002.September 30, 2001. Decreasing short-term market interest rates have lowered the Company’s cost of funds, allowing the Company to pass along some of this benefit to consumers in the form of lower loan pricing.
Finance charge income increaseddecreased by 126%6% to $185.9$90.6 million for the three months ended March 31, 2003,September 30, 2002, from $82.2$96.8 million for the three months ended March 31, 2002.September 30, 2001. Finance charge income was higherlower due primarily to an increase in average on-book receivables that resulted primarily from the Company’s decision to change the structure of securitization transactions to no longer meet the criteria for sales of finance receivables.lower loan pricing. The Company’s effective yield on its on-book finance receivables owned decreased to 16.2%18.4% for the three months ended March 31, 2003,September 30, 2002, from 19.6% for the three months ended March 31, 2002.September 30, 2001. The effective yield decreased due to lower loan pricing.is higher than the contractual rates of the Company’s finance receivables as a result of finance charge income earned between the date the auto finance contract is originated by the automobile dealership and the date the finance receivable is funded by the Company.
Subsequent to September 30, 2002, the Company’s securitization transactions were structured as secured financings. Therefore, no gain on sale was recorded for finance receivables securitized. The gain on sale of receivables was $124.1rose by 42% to $132.1 million or 5.2% of receivables securitized, for the three months ended March 31, 2002.September 30, 2002, from $92.9 million for the three months ended
September 30, 2001. The increase in gain on sale of auto receivables resulted from the sale of $2,507.9 million of receivables in the three months ended September 30, 2002, as compared to $1,725.0 million of receivables sold in the three months ended September 30, 2001. The gain as a percentage of the sales proceeds remained relatively stable at 5.3% for the three months ended September 30, 2002, as compared to 5.4% for the three months ended September 30, 2001.
Significant assumptions used in determining the gain on sale of auto receivables for the three months ended March 31, 2002, were as follows:
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Three Months Ended September 30, | ||||||
2002 | 2001 | |||||
Cumulative credit losses (including unrealized gains at time of sale) | 12.5 | % | 12.5 | % | ||
Discount rate used to estimate present value: | ||||||
Interest-only receivables from Trusts | 14.0 | % | 14.0 | % | ||
Investment in Trust receivables | 9.8 | % | 9.8 | % | ||
Restricted cash | 9.8 | % | 9.8 | % |
The cumulative credit loss assumptions utilized at the time of sale of receivables were determined using a range of possible outcomes based on historical experience, credit attributes for the specific pool of receivables and general economic factors. The unrealized gains at time of sale represent the excess of the fair value of credit enhancement assets over the Company’s carrying value related to such interests when receivables are sold.
Servicing fee income was $96.6increased to $116.9 million, or 3.4%3.5% of average gain on saleserviced auto receivables, for the three months ended March 31, 2003,September 30, 2002, compared to $97.4$81.1 million, or 3.5%3.7% of average gain on saleserviced auto receivables, for the three months
ended March 31, 2002.September 30, 2001. Servicing fee income represents accretion of the present value discount on estimated future excess cash flows from the Trusts, base servicing fees and other fees earned by the Company as servicer of the receivables sold to the Trusts. Servicing fee income also includes other-than-temporaryother than temporary impairment charges of $4.9$18.3 million and $24.9$9.1 million for the three months ended March 31, 2003September 30, 2002 and 2002,2001, respectively. Other-than-temporary impairment resulted from increased default rates caused byThe growth in servicing fee income is attributable to the continued weaknessincrease in the economy, lower than expected recovery proceeds caused by depressed used car values and the expectation that current economic conditions will continueaverage serviced auto receivables outstanding for the foreseeable future.three months ended September 30, 2002, compared to the three months ended September 30, 2001.
Costs and Expenses:
Operating expenses decreased to $82.3 million for the three months ended March 31, 2003, from $107.9 million for the three months ended March 31, 2002. Asas an annualized percentage of average managed receivables outstanding operating expenses decreased to 2.1%3.0% for the three months ended March 31, 2003,September 30, 2002, compared to 3.4%3.7% for the three months ended March 31, 2002. Operating expensesSeptember 30, 2001. The ratio improved primarily as a result of economies of scale realized from a reduction in workforce in November 2002growing receivables portfolio and implementationautomation of a revised operating plan in February 2003.
The Company recognized a $53.1 million restructuring charge related to the implementation of its revised operating plan. The revised operating plan included a decrease in the Company’s targeted loan origination, volume to approximately $750.0 million per quarter by June 2003processing and a reductionservicing functions. The dollar amount of operating expenses through downsizing its workforce and consolidating its branch office network. The restructuring charge consistedincreased by $16.5
million, or 17%, primarily of severance costs of identified workforce reductions of approximately 850 positions relateddue to the consolidation/closingaddition of 141 branch offices including the closing of the Company’s Canadian lending operations, costs incurred to terminate facilityloan processing and equipment leases prior to their termination date as well as estimated costs that will continue to be incurred under the contracts for their remaining terms without economic benefit to the Company. The restructuring charge also includes $20.8 million for discontinuation of the development of the Company’s customer relationship management system, which was designed to provide operational scalability and marketing benefits in a high-growth environment.servicing staff.
The provision for loan losses increased to $77.1$65.8 million for the three months ended March 31, 2003,September 30, 2002, from $16.7$14.8 million for the three months ended March 31, 2002.September 30, 2001. As an annualizeda percentage of average on-book finance receivables owned, the provision for loan losses was 6.7%13.3% and 4.0%3.0% for the three months ended March 31, 2003 and 2002, respectively. Subsequent to September 30, 2002 and 2001, respectively. Approximately $46.2 million of this increase is due to the Company changed theCompany’s transition to a securitization transaction structure of its securitization transactions to no longer meet the criteriathat will be accounted for sales of finance receivables.as a secured financing. Under this new structure, finance receivables will remain on the Company’s balance sheet throughout their term, and credit losses related to those securitized receivables are providedwill be charged to the Company’s allowance for as a charge to operations.loan losses. The remaining increase reflects the general expectation that current economic conditions, including elevated unemployment rates, will result in a higher number of charge-offs, and that depressed
wholesale auction prices on the sale of repossessed vehicles will increase the amount charged-off per loan.severity of charge-offs.
Interest expense increased to $51.6$40.0 million for the three months ended March 31, 2003,September 30, 2002, from $33.1$35.6 million for the three months ended March 31, 2002,September 30, 2001, due to higher debt levels. Average debt outstanding was $4,575.0$2,800.5 million and $2,430.9$2,253.9 million for the three months ended March 31, 2003 and 2002, respectively. The increase in average debt outstanding reflects the accounting for securitization transactions subsequent to September 30, 2002 as secured financings.and 2001, respectively. The Company’s effective rate of interest paid on its debt decreased to 4.6%5.7% from 5.5%6.3% as a result of lower short-term market interest rates.
The Company’s effective income tax rate was 38.5% for the three months ended March 31, 2003September 30, 2002 and 2002.2001.
Other Comprehensive Income:
Other comprehensive income consisted of the following (in thousands):
Three Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Unrealized losses on credit enhancement assets | $ | (9,071 | ) | $ | (6,807 | ) | ||
Unrealized gains on cash flow hedges |
| 4,291 |
|
| 27,611 |
| ||
Canadian currency translation adjustment |
| 6,421 |
|
| 53 |
| ||
Income tax benefit (provision) |
| 1,841 |
|
| (8,009 | ) | ||
$ | 3,482 |
| $ | 12,848 |
| |||
Credit Enhancement Assets
The unrealized lossesgains (losses) on credit enhancement assets consisted of the following (in thousands):
Three Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Unrealized gains at time of sale | $ | 12,186 |
| |||||
Unrealized holding losses related to changes in credit loss assumptions | $ | (1,521 | ) |
| (11,605 | ) | ||
Unrealized holding losses related to changes in interest rates |
| (2,843 | ) |
| (3,048 | ) | ||
Net reclassification of unrealized gains into earnings |
| (4,707 | ) |
| (4,340 | ) | ||
$ | (9,071 | ) | $ | (6,807 | ) | |||
Unrealized gains at time of sale Unrealized holding losses related to changes in credit loss assumptions Unrealized holding gains related to changes in interest rates Net reclassification into earnings Three Months Ended
September 30, 2002 2001 $ 11,091 $ 10,066 (15,374 ) (50,608 ) 9,316 59,681 (4,520 ) (24,361 ) $ 513 $ (5,222 )
The unrealized gains at time of sale represent the excess of the fair value of credit enhancement assets over the Company’s carrying value related to such interests when receivables are sold. No unrealized gainUnrealized gains at time of sale was recordedwere
higher for the three months ended March 31, 2003, since securitization transactions entered into subsequent to September 30, 2002, were structured as secured financings.compared to the three months ended September 30, 2001, due to a greater amount of receivables sold in the period ended September 30, 2002.
Changes in the fair value of credit enhancement assets as a result of modifications to the credit loss assumptions are reported as unrealized holding gains or losses in other comprehensive income until realized, or, in the case of unrealized holding losses considered to be other-than-temporary, as a charge to operations. The cumulative credit loss assumptions used to estimate the fair value of credit enhancement assets are periodically reviewed by the Company and modified to reflect the actual credit performance for each securitization pool through the reporting date as well as estimates of future losses considering several factors including changes in the general economy. Changes in the fair value of credit enhancement assets as a result of modifications to the credit loss assumptions are reported as unrealized holding gains or losses in other comprehensive income until realized, or, in the case of unrealized holding losses considered to be other than temporary, as a charge to operations.
The Company increased the cumulative credit loss assumptions (including remaining unrealized gains at time of sale) used in measuring the fair value of credit enhancement assets to a range of 11.1% to 12.5% as of September 30, 2002, from a range of 10.4% to 12.7% as of June 30, 2002, resulting in an unrealized holding loss of $15.4 million for the three months ended September 30, 2002. The range of cumulative credit loss assumptions was increased to reflect adverse actual credit performance compared to previous assumptions as well as expectations for higher future losses due to continued weakness in the general economy during the three months ended September 30, 2002.
The Company increased the cumulative credit loss assumptions (including remaining unrealized gains at time of sale) used in measuring the fair value of credit enhancement assets to a range of 9.9% to 12.5% as of September 30, 2001, from a range of 8.7% to 11.7% as of June 30, 2001, resulting in an unrealized holding loss of $50.6 million for the three months ended September 30, 2001. The range of cumulative credit loss assumptions was increased to reflect expectations for higher future losses due to expectations of a general decline in the economy during the three months ended September 30, 2001.
Differences between cumulative credit loss assumptions used in individual securitization pools can be attributed to the original credit attributes of a pool, actual credit performance through the reporting date and pool seasoning to the extent that changes in economic trends will have more of an impact on the expected future performance of less seasoned pools.
The Company increased the cumulative credit loss assumptions (including remaining unrealized gains at time of sale) used in measuring the fair value of credit enhancement assets to a range of 10.9% to 13.9% as of March 31, 2003, from a range of 10.7% to 13.6% as of December 31, 2002, which caused an other-than-temporary impairment charge of $4.9 million and unrealized holding losses of $1.5 million for the three months ended March 31, 2003. The range of cumulative credit loss assumptions was increased to reflect adverse actual credit performance compared to previous assumptions primarily due to lower than anticipated recovery values as well as expectations for higher future losses due to continued weakness in the general economy. Unrealized holding losses of $11.6 million for the three months ended March 31, 2002, resulted from an increase in cumulative credit loss assumptions for securitization Trusts, reflecting actual credit loss experience and expectations for adverse future credit loss development as a result of continued weakness in the economy, including higher unemployment rates.
Unrealized holding lossesgains related to changes in interest rates of $2.8$9.3 million and $3.0$59.7 million for the three months ended March 31, 2003September 30, 2002 and 2002,2001, respectively, resulted primarily from a decreasean increase in estimated future cash flows from the Trusts due to lower interest income earned on the investment of restricted cash and collections accounts. The lower earnings were partially offset by a decrease in interest rates payable to investors on the floating rate tranches of securitization transactions. This unrealized gain was offset by the unrealized losses on cash flow hedges described below.
Net unrealized gains of $4.7$4.5 million and $4.3$24.4 million were reclassified into earnings during the three months ended March 31, 2003September 30, 2002 and 2002,2001, respectively, and relate primarily to recognition of excess estimated cash flows and actual excess cash collected over the Company’s initial estimate and
recognition of unrealized gains at time of
sale. Included in the $4.7$4.5 million of net unrealized gaingains recognized during the period is net unrealized gains of $8.1$6.3 million related to fluctuations in interest rates offset by cash flow hedges described below.
CashAnother component of other comprehensive income is unrealized losses on cash flow hedges
hedges. Unrealized gainslosses on cash flow hedges were $4.3$10.8 million for the three months ended March 31, 2003,September 30, 2002, compared to $27.6$40.4 million for the three months ended March 31, 2002.September 30, 2001. Expectations that short-term market interest rates will remain lower for an extended period of time during the three months ended September 30, 2002, as compared to the three months ended September 30, 2001, resulted in an increase in the liability related to the Company’s interest rate swap agreements. Unrealized gains and losses on cash flow hedges are reclassified into earnings as the Company’s unrealized gains or losses related to interest rate fluctuations on the Company’sits credit enhancement assets are reclassified into earnings. Net unrealized losses reclassified into earnings were $8.1$8.6 million and $3.8 million for the three months ended March 31, 2003.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment gains of $6.4 millionSeptember 30, 2002 and $0.1 million for the three months ended March 31, 2003 and 2002, respectively, were included in other comprehensive income. This unrealized gain is due to the increase in the value of the Company’s Canadian dollar denominated assets related to the decline in the U.S. dollar to Canadian dollar conversion rates during the period.2001, respectively.
Net Margin:
A key measure of the Company’s performance is net margin. Net margin is the difference between finance charge and other income earned on the Company’s receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.
The Company’s net margin as reflected onin the consolidated income statements of income is as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2002 | 2001 | |||||||||||||
Finance charge and other income | $ | 191,087 |
| $ | 85,255 |
| $ | 95,649 | $ | 99,670 | ||||||
Interest expense |
| (51,550 | ) |
| (33,123 | ) | (40,019 | ) | (35,590 | ) | ||||||
Net margin | $ | 139,537 |
| $ | 52,132 |
| $ | 55,630 | $ | 64,080 | ||||||
The Company evaluates the profitability of its lending activities based partly upon the net margin related to its managed auto loan portfolio, including on-book and gain on sale receivables. The Company uses this information to analyze trends in the components of the profitability of its managed auto portfolio. NetAnalysis of net margin on a managed basis allows the Company to determine which origination channels and loan products are most profitable, guides the Company in making pricing decisions for loan products and indicates if sufficient spread exists between the Company’s revenues and cost of funds to cover operating expenses and achieve corporate profitability objectives. Additionally, net margin on a managed basis facilitates comparisons of results between the Company and other finance companies (i) that do not securitize their receivables or (ii) due to the structure of their securitization
transactions, are not required to account for the securitization of their receivables as a sale. The Company routinely securitizes its receivables and
prior to October 1, 2002, recorded a gain on the sale of such receivables. The net margin on a managed basis presented below assumes that all securitized receivables have not been sold and are still on the Company’s consolidated balance sheet. Accordingly, no gain on sale or servicing fee income would have been recognized. Instead, finance charges would be recognized over the life of the securitized receivables as earned, and interest and other costs related to the asset-backed securities would be recognized as incurred.
Net margin for the Company’s managed finance receivables portfolio is as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2003 | 2002 | 2002 | 2001 | |||||||||||||
Finance charge and other income | $ | 688,382 |
| $ | 589,677 |
| $ | 686,728 | $ | 512,544 | ||||||
Interest expense |
| (189,069 | ) |
| (192,634 | ) | (201,990 | ) | (179,492 | ) | ||||||
Net margin | $ | 499,313 |
| $ | 397,043 |
| $ | 484,738 | $ | 333,052 | ||||||
Net margin as a percentage of average managed finance receivables outstanding is as follows (dollars in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||
2003 | 2002 | 2002 | 2001 | |||||||||||
Finance charge and other income |
| 17.2% |
| 18.4% | 17.8 | % | 18.9 | % | ||||||
Interest expense |
| (4.7) |
| (6.0) | (5.2 | ) | (6.6 | ) | ||||||
Net margin as a percentage of average managed finance receivables |
| 12.5% |
| 12.4% | 12.6 | % | 12.3 | % | ||||||
Average managed finance receivables | $ | 16,202,400 | $ | 12,990,674 | $ | 15,298,014 | $ | 10,757,878 | ||||||
Net margin as a percentage of average managed finance receivables increased for the three months ended March 31, 2003,September 30, 2002, compared to the three months ended March 31, 2002, as the Company was able to retain some of the benefit of declining interest rates in its loan pricing strategies.
The following is a reconciliation of finance charge and other income as reflected on the Company’s consolidated statements of income to the Company’s managed basis finance charge and other income:
Three Months Ended March 31, | ||||||
2003 | 2002 | |||||
Finance charge and other income per consolidated statements of income | $ | 191,087 | $ | 85,255 | ||
Adjustments to reflect income earned on receivables in gain on sale Trusts |
| 497,295 |
| 504,422 | ||
Managed basis finance charge and other income | $ | 688,382 | $ | 589,677 | ||
The following is a reconciliation of interest expense as reflected on the Company’s consolidated statements of income to the Company’s managed basis interest expense:
Three Months Ended March 31, | ||||||
2003 | 2002 | |||||
Interest expense per consolidated statements of income | $ | 51,550 | $ | 33,123 | ||
Adjustments to reflect expenses incurred by gain on sale Trusts |
| 137,519 |
| 159,511 | ||
Managed basis interest expense | $ | 189,069 | $ | 192,634 | ||
Nine Months Ended March 31, 2003 as compared to Nine Months Ended March 31, 2002
Revenue:
The Company’s average managed receivables outstanding consisted of the following (in thousands):
Nine Months Ended March 31, | ||||||
2003 | 2002 | |||||
On-book | $ | 3,237,909 | $ | 1,771,980 | ||
Gain on sale |
| 12,614,872 |
| 10,098,419 | ||
Total managed | $ | 15,852,781 | $ | 11,870,399 | ||
Average managed receivables outstanding increased by 34% as a result of the purchase of loans in excess of collections and charge-offs. The Company purchased $5,623.7 million of auto loans during the nine months ended March 31, 2003, compared to purchases of $6,503.3 million during the nine months ended March 31, 2002. This decrease resulted from a reduction in the number of the
Company’s branch offices in connection with the Company’s revised operating plan implemented in February 2003.
The average new loan size was $16,791 for the nine months ended March 31, 2003, compared to $16,349 for the nine months ended March 31, 2002. The increase in average new loan size was due to a change in the mix of business towards financing later model vehicles. The average annual percentage rate for finance receivables purchased during the nine months ended March 31, 2003, was 16.8%, compared to 17.8% during the nine months ended March 31, 2002. Decreasing short-term market interest rates have lowered the Company’s cost of funds, allowing the Company to pass along some of this benefit to consumers in the form of lower loan pricing.
Finance charge income increased by 58% to $410.4 million for the nine months ended March 31, 2003, from $259.0 million for the nine months ended March 31, 2002. Finance charge income was higher due to an increase in average on-book receivables that resulted primarily from the Company’s decision to change the structure of securitization transactions to no longer meet the criteria for sales of finance receivables. The Company’s effective yield on its on-book finance receivables decreased to 16.9% for the nine months ended March 31, 2003, from 19.5% for the nine months ended March 31, 2002. The effective yield decreased due to lower loan pricing.
The gain on sale of receivables decreased by 59% to $132.1 million for the nine months ended March 31, 2003, from $325.7 million for the nine months ended March 31, 2002. The decrease in gain on sale of receivables resulted from the Company’s decision to structure securitization transactions subsequent to September 30, 2002, as secured financings. During the nine months ended March 31, 2003, $2,507.9 million of finance receivables securitized were accounted for as sales of receivables as compared to $6,050.0 million during the nine months ended March 31, 2002. The gain as a percentage of the receivables securitized in gain on sale Trusts remained relatively stable at 5.3% for the nine months ended March 31, 2003, as compared to 5.4% for the nine months ended March 31, 2002.
Significant assumptions used in determining the gain on sale of receivables were as follows:
Nine Months Ended March 31, | ||||||
2003 | 2002 | |||||
Cumulative credit losses (including unrealized gains at time of sale) | 12.5 | % | 12.5 | % | ||
Discount rate used to estimate present value: | ||||||
Interest-only receivables from Trusts | 14.0 | % | 14.0 | % | ||
Investments in Trust receivables | 9.8 | % | 9.8 | % | ||
Restricted cash | 9.8 | % | 9.8 | % |
The cumulative credit loss assumptions utilized at the time of sale of receivables were determined using a range of possible outcomes based on
historical experience, credit attributes for the specific pool of receivables and general economic factors. The unrealized gains at time of sale represent the excess of the fair value of credit enhancement assets over the Company’s carrying value related to such interests when receivables are sold.
Servicing fee income was to $228.5 million, or 2.4% of average gain on sale auto receivables, for the nine months ended March 31, 2003, compared to $277.2 million, or 3.7% of average gain on sale auto receivables, for the nine months ended March 31, 2002. Servicing fee income represents accretion of the present value discount on estimated future excess cash flows from the Trusts, base servicing fees and other fees earned by the Company as servicer of the receivables sold to the Trusts. Servicing fee income also includes other-than-temporary impairment charges of $96.7 million and $38.9 million for the nine months ended March 31, 2003 and 2002, respectively. Other-than-temporary impairment resulted from increased default rates caused by the continued weakness in the economy, lower than expected recovery proceeds caused by depressed used car values and the expectation that current economic conditions will continue for the foreseeable future. In addition, the Company’s credit enhancement assets are carried on its financial statements based on the present value of future cash distributions from securitization Trusts. The delay in cash distributions from FSA-insured securitizations reduced the present value of such cash distributions and resulted in further other-than-temporary impairment.
Costs and Expenses:
Operating expenses decreased to $300.5 million for the nine months ended March 31, 2003, from $315.7 million for the nine months ended March 31, 2002. As an annualized percentage of average managed receivables outstanding, operating expenses decreased to 2.5% for the nine months ended March 31, 2003, compared to 3.5% for the nine months ended March 31, 2002. Operating expenses improved primarily as a result of a reduction in workforce in November 2002 and implementation of a revised operating plan in February 2003.
The Company recognized $60.0 million in restructuring charges related to the reduction in the Company’s workforce in November 2002 and the implementation of its revised operating plan in February 2003. The Company recognized a $6.9 million restructuring charge for its November 2002 reduction in workforce and a $53.1 million restructuring charge related to the implementation of its revised operating plan. The revised operating plan included a decrease in the Company’s targeted loan origination volume to approximately $750.0 million per quarter by June 2003 and a reduction of operating expenses through downsizing its workforce and consolidating its branch office network. The restructuring charges recognized during the nine months ended March 31, 2003, consisted primarily of severance costs of identified workforce reductions of approximately 1,200 positions related to the consolidation/closing of 161 branch offices including the closing of the Company’s Canadian lending activities, costs incurred to terminate facility and equipment leases prior to their termination date as well as estimated costs that will continue to be incurred under the contracts for their remaining terms without economic benefit to the Company. The restructuring charge also includes $20.8 million for
discontinuation of the development of the Company’s customer relationship management system, which was designed to provide operational scalability and marketing benefits in a high-growth environment.
The provision for loan losses increased to $229.8 million for the nine months ended March 31, 2003, from $48.2 million for the nine months ended March 31, 2002. As an annualized percentage of average on-book finance receivables, the provision for loan losses was 9.5% and 3.6% for the nine months ended March 31, 2003 and 2002, respectively. Subsequent to September 30, 2002, the Company changed the structure of its securitization transactions to no longer meet the criteria for sales of finance receivables. Under this new structure, finance receivables remain on the Company’s balance sheet throughout their term, and credit losses related to those securitized receivables are provided for as a charge to operations. The remaining increase reflects the general expectation that current economic conditions, including elevated unemployment rates, will result in a higher number of charge-offs, and that depressed wholesale auction prices on the sale of repossessed vehicles will increase the amount charged-off per loan.
Interest expense increased to $131.5 million for the nine months ended March 31, 2003, from $99.3 million for the nine months ended March 31, 2002, due to higher debt levels. Average debt outstanding was $3,612.3 million and $2,314.2 million for the nine months ended March 31, 2003 and 2002, respectively. The increase in average debt outstanding reflects the accounting for securitization transactions subsequent to September 30, 2002, as secured financings. The Company’s effective rate of interest paid on its debt decreased to 4.8% from 5.7% as a result of lower market interest rates.
The Company’s effective income tax rate was 38.5% for the nine months ended March 31, 2003 and 2002.
Other Comprehensive Loss:
Other comprehensive loss consisted of the following (in thousands):
Nine Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Unrealized losses on credit enhancement assets | $ | (84,960 | ) | $ | (5,829 | ) | ||
Unrealized (losses) gains on cash flow hedges |
| (10,344 | ) |
| 4,068 |
| ||
Canadian currency translation adjustment |
| 3,300 |
|
| (2,008 | ) | ||
Income tax benefit |
| 36,692 |
|
| 679 |
| ||
$ | (55,312 | ) | $ | (3,090 | ) | |||
Credit Enhancement Assets
The unrealized losses on credit enhancement assets consisted of the following (in thousands):
Nine Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Unrealized gains at time of sale | $ | 11,091 |
| $ | 37,291 |
| ||
Unrealized holding losses related to changes in credit loss assumptions |
| (62,002 | ) |
| (17,745 | ) | ||
Unrealized holding losses related to changes in interest rates |
| (2,197 | ) |
| (14,712 | ) | ||
Net reclassification of unrealized gains into earnings |
| (31,852 | ) |
| (10,663 | ) | ||
$ | (84,960 | ) | $ | (5,829 | ) | |||
The unrealized gains at time of sale represent the excess of the fair value of credit enhancement assets over the Company’s carrying value related to such interests when receivables are sold. Unrealized gains at time of sale were lower for the nine months ended March 31, 2003, as compared to the nine months ended March 31, 2002, due to the change in the structure of securitization transactions entered into subsequent to September 30, 2002, to no longer meet the criteria for sales of finance receivables.
Changes in the fair value of credit enhancement assets as a result of modifications to the credit loss assumptions are reported as unrealized holding gains or losses in other comprehensive loss until realized, or, in the case of unrealized holding losses considered to be other-than-temporary, as a charge to operations. The cumulative credit loss assumptions used to estimate the fair value of credit enhancement assets are periodically reviewed by the Company and modified to reflect the actual credit performance for each securitization pool through the reporting date as well as estimates of future losses considering several factors including changes in the general economy. Differences between cumulative credit loss assumptions used in individual securitization pools can be attributed to the original credit attributes of a pool, actual credit performance through the reporting date and pool seasoning to the extent that changes in economic trends will have more of an impact on the expected future performance of less seasoned pools.
The Company increased the cumulative credit loss assumptions (including remaining unrealized gains at time of sale) used in measuring the fair value of credit enhancement assets to a range of 10.9% to 13.9% as of March 31, 2003, from a range of 10.4% to 12.7% as of June 30, 2002, which, together with the expected delay in cash distributions from FSA-insured securitizations, caused an other-than-temporary impairment charge of $96.7 million and an unrealized holding loss of $62.0 million for the nine months ended March 31, 2003. The range of cumulative credit loss assumptions was increased to
reflect adverse actual credit performance compared to previous assumptions primarily due to lower than anticipated recovery values as well as expectations for higher future losses due to continued weakness in the general economy. Unrealized holding losses of $17.7 million for the nine months ended March 31, 2002, resulted from an increase in cumulative credit loss assumptions for certain securitization Trusts due to expectations of a general decline in the economy.
Unrealized holding losses related to changes in interest rates of $2.2 million and $14.7 million for the nine months ended March 31, 2003 and 2002, respectively, resulted primarily from a decrease in estimated future cash flows from the Trusts due to lower interest income earned on the investment of restricted cash and collections accounts. The lower earnings were partially offset by a decrease in interest rates payable to investors on the floating rate tranches of securitization transactions.
Net unrealized gains of $31.9 million and $10.7 million were reclassified into earnings during the nine months ended March 31, 2003 and 2002, respectively, and relate primarily to recognition of actual excess cash collected over the Company’s initial estimate and recognition of unrealized gains at time of sale. Included in the $31.9 million of net unrealized gain recognized during the period is net unrealized gains of $28.7 million related to fluctuations in interest rates offset by cash flow hedges described below.
Cash flow hedges
Unrealized losses on cash flow hedges were $10.3 million for the nine months ended March 31, 2003, compared to unrealized gains of $4.1 million for the nine months ended March 31, 2002. Unrealized losses on cash flow hedges are reclassified into earnings as unrealized gains or losses related to interest rate fluctuations on the Company’s credit enhancement assets are reclassified into earnings. Net unrealized losses reclassified into earnings were $28.7 million for the nine months ended March 31, 2003.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment gain of $3.3 million offset losses included in other comprehensive loss for the nine months ended March 31, 2003. This unrealized gain is due to the increase in the value of the Company’s Canadian dollar denominated assets related to the decline in the U.S. dollar to Canadian dollar conversion rates during the period. Canadian currency translation adjustment loss of $2.0 million was included in other comprehensive loss for the nine months ended March 31, 2002. This unrealized loss is due to the decline in the value of the Company’s Canadian dollar denominated assets related to the increased strength in the U.S. dollar to Canadian dollar conversion rates during the period.
Net Margin:
Net margin is the difference between finance charge and other income earned on the Company’s receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.
The Company’s net margin as reflected on the consolidated statements of income is as follows (in thousands):
Nine Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Finance charge and other income | $ | 426,292 |
| $ | 268,329 |
| ||
Interest expense |
| (131,453 | ) |
| (99,270 | ) | ||
Net margin | $ | 294,839 |
| $ | 169,059 |
| ||
The Company evaluates the profitability of its lending activities based partly upon the net margin related to its managed auto loan portfolio, including on-book and gain on sale receivables. The Company uses this information to analyze trends in the components of the profitability of its managed auto portfolio. Net margin on a managed basis facilitates comparisons of results between the Company and other finance companies (i) that do not securitize their receivables or (ii) due to the structure of their securitization transactions, are not required to account for the securitization of their receivables as a sale. The Company routinely securitizes its receivables and prior to October 1, 2002, recorded a gain on the sale of such receivables. The net margin on a managed basis presented below assumes that all securitized receivables have not been sold and are still on the Company’s consolidated balance sheet. Accordingly, no gain on sale or servicing fee income would have been recognized. Instead, finance charges would be recognized over the life of the securitized receivables as earned, and interest and other costs related to the asset-backed securities would be recognized as incurred.
Net margin for the Company’s managed finance receivables portfolio is as follows (in thousands):
Nine Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Finance charge and other income | $ | 2,079,626 |
| $ | 1,655,182 |
| ||
Interest expense |
| (586,070 | ) |
| (560,435 | ) | ||
Net margin | $ | 1,493,556 |
| $ | 1,094,747 |
| ||
Net margin as a percentage of average managed finance receivables outstanding is as follows (dollars in thousands):
Nine Months Ended March 31, | ||||||||
2003 | 2002 | |||||||
Finance charge and other income |
| 17.5 | % |
| 18.6 | % | ||
Interest expense |
| (4.9 | ) |
| (6.3 | ) | ||
Net margin as a percentage of average managed finance receivables |
| 12.6 | % |
| 12.3 | % | ||
Average managed finance receivables | $ | 15,852,781 |
| $ | 11,870,399 |
| ||
Net margin as a percentage of average managed finance receivables increased for the nine months ended March 31, 2003, compared to the nine months ended March 31, 2002,2001, as the Company was able to retain some of the benefit of declining interest rates in its loan pricing strategies.
The following is a reconciliation of finance charge and other income as reflected on the Company’s consolidated statements of income to the Company’s managed basis finance charge and other income:income (in thousands):
Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||
2003 | 2002 | 2002 | 2001 | |||||||||
Finance charge and other income per consolidated statements of income | $ | 426,292 | $ | 268,329 | $ | 95,649 | $ | 99,670 | ||||
Adjustments to reflect income earned on receivables in gain on sale Trusts |
| 1,653,334 |
| 1,386,853 | 591,079 | 412,874 | ||||||
Managed basis finance charge and other income | $ | 2,079,626 | $ | 1,655,182 | $ | 686,728 | $ | 512,544 | ||||
The following is a reconciliation of interest expense as reflected on the Company’s consolidated statements of income to the Company’s managed basis interest expense:expense (in thousands):
Nine Months Ended March 31, | ||||||
2003 | 2002 | |||||
Interest expense per consolidated statements of income | $ | 131,453 | $ | 99,270 | ||
Adjustments to reflect expenses incurred by gain on sale Trusts |
| 454,617 |
| 461,165 | ||
Managed basis interest expense | $ | 586,070 | $ | 560,435 | ||
Three Months Ended September 30, Interest expense per consolidated statements of income Adjustments to reflect interest expense incurred on receivables in gain on sale Trusts Managed basis interest expense 2002 2001 $ 40,019 $ 35,590 161,971 143,902 $ 201,990 $ 179,492
CREDIT QUALITY
The Company provides financing in relatively high-risk markets, and, therefore, anticipates a corresponding high level of delinquencies and charge-offs.
FinanceHistorically, receivables purchased by the Company have been held on the Company’s balance sheets include receivables purchased butsheet until such loans were sold in a securitization transaction. Receivables that were ineligible for sale, because they did not yet securitized andmeet certain criteria established in connection with securitization transactions, were retained on the Company’s consolidated balance sheet. Finance receivables securitized byunder the Company after September 30, 2002.Company’s new securitization structure will not be removed from the consolidated balance sheet but will remain on the consolidated balance sheet throughout their term. Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses on the balance sheet at a level considered adequate to cover probable credit losses on finance receivables at March 31, 2003.receivables. Finance receivables are charged-off to the allowance for loan losses when the Company repossesses and disposes of the collateral or the account is otherwise deemed uncollectable.
Prior to October 1, 2002, theThe Company has periodically sold receivables to Trusts in securitization transactions accounted for as a sale of receivablesto Trusts and retained an interest in the receivables sold in the form of credit enhancement assets. Credit enhancement assets are reflected on the Company’s balance sheet at fair value, calculated based upon the present value of estimated excess future cash flows from the Trusts using, among other assumptions, estimates of future cumulative credit losses on the receivables sold. Charge-offs of receivables that have been sold to Trusts decrease the amount of excess future cash flows from the Trusts. If such charge-offs are expected to exceed the Company’s original estimates of cumulative credit losses, or if the actual timing of these losses differs from expected timing, the fair value of credit enhancement assets iscould be written down through an other-than-temporary impairment charge to earnings.
The following table presents certain data related to the receivables portfolio (dollars in thousands):
March 31, 2003 | ||||||||||||
On-Book | Gain on Sale | Total Managed | ||||||||||
Principal amount of receivables | $ | 5,028,731 |
| $ | 10,820,142 |
| $ | 15,848,873 |
| |||
Nonaccretable acquisition fees |
| (98,376 | ) |
| (98,376 | ) | ||||||
Allowance for loan losses |
| (187,496 | ) |
| (1,094,660 | )(a) |
| (1,282,156 | ) | |||
Receivables, net | $ | 4,742,859 |
| |||||||||
Number of outstanding contracts |
| 330,730 |
|
| 882,792 |
|
| 1,213,522 |
| |||
Average principal amount of outstanding contract (in dollars) | $ | 15,205 |
| $ | 12,257 |
| $ | 13,060 |
| |||
Allowance for loan losses and nonaccretable acquisition fees as a percentage of receivables |
| 5.7 | % |
| 10.1 | % |
| 8.7 | % | |||
Principal amount of receivables Allowance for loan losses and nonaccretable acquisition fees Receivables, net Number of outstanding contracts Average principal amount of outstanding contract (in dollars) Allowance for loan losses and nonaccretable acquisition fees as a Percentage of receivables September 30, 2002 Owned Serviced Total
Managed $ 2,156,471 $ 13,590,732 $ 15,747,203 (115,155 ) $ 2,041,316 146,782 1,044,048 1,190,830 $ 14,692 $ 13,017 $ 13,224 5.3 %
The following is a summary of managed finance receivables which are (i) more than 30 days delinquent, but not yet in repossession, and (ii) in repossession (dollars in thousands):
March 31, 2003 | September 30, 2002 | |||||||||||||||||||||||||||||||||||
On-Book | Gain on Sale | Total Managed | Owned | Serviced | Total Managed | |||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
Delinquent contracts: | ||||||||||||||||||||||||||||||||||||
31 to 60 days | $ | 190,969 | 3.8 | % | $ | 957,461 | 8.9 | % | $ | 1,148,430 | 7.3 | % | $ | 32,957 | 1.5 | % | $ | 1,154,050 | 8.5 | % | $ | 1,187,007 | 7.6 | % | ||||||||||||
Greater than 60 days |
| 68,899 | 1.4 |
|
| 357,180 | 3.3 |
|
| 426,079 | 2.7 |
| 38,134 | 1.8 | 518,219 | 3.8 | 556,353 | 3.5 | ||||||||||||||||||
| 259,868 | 5.2 |
|
| 1,314,641 | 12.2 |
|
| 1,574,509 | 10.0 |
| 71,091 | 3.3 | 1,672,269 | 12.3 | 1,743,360 | 11.1 | |||||||||||||||||||
In repossession |
| 31,287 | 0.6 |
|
| 196,556 | 1.8 |
|
| 227,843 | 1.4 |
| 14,053 | 0.6 | 160,684 | 1.2 | 174,737 | 1.1 | ||||||||||||||||||
$ | 291,155 | 5.8 | % | $ | 1,511,197 | 14.0 | % | $ | 1,802,352 | 11.4 | % | $ | 85,144 | 3.9 | % | $ | 1,832,953 | 13.5 | % | $ | 1,918,097 | 12.2 | % | |||||||||||||
March 31, 2002 | September 30, 2001 | |||||||||||||||||||||||||||||||||||
On-Book | Gain on Sale | Total Managed | Owned | Serviced | Total Managed | |||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
Delinquent contracts: | ||||||||||||||||||||||||||||||||||||
31 to 60 days | $ | 46,967 | 2.0 | % | $ | 869,307 | 7.7 | % | $ | 916,274 | 6.7 | % | $ | 65,541 | 2.9 | % | $ | 803,596 | 8.9 | % | $ | 869,137 | 7.7 | % | ||||||||||||
Greater than 60 days |
| 35,783 | 1.5 |
|
| 388,990 | 3.5 |
|
| 424,773 | 3.1 |
| 35,271 | 1.5 | 315,730 | 3.5 | 351,001 | 3.1 | ||||||||||||||||||
| 82,750 | 3.5 |
|
| 1,258,297 | 11.2 |
|
| 1,341,047 | 9.8 |
| 100,812 | 4.4 | 1,119,326 | 12.4 | 1,220,138 | 10.8 | |||||||||||||||||||
In repossession |
| 15,877 | 0.6 |
|
| 137,030 | 1.2 |
|
| 152,907 | 1.1 |
| 11,437 | 0.5 | 106,487 | 1.1 | 117,924 | 1.0 | ||||||||||||||||||
$ | 98,627 | 4.1 | % | $ | 1,395,327 | 12.4 | % | $ | 1,493,954 | 10.9 | % | $ | 112,249 | 4.9 | % | $ | 1,225,813 | 13.5 | % | $ | 1,338,062 | 11.8 | % | |||||||||||||
Delinquencies in the Company’s managed receivables portfolio may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year and economic factors. Due to the
Company’s target customer base, a relatively high percentage of accounts become delinquent at some point in the life of a loan and there is a fairly high rate of account movement between current and delinquent status in the portfolio.
Finance receivables that are 31 to 60 days delinquent Delinquencies on a total managed basis were higher as of March 31, 2003,September 30, 2002, compared to March 31, 2002,September 30, 2001, due to continued weakness in the economy, including higher unemployment rates, and, to a lesser extent, an increase in the average age of the Company’s managed receivables portfolio. Finance receivables that are greater than 60 days delinquent on a total managed basis were lower as of March 31, 2003, compared to March 31, 2002, due to the Company implementing a more aggressive repossession and liquidation strategy for late-stage delinquent accounts in early calendar 2003.
In accordance with its policies and guidelines, the Company at times offers payment deferrals to consumers, whereby the consumer is allowed to move a delinquent payment to the end of the loan generally by paying a fee (approximately the interest portion of the payment deferred). The Company’s policies and guidelines, as well as certain contractual restrictions in the Company’s securitization transactions, limit the number and frequency of
deferments, that may be granted. An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted. Thereafter, such account is aged based on the timely payment of future installments in the same manner as any other account. Contracts receiving a payment deferral as an average quarterly percentage of average managed auto receivables outstanding were 7.3%5.5% and 6.3%4.7% for the three and nine months ended March 31, 2003, respectively,September 30, 2002 and 4.9% for each of the three and nine months ended March 31, 2002. Of the total amount deferred, on-book finance2001, respectively. Finance receivables owned receiving a payment deferral were 5.2% and 2.8% forless than 2.0% of the total amount deferred during the three and nine months ended March 31, 2003, respectively,September 30, 2002 and 2.5% and 2.4% for the three and nine months ended March 31, 2002, respectively. The percentage of contracts receiving a payment deferral increased during the periods ended March 31, 2003, due to higher delinquency levels in the portfolio.2001. The Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
The following table presents charge-off data with respect to the Company’s managed finance receivables portfolio (dollars in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2002 | 2001 | |||||||||||||||||||
On-Book: | ||||||||||||||||||||||||
Held for sale: | ||||||||||||||||||||||||
Repossession charge-offs | $ | 41,519 |
| $ | 25,546 |
| $ | 82,658 |
| $ | 54,615 |
| $ | 19,561 | $ | 12,313 | ||||||||
Less: Recoveries |
| (17,991 | ) |
| (12,877 | ) |
| (36,601 | ) |
| (27,648 | ) | (10,118 | ) | (6,397 | ) | ||||||||
Mandatory charge-offs (1) |
| 9,168 |
|
| 3,910 |
|
| 18,940 |
|
| 11,420 |
| 4,153 | 2,347 | ||||||||||
Net charge-offs | $ | 32,696 |
| $ | 16,579 |
| $ | 64,997 |
| $ | 38,387 |
| 13,596 | 8,263 | ||||||||||
Gain on Sale: | ||||||||||||||||||||||||
Serviced: | ||||||||||||||||||||||||
Repossession charge-offs | $ | 363,437 |
| $ | 200,149 |
| $ | 876,672 |
| $ | 493,482 |
| 256,474 | 135,634 | ||||||||||
Less: Recoveries |
| (144,279 | ) |
| (98,720 | ) |
| (366,511 | ) |
| (235,485 | ) | (118,365 | ) | (66,997 | ) | ||||||||
Mandatory charge-offs (1) |
| 50,310 |
|
| 36,927 |
|
| 168,889 |
|
| 92,676 |
| 53,576 | 27,313 | ||||||||||
Net charge-offs | $ | 269,468 |
| $ | 138,356 |
| $ | 679,050 |
| $ | 350,673 |
| 191,685 | 95,950 | ||||||||||
Total managed: | ||||||||||||||||||||||||
Repossession charge-offs | $ | 404,956 |
| $ | 225,695 |
| $ | 959,330 |
| $ | 548,097 |
| 276,035 | 147,947 | ||||||||||
Less: Recoveries |
| (162,270 | ) |
| (111,597 | ) |
| (403,112 | ) |
| (263,133 | ) | (128,483 | ) | (73,394 | ) | ||||||||
Mandatory charge-offs (1) |
| 59,478 |
|
| 40,837 |
|
| 187,829 |
|
| 104,096 |
| 57,729 | 29,660 | ||||||||||
Net charge-offs | $ | 302,164 |
| $ | 154,935 |
| $ | 744,047 |
| $ | 389,060 |
| $ | 205,281 | $ | 104,213 | ||||||||
Net charge-offs as an annualized percentage of average managed receivables outstanding |
| 7.6 | % |
| 4.8 | % |
| 6.3 | % |
| 4.4 | % | ||||||||||||
Net charge-offs as an annualized percentage of average managed finance receivables outstanding | 5.3 | % | 3.8 | % | ||||||||||||||||||||
Net recoveries as a percentage of gross repossession charge-offs |
| 40.1 | % |
| 49.4 | % |
| 42.0 | % |
| 48.0 | % | ||||||||||||
Net recoveries as a percentage of repossession charge-offs | 46.5 | % | 49.6 | % | ||||||||||||||||||||
(1) | Mandatory charge-offs represent accounts |
Net charge-offs as an annualized percentage of average managed receivables outstanding may vary from period to period based upon the average age or seasoning of the portfolio and economic factors. Net charge-offs increased for the periodsthree months ended March 31, 2003,September 30, 2002, compared to the periodsthree months ended March 31, 2002,September 30, 2001, due to continued weakness in the economy, including higher unemployment rates, and due to lower net recoveries on repossessed vehicles. Recoveries as a percentage of repossession charge-offs decreased due to general declines in used car auction values. In addition, the Company implemented a more aggressive strategy for repossessing and liquidating late-stage delinquent accounts in early calendar 2003 resulting in a higher level of charge-offs in the periods ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s primary sources of cash have been borrowings under its warehouse credit facilities and transferssales of financeauto receivables to its whole loan purchase facility and to Trusts in securitization transactions. The Company’s primary uses of cash have been purchases of finance receivables and funding credit enhancement requirements for securitization transactions.
The Company usedrequired cash of $5,870.8$2,470.2 million and $6,494.2$2,014.2 million for the purchase of auto finance receivablescontracts during the ninethree months ended March 31, 2003September 30, 2002 and 2002,2001, respectively. These purchases were funded initially utilizing warehouse credit facilities and subsequently through either the sale of finance receivables or the long-term financing of financeauto receivables in securitization or whole loan purchase transactions.
As of March 31, 2003, warehouse credit facilities consisted of the following (in millions):
Maturity | Facility Amount | Advances Outstanding | ||||
September 2003 (a) | $ | 250.0 | ||||
December 2003 (a)(b)(d) |
| 500.0 | $ | 500.0 | ||
June 2004 (a)(b) |
| 750.0 |
| 750.0 | ||
February 2005 (a)(b) |
| 500.0 |
| 500.0 | ||
March 2005 (a)(c) |
| 1,950.0 |
| 513.5 | ||
$ | 3,950.0 | $ | 2,263.5 | |||
The Company terminated itshas three separate funding agreements with administrative agents on behalf of institutionally managed commercial paper conduits and bank groups with aggregate structured warehouse financing availability of approximately $3,295.0 million. One facility provides for available structured warehouse financing of $250.0 million through September 2003. Another facility provides for multi-year structured warehouse financing with availability of $500.0 million through November 2003. The third facility provides for available structured warehouse credit facility that was scheduledfinancing of $2,545.0 million, of which $380.0 million matures in March 2003 and the remaining $2,165.0 million matures in March 2005. No amounts were outstanding under these facilities as of September 30, 2002.
The Company also has three funding agreements with administrative agents on behalf of institutionally managed medium term note conduits under which $500.0 million, $750.0 million and $500.0 million, respectively, of proceeds are available through the terms of the agreements. The funding agreements allow for the substitution of auto receivables (subject to an overcollateralization formula) for cash, and vice versa, thus allowing the Company to use the medium term note proceeds to finance auto receivables on a revolving basis. The agreements mature in NovemberDecember 2003, June 2004 and bothFebruary 2005, respectively. A total of its Canadian warehouse credit$1,750.0 million was outstanding under these facilities to realign the Company’s warehouse capacity with lower future loan origination volume.as of September 30, 2002.
The Company’s Canadian subsidiary has a revolving credit agreement, under which the subsidiary may borrow up to $150.0 million Cdn., subject to a defined borrowing base. This facility matures in August 2003. A total of $70.4 million was outstanding under the Canadian revolving credit agreement as of September 30, 2002. Additionally, the Company’s Canadian subsidiary has a warehouse credit facilities contain various default covenants requiringfacility with availability of $100.0 million Cdn., subject to a defined borrowing base. The warehouse credit facility expires in May 2003. No amounts were outstanding under the warehouse credit facility as of September 30, 2002.
As is customary in the Company’s industry, certain minimum financial ratios and cumulative net loss, delinquency and repossession ratios. As of March 31, 2003, none of the Company’s warehouse credit facilities had financial ratios or performance ratios in excess ofneed to be renewed on an annual basis. If the targeted levels.
Within the next twelve months, $950.0 million ofCompany was unable to renew these facilities on acceptable terms, there could be a material adverse effect on the Company’s warehouse credit facilities are up for renewal. In order to realign the Company’s warehouse capacity with lower future loan origination volume, the Company anticipates that certain warehouse facilities will not be renewed or will be cancelled. In accordance with this strategy, the Company intends to repay the facilityfinancial position, results of operations and exercise its right to cancel its $500.0 million warehouse credit facility that matures in December 2003 during the quarter ending June 30, 2003. The Company believes the capacity available under the remaining warehouse credit facilities will be sufficient to meet the Company’s warehouse funding needs for calendar 2003.
In March 2003, the Company entered into a whole loan purchase facility under which the Company transferred $1.0 billion of finance receivables to a special purpose finance subsidiary of the Company and received an advance of $875.0 million. Under the purchase facility, during a revolving period ending in September 2003, the Company will transfer additional receivables to the special purpose finance subsidiary to replenish the amount of principal amortized and to replace delinquent receivables. Subsequent to the revolving period, the noteholders will determine the ultimate disposition of the receivables; under certain circumstances, the Company has the right, but not the obligation, to repurchase the receivables.liquidity.
The Company has completed thirty-seventhirty-five auto receivable securitization transactions through March 31, 2003.September 30, 2002. The proceeds from the transactions were primarily used to repay borrowings outstanding under the Company’s warehouse credit facilities.
A summary of these transactions is as follows (in millions):
Transaction (a) | Date | Original Amount | Balance at March 31, 2003 | Date | Original Amount | Balance at September 30, 2002 | ||||||||
1999-A | February 1999 | $700.0 | $82.0 | |||||||||||
1999-B | May 1999 | $ | 1,000.0 | $ | 100.7 | May 1999 | 1,000.0 | 160.4 | ||||||
1999-C | August 1999 |
| 1,000.0 |
| 145.0 | August 1999 | 1,000.0 | 215.0 | ||||||
1999-D | October 1999 |
| 900.0 |
| 151.8 | October 1999 | 900.0 | 219.0 | ||||||
2000-A | February 2000 |
| 1,300.0 |
| 266.7 | February 2000 | 1,300.0 | 374.9 | ||||||
2000-B | May 2000 |
| 1,200.0 |
| 311.9 | May 2000 | 1,200.0 | 423.9 | ||||||
2000-C | August 2000 |
| 1,100.0 |
| 333.7 | August 2000 | 1,100.0 | 444.4 | ||||||
2000-1 | November 2000 |
| 495.0 |
| 149.4 | November 2000 | 495.0 | 202.8 | ||||||
2000-D | November 2000 |
| 600.0 |
| 216.9 | November 2000 | 600.0 | 282.2 | ||||||
2001-A | February 2001 |
| 1,400.0 |
| 542.2 | February 2001 | 1,400.0 | 701.8 | ||||||
2001-1 | April 2001 |
| 1,089.0 |
| 432.7 | April 2001 | 1,089.0 | 578.8 | ||||||
2001-B | July 2001 |
| 1,850.0 |
| 918.8 | July 2001 | 1,850.0 | 1,182.7 | ||||||
2001-C | September 2001 |
| 1,600.0 |
| 876.3 | September 2001 | 1,600.0 | 1,126.7 | ||||||
2001-D | October 2001 |
| 1,800.0 |
| 1,024.5 | October 2001 | 1,800.0 | 1,306.6 | ||||||
2002-A | February 2002 |
| 1,600.0 |
| 1,043.1 | February 2002 | 1,600.0 | 1,323.8 | ||||||
2002-1 | April 2002 |
| 990.0 |
| 668.8 | April 2002 | 990.0 | 838.7 | ||||||
2002-A Canada (b) | May 2002 |
| 145.0 |
| 121.9 | May 2002 | 158.9 | 141.8 | ||||||
2002-B | June 2002 |
| 1,200.0 |
| 894.8 | June 2002 | 1,200.0 | 1,105.2 | ||||||
2002-C | August 2002 |
| 1,300.0 |
| 1,026.1 | August 2002 | 1,300.0 | 1,253.5 | ||||||
2002-D | September 2002 |
| 600.0 |
| 490.7 | September 2002 | 600.0 | 590.7 | ||||||
2002-EM | October 2002 |
| 1,700.0 |
| 1,545.1 | |||||||||
C2002-1 Canada (b)(c) | November 2002 |
| 137.0 |
| 130.0 | |||||||||
$ | 23,006.0 | $ | 11,391.1 | $21,882.9 | $12,554.9 | |||||||||
(a) | Transactions 1994-A, 1995-A and B, 1996-A, B, C and D, 1997-A, B, C and D, and 1998-A, B, C and D originally totaling |
(b) | The balance at |
Prior to October 1, 2002,In connection with securitization transactions, the Company structured its securitization transactions to meet the criteria for sales of finance receivables under generally accepted accounting principles in the United States of America. The Company changed the structure of securitization transactions completed subsequent to September 30, 2002, to no longer meet the criteria for sale of finance receivables. This change in securitization structure does not change the Company’s requirementis required to provide credit enhancement in order to attain specific credit ratings for the asset-backed securities issued by the Trusts. The Company typically makes an initial deposit to a restricted cash account and transfers finance receivables in excess of the amount of asset-backed securities issued to create initial overcollateralization. The Company subsequently uses excess cash flows generated by the Trusts to either increase the restricted cash account or repay the outstanding asset-backed securities on an accelerated basis, therebythus creating additional credit enhancement through overcollateralization in the Trusts. When the credit enhancement levels reach specified percentages of the Trust’s pool of receivables, excess cash flows are distributed to the Company.
The Company’s initial cash deposit and overcollateralization transfer for its 2002-EM securitization transaction equaled the full credit enhancement amount required by the financial guaranty insurance policy provider. Therefore,Company generally expects to begin to receive excess cash flowsflow distributions from 2002-EM were distributed to the Company beginning the first month after the receivables were securitized. The Company intends to fund only the initial deposit requirement in futureits insured securitization transactions rather than fundingapproximately 15 to 18 months after receivables are securitized, although the full credit enhancement amount as wastiming of cash flow distributions is dependent upon the case instructure of the 2002-EMsecuritization transaction.
The Company employs two types of securitization structures to meet its credit enhancement requirements.structures. The structure the Company has utilizedutilizes most frequently involves the purchase of a financial guaranty
policy issued by an insurer to cover the asset-backed securities as well asand the use of reinsurance and other alternative credit enhancement productsenhancements to reduce the required initial deposit to the restricted cash account and initial overcollateralization.account. The reinsurance used to reduce the Company’s initial cash deposit has typically been arranged by anthe insurer of the asset-backed securities. However, outstandingAs of September 30, 2002, the Company had commitments from the insurer for an additional $0.5 million of reinsurance that expires in December 2002. In August 2002, the Company obtained an additional $200.0 million of reinsurance commitments that will expire in December 2003. The new reinsurance commitments increase the Company’s initial cash deposit requirement to a level of $200.03%, compared to 2% under the previous commitments, which will require an additional $50.0 million from Financial Security Assurance, Inc. (“FSA”) were cancelled byof cash deposits over the term of the new commitments. Also, in August 2002, the Company entered into a revolving credit enhancement facility that provides for borrowing up to $290.0 million for the financing of bonds rated BBB- and BB- by Standard and Poor’s in January 2003. Accordingly,connection with securitization transactions. This credit facility provides additional liquidity for credit enhancement in the future. The Company relies on these reinsurance arrangements and credit facility to supplement the amount of cash the Company must providewould otherwise require to support its securitization program. If the required initialCompany was unable to access reinsurance or alternative credit enhancement deposit in future securitization transactions from its existing capital resources.enhancements on acceptable terms, there could be a material adverse effect on the Company’s liquidity.
The Company had a credit enhancement facility with a financial institution which the Company used to fundfind a portion of the initial cash deposit for securitization transactions through October 2001, similar to the amount covered by the reinsurance as described above. In June 2002, the Company replaced the credit enhancement facility with a $130.0 million letter of credit from a financial institution. ThereThis letter of credit does not represent funded debt and, therefore, is not recorded as debt on the Company’s consolidated balance sheet. A total of $46.7 million was no balance outstanding under this letter of credit as of March 31, 2003, and the letter of credit has been retired.September 30, 2002.
The Company’s second securitization structure involves the sale of subordinatedsubordinate asset-backed securities in order to provide credit enhancement for the senior asset-backed securities. The subordinatedsubordinate asset-backed securities replace a portion of the Company’s initial credit enhancement deposit otherwise required in a securitization transaction in a manner similar to the utilization of reinsurance or other alternative credit enhancements described in the preceding paragraphs. The Company has a revolving
Initial deposits for credit enhancement purposes were $58.1 million and $80.8 million for the three months ended September 30, 2002 and 2001, respectively. Borrowings under the credit enhancement facility that provides for borrowings up to $145.0were $46.3 million for the financing of bonds rated BBB- and BB- by the rating agencies in connection with subordinated securitization transactions. The Company has not utilized this facility and believes that it is unlikely this facility will be utilized priorthree months ended September 30, 2001. Excess cash flows distributed to its expiration in August 2003 since current market conditions for execution of a senior subordinated securitization transaction by the Company are unfavorable.
Cash flows related to securitization transactions were as follows (in millions):$63.3 million and $70.7 million for the three months ended September 30, 2002 and 2001, respectively.
Nine Months Ended March 31, | ||||||
2003 | 2002 | |||||
Initial credit enhancement deposits: | ||||||
Gain on sale Trusts: | ||||||
Restricted cash | $ | 50.2 | $ | 303.5 | ||
Overcollateralization |
| 7.9 | ||||
Borrowings under credit enhancement facility |
| 182.5 | ||||
Secured financing Trusts: | ||||||
Restricted cash |
| 59.2 | ||||
Overcollateralization |
| 176.4 | ||||
Distributions from Trusts: | ||||||
Gain on sale Trusts |
| 144.6 |
| 182.8 | ||
Secured financing Trusts |
| 75.5 |
With respect to the Company’s securitization transactions covered by a financial guaranty insurance policy, agreements with the insurersinsurer provide that if portfolio performance ratios (delinquency,delinquency, default orand net loss triggers)ratios in a Trust’s pool of receivables
exceed certain targets, the specified credit enhancement levels would be increased. If a targeted portfolio performance ratio waswere exceeded in any FSA-insuredinsured securitization and a waiver waswere not granted by FSA,the insurer, excess cash flows from all of the Company’s FSA-insuredinsured securitizations could be used by the insurer to increase credit enhancement for the securitization in which a ratio was exceeded to higher specified levels rather than being distributed to the Company. If a targeted portfolio performance ratio waswere exceeded for an extended period of time in larger or multiple securitizations requiring a greater amount of additional credit enhancement, there wouldcould be a material adverse effect on the Company’s liquidity.
In March 2003,As of September 30, 2002, none of the Company exceeded its targetedCompany’s securitizations had delinquency, default or net loss triggersratios in three FSA-insured securitization transactions. A waiver was not granted by FSA. Accordingly, $19.0 millionexcess of cash generated by FSA-insured securitization transactions otherwise distributable by the Truststargeted levels. However, as a result of expected seasonal increases in Marchdelinquency levels through February 2003 was used to fund increased credit enhancement levelsand the prospects for continued economic weakness, the securitizations that breached their net loss triggers. The Company believes that it is probablelikely that net loss triggers on additional FSA-insured securitization Trusts will exceedthe initially targeted levels during calendar 2003 and possible that net loss performance triggers may bedelinquency ratios would have been exceeded in 2004 on additional FSA-insured securitization Trusts.
The prolonged weakness incertain of its securitizations during that time period. In September 2002, the economy has resulted ininsurer agreed to revise the targeted delinquency trigger levels through and including the March 2003 distribution date. As a result, the Company experiencing lower payment rates in late-stage delinquencies. Accordingly,does not expect to exceed the Company has implemented a more aggressive strategy for repossessing and liquidating these delinquent accounts.revised delinquency targets with respect to any Trusts. The Company anticipates that its new strategyexpected seasonal improvements in delinquency levels after February 2003 should result in delinquencythe ratios being maintainedreduced below targetedapplicable target levels. IfHowever, if expected seasonal improvements do not materialize or if there
is continued instability or further deterioration in the economy, targeted delinquency levels could be exceeded in certain FSA-insured securitization Trusts. However, should targeted delinquency levels be exceeded, there would be further increases in required credit enhancement levels only for securitization transactionsThe Company also believes that have not yet breached theirit is possible that net loss triggers.
Theratios on certain of its securitization Trusts will exceed target levels if current economic conditions persist or worsen. If targeted levels were exceeded and a waiver was not granted, the Company does not expect waiversestimates that $80.0 million to be granted by FSA in the future with respect to securitizations that breach net loss triggers and estimates that$100.0 million of cash otherwise distributable byfrom the Trusts on FSA-insured securitization transactions will be used to increase credit enhancementenhancements for FSA-insured transactions through fiscal 2004the insurer rather than being released to the Company.
Agreements with the Company’s financial guaranty insurance providers contain additional specified targeted portfolio performance ratios which are higher than the limits referred to in the preceding paragraphs. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured trust were to exceed these additional levels, provisions of the agreements permit the Company’s financial guaranty insurance providers to terminate the Company’s servicing rights to the receivables sold to that Trust. In addition, the servicing agreements on certain insured securitization Trusts are cross-defaulted so that a default under one servicing agreement would allow the guaranty insurance provider to terminate the Company’s servicing rights under all servicing agreements concerning securitization Trusts in which they issued a financial guaranty insurance policy. Although the Company believes it has never exceeded these additional targeted portfolio performance ratios, nor does it believesufficient liquidity in the event that cash distributions from the Trusts are curtailed as described above, the Company may be required to decrease loan origination activities, and implement other expense reductions, if securitization distributions are materially decreased for a prolonged period of time.
On September 12, 2002, Moody’s Investors Service announced its intention to review the Company for a potential credit rating downgrade. In the event of a downgrade, certain of the Company’s derivative collateral lines will be reduced. The Company anticipates that the portfolio will exceedreductions in these limits, there can be no assurance that the Company’s servicing rights with respectderivative collateral lines would require it to the automobile receivablespledge an additional $18.0 million to $40.0 million in such Trusts or any other Trust which exceeds the specified levels in future periods will not be terminated.cash to maintain its open derivative positions.
In April 2003, Fitch Ratings downgradedOn October 1, 2002, the Company’s Company completed a secondary offering of 67,000,000 shares of common stock at a price of $7.50 per share. On November 13, 2002, an additional 1,500,000 shares were issued to cover over-allotments. The net proceeds of the secondary offering were approximately $480.9 million.The Company intends to use the proceeds of the secondary offering for initial
credit ratingenhancement deposits in securitization transactions subsequent to ‘B’. This downgrade did not have an impact on the Company’s financial or liquidity position.September 30, 2002, and for other working capital needs.
In April 2003, the Company entered into a $1.0 billion securitization transaction involving the purchase of a financial guaranty insurance policy. Initial credit enhancement for this transaction was 10.5% of the original receivable pool balance and credit enhancement levels must reach 18% of the receivable pool balance before cash is distributed to the Company. Initial and targeted required credit enhancement levels are higher than the Company’s prior securitization transactions. The Company believes that additional securitizations completed in calendar 2003 will require these higher credit enhancement levels.
In February 2003, the Company implemented an operating plan in an effort to preserve and strengthen its capital and liquidity position. The plan includes a decrease in targeted loan origination volume to approximately $750.0 million per quarter by June 2003 and a reduction of operating expenses through downsizing
its workforce and consolidating its branch office network. Subject to continued access to the whole loan sale and securitization markets, the Company believes that it has sufficient liquidity to operate under its new plan through calendar 2003.
The Company will continue to require the execution of additional securitization or whole loan purchase transactions in order to fund its lending activities through calendarliquidity needs in fiscal 2003. In addition, the Company believes that it must utilize a securitization structure involving the purchase of a financial guaranty insurance policy in order to execute such securitization or whole loan purchase transactions based on current market conditions. FSA has indicated to the Company that it is unlikely to provide insurance for the Company’s securitizations for the first half of calendar 2003. Accordingly, the Company will continue to purchase financial guaranty insurance policies from other providers as it did for its April 2003 securitization transaction. There can be no assurance that funding will be available to the Company through the execution of securitization transactionsthis source or, if available, that the fundingit will be on terms acceptable terms.to it. If the Company is unable to execute securitization or whole loan purchase transactions on a regular basis, it would not have sufficient funds to finance new loan originations and, in such event, the Company wouldmay be required to further revise the scale of its business, including possible discontinuation ofsignificantly decrease loan origination activities and implement expense reductions, all of which wouldmay have a material adverse effectaffect on the Company’s ability to achieve its business and financial objectives.
INTEREST RATE RISK
Fluctuations in market interest rates impact the Company’s warehouse credit facilities and securitization transactions. The Company’s gross interest rate spread, which is the difference between interest earned on its finance receivables and interest paid, isearnings are affected by changes in interest rates as a result of its dependence upon the issuance of variable rateinterest-bearing securities and the incurrence of variable rate debt to fund its purchases oflending activities. Several factors can influence the Company’s ability to manage interest rate risk. First, auto finance receivables.
Warehouse Credit Facilities
Finance receivablescontracts are purchased by the Company and pledged to secure borrowings under its warehouse credit facilities bearat fixed interest rates. Amountsrates, while the amounts borrowed under the Company’s warehouse credit facilities bear interest at variable rates that are subject to frequent adjustmentsadjustment to reflect prevailing market interest rates. To protectSecond, the interest rate spread within each warehouse credit facility, the Company’s special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements in connection with borrowings under the Company’s warehouse credit facilities. The purchaser of the interest rate cap agreement pays a premium in return for the right to receive the difference in the interest cost at any time a specified index of market interest rates rises above the stipulated “cap” rate. The purchaser of the interest rate cap agreement bears no obligation or liability if interest rates fall below the “cap” rate. As part of the Company’s hedging strategy and when economically feasible, the Company may
simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid to purchase the interest rate cap agreement. The fair value of the interest rate cap agreements purchased and sold is included in other assets and derivative financial instruments on the Company’s consolidated balance sheets.
Securitizations
The interest rate demanded by investors in the Company’s securitization transactions depends onsecuritizations is a function of prevailing market interest rates for comparable transactions and the general interest rate environment. Therefore,Because the auto finance contracts purchased by the Company have fixed interest rates, the Company bears the risk of smaller gross interest rate spreads in the event interest rates increase during the period between the date receivables are purchased and the completion and pricing of securitization transactions. In addition, the securities issued underby the Trusts in the Company’s securitization transactions may bear fixed or variableinterest at floating rates that are subject to monthly adjustment to reflect prevailing market interest rates.
The Company utilizes several strategies to minimize the impactrisk of interest rate fluctuations, in its gross interest rate margin, including the use of derivative financial instruments, the regular sale or pledging of auto receivables to securitizationthe Trusts and pre-funding of securitization transactions.
The securitization of finance receivables allows the Company to lock in an interest rate on the funding for specific pools of receivables, thereby ensuring a gross interest rate spread throughout the term of the finance receivables. Pre-funding securitizations is the practice of issuing more asset-backed securities than needed to cover financethe amount of receivables initially sold or pledged to the Trust. The proceeds from the pre-funded portion are held in an escrow account until additional receivables are deliveredsold to the Trust in amounts up to the pre-funded balance held inof the pre-funded escrow account. The use ofIn pre-funded securitizations, allows the Company to lock in borrowing costs are locked in with respect to the finance receivablesloans subsequently delivered to the Trust. However, the Company incurs an expense in pre-funded securitizations during the period between the initial securitization and the subsequent delivery of finance receivables equal to the difference between the interestmoney market yields earned on the proceeds held in the escrow accountprior to subsequent delivery of receivables and the interest rate paid on the asset-backed securities outstanding.
In itsDerivative financial instruments are utilized to manage the gross interest rate spread on the Company’s securitization transactions, thetransactions. The Company transfers sells
fixed rate financeauto receivables to Trusts that, in turn, sell either fixed rate or floating rate securities to investors. The fixed rates on securities issued by the Trusts are indexed to market interest rate swap spreads for transactions of similar duration or various London Interbank Offered Rates (“LIBOR”) and do not fluctuate during the term of the securitization.. The floating rates on securities issued by the Trusts are indexed to LIBOR and fluctuate periodically based on movements in LIBOR. Derivative financial instruments, such as interest rate swap and cap agreements, are used to manage the gross interest rate spread on these transactions. The Company uses interest rate swap agreements to convert the variablefloating rate exposures on these securities to a fixed rate, thereby (i) locking in the gross interest rate spread to be earned by the Company over the life of a securitization accounted for as a secured financing that would have been affected by changes in interest rates or (ii) hedging the variability in future excess cash flows to be received by the Company over the life of athe securitization accounted for as a sale that would have been attributable to
interest rate risk. The Company utilizes such arrangementsthese derivative financial instruments to modify its net interest sensitivity to levels deemed appropriate based on the Company’s risk tolerance. In circumstances where the interest rate risk is deemed to be tolerable, usually if the risk if less than one year in term at inception, the Company may choose not to hedge potential fluctuations in cash flows due to changes in interest rates. The Company’s special purpose finance subsidiaries are contractually required to provide additional credit enhancements on their floating rate securities even if the Company chooses not to hedge its future cash flows. To comply with this requirement, the special purpose finance subsidiary purchases an interest rate cap agreement. When economically feasible, the Company may simultaneously sell a corresponding interest rate cap agreement to offset the premium paid to purchase the interest rate cap agreement. The fair value of the interest rate cap agreements purchased by the non-consolidated special purpose finance subsidiaries is considered in the valuation of the credit enhancement assets. The fair value of the interest rate cap agreements sold by the Company is included in derivative financial instruments on the Company’s consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are reflected in interest expense.
The Company also used an interest rate swap agreement to hedge the fair value of certain of its fixed rate senior notes. In August 2002, the Company terminated this interest rate swap agreement. The fair value of the agreement at termination date of $9.7 million is reflected as a premium in the carrying value of the senior notes and is being amortized into interest expense over the expected term of the senior notes.
In addition, the Company utilizes interest rate cap agreements as part of its interest rate risk management strategy for securitization transactions as well as for warehouse credit facilities. The purchaser of the interest rate cap agreement pays a premium in return for the right to receive the difference in the interest cost at any time a specified index of market interest rates rises above the stipulated “cap” rate. The interest rate cap agreement purchaser bears no obligation or liability if interest rates fall below the “cap” rate. The Company’s special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements as credit enhancement in connection with securitization transactions and warehouse credit facilities. The Company simultaneously sells a corresponding interest rate cap agreement in order to offset the purchased interest rate cap agreement. The fair value of the interest rate cap agreements purchased and sold by the Company is included in other assets and liabilities on the Company’s consolidated balance sheets. The fair value of the interest rate cap agreements purchased by the Trusts is considered in the valuation of the credit enhancement assets.
Management monitors the Company’s hedging activities to ensure that the value of hedges, their correlation to the contracts being hedged and the amounts being hedged continue to provide effective protection against interest rate risk. However, thereAll transactions are entered into for purposes other than trading. There have been no material changes in the Company’s interest rate risk exposure since June 30, 2002.
There can be no assurance that the Company’s strategies will be effective in minimizing interest rate risk or that increases in interest rates will not have an adverse effect on the Company’s profitability. All transactions are entered into for purposes other than trading. There have been no material changes in the Company’s interest rate risk exposure since June 30, 2002.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses the accounting and reporting for costs associated with exit or disposal activities and certain costs associated with those activities. SFAS 146 guidance was applied to restructuring charges associated with the Company’s revised operating plan implemented in February 2003.
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). This interpretation clarifies the disclosures required in quarterly and annual financial
statements about obligations under certain guarantees issues. FIN 45 also provides guidance on when a guarantor is required to recognize a liability for the obligation taken in issuing the guarantee. The adoption of this interpretation did not have a significant impact on the Company’s financial position or results of operations. This interpretation is effective for guarantees issued or modified after December 15, 2002. The required disclosures are effective for and are included in the Company’s March 31, 2003, quarterly financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends disclosure requirements of SFAS 123 to require disclosures in both annual and quarterly financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not anticipate that the adoption of this statement will have any impact on the Company’s financial position or results of operations. This statement is effective for the Company’s March 31, 2003, quarterly financial statements and the required disclosures are included in such financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities with certain characteristics. FIN 46 is effective immediately for all enterprises with variable interests in variable interest entities created after January 31, 2003 and is effective beginning with the September 30, 2003, quarterly financial statements for all variable interests in a variable interest entity created before February 1, 2003. The Company does not anticipate that the adoption of this interpretation will have any impact on the Company’s financial position or results of operations as the Company’s securitization transactions which were accounted for as sales of finance receivables were structured using qualified special purpose entities, which are excluded from the scope of this interpretation.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) for certain decisions made as part of the Derivatives Implementation Group process. SFAS 149 also amends SFAS 133 to incorporate clarifications of the definition of a derivative. This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company does not anticipate that the adoption of this statement will have a significant impact on the Company’s financial position or results of operations.
FORWARD LOOKING STATEMENTS
The preceding Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations sections containsection contains several “forward-looking statements”. Forward-looking statements are those that use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “may”, “will”, “likely”, “should”, “estimate”, “continue”, “future” or other comparable expressions. These words indicate future events and trends. Forward-looking statements are the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks and uncertainties that could cause actual results to differ significantly from historical results or from those anticipated by the Company. The most significant risks are detailed from time to time in the Company’s filings and reports with the Securities and Exchange Commission including the Company’s Annual Report on Form 10-K for the year ended June 30, 2002. It is advisable not to place undue reliance on the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because the Company’s funding strategy is dependent upon the issuance of interest-bearing securities and the incurrence of debt, fluctuations in interest rates impact the Company’s profitability. Therefore, the Company employs various hedging strategies to minimize the risk of interest rate fluctuations. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Operations – Interest Rate Risk” for additional information regarding such market risks.
Item 4.CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Such controls include those designed to ensure that information for disclosure is communicated to management, including the Executive Chairman of the Board and the(the “Chairman”), Chief Executive Officer (the “CEO”), the President (the “President”) and the Chief Financial Officer (the “CFO”), as appropriate to allow timely decisions regarding required disclosure.
The Chairman, CEO President and CFO, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within ninety days before the filing date of this quarterly report on Form 10-Q. Based on their evaluation, they have concluded, to the best of their knowledge and belief, that the disclosure controls and procedures are effective. No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Part II. OTHERII.OTHER INFORMATION
As a consumer finance company, the Company is 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. Some litigation against the Company could take the form of class action complaints by consumers. As the assignee of finance contracts originated by dealers, the Company may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages.
Several complaints have been filed by shareholders against the Company and certain of the Company’s officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The lawsuits, all of which seek class action status, have been consolidated into one action pending in the United States District Court located in Fort Worth, Texas. The consolidated lawsuit claims that deferments were improperly granted by the Company to avoid delinquency triggers in securitization transactions and enhance cash flow, thereby causing the Company to misrepresent its financial performance throughout the alleged class period. The Company believes that its granting of deferments, which is a common practice within the auto finance industry, complied at all times with the covenants contained in its securitization and warehouse financing documents, and that its deferment activities were properly disclosed to all constituents, including shareholders, asset-backed investors, creditors and credit enhancement providers. In the opinion of management, the consolidated lawsuit is without merit and the Company intends to vigorously defend against it.
Additionally, on February 27, 2003, the Company was served with a shareholder’s derivative action filed in the United States District Court for the Northern District of Texas, Fort Worth Division, entitled Mildred Rosenthal, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. This lawsuit alleges that certain officers and directors of the Company breached their respective fiduciary duties by causing the Company to make improper deferments, violated federal and state securities laws and issued misleading financial statements. The substantive allegations are essentially the same as those in the above-referenced class actions.
The Company believes that it has taken prudent steps to address the litigation risks associated with its business activities. InAs of September 30, 2002, there were no lawsuits pending or, to the opinion of management, the resolutionbest knowledge of the litigation pending orCompany, threatened against it, the Company, including the proceedings specifically described in this section,outcome of which will not have a material effectaffect on the Company’s financial condition, results of operations or cash flows.
Not Applicable
Item 3.DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Not Applicable
Item 6.EXHIBITS AND REPORTS ON FORM 8-K
(a) | Exhibits: |
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(b) | Reports on Form 8-K |
A report on Form 8-K was filed September 17, 2002, with the Commission to report the Company’s intent to structure future securitizations as on-balance sheet financings, to announce the public offering of common stock and to disclose the Company’s agreement with its insurer on April 3, 2003, announcing the transfer of $1.0 billion of auto receivables into a whole loan purchase facility. securitization triggers.
A report on Form 8-K was filed on September 30, 2002, with the Commission on April 23, 2003, to report the Company’s press releases dated April 23, 2003, announcing a reorganizationpricing of the Company’s executive management team and third quarter earnings.public offering of common stock.
Certain subsidiaries and affiliates of the Company filed reports on Form 8-K during the quarterly period ended March 31, 2003,September 30, 2002, reporting monthly information related to securitization trusts.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AmeriCredit Corp. (Registrant) | ||||||||
Date: |
| By: | /s/ Preston A. Miller
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CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002(Signature)
I, the undersigned Clifton H. Morris, Jr., Chairman of the Board and Chief Executive Officer of AmeriCredit Corp. (the “Company”), certify that:
Dated: May 15, 2003
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CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, the undersigned Daniel E. Berce, President of AmeriCredit Corp. (the “Company”), certify that:
Dated: May 15, 2003
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CERTIFICATION OF PERIODIC REPORT PURSUANT TO SECTION 302
OF SARBANES-OXLEY ACT OF 2002
I, the undersigned, Preston A. Miller, Executive Vice President, Chief Financial Officer and Treasurer of AmeriCredit Corp. (the “Company”), certify that:
Dated: May 15, 2003
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Preston A. Miller Executive Vice President, Chief Financial Officer and Treasurer |
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