UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 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'sRegistrant’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. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x¨ Accelerated filer ¨x Non-accelerated filer ¨ Smaller reporting companyReporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
There were 115,209,818116,284,194 shares of common stock, $0.01 par value outstanding as of April 30,October 31, 2008.
INDEX TO FORM 10-Q
Item 1. | CONDENSED FINANCIAL STATEMENTS |
Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)
March 31, 2008 | June 30, 2007 | September 30, 2008 | June 30, 2008 | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 484,175 | $ | 910,304 | $ | 243,752 | $ | 433,493 | ||||||||
Finance receivables, net | 14,920,808 | 15,102,370 | 13,102,726 | 14,030,299 | ||||||||||||
Restricted cash – securitization notes payable | 1,009,890 | 1,014,353 | 915,694 | 982,670 | ||||||||||||
Restricted cash – credit facilities | 254,857 | 166,884 | 190,619 | 259,699 | ||||||||||||
Property and equipment, net | 58,282 | 58,572 | 52,992 | 55,471 | ||||||||||||
Leased vehicles, net | 217,342 | 33,968 | 198,606 | 210,857 | ||||||||||||
Deferred income taxes | 274,657 | 151,704 | 317,444 | 317,319 | ||||||||||||
Goodwill | 212,595 | 208,435 | ||||||||||||||
Investment in money market fund | 112,346 | |||||||||||||||
Other assets | 186,273 | 164,430 | 237,224 | 257,402 | ||||||||||||
Total assets | $ | 17,618,879 | $ | 17,811,020 | $ | 15,371,403 | $ | 16,547,210 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Liabilities: | ||||||||||||||||
Credit facilities | $ | 3,418,571 | $ | 2,541,702 | $ | 2,990,427 | $ | 2,928,161 | ||||||||
Securitization notes payable | 10,882,696 | 11,939,447 | 9,289,957 | 10,420,327 | ||||||||||||
Senior notes | 200,000 | 200,000 | 200,000 | 200,000 | ||||||||||||
Convertible senior notes | 750,000 | 750,000 | 635,349 | 750,000 | ||||||||||||
Funding payable | 28,834 | 87,474 | 16,051 | 21,519 | ||||||||||||
Accrued taxes and expenses | 207,669 | 199,059 | 217,631 | 216,387 | ||||||||||||
Other liabilities | 145,333 | 18,188 | 104,555 | 113,946 | ||||||||||||
Total liabilities | 15,633,103 | 15,735,870 | 13,453,970 | 14,650,340 | ||||||||||||
Commitments and contingencies (Note 7) | ||||||||||||||||
Commitments and contingencies (Note 10) | ||||||||||||||||
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; 117,626,897 and 120,590,473 shares issued | 1,176 | 1,206 | ||||||||||||||
Common stock, $0.01 par value per share; 350,000,000 shares authorized; 118,721,550 and 118,766,250 shares issued | 1,187 | 1,188 | ||||||||||||||
Additional paid-in capital | 14,755 | 71,323 | 58,873 | 42,336 | ||||||||||||
Accumulated other comprehensive (loss) income | (40,277 | ) | 45,694 | |||||||||||||
Accumulated other comprehensive loss | (1,043 | ) | (6,404 | ) | ||||||||||||
Retained earnings | 2,062,898 | 2,000,066 | 1,911,022 | 1,912,684 | ||||||||||||
2,038,552 | 2,118,289 | 1,970,039 | 1,949,804 | |||||||||||||
Treasury stock, at cost (2,444,646 and 1,934,061 shares) | (52,776 | ) | (43,139 | ) | ||||||||||||
Treasury stock, at cost (2,437,356 and 2,454,534 shares) | (52,606 | ) | (52,934 | ) | ||||||||||||
Total shareholders’ equity | 1,985,776 | 2,075,150 | 1,917,433 | 1,896,870 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 17,618,879 | $ | 17,811,020 | $ | 15,371,403 | $ | 16,547,210 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of IncomeOperations and Comprehensive IncomeOperations
(Unaudited, Dollars in Thousands, Except Per Share Data)
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Finance charge income | $ | 595,743 | $ | 564,104 | $ | 1,820,300 | $ | 1,550,678 | $ | 533,973 | $ | 611,858 | ||||||||||||
Other income | 42,986 | 34,797 | 123,563 | 102,846 | 32,070 | 40,816 | ||||||||||||||||||
Servicing income | 13 | 571 | 807 | 9,009 | ||||||||||||||||||||
Gain on sale of equity investment | 15,801 | 51,997 | ||||||||||||||||||||||
638,742 | 615,273 | 1,944,670 | 1,714,530 | 566,043 | 652,674 | |||||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||
Operating expenses | 100,016 | 109,370 | 308,065 | 291,753 | 84,255 | 104,965 | ||||||||||||||||||
Depreciation expense – leased vehicles | 9,679 | 76 | 24,112 | 76 | 10,914 | 5,585 | ||||||||||||||||||
Provision for loan losses | 250,659 | 189,028 | 851,817 | 537,733 | 274,865 | 244,645 | ||||||||||||||||||
Interest expense | 208,084 | 186,610 | 633,378 | 485,941 | 195,046 | 211,261 | ||||||||||||||||||
Restructuring charges, net | 9,150 | 757 | 8,857 | 1,143 | 551 | (130 | ) | |||||||||||||||||
577,588 | 485,841 | 1,826,229 | 1,316,646 | 565,631 | 566,326 | |||||||||||||||||||
Income before income taxes | 61,154 | 129,432 | 118,441 | 397,884 | 412 | 86,348 | ||||||||||||||||||
Income tax provision | 22,989 | 25,700 | 37,547 | 124,490 | 2,074 | 24,529 | ||||||||||||||||||
Net income | 38,165 | 103,732 | 80,894 | 273,394 | ||||||||||||||||||||
Net (loss) income | (1,662 | ) | 61,819 | |||||||||||||||||||||
Other comprehensive loss Unrealized losses on credit enhancement assets | (275 | ) | (232 | ) | (3,056 | ) | ||||||||||||||||||
Unrealized losses on cash flow hedges | (61,262 | ) | (4,597 | ) | (143,288 | ) | (13,825 | ) | ||||||||||||||||
(Decrease) increase in fair value of equity investment | (1,634 | ) | 4,497 | |||||||||||||||||||||
Reclassification of gain on sale of equity investment into earnings | (15,801 | ) | (51,997 | ) | ||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||
Unrealized losses on credit enhancement assets | (198 | ) | ||||||||||||||||||||||
Unrealized gains (losses) on cash flow hedges | 9,925 | (36,143 | ) | |||||||||||||||||||||
Foreign currency translation adjustment | (2,609 | ) | 955 | 3,935 | (3,310 | ) | (1,285 | ) | 7,400 | |||||||||||||||
Income tax benefit | 22,783 | 7,469 | 53,614 | 22,906 | ||||||||||||||||||||
Income tax (provision) benefit | (3,279 | ) | 10,260 | |||||||||||||||||||||
Other comprehensive loss | (41,088 | ) | (13,883 | ) | (85,971 | ) | (44,785 | ) | ||||||||||||||||
Other comprehensive income (loss) | 5,361 | (18,681 | ) | |||||||||||||||||||||
Comprehensive (loss) income | $ | (2,923 | ) | $ | 89,849 | $ | (5,077 | ) | $ | 228,609 | ||||||||||||||
Comprehensive income | $ | 3,699 | $ | 43,138 | ||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
(Loss) earnings per share | ||||||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.88 | $ | 0.70 | $ | 2.29 | $ | (0.01 | ) | $ | 0.53 | |||||||||||
Diluted | $ | 0.31 | $ | 0.80 | $ | 0.65 | $ | 2.06 | $ | (0.01 | ) | $ | 0.49 | |||||||||||
Weighted average shares | ||||||||||||||||||||||||
Basic | 114,692,272 | 117,540,639 | 114,850,727 | 119,539,921 | 116,271,119 | 115,550,318 | ||||||||||||||||||
Diluted | 126,728,797 | 131,166,057 | 127,244,120 | 133,693,242 | 116,271,119 | 128,111,826 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
(Unaudited, in Thousands)
Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 80,894 | $ | 273,394 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Net (loss) income | $ | (1,662 | ) | $ | 61,819 | |||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 58,683 | 24,025 | 25,885 | 16,955 | ||||||||||||
Accretion and amortization of loan fees | 20,120 | (17,266 | ) | 6,995 | 4,688 | |||||||||||
Provision for loan losses | 851,817 | 537,733 | 274,865 | 244,645 | ||||||||||||
Deferred income taxes | (71,019 | ) | (28,875 | ) | (3,166 | ) | 24,529 | |||||||||
Stock-based compensation expense | 15,402 | 14,375 | 3,894 | 7,032 | ||||||||||||
Gain on sale of available for sale securities | (51,997 | ) | ||||||||||||||
Amortization of warrants | 12,348 | |||||||||||||||
Other | 5,898 | (2,675 | ) | 2,676 | 438 | |||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Other assets | (41,823 | ) | 27,174 | 1,417 | (39,057 | ) | ||||||||||
Accrued taxes and expenses | 2,912 | 11,174 | 6,960 | (40,810 | ) | |||||||||||
Net cash provided by operating activities | 922,884 | 787,062 | 330,212 | 280,239 | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Purchases of receivables | (5,475,655 | ) | (6,283,184 | ) | (586,647 | ) | (2,290,411 | ) | ||||||||
Principal collections and recoveries on receivables | 4,729,917 | 4,252,500 | 1,213,444 | 1,585,813 | ||||||||||||
Distributions from gain on sale Trusts | 7,466 | 92,957 | ||||||||||||||
Purchases of property and equipment | (7,719 | ) | (9,271 | ) | (855 | ) | (2,877 | ) | ||||||||
Net purchases of leased vehicles | (192,449 | ) | (3,466 | ) | (131,713 | ) | ||||||||||
Proceeds from sale of equity investment | 62,961 | |||||||||||||||
Acquisition of LBAC, net of cash acquired | (257,813 | ) | ||||||||||||||
Investment in money market fund | (115,821 | ) | ||||||||||||||
Change in restricted cash – securitization notes payable | 4,463 | (162,773 | ) | 66,976 | 19,540 | |||||||||||
Change in restricted cash – credit facilities | (87,926 | ) | (51,387 | ) | 68,735 | (207,180 | ) | |||||||||
Change in other assets | (15,496 | ) | 4,876 | 17,847 | (8,431 | ) | ||||||||||
Net cash used by investing activities | (1,037,399 | ) | (2,354,600 | ) | ||||||||||||
Net cash provided (used) by investing activities | 663,679 | (1,035,259 | ) | |||||||||||||
Cash flows from financing activities | ||||||||||||||||
Net change in credit facilities | 876,422 | 695,970 | 67,013 | (333,457 | ) | |||||||||||
Issuance of securitization notes payable | 3,500,000 | 4,248,304 | 2,500,000 | |||||||||||||
Payments on securitization notes payable | (4,560,947 | ) | (3,476,673 | ) | (1,130,862 | ) | (1,559,673 | ) | ||||||||
Issuance of convertible senior notes | 550,000 | |||||||||||||||
Retirement of convertible debt | (114,048 | ) | ||||||||||||||
Debt issuance costs | (13,337 | ) | (28,469 | ) | (3,366 | ) | (8,985 | ) | ||||||||
Proceeds from sale of warrants related to convertible debt | 93,086 | |||||||||||||||
Purchase of call option related to convertible debt | (145,710 | ) | ||||||||||||||
Repurchase of common stock | (127,901 | ) | (323,964 | ) | (127,901 | ) | ||||||||||
Proceeds from issuance of common stock | 14,051 | 47,864 | 14 | 10,199 | ||||||||||||
Other net changes | (587 | ) | 13,198 | (2,982 | ) | (79 | ) | |||||||||
Net cash (used) provided by financing activities | (312,299 | ) | 1,673,606 | (1,184,231 | ) | 480,104 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (426,814 | ) | 106,068 | |||||||||||||
Net decrease in cash and cash equivalents | (190,340 | ) | (274,916 | ) | ||||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents | 685 | (3,913 | ) | 599 | 1,682 | |||||||||||
Cash and cash equivalents at beginning of period | 910,304 | 513,240 | 433,493 | 910,304 | ||||||||||||
Cash and cash equivalents at end of period | $ | 484,175 | $ | 615,395 | $ | 243,752 | $ | 637,070 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including certain special purpose financing trusts utilized in securitization transactions (“Trusts”) which are considered variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation.
The consolidated financial statements as of March 31,September 30, 2008, and for the three and nine months ended March 31,September 30, 2008 and 2007, are unaudited, and in management’s opinion include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Certain prior year amounts have been reclassified to conform to current year presentation. The results for interim periods are not necessarily indicative of results for a full year.
The interim period consolidated financial statements, including the notes thereto, are condensed and do not include all disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. These interim period financial statements should be read in conjunction with our consolidated financial statements that are included in our Annual Report on Form 10-K for the year ended June 30, 2007.
Income Taxes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109”. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. The transition adjustment recognized on the date of adoption is recorded as an adjustment to retained earnings as of the beginning of the adoption period. We adopted FIN 48 on July 1, 2007. See Note 8 – “Income Taxes” for a discussion of the impact of implementing FIN 48.2008.
Recent Market Developments
We anticipate that a number of factors will continue to adversely impactaffect our liquidity in calendar 2008:fiscal 2009: higher credit enhancement levels in our securitization transactions drivencaused by bond insurance requirements,a reduction in excess spread due to a higher cost of funds and due to a lesser extent, the credit deterioration we are experiencing in our portfolio; continuedunprecedented disruptions in the capital markets and weakened demand for securities
guaranteed by insurance policies, making the execution of securitization transactions more challenging and expensive; decreasedexpensive and decreasing cash distributions from our securitization Trusts due to weaker credit performance; and the breach of portfolio performance ratios in certain of our securitization Trusts supported by auto receivables originated through our Long Beach Acceptance Corporation (“LBAC”) platform, as well as an amendment to the 2007-2-M securitization transaction to increase the portfolio performance ratios, resulting in higher credit enhancement requirements for those Trusts and a delay in cash distributions to us while those higher credit enhancement levels are built.performance.
Since January 2008, we have implemented a revised our operating plan in an effort to preserve and strengthen our capital and liquidity position, and to maintain sufficient capacity on our warehouse linescredit facilities to fund new loan originations until capital market conditions improve for securitization transactions. Under this revised plan, we increased the minimum credit score requirements for new loan originations, decreased our originations infrastructure by closing and consolidating branch underwritingcredit center locations, selectively decreased the number of dealers from whom we purchase loans and reduced operatingoriginations and overheadsupport function headcounts. We have discontinued new originations in our direct lending, leasing and leasingspecialty prime platforms, as well as certain partner relationships.
relationships, and in Canada. Our target for annualized loan origination levelstarget has been reduced to approximately $3.0 billion.$100 million per month. We recognized a restructuring charge of $9.1$0.6 million forduring the three months ended March 31, 2008, related to reductions which align our infrastructure with reduced origination targets.September 30, 2008.
We believe that we have sufficient liquidity and warehouse capacity to operate under this plan through calendar 2008.fiscal 2009 assuming the completion of at least one additional securitization transaction on similar terms as in the AmeriCredit Automobile Receivable Trust (“AMCAR”) 2008-1. We intend to utilize the forward purchase commitment with Deutsche Bank AG, Cayman Islands Branch (“Deutsche”) to place the triple-A rated asset-backed securities in such a securitization transaction. Additionally, we are currently negotiating with a significant shareholder concerning the acquisition of subordinated securities of such a securitization transaction, as well as the exchange of certain of our unsecured debt securities for additional shares of our common stock. If this transaction is consummated on the terms presently being discussed, such significant shareholder will acquire one seat on our board and we will waive the application of the Texas business combination law. However, if we are unable to complete the above mentioned transaction with this shareholder and the asset-backed securities market or the credit markets, in general, continue to deteriorate or if economic factors further deteriorate resulting in weaker credit performance, we may needbe unable to reduceplace the subordinated securities on acceptable terms or at all. In addition, if we breach any of the covenants in our targeted origination volume belowforward purchase commitment, we may be unable to place the $3.0 billion leveltriple-A rated asset-backed securities. Our credit facilities also contain covenants, which if breached, could restrict our ability to sustain adequate liquidity.
The asset-backed securities market, along with credit marketsborrow under such facilities to fund new loan originations, or in general, has been experiencing unprecedented disruptions. Market conditions began deterioratinga worst case, could result in mid-2007 and remain impaired in 2008. Current conditions in the asset-backed securities market include increased risk premiums for issuers, reduced investor demand for asset-backed securities, particularly those securities backed by sub-prime collateral, financial stress and rating agency downgrades impacting the financial guaranty insurance providers, and a general tighteningevents of availabilitydefault under most of credit. These conditions, which may increase our cost of funding and reduce our accessdebt agreements. Failure to the asset-backed securities market or other types of receivable financings, may continue or worsen in the future.
There have been some signs of improvement as several prime auto, equipment and credit card securitizations, as well as, one sub-prime auto securitization have been completed. Although the successful completion of these recent securitizations may evidence improving conditions in the asset-backed securities markets, there continues to be uncertainty about effective execution of larger scale sub-prime securitization transactions. We have not accessed the securitization market withcomplete a securitization transaction since October 2007.
In April 2008, we entered into a one year, $2 billion forward purchase commitment agreement with Deutsche Bank AG, Cayman Islands Branch (“Deutsche”). Under this agreement and subjector the inability to certain terms, Deutsche will purchase triple-A rated asset-backed securities in registered public offerings onaccess our sub-prime AmeriCredit Automobile Receivables Trust (AMCAR) securitization platform. We anticipate using this commitment in connection with securitizations backed by a financial guaranty insurance policy pursuant to an arrangement we have with Financial Security Assurance, Inc. (“FSA”) for $4.5 billion of insurance capacity.
We will continue to require execution of securitization transactions or other types of receivable financings during calendar 2008. There can be no assurance that funding will be available to us through the execution of these types of transactions or, if available, that the funding will be on acceptable terms.
However, if we are unable to execute securitization transactions in connection with the above plans, and are otherwise unable to issue any other debt or equity, wecredit facilities would not have sufficient funds to finance new loan originations and, in such event, we would be required to revise the scale of our business, including possible further reduction of loan origination activities, which would have a material adverse effect onraise substantial doubt about our ability to achieve our business and financial objectives. Forcontinue as a more complete description of the financing risks that we face, please review the Risk Factors Part I, Item I in our Annual Report on Form 10-K for the year ended June 30, 2007.going concern.
CurrentRecent Accounting Pronouncements and Accounting Changes
StatementIn the first quarter of Financial Accounting Standards No. 141R
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS 141R”), which replaces Statement of Financial Accounting Standards No. 141, “Business Combinations”. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations beginning in our 2010 fiscal year.
Statement of Financial Accounting Standards No. 161
In March 2008, the FASB issuedwe adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,157 “Fair Value Measurements” (“SFAS No. 161”157”) for all financial assets and financial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about157 defines fair value, amounts of gainsestablishes a framework for measuring fair value, and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008.enhances fair value measurement disclosure. The adoption of SFAS No. 161 will157 did not affecthave a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. See Note 9 – “Fair Value of Assets and Liabilities” for further details on our fair value measurements.
In October 2008, the FASB issued FSP 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP 157-3 did not have a significant impact on our consolidated financial statements or the fair values of our financial conditionassets and results of operations, but may require additional disclosures for our derivative and hedging activities.liabilities.
NOTE 2 – FINANCE RECEIVABLES
Finance receivables consist of the following (in thousands):
March 31, 2008 | June 30, 2007 | September 30, 2008 | June 30, 2008 | |||||||||||||
Finance receivables unsecuritized, net of fees | $ | 4,108,659 | $ | 3,054,183 | $ | 3,869,845 | $ | 3,572,214 | ||||||||
Finance receivables securitized, net of fees | 11,711,655 | 12,868,275 | 10,193,000 | 11,409,198 | ||||||||||||
Less nonaccretable acquisition fees | (44,190 | ) | (120,425 | ) | (33,469 | ) | (42,802 | ) | ||||||||
Less allowance for loan losses | (855,316 | ) | (699,663 | ) | (926,650 | ) | (908,311 | ) | ||||||||
$ | 14,920,808 | $ | 15,102,370 | $ | 13,102,726 | $ | 14,030,299 | |||||||||
Finance receivables securitized represent receivables transferred to our special purpose finance subsidiaries in securitization transactions accounted for as secured financings. Finance receivables unsecuritized include $3,870.0$3,373.0 million and $2,797.4$3,327.3 million pledged under our credit facilities as of March 31, 2008September 30 and June 30, 2007,2008, respectively.
Finance receivables are collateralized by vehicle titles and we have the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract.
The accrual of finance charge income has been suspended on $621.0$822.5 million and $632.9$728.8 million of delinquent finance receivables as of March 31, 2008September 30 and June 30, 2007,2008, respectively.
Finance contracts are generally purchased by us from auto dealers without recourse, and accordingly, the dealer usually has no liability to us if the consumer defaults on the contract. Depending upon the contract structure and consumer credit attributes, we may pay dealers a participation fee or we may charge dealers a non-refundable acquisition fee when purchasing individual finance contracts. We record the amortization of participation fees and the accretion of acquisition fees on loans purchased subsequent to June 30, 2004, to finance charge income using the effective interest method. We recorded acquisition fees on loans purchased prior to July 1, 2004, as nonaccretable fees available to cover losses inherent in the loan portfolio. Additionally, we recorded a discount on finance receivables repurchased upon the exercise of a clean-up call option from our gain on sale securitization transactions and accountaccounted for such discounts as nonaccretable discounts.
A summary of the nonaccretable acquisition fees is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Balance at beginning of period | $ | 75,866 | $ | 178,405 | $ | 120,425 | $ | 203,128 | $ | 42,802 | $ | 120,425 | ||||||||||||
Purchases of receivables | 109 | 9,195 | ||||||||||||||||||||||
Net charge-offs | (31,676 | ) | (36,931 | ) | (76,344 | ) | (70,849 | ) | (9,333 | ) | (31,675 | ) | ||||||||||||
Balance at end of period | $ | 44,190 | $ | 141,474 | $ | 44,190 | $ | 141,474 | $ | 33,469 | $ | 88,750 | ||||||||||||
A summary of the allowance for loan losses is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Balance at beginning of period | $ | 839,352 | $ | 513,135 | $ | 699,663 | $ | 475,529 | $ | 908,311 | $ | 699,663 | ||||||||||||
Acquisition of Long Beach | 41,009 | 41,009 | ||||||||||||||||||||||
Provision for loan losses | 250,659 | 189,028 | 851,817 | 537,733 | 274,865 | 244,645 | ||||||||||||||||||
Net charge-offs | (234,695 | ) | (128,186 | ) | (696,164 | ) | (439,285 | ) | (256,526 | ) | (188,316 | ) | ||||||||||||
Balance at end of period | $ | 855,316 | $ | 614,986 | $ | 855,316 | $ | 614,986 | $ | 926,650 | $ | 755,992 | ||||||||||||
NOTE 3 – SECURITIZATIONS
A summary of our securitization activity and cash flows from special purpose entities used for securitizations is as follows (in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||
Receivables securitized | $ | 1,919,503 | $ | 3,713,833 | $ | 4,895,244 | $ | 2,688,182 | ||||||||||
Net proceeds from securitization | 1,698,304 | 3,500,000 | 4,248,304 | 2,500,000 | ||||||||||||||
Servicing fees: | ||||||||||||||||||
Sold | $ | 13 | 132 | 156 | 2,615 | $ | 9 | 91 | ||||||||||
Secured financing(a) | 75,920 | 74,970 | 238,939 | 200,331 | 63,048 | 80,783 | ||||||||||||
Distributions: | ||||||||||||||||||
Sold | 248 | 7,466 | 92,957 | 173 | ||||||||||||||
Secured financing | 120,105 | 182,260 | 548,944 | 597,897 | 170,876 | 243,627 |
(a) | Servicing fees earned on securitizations accounted for as secured financings are included in finance charge income on the consolidated statements of |
As of March 31, 2008September 30 and June 30, 2007,2008, we were servicing $11,716.2$10,196.2 million and $12,899.7$11,413.0 million, respectively, of finance receivables that have been transferred or sold to securitization Trusts.
In April 2008, we entered into a one year, $2 billion forward purchase commitment agreement with Deutsche. Under this agreement and subject to certain terms, Deutsche will purchase triple-A rated asset-backed securities
issued by our sub-prime AMCAR securitization platform in registered public offerings. We paid $20.0 million of upfront commitment fees in connection with the agreement, which are being amortized to interest expense over the term of the facility. Unamortized costs of $10.8 million, as of September 30, 2008, are included in other assets on the consolidated balance sheets. Subsequent to September 30, 2008, we utilized $376.0 million of the commitment in conjunction with the execution of our AMCAR 2008-1 transaction. See Note 11 - “Warrants” for a discussion of warrants issued by us in connection with this transaction.
This agreement with Deutsche is subject to several performance covenants. We consider the most restrictive of these covenants to be the requirement to maintain a portfolio annualized net loss ratio of less than eight percent of average receivables on a rolling six month basis. If we were to breach any covenant in the agreement, Deutsche would no longer be obligated to purchase triple-A rated asset-backed securities under our AMCAR securitization program.
In September 2008, we entered into agreements with Wachovia Capital Markets, LLC and Wachovia Bank, National Association (together, “Wachovia”), to establish two funding facilities under which Wachovia would provide total funding of $117.7 million, during the one year term of the facilities, secured by asset-backed securities as collateral. Subsequent to September 30, 2008, and in conjunction with our AMCAR 2008-1 transaction, we obtained funding of $48.9 million by pledging AA/Aa2-rated asset-backed securities (the “Class B Notes”) as collateral and $68.8 million by pledging A/A3-rated asset-backed securities (the “Class C Notes”) as collateral. Under these funding facilities, we retained the Class B Notes and the Class C Notes and then sold the retained notes to a special purpose subsidiary, which in turn pledged such retained notes as collateral to secure the fundings under the two facilities. Currently, the facilities are fully utilized. At the end of the one year term, the facilities, if not renewed, will amortize in accordance with the securitization transaction until paid off. We paid $1.9 million of upfront commitment fees in connection with these facilities, which are being amortized to interest expense over the one year term of the facilities. Unamortized costs of $1.9 million, as of September 30, 2008, are included in other assets on the consolidated balance sheets. See Note 11 - “Warrants” for a discussion of warrants issued by us in connection with this transaction.
NOTE 4 – OTHER ASSETS – INVESTMENT IN MONEY MARKET FUND
We had an investment of $115.8 million in the Reserve Primary Money Market Fund (“the Reserve Fund”), a money market fund which has suspended redemptions and is in the process of liquidating its portfolio of investments. In mid-September, the net asset value of the Reserve Fund decreased below $1 per share as a result of the trustees of the Reserve Fund valuing their investments in Lehman Brothers Holdings Inc. (“LBHI”) debt securities held by the Reserve Fund at zero. Because redemptions of the fund have been suspended and our investment is not readily convertible to cash, we reclassified this investment on our balance sheet from cash and cash equivalents to other assets. We recognized an other than temporary impairment of $3.5 million, at September 30, 2008, by valuing the asset at the estimated net asset value of $0.97 per share as published by the Reserve Fund. As each security in the portfolio matures or
additional liquidity becomes available within the fund, the Reserve Fund has indicated that interim distributions will be made to the investors in the fund on a pro rata basis. Changes in market conditions could result in further adjustments to the fair value of this investment. Subsequent to September 30, 2008, we received $58.8 million as a partial distribution from the Reserve Fund.
NOTE 45 – CREDIT FACILITIES
Amounts outstanding under our credit facilities are as follows (in thousands):
March 31, 2008 | June 30, 2007 | September 30, 2008 | June 30, 2008 | |||||||||
Master warehouse facility | $ | 1,509,497 | $ | 822,955 | $ | 1,597,483 | $ | 1,470,335 | ||||
Medium term note facility | 750,000 | 750,000 | 750,000 | 750,000 | ||||||||
Call facility | 269,667 | 440,561 | 94,325 | 156,945 | ||||||||
Prime/Near prime facility | 764,380 | 352,700 | 424,669 | |||||||||
Bay View facility | 106,949 | |||||||||||
Long Beach facility | 371,902 | |||||||||||
Canadian facility | 125,027 | 49,335 | 107,218 | 126,212 | ||||||||
Leasing warehouse facility | 88,701 | |||||||||||
$ | 3,418,571 | $ | 2,541,702 | $ | 2,990,427 | $ | 2,928,161 | |||||
Further detail regarding terms and availability of the credit facilities as of March 31,September 30, 2008, follows (in thousands):
Maturity(a) | Facility Amount | Advances Outstanding | Finance Receivables Pledged | Restricted Cash Pledged(e) | ||||||||
Master warehouse facility: | ||||||||||||
October 2009 | $ | 2,500,000 | $ | 1,509,497 | $ | 1,707,836 | $ | 19,528 | ||||
Medium term note facility: | ||||||||||||
October 2009(b) | 750,000 | 750,000 | 784,562 | 59,754 | ||||||||
Call facility: | ||||||||||||
August 2008 | 500,000 | 269,667 | 357,302 | 26,968 | ||||||||
Prime/Near prime facility: | ||||||||||||
September 2008(c) | 1,500,000 | 764,380 | 868,554 | 10,672 | ||||||||
Canadian facility: | ||||||||||||
May 2008(d) | 146,292 | 125,027 | 151,725 | 2,957 | ||||||||
$ | 5,396,292 | $ | 3,418,571 | $ | 3,869,979 | $ | 119,879 | |||||
Maturity(a) | Facility Amount | Advances Outstanding | Finance Receivables Pledged | Restricted Cash Pledged (d) | ||||||||
Master warehouse facility(b): | ||||||||||||
October 2009 | $ | 2,245,000 | $ | 1,597,483 | $ | 1,773,914 | $ | 53,508 | ||||
Medium term note facility(c): | ||||||||||||
October 2009 | 750,000 | 750,000 | 807,081 | 16,208 | ||||||||
Call facility: | 94,325 | 222,755 | ||||||||||
Prime/Near prime facility: | ||||||||||||
September 2009 | 450,000 | 352,700 | 432,635 | 5,962 | ||||||||
Canadian facility: | ||||||||||||
May 2009 | 107,218 | 136,628 | 2,584 | |||||||||
Leasing warehouse facility: | ||||||||||||
June 2009 | 100,000 | 88,701 | 1,249 | |||||||||
$ | 3,545,000 | $ | 2,990,427 | $ | 3,373,013 | $ | 79,511 | |||||
(a) | Because |
(b) | See discussion below regarding the bankruptcy of Lehman Brothers Holdings Inc. and its commitment to the master warehouse facility. |
(c) | This facility is a revolving facility through the date stated above. During the revolving period, we have the ability to substitute receivables for cash, or vice versa. |
(d) |
These amounts do not include cash collected on finance receivables pledged of |
Generally, our credit facilities are administered by agents on behalf of institutionally managed commercial paper or medium term note conduits. Under these funding agreements, we transfer finance receivables to our special purpose finance subsidiaries. These subsidiaries, in turn, issue notes to the
agents, collateralized by such finance receivables and cash. The agents provide funding under the notes to the subsidiaries pursuant to an advance formula, and the subsidiaries forward the funds to us in consideration for the transfer of finance receivables. While these subsidiaries are included in our consolidated financial statements, these subsidiaries are separate legal entities and the finance receivables and other assets held by these subsidiaries are legally owned by these subsidiaries and are not available to our creditors or our other subsidiaries. Advances under the funding agreements bear interest at commercial paper, LIBOR or prime rates plus specified fees depending upon the source of funds provided by the agents.
We are required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under the facilities. Additionally, certain funding agreements contain various covenants requiring minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and delinquency ratios, and pool level cumulative net loss ratios) as well as limits on deferment levels. We consider the most restrictive of these covenants to be (i) maintenance of a portfolio annualized net credit loss ratio of less than 8.5 percent of average receivables on a rolling six month basis, (ii) maintenance of an average earnings ratio to interest expense for two consecutive fiscal quarters of not less than 1.2 times and (iii) the requirement to repurchase receivables that have been pledged to the master warehouse facility for more than 364 days. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or restrict our ability to obtain additional borrowings under these agreements. As of March 31,September 30, 2008, we were in compliance with all covenants in our credit facilities.
Subsequent to March 31,On September 15, 2008, LBHI filed a petition in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of the United States Bankruptcy Code. Subsequently, 16 additional affiliates of LBHI (together with LBHI, “Lehman”) filed petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of the United States Bankruptcy Code. Lehman is one of the eleven financial institutions in the syndicate that comprise the master warehouse facility. Lehman’s commitment under the facility was $255 million, which amount will not be available for future borrowing. As of September 30, 2008, we amendedhad $105 million outstanding under the Lehman commitment which will be repaid as the facility pays off.
The call facility matured in August 2008 and was not renewed. The facility was paid off in October 2008.
The prime/near prime facility was renewed in September 2008 and reduced in size from $1,120.0 million to $450.0 million to align with the suspension of our prime/near-prime facility to address a potential portfolio performance ratio violation in the facility related to credit losses in our Bay View and Long Beach portfolios. The amendment reduced the size of the facility to $1,120.0 million from $1,500.0 million.near prime origination platforms.
Debt issuance costs are being amortized to interest expense over the expected term of the credit facilities. Unamortized costs of $5.2$5.0 million and $6.5$6.0 million as of March 31, 2008September 30 and June 30, 2007,2008, respectively, are included in other assets on the consolidated balance sheets.
NOTE 56 – SECURITIZATION NOTES PAYABLE
Securitization notes payable represents debt issued by us in securitization transactions accounted for as secured financings.transactions. Debt issuance costs are being amortized over the expected term of the securitizations; accordingly, unamortizedsecuritizations on an effective yield basis. Unamortized costs of $20.4$16.5 million and $23.6$19.3 million as of March 31, 2008September 30 and June 30, 2007,2008, respectively, are included in other assets on the consolidated balance sheets.
Securitization notes payable as of March 31,September 30, 2008, consists of the following (dollars in thousands):
Transaction | Maturity Date (b) | Original Note Amount | Original Weighted Average Interest Rate | Receivables Pledged | Note Balance | Maturity Date (b) | Original Note Amount | Original Weighted Average Interest Rate | Receivables Pledged | Note Balance | ||||||||||||||||||
2004-1 | July 2010 | $ | 575,000 | 3.7 | % | $ | 84,127 | $ | 61,803 | |||||||||||||||||||
2004-C-A | May 2011 | 800,000 | 3.2 | % | 133,092 | 119,848 | May 2011 | $ | 800,000 | 3.2 | % | $ | 91,906 | $ | 82,725 | |||||||||||||
2004-D-F | July 2011 | 750,000 | 3.1 | % | 140,973 | 129,589 | July 2011 | 750,000 | 3.1 | % | 100,396 | 91,789 | ||||||||||||||||
2005-A-X | October 2011 | 900,000 | 3.7 | % | 196,042 | 177,555 | October 2011 | 900,000 | 3.7 | % | 142,605 | 128,670 | ||||||||||||||||
2005-1 | May 2011 | 750,000 | 4.5 | % | 181,041 | 132,171 | May 2011 | 750,000 | 4.5 | % | 134,534 | 97,467 | ||||||||||||||||
2005-B-M | May 2012 | 1,350,000 | 4.1 | % | 384,134 | 341,429 | May 2012 | 1,350,000 | 4.1 | % | 291,829 | 257,369 | ||||||||||||||||
2005-C-F | June 2012 | 1,100,000 | 4.5 | % | 361,692 | 326,838 | June 2012 | 1,100,000 | 4.5 | % | 278,986 | 250,148 | ||||||||||||||||
2005-D-A | November 2012 | 1,400,000 | 4.9 | % | 525,124 | 478,608 | November 2012 | 1,400,000 | 4.9 | % | 410,591 | 371,051 | ||||||||||||||||
2006-1 | May 2013 | 945,000 | 5.3 | % | 390,257 | 304,881 | May 2013 | 945,000 | 5.3 | % | 309,464 | 240,458 | ||||||||||||||||
2006-RM | January 2014 | 1,200,000 | 5.4 | % | 882,787 | 802,920 | ||||||||||||||||||||||
2006-R-M | January 2014 | 1,200,000 | 5.4 | % | 712,003 | 642,002 | ||||||||||||||||||||||
2006-A-F | September 2013 | 1,350,000 | 5.6 | % | 722,741 | 659,891 | September 2013 | 1,350,000 | 5.6 | % | 581,003 | 526,252 | ||||||||||||||||
2006-B-G | September 2013 | 1,200,000 | 5.2 | % | 723,260 | 664,821 | September 2013 | 1,200,000 | 5.2 | % | 588,201 | 536,127 | ||||||||||||||||
2007-A-X | October 2013 | 1,200,000 | 5.2 | % | 806,377 | 747,763 | October 2013 | 1,200,000 | 5.2 | % | 663,198 | 609,019 | ||||||||||||||||
2007-B-F | December 2013 | 1,500,000 | 5.2 | % | 1,137,107 | 1,049,660 | December 2013 | 1,500,000 | 5.2 | % | 944,684 | 866,062 | ||||||||||||||||
2007-1 | March 2016 | 1,000,000 | 5.4 | % | 723,076 | 722,669 | March 2016 | 1,000,000 | 5.4 | % | 586,381 | 580,824 | ||||||||||||||||
2007-C-M | April 2014 | 1,500,000 | 5.5 | % | 1,273,470 | 1,172,605 | April 2014 | 1,500,000 | 5.5 | % | 1,065,219 | 977,601 | ||||||||||||||||
2007-D-F | June 2014 | 1,000,000 | 5.5 | % | 901,942 | 840,131 | June 2014 | 1,000,000 | 5.5 | % | 761,863 | 697,541 | ||||||||||||||||
2007-2-M | March 2016 | 1,000,000 | 5.3 | % | 889,330 | 867,326 | March 2016 | 1,000,000 | 5.3 | % | 740,064 | 699,670 | ||||||||||||||||
2008-A-F | October 2014 | 750,000 | 6.0 | % | 835,706 | 667,626 | ||||||||||||||||||||||
BV2005-LJ-1 (a) | May 2012 | 232,100 | 5.1 | % | 55,394 | 57,632 | May 2012 | 232,100 | 5.1 | % | 41,087 | 42,888 | ||||||||||||||||
BV2005-LJ-2 (a) | February 2014 | 185,596 | 4.6 | % | 52,782 | 54,740 | February 2014 | 185,596 | 4.6 | % | 39,552 | 41,071 | ||||||||||||||||
BV2005-3 (a) | June 2014 | 220,107 | 5.1 | % | 78,776 | 82,027 | June 2014 | 220,107 | 5.1 | % | 61,454 | 63,934 | ||||||||||||||||
LB2004-B (a) | April 2011 | 250,000 | 3.5 | % | 30,500 | 32,106 | ||||||||||||||||||||||
LB2004-C (a) | July 2011 | 350,000 | 3.5 | % | 64,433 | 64,722 | July 2011 | 350,000 | 3.5 | % | 45,585 | 44,980 | ||||||||||||||||
LB2005-A (a) | April 2012 | 350,000 | 4.1 | % | 86,242 | 84,916 | April 2012 | 350,000 | 4.1 | % | 64,526 | 66,799 | ||||||||||||||||
LB2005-B (a) | June 2012 | 350,000 | 4.4 | % | 111,904 | 109,119 | June 2012 | 350,000 | 4.4 | % | 84,857 | 83,516 | ||||||||||||||||
LB2006-A (a) | May 2013 | 450,000 | 5.4 | % | 193,282 | 189,702 | May 2013 | 450,000 | 5.4 | % | 151,251 | 142,698 | ||||||||||||||||
LB2006-B (a) | September 2013 | 500,000 | 5.2 | % | 258,503 | 268,828 | September 2013 | 500,000 | 5.2 | % | 205,169 | 211,975 | ||||||||||||||||
LB2007-A | January 2014 | 486,000 | 5.0 | % | 323,267 | 338,396 | January 2014 | 486,000 | 5.0 | % | 260,886 | 269,695 | ||||||||||||||||
$ | 22,893,803 | $ | 11,711,655 | $ | 10,882,696 | $ | 22,818,803 | $ | 10,193,000 | $ | 9,289,957 | |||||||||||||||||
(a) | Transactions relate to securitization Trusts acquired by us. |
(b) | Maturity date represents final legal maturity of securitization notes payable. Securitization notes payable are expected to be paid based on amortization of the finance receivables pledged to the Trusts. |
At the time of securitization of finance receivables, we are required to pledge assets equal to a specified percentage of the securitization pool to support the securitization transaction. Typically, the assets pledged consist
of cash deposited to a restricted account and additional receivables delivered to the Trust, which create overcollateralization. The securitization transactions require the percentage of assets pledged to support the transaction to increase 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 targeted percentage level of assets has been reached. Once the targeted percentage level of assets is reached and maintained, excess cash flows generated by the Trusts are released to us as distributions from Trusts. 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 are also released to us as distributions from Trusts.
Several of the financial guaranty insurers used by us in the past are facing financial stress and rating agency downgrades due to risk exposures on insurance policies that guarantee mortgage debt and related structured products. As a result, demand for securities guaranteed by insurance, particularly securities backed by sub-prime collateral, has generally weakened. One of the insurers we have used, FSA, has been able to maintain its capital position and triple-A rating. We have an offer of capacity from FSA for $4,500.0 million for our sub-prime securitizations throughout calendar year 2008. Under this arrangement, which is not a commitment, prior to issuing an insurance policy, FSA will evaluate each securitization we propose to execute on a transaction by transaction basis as to timing, collateral composition, size, market conditions and other factors. While we believe that FSA will issue insurance policies to guarantee the securities issued in these securitizations to investors and that such policies will be accepted by investors and enhance the execution of our securitization transactions, we can provide no assurance on any of these matters.
Credit enhancement requirements in our sub-prime securitization structures will increase in calendar 2008 driven by bond insurance requirements, a reduction in excess spread due to higher cost of funds, and to a lesser extent, the credit deterioration we are experiencing in our portfolio. Historically, the level of credit enhancement required by the bond insurers in our securitization transactions would support a “shadow rating” to the bond insurer, or attachment point, of triple-B. The insurance policy provided by the bond insurer then allows for the actual rating on the securitization notes to be triple-A. The attachment point also determines the amount of capital the bond insurer is charged. As part of our arrangement with FSA, FSA will require us to increase the amount of credit enhancement we provide in a transaction to increase the attachment point to a rating of single-A-minus. With these changes, we expect enhancement levels on our securitization transactions to increase to initial and target credit enhancement levels in the low 20% range. This increase in enhancement levels will adversely impact our liquidity position.
With respect to our securitization transactions covered by a financial guaranty insurance policy, including transactions covered by FSA policies, agreements with the bond insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.
The securitization transactions insured by some of our financial guaranty insurance providers are cross-collateralized to a limited extent. In the event of a shortfall in the original target credit enhancement requirement for any of these securitization Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount.
AsDuring the three months ended September 30, 2008, we exceeded the cumulative default ratio target in the AMCAR 2007-D-F securitization. Accordingly, $6.7 million of March 31,cash otherwise distributable to us has been used to fund increased credit enhancement levels.
During fiscal 2008 and at September 30, 2008, three LBACLong Beach Acceptance Corporation (“LBAC”) securitizations (LB2006-A, LB2006-B and LB2007-A) insured by FSA had delinquency ratios in excess of the targeted levels. As part of thean arrangement with FSA described above,the insurer of these transactions, the excess cash flows from our other FSAsecuritizations insured securitizations are beingby this insurer were used to fund higher credit enhancement requirements in the LBAC Trusts which exceeded the portfolio performance ratios. As of March 31, 2008, cash otherwise distributable to us of $24 million has been used to buildThe higher required credit enhancement levels in these three LBAC Trusts. An additional $17 millionTrusts were reached as of excess cash will be needed to fund the higher credit enhancement levels. We anticipate that we will reach these requirements in MayJune 30, 2008. Additionally, twoone other LBAC securitizations (LB2005-A and LB2005-B) insured by FSAsecuritization (LB2005-A) had a delinquency ratiosratio in excess of its targeted levelslevel as of March 31,September 30, 2008. Excess cash flows from these LBAC securitizationsthis trust are being used to build higher credit enhancement levels in the respective Trusts that breached the portfolio performance ratios, instead of being distributed to us.
During the March 2008 quarter, we entered into an agreement with MBIA, Inc. (“MBIA”) to increase the portfolio performance ratios in the 2007-2-M securitization insured by MBIA. In return for higher portfolio performance ratios, we agreed to use excess cash flow from other MBIA insured securitizations to fund the higher credit enhancement requirement for the 2007-2-M Trust. We anticipate that it will take approximately three months to build the credit enhancement up to the new target requirement and $34 million otherwise distributable to us will be used to fund the higher credit enhancement requirements in this securitization transaction.
Agreements with all of our financial guaranty insurance providers contain additional specified targettargeted portfolio performance ratios that are higher than the levelsthose previously described. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these higher levels, provisions of the agreements permit our financial guaranty insurance providers to terminate our servicing rights to the receivables sold to that Trust.
NOTE 7 – CONVERTIBLE SENIOR NOTES
In November 2003, we issued $200.0 million of contingently convertible senior notes that are due in November 2023. Interest on the notes is payable semiannually at a rate of 1.75% per annum. The notes, which are uncollateralized, are convertible prior to maturity into shares of our common stock at $18.68 per share. Additionally, we may exercise our option to repurchase the notes, or holders of the convertible senior notes may require us to repurchase the notes, on November 15, 2008, at a price equal to 100.25% of the principal amount of the notes redeemed, or after November 15, 2008 at par. During the three months ended September 30, 2008, we repurchased $114.7 million of these convertible notes at a small discount. On October 20, 2008, we made a tender offer for the remaining balance of $85.3 million of these convertible notes which expires November 17, 2008, at a price equal to 100.25% of the principal amount of the notes redeemed.
NOTE 68 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of March 31, 2008September 30 and June 30, 2007,2008, we had interest rate swap agreements with underlying notional amounts of $3,344.8 million and $2,355.1$3,181.5 million, respectively. The fair value of our interest rate swap agreements of $131.5$63.5 million and $72.7 million as of March 31,September 30, 2008 isand June 30, 2008, respectively, are included in other liabilities on the consolidated balance sheets. The fair value of our interest rate swap agreements of $14.9 million as of June 30, 2007, is included in other assets on
the consolidated balance sheets. Interest rate swap agreements designated as hedges had unrealized losses of $129.1$60.3 million and unrealized gains of $14.2$70.2 million included in accumulated other comprehensive income as of March 31, 2008September 30 and June 30, 2007,2008, respectively. The ineffectiveness related to the interest rate swap agreements designated as hedges was not material for the three and nine month periods ended March 31,September 30, 2008 and 2007. We estimate approximately $74.0$41.5 million of unrealized losses included in other comprehensive income will be reclassified into earnings within the next twelve months.
As of March 31, 2008September 30 and June 30, 2007, we2008, our special purpose finance subsidiaries had purchased interest rate cap agreements with underlying notional amounts of $3,088.7$3,226.6 million and $4,323.7$3,173.3 million, respectively. As of September 30 and June 30, 2008, we had sold interest rate cap agreements with underlying notional amounts of $3,087.6 million and $3,034.3 million, respectively. The fair value of our interest rate cap agreements purchased by our special purpose finance subsidiaries of $8.6$36.6 million and $13.4$36.5 million as of March 31, 2008September 30 and June 30, 2007,2008, respectively, are included in other assets on the consolidated balance sheets. The fair value of our interest rate cap agreements sold by us of $8.6$36.5 million and $13.4$36.4 million as of March 31, 2008September 30 and June 30, 2007,2008, respectively, are included in other liabilities on the consolidated balance sheets.
Under the terms of our derivative financial instruments, we are required to pledge certain funds to be held in restricted cash accounts as collateral for
the outstanding derivative transactions. As of March 31, 2008September 30 and June 30, 2007,2008, these restricted cash accounts totaled $26.8$36.4 million and $10.2$52.8 million, respectively, and are included in other assets on the consolidated balance sheets.
As described in Note 5 - “Credit Facilities”, Lehman filed for bankruptcy protection on September 15, 2008. At September 30, 2008, Lehman was the counterparty on interest rate swaps with notional amounts of $1,089.7 million and fair value of $25.9 million recorded in other liabilities on the consolidated balance sheet. We have ceased hedge accounting for these swaps and are currently seeking a replacement counterparty.
NOTE 9 – FAIR VALUES OF ASSETS AND LIABILITIES
Effective July 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS 157”), which provides a framework for measuring fair value under GAAP. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels.
There are three general valuation techniques that may be used to measure fair value, as described below:
A) | Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources; |
B) | Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and |
C) | Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques, and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate. |
Assets and liabilities itemized below were measured at fair value during the period using the market and income approaches (in thousands):
September 30, 2008 | ||||||||||||||
Fair Value Measurements Using | Assets / Liabilities At Fair Value | Valuation Technique | ||||||||||||
Quoted Prices In Active Markets Identical Assets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | ||||||||||||
Assets | ||||||||||||||
Interest Rate Caps Purchased | $ | 36,590 | $ | 36,590 | (A | ) | ||||||||
Other Assets – Investment in Money Market Fund | $ | 112,346 | 112,346 | (C | ) | |||||||||
Total Assets | $ | 36,590 | $ | 112,346 | $ | 148,936 | ||||||||
Liabilities | ||||||||||||||
Interest Rate Swap Agreements | $ | 63,489 | $ | 63,489 | (C | ) | ||||||||
Interest Rate Caps Sold | $ | 36,542 | 36,542 | (A | ) | |||||||||
Total Liabilities | $ | 36,542 | $ | 63,489 | $ | 100,031 | ||||||||
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during fiscal 2009 (in thousands):
Other Assets - Investment in Money Market Fund | Interest Rate Swap Agreements | |||||||
Balance at July 1, 2008 | $ | (72,697 | ) | |||||
Transfers into Level 3 | $ | 115,821 | ||||||
Total realized and unrealized losses: | ||||||||
Included in earnings | (3,475 | ) | (1,343 | ) | ||||
Included in other comprehensive income | (10,225 | ) | ||||||
Purchases, issuances and settlements | 20,776 | |||||||
Balance at September 30, 2008 | $ | 112,346 | $ | (63,489 | ) | |||
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. A brief description of the valuation techniques used for our Level 3 assets and liabilities is provided below.
Other Assets
We had an investment of $115.8 million in the Reserve Fund, a money market fund which has suspended redemptions and is in the process of liquidating the portfolio of investments. In mid-September, the net asset value of the Reserve Fund decreased below $1 per share as a result of the trustees of the Reserve Fund valuing their investments in LBHI debt
securities held by the Reserve Fund at zero. Because redemptions of the fund have been suspended and our investment is not readily convertible to cash, we reclassified this investment on our balance sheet from cash and cash equivalents to other assets. We recognized an other than temporary impairment of $3.5 million, at September 30, 2008, by valuing the asset at the estimated net asset value of $0.97 per share as published by the Reserve Fund. As each security in the portfolio matures or additional liquidity becomes available within the fund, the Reserve Fund has indicated that interim distributions will be made to the investors in the fund on a pro rata basis. Changes in market conditions could result in further adjustments to the fair value of this investment. Subsequent to September 30, 2008, we received $58.8 million as a partial distribution from the Reserve Fund.
Derivatives
Our derivatives are not exchange traded but instead traded in over-the-counter markets where quoted market prices are not readily available. The fair value of derivatives is derived using models that use primarily market observable inputs, such as interest rate yield curves and credit curves. Any derivative fair value measurements using significant assumptions that are unobservable are classified as Level 3, which include interest rate swaps whose remaining terms extend beyond market observable interest rate yield curves. The impacts of the derivative liabilities for our and the counterparties’ non-performance risk to the derivative trades is considered when measuring the fair value of derivative liabilities.
NOTE 710 – COMMITMENTS AND CONTINGENCIES
Guarantees of Indebtedness
The payments of principal and interest on our senior notes and convertible senior notes are guaranteed by certain of our subsidiaries. The carrying value of the senior notes and convertible senior notes was $835.3 and $950.0 million as of March 31, 2008September 30 and June 30, 2007.2008, respectively. See guarantor consolidating financial statements in Note 13.16 – “Guarantor Consolidating Financial Statements”.
Legal Proceedings
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants. Some litigation against us could take the form of class action complaints by consumers and/or shareholders. As the assignee of finance contracts originated by dealers, we 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 can include requests for compensatory, statutory and punitive damages. We believe that we have taken prudent steps to address and mitigate
the litigation risks associated with our business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened litigation will not be material to our consolidated financial position or our results of operations.
NOTE 811 – WARRANTS
In connection with the closing of the forward purchase agreement with Deutsche (See Note 3 – “Securitizations”), we issued a warrant to an affiliate of Deutsche under which it may purchase up to 7.5 million shares of our common stock. The warrant may be exercised on or before April 15, 2015 at an exercise price of $12.01 per share. The total value of the warrant, $48.9 million, is being amortized to interest expense and additional paid in capital over the term of the forward purchase agreement. As of September 30, 2008, there was $26.5 million of unamortized cost.
In connection with the closing of the Wachovia funding facilities (See Note 3 – “Securitizations”), we issued a warrant to Wachovia under which they may purchase up to 1.0 million shares of common stock. The warrant may be exercised on or before September 24, 2015 at an exercise price of $13.55 per share. The total value of the warrant, $8.3 million, is being amortized to interest expense and additional paid in capital over the term of the Wachovia funding facilities. As of September 30, 2008, there was $8.2 million of unamortized cost.
NOTE 12 – INCOME TAXES
We adopted the provisions of FIN 48 on July 1, 2007. The adoption of FIN 48 resulted in a decrease to retained earnings of $0.5 million, an increase in deferred income taxes of $53.1 million and an increase to accrued taxes and expenses of $53.6 million.
Upon implementation of FIN 48 on July 1, 2007,had unrecognized tax benefits were $42.3 million.of $76.8 million and $57.7 million at September 30 and June 30, 2008, respectively. The increase is due primarily to an $18.8 million change attributable to current year activity in temporary items. The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate was $17.7is $21.9 million and $21.7 million at September 30 and June 30, 2008, respectively, which includes the federal benefit of state taxes. As of March 31, 2008, the amount of gross unrecognized tax benefits and the amount that would affect the effective income tax rate in future periods is $52.1 million and $20.2 million, respectively. It is reasonably possible that the amount of unrecognized tax benefits will change during the next twelve months. However, we do not expect any changes to have a material impact on our results of operations or our financial position.
We recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision. As of July 1, 2007,2008, accrued interest and penalties associated with uncertain tax positions were $5.6was $9.5 million and $6.9$7.4 million, respectively. ForDuring the ninethree months ended March 31,September 30, 2008, we hadaccrued an increase of $0.6additional $1.0 million in accrued potential interest associated with uncertain tax positions. For the nine months ended March 31, 2008, we had an increase of $0.4and $0.7 million in accrued potential penalties associated with uncertain tax positions.
At September 30, 2008, we believe that it is reasonably possible that the balance of the gross unrecognized tax benefits could decrease by $0.2 million to $10.5 million in the next twelve months due to ongoing activities with various taxing jurisdictions that we expect may give rise to settlements or the expiration of statutes of limitations. We continually evaluate expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings.
We file income tax returns in the U.S. federal jurisdiction, and various state, local, and foreign jurisdictions. Our U.S. federal income tax returns subsequent to fiscal year 2005 remain subject to examination by theThe Internal Revenue Service (“IRS”). The IRS completed its examination of our fiscal years 2004 and 2005 consolidated federal income tax returns in the second quarter of fiscal year 2007.2008. The returns for those years will beare subject to an appeals proceeding, which we anticipate will be concluded by the end of fiscal year 2009. We expect the outcome of the appeals proceeding will not result in a material change to our financial position or results of operations. Our U.S. federal income tax returns prior to fiscal year 2004 are closed. Foreign and U.S. state jurisdictions have statutes of limitations that generally range from 3three to 5five years. Our tax returns are currently under examination in various U.S. state and foreign jurisdictions.
Our effective income tax rate was 37.6%503.2% and 19.9%28.4% for the three months ended March 31,September 30, 2008 and 2007, respectively. The rate for the three months ended March 31,September 30, 2008, is primarily a result of the relationship between increases in interest and penalties associated with prior year tax positions discussed above and income before income taxes. The rate for the three months ended September 30, 2007, reflectsreflected a favorable resolutionrevised estimate of prior contingent liabilities.
Our effectivedeferred tax assets and liabilities relating to state income tax rate was 31.7%rates and 31.3% for the nine months ended March 31, 2008 and 2007, respectively.exercise of warrants issued in September 2002.
NOTE 913 – RESTRUCTURING CHARGES
We recognized restructuring charges of $9.1 million during the three months ended March 31, 2008, which included $8.7 million in personnel related costs and $0.4 million of contract termination costs related to reorganizing our originations structure.
As of March 31, 2008,Since 2003, total costs incurred to date related to our restructuring activities include $31.0$40.2 million in personnel-related costs and $69.8$72.4 million of contract termination and other associated costs.
A summary of the liabilities, which are included in accrued taxes and expenses on the consolidated balance sheets, for restructuring charges for the ninethree months ended March 31,September 30, 2008, is as follows (in thousands):
Personnel-Related Costs | Contract Termination Costs | Other Associated Costs | Total | |||||||||||||
Balance at June 30, 2007 | $ | 122 | $ | 4,175 | $ | 1,973 | $ | 6,270 | ||||||||
Additions | 8,672 | 329 | 92 | 9,093 | ||||||||||||
Settlements: | ||||||||||||||||
Cash | (5,323 | ) | (561 | ) | (383 | ) | (6,267 | ) | ||||||||
Non-Cash | 6 | (65 | ) | (59 | ) | |||||||||||
Adjustments | (122 | ) | 56 | (170 | ) | (236 | ) | |||||||||
Balance at March 31, 2008 | $ | 3,349 | $ | 4,005 | $ | 1,447 | $ | 8,801 | ||||||||
Personnel- Related Costs | Contract Termination Costs | Other Associated Costs | Total | |||||||||||||
Balance at July 1, 2008 | $ | 3,207 | $ | 3,741 | $ | 1,442 | $ | 8,390 | ||||||||
Cash settlements | (3,047 | ) | (922 | ) | (217 | ) | (4,186 | ) | ||||||||
Adjustments | 5 | 357 | 189 | 551 | ||||||||||||
Balance at September 30, 2008 | $ | 165 | $ | 3,176 | $ | 1,414 | $ | 4,755 | ||||||||
NOTE 1014 – 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 data):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||||||||||||||
Net income | $ | 38,165 | $ | 103,732 | $ | 80,894 | $ | 273,394 | |||||||||||
Net (loss) income | $ | (1,662 | ) | $ | 61,819 | ||||||||||||||
Interest expense related to 2003 convertible senior notes, net of related tax effects | 713 | 915 | 2,340 | 2,352 | 817 | ||||||||||||||
Adjusted net income | $ | 38,878 | $ | 104,647 | $ | 83,234 | $ | 275,746 | |||||||||||
Adjusted net (loss) income | $ | (1,662 | ) | $ | 62,636 | ||||||||||||||
Basic weighted average shares | 114,692,272 | 117,540,639 | 114,850,727 | 119,539,921 | 116,271,119 | 115,550,318 | |||||||||||||
Incremental shares resulting from assumed conversions: | |||||||||||||||||||
Stock-based compensation and warrants | 1,331,320 | 2,920,213 | 1,688,188 | 3,448,116 | 1,856,303 | ||||||||||||||
2003 convertible senior notes | 10,705,205 | 10,705,205 | 10,705,205 | 10,705,205 | 10,705,205 | ||||||||||||||
12,036,525 | 13,625,418 | 12,393,393 | 14,153,321 | 12,561,508 | |||||||||||||||
Diluted weighted average shares | 126,728,797 | 131,166,057 | 127,244,120 | 133,693,242 | 116,271,119 | 128,111,826 | |||||||||||||
Earnings per share: | |||||||||||||||||||
(Loss) earnings per share: | |||||||||||||||||||
Basic | $ | 0.33 | $ | 0.88 | $ | 0.70 | $ | 2.29 | $ | (0.01 | ) | $ | 0.53 | ||||||
Diluted | $ | 0.31 | $ | 0.80 | $ | 0.65 | $ | 2.06 | $ | (0.01 | ) | $ | 0.49 | ||||||
Basic (loss) earnings per share have been computed by dividing net (loss) income by weighted average shares outstanding.
Diluted loss per share has been computed by dividing net loss by the diluted weighted average shares, assuming no incremental shares because all potentially dilutive common stock equivalents are anti-dilutive.Diluted earnings per share havehas been computed by dividing net income, adjusted for interest expense (net of related tax effects) related to our convertible senior notes issued in November 2003, by the diluted weighted average shares and assumed incremental shares. The treasury stock method was used to compute the assumed incremental shares related to our outstanding stock-based compensation and warrants and will be used to compute the assumed incremental shares related to our convertible senior notes issued in September 2006 onceupon our stock price increasing above the average market price of the common shares exceeds therelevant conversion price. The average common stock market prices for the periods were used to determine the number of incremental shares. Options to purchase approximately 3.0 million and 2.81.7 million shares of common stock for the three and nine months ended March 31, 2008 respectively, and 0.7 million shares of common stock for the three and nine months ended March 31,at September 30, 2007, 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. Warrants to purchase approximately 30.0 million shares of common stock for the three and nine months ended March 31, 2008 andSeptember 30, 2007, were not included in the computation of diluted earnings
per share because the exercise price wasprices were greater than the average market price of the common shares.
The if-converted method was used to calculate the impact of our convertible senior notes issued in November 2003 on assumed incremental shares.shares for the three months ended September 30, 2007.
NOTE 1115 – SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest costs and income taxes consist of the following (in thousands):
Nine Months Ended March 31, | ||||||
2008 | 2007 | |||||
Interest costs (none capitalized) | $ | 631,257 | $ | 481,962 | ||
Income taxes | 79,556 | 121,319 |
NOTE 12 – SUBSEQUENT EVENTS
We entered into a forward purchase agreement with Deutsche whereby they will purchase, at specified spread levels that we consider to generally represent primary issuance market pricing, up to $2 billion of triple-A rated AMCAR securitization notes that we issue over a twelve month period. In exchange for this commitment, we paid $20 million in upfront commitment fees and granted Deutsche a warrant to purchase 7.5 million shares of common stock with an exercise price of $12.01 per share.
Three Months Ended September 30, | ||||||
2008 | 2007 | |||||
Interest costs (none capitalized) | $ | 184,831 | $ | 207,392 | ||
Income taxes | 326 | 31,308 |
NOTE 1316 – GUARANTOR CONSOLIDATING FINANCIAL STATEMENTS
The payment of principal and interest on our senior notes and convertible senior notes are guaranteed by certain of our subsidiaries (the “Subsidiary Guarantors”). The separate financial statements of the Subsidiary Guarantors are not included herein because the Subsidiary Guarantors are our wholly-owned consolidated subsidiaries and are jointly, severally, fully and unconditionally liable for the obligations represented by the convertible senior notes. We believe that the consolidating financial information for AmeriCredit Corp., the combined Subsidiary Guarantors and the combined Non-Guarantor Subsidiaries provide information that is more meaningful in understanding the financial position of the Subsidiary Guarantors than separate financial statements of the Subsidiary Guarantors.
The consolidating financial statements 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 parent company and our subsidiaries on a consolidated basis and (v) the parent company and our 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 operations 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,September 30, 2008
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 434,269 | $ | 49,906 | $ | 484,175 | $ | 152,089 | $ | 91,663 | $ | 243,752 | |||||||||||||||||||||||||||
Finance receivables, net | 181,967 | 14,738,841 | 14,920,808 | 409,957 | 12,692,769 | 13,102,726 | |||||||||||||||||||||||||||||||||
Restricted cash - securitization notes payable | 1,009,890 | 1,009,890 | |||||||||||||||||||||||||||||||||||||
Restricted cash - credit facilities | 254,857 | 254,857 | |||||||||||||||||||||||||||||||||||||
Restricted cash – securitization notes payable | 915,694 | 915,694 | |||||||||||||||||||||||||||||||||||||
Restricted cash – credit facilities | 190,619 | 190,619 | |||||||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 5,944 | 52,338 | 58,282 | $ | 5,777 | 47,215 | 52,992 | |||||||||||||||||||||||||||||||
Leased vehicles, net | 217,342 | 217,342 | 25,140 | 173,466 | 198,606 | ||||||||||||||||||||||||||||||||||
Deferred income taxes | 73,937 | 105,219 | 95,501 | 274,657 | 30,990 | 319,213 | (32,759 | ) | 317,444 | ||||||||||||||||||||||||||||||
Goodwill | 212,595 | 212,595 | |||||||||||||||||||||||||||||||||||||
Investment in money market fund | 112,346 | 112,346 | |||||||||||||||||||||||||||||||||||||
Other assets | (1,355 | ) | 127,022 | 60,606 | 186,273 | (266 | ) | 177,379 | 60,111 | 237,224 | |||||||||||||||||||||||||||||
Due from affiliates | 866,082 | 4,134,574 | $ | (5,000,656 | ) | 835,887 | 4,398,486 | $ | (5,234,373 | ) | |||||||||||||||||||||||||||||
Investment in affiliates | 2,065,844 | 6,094,330 | 545,299 | (8,705,473 | ) | 1,983,507 | 6,232,923 | 543,021 | (8,759,451 | ) | |||||||||||||||||||||||||||||
Total assets | $ | 3,010,452 | $ | 7,425,082 | $ | 20,889,474 | $ | (13,706,129 | ) | $ | 17,618,879 | $ | 2,855,895 | $ | 7,476,262 | $ | 19,033,070 | $ | (13,993,824 | ) | $ | 15,371,403 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||||
Credit facilities | $ | 3,418,571 | $ | 3,418,571 | $ | 2,990,427 | $ | 2,990,427 | |||||||||||||||||||||||||||||||
Securitization notes payable | 10,882,696 | 10,882,696 | 9,289,957 | 9,289,957 | |||||||||||||||||||||||||||||||||||
Senior notes | $ | 200,000 | 200,000 | $ | 200,000 | 200,000 | |||||||||||||||||||||||||||||||||
Convertible senior notes | 750,000 | 750,000 | 635,349 | 635,349 | |||||||||||||||||||||||||||||||||||
Funding payable | $ | 28,274 | 560 | 28,834 | $ | 16,068 | (17 | ) | 16,051 | ||||||||||||||||||||||||||||||
Accrued taxes and expenses | 73,212 | 67,790 | 66,667 | 207,669 | 102,162 | 45,686 | 69,783 | 217,631 | |||||||||||||||||||||||||||||||
Other liabilities | 1,464 | 143,869 | 145,333 | 951 | 103,604 | 104,555 | |||||||||||||||||||||||||||||||||
Due to affiliates | 5,000,656 | $ | (5,000,656 | ) | 5,234,373 | $ | (5,234,373 | ) | |||||||||||||||||||||||||||||||
Total liabilities | 1,024,676 | 5,240,589 | 14,368,494 | (5,000,656 | ) | 15,633,103 | 938,462 | 5,399,731 | 12,350,150 | (5,234,373 | ) | 13,453,970 | |||||||||||||||||||||||||||
Shareholders’ equity: | |||||||||||||||||||||||||||||||||||||||
Common stock | 1,176 | 75,355 | 30,627 | (105,982 | ) | 1,176 | 1,187 | 50,775 | 30,627 | (81,402 | ) | 1,187 | |||||||||||||||||||||||||||
Additional paid-in capital | 14,755 | 75,878 | 3,916,519 | (3,992,397 | ) | 14,755 | 58,873 | 75,878 | 3,924,343 | (4,000,221 | ) | 58,873 | |||||||||||||||||||||||||||
Accumulated other comprehensive (loss) income | (40,277 | ) | (57,964 | ) | 40,539 | 17,425 | (40,277 | ) | (1,043 | ) | (18,272 | ) | 36,951 | (18,679 | ) | (1,043 | ) | ||||||||||||||||||||||
Retained earnings | 2,062,898 | 2,091,224 | 2,533,295 | (4,624,519 | ) | 2,062,898 | 1,911,022 | 1,968,150 | 2,690,999 | (4,659,149 | ) | 1,911,022 | |||||||||||||||||||||||||||
2,038,552 | 2,184,493 | 6,520,980 | (8,705,473 | ) | 2,038,552 | 1,970,039 | 2,076,531 | 6,682,920 | (8,759,451 | ) | 1,970,039 | ||||||||||||||||||||||||||||
Treasury stock | (52,776 | ) | (52,776 | ) | (52,606 | ) | (52,606 | ) | |||||||||||||||||||||||||||||||
Total shareholders’ equity | 1,985,776 | 2,184,493 | 6,520,980 | (8,705,473 | ) | 1,985,776 | 1,917,433 | 2,076,531 | 6,682,920 | (8,759,451 | ) | 1,917,433 | |||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,010,452 | $ | 7,425,082 | $ | 20,889,474 | $ | (13,706,129 | ) | $ | 17,618,879 | $ | 2,855,895 | $ | 7,476,262 | $ | 19,033,070 | $ | (13,993,824 | ) | $ | 15,371,403 | |||||||||||||||||
AmeriCredit Corp.
Consolidating Balance Sheet
June 30, 20072008
(in thousands)Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 899,386 | $ | 10,918 | $ | 910,304 | $ | 361,352 | $ | 72,141 | $ | 433,493 | ||||||||||||||||||||||||||
Finance receivables, net | 201,036 | 14,901,334 | 15,102,370 | 173,077 | 13,857,222 | 14,030,299 | ||||||||||||||||||||||||||||||||
Restricted cash - securitization notes payable | 1,014,353 | 1,014,353 | ||||||||||||||||||||||||||||||||||||
Restricted cash - credit facilities | 166,884 | 166,884 | ||||||||||||||||||||||||||||||||||||
Restricted cash – securitization notes payable | 982,670 | 982,670 | ||||||||||||||||||||||||||||||||||||
Restricted cash – credit facilities | 259,699 | 259,699 | ||||||||||||||||||||||||||||||||||||
Property and equipment, net | $ | 6,194 | 52,378 | 58,572 | $ | 5,860 | 49,611 | 55,471 | ||||||||||||||||||||||||||||||
Leased vehicles, net | 33,968 | 33,968 | 106,689 | 104,168 | 210,857 | |||||||||||||||||||||||||||||||||
Deferred income taxes | (32,624 | ) | 119,827 | 64,501 | 151,704 | 19,244 | 311,761 | (13,686 | ) | 317,319 | ||||||||||||||||||||||||||||
Goodwill | 208,435 | 208,435 | ||||||||||||||||||||||||||||||||||||
Other assets | 16,454 | 75,468 | 72,508 | 164,430 | 1,372 | 193,972 | 62,058 | 257,402 | ||||||||||||||||||||||||||||||
Due from affiliates | 1,029,444 | 2,273,498 | $ | (3,302,942 | ) | 941,157 | 3,911,745 | $ | (4,852,902 | ) | ||||||||||||||||||||||||||||
Investment in affiliates | 2,070,684 | 4,070,618 | 529,740 | (6,671,042 | ) | 1,967,775 | 5,908,573 | 544,169 | (8,420,517 | ) | ||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||||
Total assets | $ | 3,090,152 | $ | 5,661,116 | $ | 19,033,736 | $ | (9,973,984 | ) | $ | 17,811,020 | $ | 2,935,408 | $ | 7,105,035 | $ | 19,780,186 | $ | (13,273,419 | ) | $ | 16,547,210 | ||||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||||||||
Credit facilities | $ | 2,541,702 | $ | 2,541,702 | $ | 2,928,161 | $ | 2,928,161 | ||||||||||||||||||||||||||||||
Securitization notes payable | 11,939,447 | 11,939,447 | 10,420,327 | 10,420,327 | ||||||||||||||||||||||||||||||||||
Senior notes | $ | 200,000 | 200,000 | $ | 200,000 | 200,000 | ||||||||||||||||||||||||||||||||
Convertible senior notes | 750,000 | 750,000 | 750,000 | 750,000 | ||||||||||||||||||||||||||||||||||
Funding payable | $ | 86,917 | 557 | 87,474 | $ | 21,561 | (42 | ) | 21,519 | |||||||||||||||||||||||||||||
Accrued taxes and expenses | 64,251 | 60,656 | 74,152 | 199,059 | 87,335 | 55,661 | 73,391 | 216,387 | ||||||||||||||||||||||||||||||
Other liabilities | 751 | 17,437 | 18,188 | 1,203 | 112,743 | 113,946 | ||||||||||||||||||||||||||||||||
Due to affiliates | 3,302,942 | $ | (3,302,942 | ) | 4,852,902 | $ | (4,852,902 | ) | ||||||||||||||||||||||||||||||
Total liabilities | 1,015,002 | 3,467,952 | 14,555,858 | (3,302,942 | ) | 15,735,870 | 1,038,538 | 5,042,867 | 13,421,837 | (4,852,902 | ) | 14,650,340 | ||||||||||||||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||||||||||||||||||||
Common stock | 1,206 | 75,355 | 30,627 | (105,982 | ) | 1,206 | 1,188 | 50,775 | 30,627 | (81,402 | ) | 1,188 | ||||||||||||||||||||||||||
Additional paid-in capital | 71,323 | 75,791 | 2,048,960 | (2,124,751 | ) | 71,323 | 42,336 | 75,878 | 3,659,102 | (3,734,980 | ) | 42,336 | ||||||||||||||||||||||||||
Accumulated other comprehensive income | 45,694 | 27,592 | 37,414 | (65,006 | ) | 45,694 | ||||||||||||||||||||||||||||||||
Accumulated other comprehensive (loss) income | (6,404 | ) | (21,801 | ) | 40,602 | (18,801 | ) | (6,404 | ) | |||||||||||||||||||||||||||||
Retained earnings | 2,000,066 | 2,014,426 | 2,360,877 | (4,375,303 | ) | 2,000,066 | 1,912,684 | 1,957,316 | 2,628,018 | (4,585,334 | ) | 1,912,684 | ||||||||||||||||||||||||||
2,118,289 | 2,193,164 | 4,477,878 | (6,671,042 | ) | 2,118,289 | 1,949,804 | 2,062,168 | 6,358,349 | (8,420,517 | ) | 1,949,804 | |||||||||||||||||||||||||||
Treasury stock | (43,139 | ) | (43,139 | ) | (52,934 | ) | (52,934 | ) | ||||||||||||||||||||||||||||||
Total shareholders’ equity | 2,075,150 | 2,193,164 | 4,477,878 | (6,671,042 | ) | 2,075,150 | 1,896,870 | 2,062,168 | 6,358,349 | (8,420,517 | ) | 1,896,870 | ||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 3,090,152 | $ | 5,661,116 | $ | 19,033,736 | $ | (9,973,984 | ) | $ | 17,811,020 | $ | 2,935,408 | $ | 7,105,035 | $ | 19,780,186 | $ | (13,273,419 | ) | $ | 16,547,210 | ||||||||||||||||
AmeriCredit Corp.
Consolidating Statement of Operations
Three Months Ended September 30, 2008
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenue | |||||||||||||||||||
Finance charge income | $ | 17,704 | $ | 516,269 | $ | 533,973 | |||||||||||||
Other income | $ | 8,107 | 279,052 | 540,473 | $ | (795,562 | ) | 32,070 | |||||||||||
Equity in income of affiliates | 10,834 | 62,981 | (73,815 | ) | |||||||||||||||
18,941 | 359,737 | 1,056,742 | (869,377 | ) | 566,043 | ||||||||||||||
Costs and expenses | |||||||||||||||||||
Operating expenses | 6,244 | 14,632 | 63,379 | 84,255 | |||||||||||||||
Depreciation expense – leased vehicles | 5,099 | 5,815 | 10,914 | ||||||||||||||||
Provision for loan losses | 55,447 | 219,418 | 274,865 | ||||||||||||||||
Interest expense | 21,698 | 302,635 | 666,275 | (795,562 | ) | 195,046 | |||||||||||||
Restructuring charges, net | 551 | 551 | |||||||||||||||||
27,942 | 378,364 | 954,887 | (795,562 | ) | 565,631 | ||||||||||||||
(Loss) income before income taxes | (9,001 | ) | (18,627 | ) | 101,855 | (73,815 | ) | 412 | |||||||||||
Income tax (benefit) provision | (7,339 | ) | (29,461 | ) | 38,874 | 2,074 | |||||||||||||
Net (loss) income | $ | (1,662 | ) | $ | 10,834 | $ | 62,981 | $ | (73,815 | ) | $ | (1,662 | ) | ||||||
AmeriCredit Corp.
Consolidating Statement of Income
Three Months Ended March 31, 2008
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Revenue | ||||||||||||||||||
Finance charge income | $ | 25,607 | $ | 570,136 | $ | 595,743 | ||||||||||||
Other income | $ | 17,381 | 701,900 | 1,468,261 | $ | (2,144,556 | ) | 42,986 | ||||||||||
Servicing income (loss) | 13,397 | (13,384 | ) | 13 | ||||||||||||||
Equity in income of affiliates | 37,442 | 95,309 | (132,751 | ) | ||||||||||||||
54,823 | 836,213 | 2,025,013 | (2,277,307 | ) | 638,742 | |||||||||||||
Costs and expenses | ||||||||||||||||||
Operating expenses | 7,824 | 15,695 | 76,497 | 100,016 | ||||||||||||||
Depreciation expense - leased vehicles | 9,679 | 9,679 | ||||||||||||||||
Provision for loan losses | 32,790 | 217,869 | 250,659 | |||||||||||||||
Interest expense | 8,081 | 761,513 | 1,583,046 | (2,144,556 | ) | 208,084 | ||||||||||||
Restructuring charges, net | 9,150 | 9,150 | ||||||||||||||||
15,905 | 828,827 | 1,877,412 | (2,144,556 | ) | 577,588 | |||||||||||||
Income before income taxes | 38,918 | 7,386 | 147,601 | (132,751 | ) | 61,154 | ||||||||||||
Income tax provision (benefit) | 753 | (30,056 | ) | 52,292 | 22,989 | |||||||||||||
Net income | $ | 38,165 | $ | 37,442 | $ | 95,309 | $ | (132,751 | ) | $ | 38,165 | |||||||
AmeriCredit Corp.
Consolidating Statement of Income
Three Months Ended March 31,September 30, 2007
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | |||||||||||||||
Revenue | |||||||||||||||||||
Finance charge income | $ | 30,203 | $ | 533,901 | $ | 564,104 | |||||||||||||
Other income | $ | 13,400 | 560,861 | 1,134,133 | $ | (1,673,597 | ) | 34,797 | |||||||||||
Servicing income (loss) | 9,273 | (8,702 | ) | 571 | |||||||||||||||
Gain on sale of equity investment | 15,801 | 15,801 | |||||||||||||||||
Equity in income of affiliates | 113,508 | 28,354 | (141,862 | ) | |||||||||||||||
126,908 | 644,492 | 1,659,332 | (1,815,459 | ) | 615,273 | ||||||||||||||
Costs and expenses | |||||||||||||||||||
Operating expenses | 22,804 | 15,092 | 71,474 | 109,370 | |||||||||||||||
Depreciation expense – leased vehicles | 76 | 76 | |||||||||||||||||
Provision for loan losses | (86,000 | ) | 275,028 | 189,028 | |||||||||||||||
Interest expense | 3,678 | 586,124 | 1,270,405 | (1,673,597 | ) | 186,610 | |||||||||||||
Restructuring charges, net | 757 | 757 | |||||||||||||||||
26,482 | 516,049 | 1,616,907 | (1,673,597 | ) | 485,841 | ||||||||||||||
Income before income taxes | 100,426 | 128,443 | 42,425 | (141,862 | ) | 129,432 | |||||||||||||
Income tax (benefit) provision | (3,306 | ) | 14,935 | 14,071 | 25,700 | ||||||||||||||
Net income | $ | 103,732 | $ | 113,508 | $ | 28,354 | $ | (141,862 | ) | $ | 103,732 | ||||||||
AmeriCredit Corp.
Consolidating Statement of Income
Nine Months Ended March 31, 2008
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Revenue | ||||||||||||||||||
Finance charge income | $ | 71,176 | $ | 1,749,124 | $ | 1,820,300 | ||||||||||||
Other income | $ | 50,238 | 1,808,517 | 3,623,832 | $ | (5,359,024 | ) | 123,563 | ||||||||||
Servicing income (loss) | 36,973 | (36,166 | ) | 807 | ||||||||||||||
Equity in income of affiliates | 76,798 | 172,418 | (249,216 | ) | ||||||||||||||
127,036 | 2,089,084 | 5,336,790 | (5,608,240 | ) | 1,944,670 | |||||||||||||
Costs and expenses | ||||||||||||||||||
Operating expenses | 20,018 | 44,689 | 243,358 | 308,065 | ||||||||||||||
Depreciation expense - leased vehicles | 24,112 | 24,112 | ||||||||||||||||
Provision for loan losses | 49,652 | 802,165 | 851,817 | |||||||||||||||
Interest expense | 24,223 | 1,928,284 | 4,039,895 | (5,359,024 | ) | 633,378 | ||||||||||||
Restructuring charges, net | 8,857 | 8,857 | ||||||||||||||||
44,241 | 2,055,594 | 5,085,418 | (5,359,024 | ) | 1,826,229 | |||||||||||||
Income before income taxes | 82,795 | 33,490 | 251,372 | (249,216 | ) | 118,441 | ||||||||||||
Income tax provision (benefit) | 1,901 | (43,308 | ) | 78,954 | 37,547 | |||||||||||||
Net income | $ | 80,894 | $ | 76,798 | $ | 172,418 | $ | (249,216 | ) | $ | 80,894 | |||||||
AmeriCredit Corp.
Consolidating Statement of Income
Nine Months Ended March 31, 2007
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | ||||||||||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||||||||||||
Finance charge income | $ | 84,894 | $ | 1,465,784 | $ | 1,550,678 | $ | 32,206 | $ | 579,652 | $ | 611,858 | |||||||||||||||||||||||||
Other income | $ | 36,255 | 1,472,834 | 3,159,462 | $ | (4,565,705 | ) | 102,846 | $ | 15,358 | 454,090 | 837,457 | $ | (1,266,089 | ) | 40,816 | |||||||||||||||||||||
Servicing income (loss) | 20,289 | (11,280 | ) | 9,009 | |||||||||||||||||||||||||||||||||
Gain on sale of equity investment | 51,997 | 51,997 | |||||||||||||||||||||||||||||||||||
Equity in income of affiliates | 292,189 | 167,141 | (459,330 | ) | 59,951 | 64,774 | (124,725 | ) | |||||||||||||||||||||||||||||
328,444 | 1,797,155 | 4,613,966 | (5,025,035 | ) | 1,714,530 | 75,309 | 551,070 | 1,417,109 | (1,390,814 | ) | 652,674 | ||||||||||||||||||||||||||
Costs and expenses | |||||||||||||||||||||||||||||||||||||
Operating expenses | 54,665 | 28,150 | 208,938 | 291,753 | 4,683 | 18,553 | 81,729 | 104,965 | |||||||||||||||||||||||||||||
Depreciation expense - leased vehicles | 76 | 76 | |||||||||||||||||||||||||||||||||||
Depreciation expense – leased vehicles | 5,585 | 5,585 | |||||||||||||||||||||||||||||||||||
Provision for loan losses | (92,194 | ) | 629,927 | 537,733 | 5,775 | 238,870 | 244,645 | ||||||||||||||||||||||||||||||
Interest expense | 8,944 | 1,529,997 | 3,512,705 | (4,565,705 | ) | 485,941 | 8,066 | 463,240 | 1,006,044 | (1,266,089 | ) | 211,261 | |||||||||||||||||||||||||
Restructuring charges, net | 1,143 | 1,143 | (130 | ) | (130 | ) | |||||||||||||||||||||||||||||||
63,609 | 1,467,172 | 4,351,570 | (4,565,705 | ) | 1,316,646 | 12,749 | 493,023 | 1,326,643 | (1,266,089 | ) | 566,326 | ||||||||||||||||||||||||||
Income before income taxes | 264,835 | 329,983 | 262,396 | (459,330 | ) | 397,884 | 62,560 | 58,047 | 90,466 | (124,725 | ) | 86,348 | |||||||||||||||||||||||||
Income tax (benefit) provision | (8,559 | ) | 37,794 | 95,255 | 124,490 | ||||||||||||||||||||||||||||||||
Net income | $ | 273,394 | $ | 292,189 | $ | 167,141 | $ | (459,330 | ) | $ | 273,394 | ||||||||||||||||||||||||||
Income tax provision (benefit) | 741 | (1,904 | ) | 25,692 | 24,529 | ||||||||||||||||||||||||||||||||
$ | 61,819 | $ | 59,951 | $ | 64,774 | $ | (124,725 | ) | $ | 61,819 | |||||||||||||||||||||||||||
AmeriCredit Corp.
Consolidating Statement of Cash Flows
NineThree Months Ended March 31,September 30, 2008
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 80,894 | $ | 76,798 | $ | 172,418 | $ | (249,216 | ) | $ | 80,894 | |||||||||||||||||||||||||||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net (loss) income | $ | (1,662 | ) | $ | 10,834 | $ | 62,981 | $ | (73,815 | ) | $ | (1,662 | ) | |||||||||||||||||||||||||||
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 250 | 33,939 | 24,494 | 58,683 | 1,100 | 13,240 | 11,545 | 25,885 | ||||||||||||||||||||||||||||||||
Accretion and amortization of loan fees | 6,554 | 13,566 | 20,120 | (2,503 | ) | 9,498 | 6,995 | |||||||||||||||||||||||||||||||||
Provision for loan losses | 49,652 | 802,165 | 851,817 | 55,447 | 219,418 | 274,865 | ||||||||||||||||||||||||||||||||||
Deferred income taxes | (108,795 | ) | 68,526 | (30,750 | ) | (71,019 | ) | (11,170 | ) | (11,373 | ) | 19,377 | (3,166 | ) | ||||||||||||||||||||||||||
Stock-based compensation expense | 15,402 | 15,402 | 3,894 | 3,894 | ||||||||||||||||||||||||||||||||||||
Amortization of warrants | 12,348 | 12,348 | ||||||||||||||||||||||||||||||||||||||
Other | 6,660 | (762 | ) | 5,898 | (1,123 | ) | 3,807 | (8 | ) | 2,676 | ||||||||||||||||||||||||||||||
Equity in income of affiliates | (76,798 | ) | (172,418 | ) | 249,216 | (10,834 | ) | (62,981 | ) | 73,815 | ||||||||||||||||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||
Other assets | 22,730 | (62,086 | ) | (2,467 | ) | (41,823 | ) | 1,118 | (2,431 | ) | 2,730 | 1,417 | ||||||||||||||||||||||||||||
Accrued taxes and expenses | 20,319 | (10,154 | ) | (7,253 | ) | 2,912 | 18,096 | (4,562 | ) | (6,574 | ) | 6,960 | ||||||||||||||||||||||||||||
Net cash (used) provided by operating activities | (45,998 | ) | (2,529 | ) | 971,411 | 922,884 | ||||||||||||||||||||||||||||||||||
Net cash provided (used) by operating activities | 11,767 | (522 | ) | 318,967 | 330,212 | |||||||||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Purchases of receivables | (5,475,655 | ) | (5,156,364 | ) | 5,156,364 | (5,475,655 | ) | (586,647 | ) | (222,243 | ) | 222,243 | (586,647 | ) | ||||||||||||||||||||||||||
Principal collections and recoveries on receivables | 227,176 | 4,502,741 | 4,729,917 | 63,185 | 1,150,259 | 1,213,444 | ||||||||||||||||||||||||||||||||||
Net proceeds from sale of receivables | 5,156,364 | (5,156,364 | ) | 222,243 | (222,243 | ) | ||||||||||||||||||||||||||||||||||
Distributions from gain on sale Trusts | 7,466 | 7,466 | ||||||||||||||||||||||||||||||||||||||
Purchases of property and equipment | 1,412 | (9,131 | ) | (7,719 | ) | (855 | ) | (855 | ) | |||||||||||||||||||||||||||||||
Net purchases of leased vehicles | (192,449 | ) | (192,449 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash - securitization notes payable | (11 | ) | 4,474 | 4,463 | ||||||||||||||||||||||||||||||||||||
Change in restricted cash - credit facilities | (87,926 | ) | (87,926 | ) | ||||||||||||||||||||||||||||||||||||
Investment in money market fund | (115,821 | ) | (115,821 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash – securitization notes payable | 66,976 | 66,976 | ||||||||||||||||||||||||||||||||||||||
Change in restricted cash – credit facilities | 68,735 | 68,735 | ||||||||||||||||||||||||||||||||||||||
Change in other assets | (16,677 | ) | 1,181 | (15,496 | ) | 92,732 | (74,885 | ) | 17,847 | |||||||||||||||||||||||||||||||
Net change in investment in affiliates | (8,269 | ) | (1,845,800 | ) | (15,631 | ) | 1,869,700 | 1,285 | (266,390 | ) | 1,147 | 263,958 | ||||||||||||||||||||||||||||
Net cash used by investing activities | (6,857 | ) | (2,156,183 | ) | (744,059 | ) | 1,869,700 | (1,037,399 | ) | |||||||||||||||||||||||||||||||
Net cash provided (used) by investing activities | 1,285 | (591,553 | ) | 989,989 | 263,958 | 663,679 | ||||||||||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Net change in credit facilities | 876,422 | 876,422 | 67,013 | 67,013 | ||||||||||||||||||||||||||||||||||||
Issuance of securitization notes payable | 3,500,000 | 3,500,000 | ||||||||||||||||||||||||||||||||||||||
Payments on securitization notes payable | (4,560,947 | ) | (4,560,947 | ) | (1,130,862 | ) | (1,130,862 | ) | ||||||||||||||||||||||||||||||||
Retirement of convertible debt | (114,048 | ) | (114,048 | ) | ||||||||||||||||||||||||||||||||||||
Debt issuance costs | (13,337 | ) | (13,337 | ) | (21 | ) | (1,969 | ) | (1,376 | ) | (3,366 | ) | ||||||||||||||||||||||||||||
Repurchase of common stock | (127,901 | ) | (127,901 | ) | ||||||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 14,051 | 12 | 1,867,634 | (1,867,646 | ) | 14,051 | 14 | 265,241 | (265,241 | ) | 14 | |||||||||||||||||||||||||||||
Other net changes | (586 | ) | (1 | ) | (587 | ) | (2,982 | ) | (2,982 | ) | ||||||||||||||||||||||||||||||
Net change in due (to) from affiliates | 163,362 | 1,691,975 | (1,858,143 | ) | 2,806 | 105,270 | 385,039 | (489,465 | ) | (844 | ) | |||||||||||||||||||||||||||||
Net cash provided (used) by financing activities | 48,926 | 1,691,986 | (188,371 | ) | (1,864,840 | ) | (312,299 | ) | ||||||||||||||||||||||||||||||||
Net cash used by financing activities | (11,767 | ) | 383,070 | (1,289,449 | ) | (266,085 | ) | (1,184,231 | ) | |||||||||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (3,929 | ) | (466,726 | ) | 38,981 | 4,860 | (426,814 | ) | ||||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 1,285 | (209,005 | ) | 19,507 | (2,127 | ) | (190,340 | ) | ||||||||||||||||||||||||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents | 3,929 | 1,609 | 7 | (4,860 | ) | 685 | (1,285 | ) | (258 | ) | 15 | 2,127 | 599 | |||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 899,386 | 10,918 | 910,304 | 361,352 | 72,141 | 433,493 | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | $ | 434,269 | $ | 49,906 | $ | $ | 484,175 | $ | $ | 152,089 | $ | 91,663 | $ | $ | 243,752 | ||||||||||||||||||||||||
AmeriCredit Corp.
Consolidating Statement of Cash Flows
NineThree Months Ended March 31,September 30, 2007
(Unaudited, in Thousands)
AmeriCredit Corp. | Guarantors | Non-Guarantors | Eliminations | Consolidated | AmeriCredit Corp. | Guarantors | Non- Guarantors | Eliminations | Consolidated | |||||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||||
Net income | $ | 273,394 | $ | 292,189 | $ | 167,141 | $ | (459,330 | ) | $ | 273,394 | $ | 61,819 | $ | 59,951 | $ | 64,774 | $ | (124,725 | ) | $ | 61,819 | ||||||||||||||||||
Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 2,266 | 8,431 | 13,328 | 24,025 | 83 | 8,529 | 8,343 | 16,955 | ||||||||||||||||||||||||||||||||
Accretion and amortization of loan fees | 293 | (17,559 | ) | (17,266 | ) | 4,395 | 293 | 4,688 | ||||||||||||||||||||||||||||||||
Provision for loan losses | (92,194 | ) | 629,927 | 537,733 | 5,775 | 238,870 | 244,645 | |||||||||||||||||||||||||||||||||
Deferred income taxes | (162,287 | ) | 200,570 | (67,158 | ) | (28,875 | ) | 653 | 36,837 | (12,961 | ) | 24,529 | ||||||||||||||||||||||||||||
Stock-based compensation expense | 14,375 | 14,375 | 7,032 | 7,032 | ||||||||||||||||||||||||||||||||||||
Gain on sale of available for sale securities | (51,997 | ) | (51,997 | ) | ||||||||||||||||||||||||||||||||||||
Other | 3,980 | (6,655 | ) | (2,675 | ) | 804 | (366 | ) | 438 | |||||||||||||||||||||||||||||||
Equity in income of affiliates | (292,189 | ) | (167,141 | ) | 459,330 | (59,951 | ) | (64,774 | ) | 124,725 | ||||||||||||||||||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||
Other assets | (4 | ) | 15,885 | 11,293 | 27,174 | 574 | (38,937 | ) | (694 | ) | (39,057 | ) | ||||||||||||||||||||||||||||
Accrued taxes and expenses | 22,048 | (24,912 | ) | 14,038 | 11,174 | (27,333 | ) | (19,414 | ) | 5,937 | (40,810 | ) | ||||||||||||||||||||||||||||
Net cash (used) provided by operating activities | (142,397 | ) | 185,104 | 744,355 | 787,062 | (17,123 | ) | (6,834 | ) | 304,196 | 280,239 | |||||||||||||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||||
Purchases of receivables | (6,283,184 | ) | (5,780,275 | ) | 5,780,275 | (6,283,184 | ) | (2,290,411 | ) | (2,190,249 | ) | 2,190,249 | (2,290,411 | ) | ||||||||||||||||||||||||||
Principal collections and recoveries on receivables | 320,024 | 3,932,476 | 4,252,500 | 35,557 | 1,550,256 | 1,585,813 | ||||||||||||||||||||||||||||||||||
Net proceeds from sale of receivables | 5,780,275 | (5,780,275 | ) | 2,190,249 | (2,190,249 | ) | ||||||||||||||||||||||||||||||||||
Distributions from gain on sale Trusts | 92,957 | 92,957 | ||||||||||||||||||||||||||||||||||||||
Purchases of property and equipment | (9,271 | ) | (9,271 | ) | 1 | (2,878 | ) | (2,877 | ) | |||||||||||||||||||||||||||||||
Net purchases of leased vehicles | (3,466 | ) | (3,466 | ) | (131,713 | ) | (131,713 | ) | ||||||||||||||||||||||||||||||||
Proceeds from sale of equity investment | 62,961 | 62,961 | ||||||||||||||||||||||||||||||||||||||
Acquisition of LBAC, net of cash acquired | (257,813 | ) | (257,813 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash - securitization notes payable | (162,773 | ) | (162,773 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash - credit facilities | (51,387 | ) | (51,387 | ) | ||||||||||||||||||||||||||||||||||||
Change in restricted cash – securitization notes payable | 19,540 | 19,540 | ||||||||||||||||||||||||||||||||||||||
Change in restricted cash – credit facilities | (207,180 | ) | (207,180 | ) | ||||||||||||||||||||||||||||||||||||
Change in other assets | 4,871 | 5 | 4,876 | (9,778 | ) | 1,347 | (8,431 | ) | ||||||||||||||||||||||||||||||||
Net change in investment in affiliates | 799 | (455,336 | ) | (89,461 | ) | 543,998 | (1,400 | ) | 118,424 | (1,617 | ) | (115,407 | ) | |||||||||||||||||||||||||||
Net cash provided (used) by investing activities | 799 | (837,473 | ) | (2,061,924 | ) | 543,998 | (2,354,600 | ) | ||||||||||||||||||||||||||||||||
Net cash used by investing activities | (1,399 | ) | (90,550 | ) | (827,903 | ) | (115,407 | ) | (1,035,259 | ) | ||||||||||||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||||
Net change in credit facilities | (202,522 | ) | 898,492 | 695,970 | (333,457 | ) | (333,457 | ) | ||||||||||||||||||||||||||||||||
Issuance of securitization notes payable | 4,248,304 | 4,248,304 | 2,500,000 | 2,500,000 | ||||||||||||||||||||||||||||||||||||
Payments on securitization notes payable | (2,074 | ) | (3,474,599 | ) | (3,476,673 | ) | (1,559,673 | ) | (1,559,673 | ) | ||||||||||||||||||||||||||||||
Issuance of convertible senior notes | 550,000 | 550,000 | ||||||||||||||||||||||||||||||||||||||
Debt issuance costs | (13,207 | ) | (15,262 | ) | (28,469 | ) | (8,985 | ) | (8,985 | ) | ||||||||||||||||||||||||||||||
Proceeds from sale of warrants | 93,086 | 93,086 | ||||||||||||||||||||||||||||||||||||||
Purchase of call option on common stock | (145,710 | ) | (145,710 | ) | ||||||||||||||||||||||||||||||||||||
Repurchase of common stock | (323,964 | ) | (323,964 | ) | (127,901 | ) | (127,901 | ) | ||||||||||||||||||||||||||||||||
Net proceeds from issuance of common stock | 47,864 | 566,252 | (566,252 | ) | 47,864 | |||||||||||||||||||||||||||||||||||
Proceeds from issuance of common stock | 10,199 | (116,807 | ) | 116,807 | 10,199 | |||||||||||||||||||||||||||||||||||
Other net changes | 13,833 | (635 | ) | 13,198 | (78 | ) | (1 | ) | (79 | ) | ||||||||||||||||||||||||||||||
Net change in due (to) from affiliates | (76,994 | ) | 947,375 | (891,534 | ) | 21,153 | 128,901 | (178,287 | ) | 44,338 | 5,048 | |||||||||||||||||||||||||||||
Net cash provided (used) by financing activities | 144,908 | 742,144 | 1,331,653 | (545,099 | ) | 1,673,606 | 11,121 | (178,288 | ) | 525,416 | 121,855 | 480,104 | ||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 3,310 | 89,775 | 14,084 | (1,101 | ) | 106,068 | ||||||||||||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (7,401 | ) | (275,672 | ) | 1,709 | 6,448 | (274,916 | ) | ||||||||||||||||||||||||||||||||
Effect of Canadian exchange rate changes on cash and cash equivalents | (3,310 | ) | (1,704 | ) | 1,101 | (3,913 | ) | 7,401 | 714 | 15 | (6,448 | ) | 1,682 | |||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 513,240 | 513,240 | 899,386 | 10,918 | 910,304 | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | $ | 601,311 | $ | 14,084 | $ | $ | 615,395 | $ | $ | 624,428 | $ | 12,642 | $ | $ | 637,070 | ||||||||||||||||||||||||
Item 2. |
GENERAL
We are a leading independent auto finance company specializing in purchasing retail automobile installment sales contracts originated by franchised and select independent dealers in connection with the sale of used and new automobiles. We generate revenue and cash flows primarily through the purchase, retention, subsequent securitization and servicing of finance receivables. As used herein, “loans” include auto finance receivables originated by dealers and purchased by us as well as direct extensions of credit made by us to consumer borrowers.us. To fund the acquisition of receivables prior to securitization and to fund the repurchase of receivables pursuant to cleanupclean-up call options, we use available cash and borrowings under our credit facilities. We earn finance charge income on the finance receivables and pay interest expense on borrowings under our credit facilities.
We, through wholly-owned subsidiaries, periodically transfer receivables to securitization trusts (“Trusts”) that issue asset-backed securities to investors. We retain an interest in these securitization transactions in the form of restricted cash accounts and overcollateralization whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts as well as the estimated future excess cash flows expected to be received by us over the life of the securitization. Excess cash flows result from the difference between the finance charges 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 us.us, or in a securitization utilizing a senior subordinated structure, may be used to accelerate the repayment of certain subordinated securities. In addition to excess cash flows, we receive monthly base servicing fees and we collect other fees, such as late charges, as servicer for securitization Trusts. For securitization transactions that involve the purchase of a financial guaranty insurance policy, credit enhancement requirements will increase if targeted portfolio performance ratios are exceeded. Excess cash flows otherwise distributable to us from Trusts in which the portfolio performance ratios were exceeded and from other Trusts which may be subject to limited cross-collateralization provisions are accumulated in the Trusts until such higher levels of credit enhancement are reached and maintained. Senior subordinated securitizations typically do not utilize portfolio performance ratios.
We structure our securitization transactions as secured financings. Accordingly, following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance
sheets. We recognize finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction and record a provision for loan losses to cover probable loan losses on the receivables.
Recent Developments
PriorWe anticipate a number of factors will continue to October 1, 2002,adversely affect our liquidity in fiscal 2009: higher credit enhancement levels in our securitization transactions were structured as salescaused by a reduction in excess spread due to a higher cost of finance receivables. We also acquired twofunds and due to credit deterioration we are experiencing in our portfolio; unprecedented disruptions in the capital markets making the execution of securitization transactions more challenging and expensive and decreasing cash distributions from our securitization Trusts which were accounted for as sales of finance receivables. Receivables sold under this structure are referreddue to herein as “gain on sale receivables”. At March 31, 2008, we had no outstanding gain on sale securitizations.
On May 1, 2006, we acquired the stock of Bay View Acceptance Corporation (“BVAC”). BVAC serves auto dealers offering specialized auto finance products, including extended term financing and higher loan-to-value advances primarily to consumers with primeweaker credit scores.
On January 1, 2007, we acquired the stock of Long Beach Acceptance Corp. (“LBAC”). LBAC serves auto dealers by offering auto finance products primarily to consumers with near-prime credit scores.performance.
Since January 2008, we have implemented a revised our operating plan in an effort to preserve and strengthen our capital and liquidity position, and to maintain sufficient capacity on our warehouse linescredit facilities to fund new loan originations until capital market conditions improve for securitization transactions. Under this revised plan, we increased the minimum credit score requirements for new loan originations, decreased our originations infrastructure by closing and consolidating branch underwritingcredit center locations, selectively decreased the number of dealers from whom we purchase loans and reduced operatingoriginations and overheadsupport function headcounts. We have discontinued new originations in our direct lending, leasing and leasingspecialty prime platforms, as well as certain partner relationships.relationships, and in Canada. Our target for annualized loan origination levelstarget has been reduced to approximately $3.0 billion.$100 million per month. We recognized a restructuring charge of $9.1$0.6 million forduring the three months ended March 31, 2008, relatedSeptember 30, 2008.
We believe that we have sufficient liquidity and warehouse capacity to reductions which alignoperate under this plan through fiscal 2009 assuming the completion of at least one additional securitization transaction on similar terms as the AmeriCredit Automobile Receivable Trust (“AMCAR”) 2008-1. We intend to utilize the forward purchase commitment with Deutsche Bank AG, Cayman Islands Branch (“Deutsche”) to place the triple-A rated asset-backed securities in such a securitization transaction. Additionally, we are currently negotiating with a significant shareholder concerning the acquisition of subordinated securities of such a securitization transaction, as well as the exchange of certain of our infrastructureunsecured debt securities for additional shares of our common stock. If this transaction is consummated on the terms presently being discussed, such significant shareholder will acquire one seat on our board and we will waive the application of the Texas business combination law. However, if we are unable to complete the above mentioned transaction with reduced origination targets.
CRITICAL ACCOUNTING ESTIMATES
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 liabilitiesthis shareholder and the disclosures of contingent assets and liabilities as ofasset-backed securities market or 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 differencescredit markets, in general, continue to deteriorate we may be material. The accounting estimates thatunable to place the subordinated securities on acceptable terms or at all. In addition, if we believe are the most critical to understanding and evaluating our reported financial results include the following:
Allowance for loan losses
The allowance for loan losses is established systematically based on the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. We review 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 the probable credit losses. We also use historical charge-off experience to determine a loss confirmation period, which is defined as the time between when an event, such as delinquency status, giving rise to a probable credit loss occurs with respect to a specific account and when such account is charged off. This loss confirmation period is applied to the forecasted probable credit losses to determine the amount of losses inherent in finance receivables at the reporting date. Assumptions regarding credit losses and loss confirmation periods are reviewed periodically and may be impacted by actual performance of finance receivables and changes inbreach any of the factors discussed above. Should the credit loss assumption or loss confirmation period increase, there would be an increase in the amount of allowance for loan losses required, which would decrease the net carrying value of finance receivables and increase the amount of provision for loan losses recorded on the consolidated statements of income and comprehensive income. A 10% and 20% increase in cumulative net credit losses over the loss confirmation period would increase the allowance for loan losses as of March 31, 2008, as follows (in thousands):
10% adverse change | 20% adverse change | |||||
Impact on allowance for loan losses | $ | 89,951 | $ | 179,901 |
We believe that the allowance for loan losses is adequate to cover probable losses inherentcovenants in our receivables; however, becauseforward purchase commitment, we maybe be unable to place the allowance fortriple-A rated asset-backed securities. Our credit facilities also contain covenants, which if breached, could restrict our ability to borrow under such facilities to fund new loan losses is based on estimates, there can be no assurance thatoriginations, or in a worst case, could result in events of default under most of our debt agreements. Failure to complete a securitization transaction or the ultimate charge-off amount will not exceed such estimates or thatinability to access our credit loss assumptions will not increase.
Income Taxes
We are subjectfacilities would raise substantial doubt about our ability to income tax in the United States and Canada. In the ordinary course of our business, there may be transactions, calculations, structures and filing positions where the ultimate tax outcome is uncertain. At any point in time, multiple tax years are subject to audit by various taxing jurisdictions and we record liabilities for anticipated tax issues based on the requirements of Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109”. Management believes that the estimates are reasonable. However, due to expiring statutes of limitations, audits, settlements, changes in tax law or new authoritative rulings, no assurance can be given that the final outcome of these matters will be comparable to what was reflected in the historical income tax provisions and accruals. We may need to adjust our accrued tax assets or liabilities if actual results differ from estimated results or if we adjust these assumptions in the future, which could materially impact the effective tax rate, earnings, accrued tax balances and cash.continue as a going concern.
As a part of our financial reporting process, we must assess the likelihood that our deferred tax assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a valuation allowance for the deferred tax assets that are estimated to be unrecoverable. In this process, certain criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years that can be used to absorb net operating losses, credit carrybacks, and estimated taxable income in future years. Based upon our earnings history and earnings projections, management believes it is more likely than not that the tax benefits of the asset will be fully realized. Accordingly, no valuation allowance has been provided on deferred taxes. Our judgment regarding future taxable income may change due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period in which such determinations are made.
Since July 1, 2007, we have accounted for uncertainty in income taxes recognized in the financial statements in accordance with FIN 48. FIN 48 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the financial statements and prescribes how such benefit should be measured. It also provides guidance on derecognition, classification, accrual of interest and penalties, accounting in interim periods, disclosure and transition.
RESULTS OF OPERATIONS
Three Months Ended March 31,September 30, 2008 as compared to Three Months Ended March 31,September 30, 2007
Changes in Finance Receivables:
A summary of changes in our finance receivables is as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Balance at beginning of period | $ | 16,352,204 | $ | 12,548,925 | $ | 14,981,412 | $ | 15,922,458 | ||||||||
LBAC acquisition | 1,784,263 | |||||||||||||||
Loans purchased | 1,303,245 | 2,514,268 | 579,290 | 2,239,619 | ||||||||||||
Liquidations and other | (1,835,135 | ) | (1,723,549 | ) | (1,497,857 | ) | (1,784,549 | ) | ||||||||
Balance at end of period | $ | 15,820,314 | $ | 15,123,907 | $ | 14,062,845 | $ | 16,377,528 | ||||||||
Average finance receivables | $ | 16,187,675 | $ | 14,669,061 | $ | 14,544,922 | $ | 16,188,641 | ||||||||
The decrease in loans purchased during the three months ended March 31,September 30, 2008, as compared to the three months ended March 31,September 30, 2007, was primarily due to the implementation of the revised operating plan. The increase in liquidations and
other resulted primarily from higher collections and charge-offs on finance receivables due to the increase in average finance receivables combined with overall economic weakness.
The average new loan size increaseddecreased to $19,032$17,773 for the three months ended March 31,September 30, 2008, from $18,629$19,159 for the three months ended March 31, 2007.September 30, 2007, due to reduced purchases of prime/near prime loans under the revised operating plan. The average annual percentage rate for finance receivables purchased during the three months ended March 31,September 30, 2008, decreasedincreased to 15.3%16.6% from 15.6%15.4% during the three months ended March 31,September 30, 2007, due to an increase in the minimum credit score requirements in conjunction with the revised operating plan.increased new loan pricing as a result of higher funding costs.
Net Margin:
Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.
Our net margin as reflected on the consolidated statements of incomeoperations is as follows (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Finance charge income | $ | 595,743 | $ | 564,104 | $ | 533,973 | $ | 611,858 | ||||||||
Other income | 42,986 | 34,797 | 32,070 | 40,816 | ||||||||||||
Interest expense | (208,084 | ) | (186,610 | ) | (195,046 | ) | (211,261 | ) | ||||||||
Net margin | $ | 430,645 | $ | 412,291 | $ | 370,997 | $ | 441,413 | ||||||||
Net margin as a percentage of average finance receivables is as follows:
Three��Months Ended March 31, | Three Months Ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Finance charge income | 14.8 | % | 15.6 | % | 14.5 | % | 15.0 | % | ||||
Other income | 1.1 | 1.0 | 0.9 | 1.0 | ||||||||
Interest expense | (5.2 | ) | (5.2 | ) | (5.3 | ) | (5.2 | ) | ||||
Net margin as a percentage of average finance receivables | 10.7 | % | 11.4 | % | 10.1 | % | 10.8 | % | ||||
The decrease in net margin as a percentage of average finance receivables for the three months ended March 31,September 30, 2008, as compared to the three months ended March 31,September 30, 2007, was a result of the lower effective yield due to a shiftgreater proportion of prime/near prime loans purchased prior to implementation of the revised operating plan, combined with a higher credit mixpercentage of finance receivables being in the portfolio.
Revenue:
Finance charge income increaseddecreased by 6.0%12.7% to $595.7$534.0 million for the three months ended March 31,September 30, 2008, from $564.1$611.9 million for the three months ended March 31,September 30, 2007, primarily due to the 10.0% increase10.2% decrease in average finance receivables. The effective yield on our finance receivables decreased to 14.8%14.5% for the three months ended March 31,September 30, 2008, from 15.6%15.0% for the three months ended March 31,September 30, 2007. The effective yield represents finance charges and fees taken into earnings during the period as a percentage of average finance receivables and may be lower than the contractual rates of our finance contracts due to finance receivables in nonaccrual status.
Other income consists of the following (in thousands):
Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Investment income | $ | 11,965 | $ | 20,063 | $ | 4,926 | $ | 18,957 | ||||
Leasing income | 11,945 | 6,628 | ||||||||||
Late fees and other income | 31,021 | 14,734 | 15,199 | 15,231 | ||||||||
$ | 42,986 | $ | 34,797 | $ | 32,070 | $ | 40,816 | |||||
Investment income decreased as a result of lower invested cash balances as well asand lower investment rates. Late fees and other income increased primarily asrates combined with a result of $11.4$3.5 million of income earned duringloss on our investment in the three months ended March 31, 2008, on leased vehicles.Reserve Primary Money Market Fund (“the Reserve Fund”).
Costs and Expenses:
Operating Expenses
Operating expenses decreased by 9.0%19.7% to $100.0$84.3 million for the three months ended March 31,September 30, 2008, from $109.4$105.0 million for the three months ended March 31,September 30, 2007, as a result of the implementation ofcost savings from the revised operating plan. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 81.9%70.9% and 77.8%77.1% of total operating expenses for the three months ended March 31,September 30, 2008 and 2007, respectively.
Operating expenses as an annualized percentage of average finance receivables were 2.5%2.3% for the three months ended March 31,September 30, 2008, as compared to 3.0%2.6% for the three months ended March 31,September 30, 2007. The decrease in operating expenses as an annualized percentage of average finance receivables primarily resulted from cost synergies realized from the integration of LBAC, as well as expense reductions due to the implementation of the revised operating plan.
Provision for Loan losses
Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable
credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for the three months ended March 31, 2008 and 2007, reflects inherent losses on receivables originated during those quarters and changes in the amount of inherent losses on receivables originated in prior periods. The provision for loan losses increased to $250.7 million for the three months ended March 31, 2008, from $189.0 million for the three months ended March 31, 2007, primarily as a result of weaker results from the LBAC portfolio and sub-prime loans originated in calendar year 2006 and 2007 as well as higher expected future losses due to weaker economic conditions, particularly in certain geographic areas, including Florida and Southern California. As an annualized percentage of average finance receivables, the provision for loan losses was 6.2% and 5.2% for the three months ended March 31, 2008 and 2007, respectively.
Interest Expense
Interest expense increased to $208.1 million for the three months ended March 31, 2008, from $186.6 million for the three months ended March 31, 2007. Average debt outstanding was $15,282.1 million and $13,992.4 million for the three months ended March 31, 2008 and 2007, respectively. Our effective rate of interest paid on our debt increased to 5.5% for the three months ended March 31, 2008, compared to 5.4% for the three months ended March 31, 2007, due to a continued run-off of older securitizations with lower interest cost.
Taxes
Our effective income tax rate was 37.6% and 19.9% for the three months ended March 31, 2008 and 2007, respectively. The rate for the three months ended March 31, 2007 reflects a favorable resolution of prior contingent liabilities.
Other Comprehensive Loss:
Other comprehensive loss consisted of the following (in thousands):
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Unrealized losses on cash flow hedges | $ | (61,262 | ) | $ | (4,597 | ) | ||
Unrealized losses on credit enhancement assets | (275 | ) | ||||||
Decrease in fair value of equity investment | (1,634 | ) | ||||||
Reclassification of gain on sale of equity investment into earnings | (15,801 | ) | ||||||
Canadian currency translation adjustment | (2,609 | ) | 955 | |||||
Income tax benefit | 22,783 | 7,469 | ||||||
$ | (41,088 | ) | $ | (13,883 | ) | |||
Cash Flow Hedges
Unrealized losses on cash flow hedges consisted of the following (in thousands):
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Unrealized losses related to changes in fair value | $ | (71,314 | ) | $ | (2,457 | ) | ||
Reclassification of net unrealized losses (gains) into earnings | 10,052 | (2,140 | ) | |||||
$ | (61,262 | ) | $ | (4,597 | ) | |||
Unrealized losses related to changes in fair value for the three months ended March 31, 2008 and 2007, were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements changed because of a significant decline in forward interest rates.
Unrealized losses on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment losses of $2.6 million and gains of $1.0 million for the three months ended March 31, 2008 and 2007, respectively, were included in other comprehensive loss. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar conversion rates during the three months ended March 31, 2008 and 2007. We do not anticipate the settlement of intercompany transactions with our Canadian subsidiaries in the foreseeable future.
Nine Months Ended March 31, 2008 as compared to Nine Months Ended March 31, 2007
Changes in Finance Receivables:
A summary of changes in our finance receivables is as follows (in thousands):
Nine Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Balance at beginning of period | $ | 15,922,458 | $ | 11,775,665 | ||||
LBAC acquisition | 1,784,263 | |||||||
Loans purchased | 5,302,754 | 5,939,004 | ||||||
Loans repurchased from gain on sale Trusts | 18,401 | 315,153 | ||||||
Liquidations and other | (5,423,299 | ) | (4,690,178 | ) | ||||
Balance at end of period | $ | 15,820,314 | $ | 15,123,907 | ||||
Average finance receivables | $ | 16,261,870 | $ | 12,993,241 | ||||
The decrease in loans purchased during the nine months ended March 31, 2008, as compared to the nine months ended March 31, 2007, was primarily due to the implementation of the revised operating plan. The increase in liquidations and other resulted primarily from higher collections and charge-offs on finance receivables due to the increase in average finance receivables combined with overall economic weakness.
The average new loan size increased to $19,180 for the nine months ended March 31, 2008, from $18,185 for the nine months ended March 31, 2007, due to loans purchased through the LBAC platform which are generally larger in size. The average annual percentage rate for finance receivables purchased during the nine months ended March 31, 2008, decreased to 15.3% from 16.1% during the nine months ended March 31, 2007, due to lower average percentage rates on the LBAC loans purchased.
Net Margin:
Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.
Our net margin as reflected on the consolidated statements of income is as follows (in thousands):
Nine Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Finance charge income | $ | 1,820,300 | $ | 1,550,678 | ||||
Other income | 123,563 | 102,846 | ||||||
Interest expense | (633,378 | ) | (485,941 | ) | ||||
Net margin | $ | 1,310,485 | $ | 1,167,583 | ||||
Net margin as a percentage of average finance receivables is as follows:
Nine Months Ended March 31, | ||||||
2008 | 2007 | |||||
Finance charge income | 14.9 | % | 15.9 | % | ||
Other income | 1.0 | 1.1 | ||||
Interest expense | (5.2 | ) | (5.0 | ) | ||
Net margin as a percentage of average finance receivables | 10.7 | % | 12.0 | % | ||
The decrease in net margin as a percentage of average finance receivables for the nine months ended March 31, 2008, as compared to the nine months ended March 31, 2007, was a result of the lower effective yield on the LBAC portfolio, combined with an increase in interest expense caused by a continued run-off of older securitizations with lower interest costs.
Revenue:
Finance charge income increased by 17.0% to $1,820.3 million for the nine months ended March 31, 2008, from $1,550.7 million for the nine months ended March 31, 2007, primarily due to the 25.0% increase in average finance receivables. The effective yield on our finance receivables decreased to 14.9% for the nine months ended March 31, 2008, from 15.9% for the nine months ended March 31, 2007. The effective yield represents finance charges and fees taken into earnings during the period as a percentage of average finance receivables and may be lower than the contractual rates of our finance contracts due to finance receivables in nonaccrual status. The decrease in the effective yield is due mainly to a lower effective yield on the LBAC portfolio.
Servicing income decreased for the nine months ended March 31, 2008, as compared to the nine months ended March 31, 2007, as a result of the run-off of our gain on sale receivables portfolio.
Other income consists of the following (in thousands):
Nine Months Ended March 31, | ||||||
2008 | 2007 | |||||
Investment income | $ | 47,526 | $ | 65,963 | ||
Late fees and other income | 76,037 | 36,883 | ||||
$ | 123,563 | $ | 102,846 | |||
Investment income decreased as a result of lower invested cash balances, as well as lower investment rates. Late fees and other income increased primarily as a result of $28.6 million of income earned during the nine months ended March 31, 2008, on leased vehicles.
Costs and Expenses:
Operating Expenses
Operating expenses increased by 6.0% to $308.1 million for the nine months ended March 31, 2008, from $291.8 million for the nine months ended March 31, 2007, as a result of higher average finance receivables outstanding, which were offset in part by the implementation of the revised operating plan. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 79.4% and 76.8% of total operating expenses for the nine months ended March 31, 2008 and 2007, respectively.
Operating expenses as an annualized percentage of average finance receivables were 2.5% for the nine months ended March 31, 2008, as compared to 3.0% for the nine months ended March 31, 2007. The decrease in operating expenses as an annualized percentage of average finance receivables primarily resulted from cost synergies realized from the integration of LBAC, as well as larger portfolio scale and expense reductions due to the implementation of the revised operating plan.
Provision for Loan losses
Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for the ninethree months ended March 31,September 30, 2008 and 2007, reflects inherent losses on receivables originated during those periodsquarters and changes in the amount of inherent losses on receivables originated in prior periods. The provision for loan losses increased to $851.8$274.9 million for the ninethree months ended March 31,September 30, 2008, from $537.7$244.6 million for the ninethree months ended March 31,September 30, 2007, primarily as a result of weaker than expected resultscredit performance from the LBAC portfolio and sub-prime loans originated in calendar yearyears 2006 and 2007, as well as higher expected future losses due to weaker economic
conditions, particularly in certain geographic areas, including Florida and Southern California. conditions. As an annualized percentage of average finance receivables, the provision for loan losses was 7.0%7.5% and 5.5%6.0% for the ninethree months ended March 31,September 30, 2008 and 2007, respectively.
Interest Expense
Interest expense increaseddecreased to $633.4$195.0 million for the ninethree months ended March 31,September 30, 2008, from $485.9$211.3 million for the ninethree months ended March 31,September 30, 2007. Average debt outstanding was $15,415.6$13,557.8 million and $12,375.2$15,373.4 million for the ninethree months ended March 31,September 30, 2008 and 2007, respectively. Our effective rate of interest paid on our debt increased to 5.7% for the three months ended September 30, 2008, compared to 5.5% for the ninethree months ended March 31, 2008, compared to 5.2% for the nine months ended March 31,September 30, 2007, due to a continued run-offan increase in market interest rates and principal paydown of older securitizations with lower interest cost.
Taxes
Our effective income tax rate was 31.7%503.2% and 31.3%28.4% for the ninethree months ended March 31,September 30, 2008 and 2007, respectively. The rate for the three months ended September 30, 2008, is primarily a result of the relationship between increases in prior year contingent interest and penalties in relation
to income before income taxes. The rate for the three months ended September 30, 2007, reflected a revised estimate of deferred tax assets and liabilities relating to state income tax rates and the exercise of warrants issued in September 2002.
Other Comprehensive Loss:Income (Loss):
Other comprehensive lossincome (loss) consisted of the following (in thousands):
Nine Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
Unrealized losses on cash flow hedges | $ | (143,288 | ) | $ | (13,825 | ) | ||
Unrealized losses on credit enhancement assets | (232 | ) | (3,056 | ) | ||||
Increase in fair value of equity investment | 4,497 | |||||||
Reclassification of gain on sale of equity investment into earnings | (51,997 | ) | ||||||
Canadian currency translation adjustment | 3,935 | (3,310 | ) | |||||
Income tax benefit | 53,614 | 22,906 | ||||||
$ | (85,971 | ) | $ | (44,785 | ) | |||
Unrealized losses on credit enhancement assets Unrealized gains (losses) on cash flow hedges Canadian currency translation adjustment Income tax (provision) benefit Three Months Ended
September 30, 2008 2007 $ (198 ) $ 9,925 (36,143 ) (1,285 ) 7,400 (3,279 ) 10,260 $ 5,361 $ (18,681 )
Cash Flow Hedges
Unrealized lossesgains (losses) on cash flow hedges consisted of the following (in thousands):
Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Unrealized losses related to changes in fair value | $ | (149,081 | ) | $ | (3,470 | ) | $ | (10,225 | ) | $ | (32,702 | ) | ||||
Reclassification of net unrealized losses (gains) into earnings | 5,793 | (10,355 | ) | |||||||||||||
Reclassification of net unrealized gains (losses) into earnings | 20,150 | (3,441 | ) | |||||||||||||
$ | (143,288 | ) | $ | (13,825 | ) | $ | 9,925 | $ | (36,143 | ) | ||||||
Unrealized losses related to changes in fair value for the ninethree months ended March 31,September 30, 2008 and 2007, were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements decreased because of a significant declinefluctuates based upon changes in forward interest rates.rate expectations.
Unrealized gains or losses on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment losses of $1.3 million and gains of $3.9 million and losses of $3.3$7.4 million for the ninethree months ended March 31,September 30, 2008 and 2007, respectively, were included in other comprehensive loss.income (loss). The
translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar conversion rates during the ninethree months ended March 31,September 30, 2008 and 2007. We do not anticipate the settlement of intercompany transactions with our Canadian subsidiaries in the foreseeable future.
CREDIT QUALITY
Generally, we provide financing in relatively high-risk markets, and, therefore, anticipate a corresponding high level of delinquencies and charge-offs.
The following tables present certain data related to the finance receivables portfolio (dollars in thousands):
March 31, 2008 | ||||
Principal amount of receivables, net of fees | $ | 15,820,314 | ||
Nonaccretable acquisition fees | (44,190 | ) | ||
Allowance for loan losses | (855,316 | ) | ||
Receivables, net | $ | 14,920,808 | ||
Number of outstanding contracts | 1,140,207 | |||
Average carrying amount of outstanding contract (in dollars) | $ | 13,875 | ||
Allowance for loan losses and nonaccretable acquisition fees as a percentage of receivables | 5.7 | % | ||
June 30, 2007 | ||||||||||||||||||
Finance Receivables | Gain on Sale | Total Managed | September 30, 2008 | June 30, 2008 | ||||||||||||||
Principal amount of receivables, net of fees | $ | 15,922,458 | $ | 24,091 | $ | 15,946,549 | $ | 14,062,845 | $ | 14,981,412 | ||||||||
Nonaccretable acquisition fees | (120,425 | ) | (33,469 | ) | (42,802 | ) | ||||||||||||
Allowance for loan losses | (699,663 | ) | (926,650 | ) | (908,311 | ) | ||||||||||||
Receivables, net | $ | 15,102,370 | $ | 13,102,726 | $ | 14,030,299 | ||||||||||||
Number of outstanding contracts | 1,143,713 | 2,028 | 1,145,741 | 1,047,819 | 1,094,915 | |||||||||||||
Average carrying amount of outstanding contract (in dollars) | $ | 13,922 | $ | 11,879 | $ | 13,918 | $ | 13,421 | $ | 13,683 | ||||||||
Allowance for loan losses and nonaccretable acquisition fees as a percentage of receivables | 5.2 | % | 6.8 | % | 6.3 | % | ||||||||||||
The allowance for loan losses and nonaccretable acquisition fees as a percentage of finance receivables increased to 5.7%6.8% as of March 31,September 30, 2008, from 5.2%6.3% as of June 30, 2007,2008, as a result of higher expected future losses due to weaker economic conditions, particularly in certain geographic regions such as Florida and Southern California, increased budgetary stress on sub-prime and near prime consumers and lower recovery rates on repossessed collateral.
Delinquency
The following is a summary of managed finance receivables that are (i) more than 30 days delinquent, but not yet in repossession, and (ii) in repossession, but not yet charged off (dollars in thousands):
March 31, 2008 | ||||||
Amount | Percent | |||||
Delinquent contracts: | ||||||
31 to 60 days | $ | 833,571 | 5.3 | % | ||
Greater than 60 days | 361,341 | 2.3 | ||||
1,194,912 | 7.6 | |||||
In repossession | 50,159 | 0.3 | ||||
$ | 1,245,071 | 7.9 | % | |||
March 31, 2007 | ||||||||||||||||||||||||
Finance Receivables | Total Managed | September 30, 2008 | September 30, 2007 | |||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||
Delinquent contracts: | ||||||||||||||||||||||||
31 to 60 days | $ | 616,655 | 4.1 | % | $ | 616,884 | 4.1 | % | $ | 1,047,718 | 7.4 | % | $ | 903,950 | 5.5 | % | ||||||||
Greater than 60 days | 224,829 | 1.5 | 224,952 | 1.5 | ||||||||||||||||||||
Greater-than-60 days | 505,033 | 3.6 | 424,228 | 2.6 | ||||||||||||||||||||
841,484 | 5.6 | 841,836 | 5.6 | 1,552,751 | 11.0 | 1,328,178 | 8.1 | |||||||||||||||||
In repossession | 37,004 | 0.2 | 37,016 | 0.2 | 74,325 | 0.5 | 60,328 | 0.4 | ||||||||||||||||
$ | 878,488 | 5.8 | % | $ | 878,852 | 5.8 | % | $ | 1,627,076 | 11.5 | % | $ | 1,388,506 | 8.5 | % | |||||||||
An account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually due. Delinquencies in our managedfinance 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 our target customer base, a relatively high percentage of accounts become delinquent at some point in the life of a loan and there is a high rate of account movement between current and delinquent status in the portfolio.
Delinquencies in finance receivables were higher at March 31,September 30, 2008, as compared to March 31,September 30, 2007, as a result ofdue to deterioration in credit performance for the reasons described above.
Deferrals
In accordance with our policies and guidelines, we, at times, offer payment deferrals to consumers whereby the consumer is allowed to move up to two delinquent payments to the end of the loan generally by paying a fee (approximately the interest portion of the payment deferred, except where state
law provides for a lesser amount). Our policies and guidelines limit the number and frequency of deferments that may be granted. Additionally, we generally limit the granting of deferments on new accounts until a requisite number of payments have been received. Due to the nature of our customer base and policies and guidelines of the deferral program, approximately 50% of accounts historically comprising the managed portfolio received a deferral at some point in the life of the account.
An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted and therefore is not included as a delinquent account. 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 finance receivables outstanding were as follows:7.3% and 6.0% for the three months ended September 30, 2008 and 2007, respectively.
Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Finance receivables (as a percentage of average finance receivables) | 5.8 | % | 5.0 | % | 6.2 | % | 6.0 | % | ||||
Total managed portfolio (as a percentage of average managed receivables) | 5.8 | % | 5.0 | % | 6.2 | % | 6.0 | % | ||||
The following is a summary of deferrals as a percentage of receivables outstanding:
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June 30, 2007 | ||||||||||||
Finance Receivables | Total Managed | September 30, 2008 | June 30, 2008 | |||||||||
Never deferred | 80.5 | % | 80.6 | % | 73.5 | % | 75.3 | % | ||||
Deferred: | ||||||||||||
1-2 times | 16.3 | 16.3 | 22.2 | 20.6 | ||||||||
3-4 times | 3.1 | 3.1 | 4.2 | 3.7 | ||||||||
Greater than 4 times | 0.1 | 0.1 | 0.4 | |||||||||
Total deferred | 19.5 | 19.4 | 26.5 | 24.7 | ||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
We evaluate the results of our deferment strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
Changes in deferment levels do not have a direct impact on the ultimate amount of finance receivables charged off by us. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios and loss confirmation periods used in the determination of the adequacy of our allowance for loan losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the loan portfolio and therefore increase the allowance for loan losses and related provision for loan losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan losses and related provision for loan losses.
Charge-offs
The following table presents charge-off data with respect to our finance receivables portfolio (dollars in thousands):
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended September 30, | ||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |||||||||||||||||||
Finance receivables: | ||||||||||||||||||||||||
Repossession charge-offs | $ | 479,857 | $ | 293,861 | $ | 1,138,144 | $ | 806,857 | ||||||||||||||||
Less: Recoveries | (210,682 | ) | (145,489 | ) | (513,820 | ) | (395,730 | ) | ||||||||||||||||
Mandatory charge-offs (a) | (2,804 | ) | 16,745 | 148,184 | 99,007 | |||||||||||||||||||
Net charge-offs | $ | 266,371 | $ | 165,117 | $ | 772,508 | $ | 510,134 | ||||||||||||||||
Total managed: | ||||||||||||||||||||||||
Repossession charge-offs | $ | 479,857 | $ | 294,072 | $ | 1,138,266 | $ | 817,595 | $ | 363,529 | $ | 289,883 | ||||||||||||
Less: Recoveries | (210,682 | ) | (145,617 | ) | (513,896 | ) | (400,442 | ) | (151,323 | ) | (141,501 | ) | ||||||||||||
Mandatory charge-offs (a) | (2,804 | ) | 16,720 | 148,176 | 97,855 | 53,653 | 71,609 | |||||||||||||||||
Net charge-offs | $ | 266,371 | $ | 165,175 | $ | 772,546 | $ | 515,008 | $ | 265,859 | $ | 219,991 | ||||||||||||
Net charge-offs as an annualized percentage of average receivables: | 7.3 | % | 5.4 | % | ||||||||||||||||||||
Finance receivables | 6.6% | 4.6% | 6.3% | 5.2% | ||||||||||||||||||||
Total managed portfolio | 6.6% | 4.6% | 6.3% | 5.2% | ||||||||||||||||||||
Recoveries as a percentage of gross repossession charge-offs: | 41.6 | % | 48.8 | % | ||||||||||||||||||||
Finance receivables | 43.9% | 49.5% | 45.2% | 49.0% | ||||||||||||||||||||
Total managed portfolio | 43.9% | 49.5% | 45.2% | 49.0% | ||||||||||||||||||||
(a) | Mandatory charge-offs |
Net charge-offs as an annualized percentage of average finance receivables outstanding may vary from period to period based upon the average age or seasoning of the portfolio and economic factors. The increase in the total managed portfolionet charge-offs for the three and nine months ended March 31,September 30, 2008, as an annualized percentage of average finance receivables, as compared to the three months ended September 30, 2007, was as a result of weaker results from the LBAC portfolio and sub-prime loans originated in calendar year 2007 and 2006 as well aseconomic conditions combined with a decline in the wholesale auction values for used cars.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of cash are finance charge income, servicing fees, distributions from securitization Trusts, net proceeds from senior notes and convertible senior notes transactions, borrowings under credit facilities, transfers of finance receivables to Trusts in securitization transactions and
collections and recoveries on finance receivables. Our primary uses of cash are purchases of finance receivables, repayment of credit facilities, and securitization notes payable and other indebtedness, funding credit enhancement requirements for securitization transactions and credit facilities, operating expenses, repurchase of convertible notes and income taxes.
We used cash of $5,475.7$586.6 million and $6,283.2$2,290.4 million for the purchase of finance receivables during the ninethree months ended March 31,September 30, 2008 and 2007, respectively. These purchases were funded initially utilizing cash and credit facilities and our strategy is to subsequently obtain long-term financing for these receivables inthrough securitization transactions.
Credit Facilities
In the normal course of business, in addition to using our available cash, we pledge receivables and borrow under our credit facilities to fund our operations and repay these borrowings as appropriate under our cash management strategy.
As of March 31,September 30, 2008, credit facilities consisted of the following (in millions):
Facility Type | Maturity (a) | Facility Amount | Advances Outstanding | Maturity (a) | Facility Amount | Advances Outstanding | ||||||||||
Master warehouse facility | October 2009 | $ | 2,500.0 | $ | 1,509.5 | October 2009 | $ | 2,245.0 | $ | 1,597.5 | ||||||
Medium term note facility | October 2009 (b) | 750.0 | 750.0 | October 2009 (b) | 750.0 | 750.0 | ||||||||||
Call facility | August 2008 | 500.0 | 269.7 | 94.3 | ||||||||||||
Prime/Near prime facility | September 2008 | 1,500.0 | 764.4 | September 2009 | 450.0 | 352.7 | ||||||||||
Canadian facility | May 2008 (c) | 146.3 | 125.0 | |||||||||||||
Canadian credit facility | May 2009 | 107.2 | ||||||||||||||
Lease warehouse facility | June 2009 | 100.0 | 88.7 | |||||||||||||
$ | 5,396.3 | $ | 3,418.6 | $ | 3,545.0 | $ | 2,990.4 | |||||||||
(a) | Because |
(b) | This facility is a revolving facility through the date stated above. During the revolving period, we have the ability to substitute receivables for cash, or vice versa. |
(c) |
(d) | The prime/near prime facility was renewed in September 2008 and reduced in size from $1,120.0 million to $450.0 million. |
In August 2007, we renewed our call facility, extendingOn September 15, 2008, Lehman Brothers Holdings Inc. (“LBHI”) filed a petition in the maturity to August 2008.
In September 2007, we terminated a $400.0 million near-prime facility, a $450.0 million BVAC facility and a $600.0 million LBAC facility, and we entered into the prime/near prime facility, which provides up to $1,500.0 million through September 2008United States Bankruptcy Court for the financingSouthern District of prime and near-prime credit quality receivables. Subsequent to March 31,New York seeking relief under Chapter 11 of the United States Bankruptcy Code. Subsequently, 16 additional affiliates of LBHI (together with LBHI, “Lehman”) filed petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of the United States Bankruptcy Code. Lehman is one of the eleven financial institutions in the syndicate that comprise the master warehouse facility. Lehman’s commitment under the facility was $255 million, which amount will not be available for future borrowing. As of September 30, 2008, we amended our prime/near-prime facility to address a potential covenant violation inhad $105 million outstanding under the Lehman commitment which will be repaid as the facility related to credit losses in our Bay View and Long Beach portfolios. The amendment reduced the size of the facility to $1,120.0 million from $1,500.0 million.pays off.
Our credit facilities contain various covenants requiring certain minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and delinquency ratios, and pool level cumulative net loss) as well as limits on deferment levels. As of March 31,September 30, 2008, we were in compliance with all covenants in our credit facilities.
Our call facility and prime/near prime facility have renewal dates in August and September 2008, respectively.covenants. We are having preliminary discussions with our lenders onconsider the renewalsmost restrictive of these facilitiescovenants to be (i) maintenance of a portfolio annualized net credit loss ratio of less than 8.5 percent of average receivables on a rolling six month basis, (ii) maintenance of an
average earnings ratio to interest expense for two consecutive fiscal quarters of not less than 1.2 times and anticipate(iii) the requirement to repurchase receivables that one or both of these facilities could be reduced in capacity size or even eliminated. However, with our lower loan originations targets andhave been pledged to the available warehouse capacity we expect to achieve through securitizations supported by the Deutsche commitment, we anticipate having sufficient warehouse capacity through calendar 2008.
Additionally, we have the Canadianmaster warehouse facility that is scheduled to mature in May 2008. While we continue to work on renewing this facility, we have substantially reduced the level of Canadian loan originations to work within our current financing limitations. If we are unable to renew or replace the Canadian warehouse facility on terms that would allow for the profitable continuation of our Canadian business line, we will evaluate the possibility of discontinuing our Canadian loan originations platform.more than 364 days.
Securitizations
We have completed 6263 securitization transactions through March 31,September 30, 2008, excluding securitization Trusts entered into by BVACBay View Acceptance Corporation (“BVAC”) and LBACLong Beach Acceptance Corporation (“LBAC”) prior to their acquisition by us. The proceeds from the transactions were primarily used to repay borrowings outstanding under our credit facilities.
A summary of the active transactions is as follows (in millions):
Transaction | Date | Original Amount | Balance at March 31, 2008 | |||||
Secured financing: | ||||||||
2004-1 | June 2004 | $ | 575.0 | $ | 61.9 | |||
2004-C-A | August 2004 | 800.0 | 119.9 | |||||
2004-D-F | November 2004 | 750.0 | 129.6 | |||||
2005-A-X | February 2005 | 900.0 | 177.6 | |||||
2005-1 | April 2005 | 750.0 | 132.2 | |||||
2005-B-M | June 2005 | 1,350.0 | 341.4 | |||||
2005-C-F | August 2005 | 1,100.0 | 326.8 | |||||
2005-D-A | November 2005 | 1,400.0 | 478.6 | |||||
2006-1 | March 2006 | 945.0 | 304.9 | |||||
2006-R-M | May 2006 | 1,200.0 | 802.9 | |||||
2006-A-F | July 2006 | 1,350.0 | 659.9 | |||||
2006-B-G | September 2006 | 1,200.0 | 664.8 | |||||
2007-A-X | January 2007 | 1,200.0 | 747.8 | |||||
2007-B-F | April 2007 | 1,500.0 | 1,049.7 | |||||
2007-1 | May 2007 | 1,000.0 | 722.7 | |||||
2007-C-M | July 2007 | 1,500.0 | 1,172.6 | |||||
2007-D-F | September 2007 | 1,000.0 | 840.1 | |||||
2007-2-M | October 2007 | 1,000.0 | 867.3 | |||||
BV2005-LJ-1 | February 2005 | 232.1 | 57.6 | |||||
BV2005-LJ-2 | July 2005 | 185.6 | 54.7 | |||||
BV2005-3 | December 2005 | 220.1 | 82.0 | |||||
LB2004-B | July 2004 | 250.0 | 32.1 | |||||
LB2004-C | December 2004 | 350.0 | 64.7 | |||||
LB2005-A | June 2005 | 350.0 | 84.9 | |||||
LB2005-B | October 2005 | 350.0 | 109.1 | |||||
LB2006-A | May 2006 | 450.0 | 189.7 | |||||
LB2006-B | September 2006 | 500.0 | 268.8 | |||||
LB2007-A | March 2007 | 486.0 | 338.4 | |||||
Total active securitizations | $ | 22,893.8 | $ | 10,882.7 | ||||
Transaction 2004-C-A 2004-D-F 2005-A-X 2005-1 2005-B-M 2005-C-F 2005-D-A 2006-1 2006-R-M 2006-A-F 2006-B-G 2007-A-X 2007-B-F 2007-1 2007-C-M 2007-D-F 2007-2-M 2008-A-F BV2005-LJ-1 BV2005-LJ-2 BV2005-3 LB2004-C LB2005-A LB2005-B LB2006-A LB2006-B LB2007-A Total active securitizations Date Original
Amount Balance at
September 30, 2008 August 2004 $ 800.0 $ 82.7 November 2004 750.0 91.8 February 2005 900.0 128.7 April 2005 750.0 97.5 June 2005 1,350.0 257.4 August 2005 1,100.0 250.1 November 2005 1,400.0 371.0 March 2006 945.0 240.5 May 2006 1,200.0 642.0 July 2006 1,350.0 526.3 September 2006 1,200.0 536.1 January 2007 1,200.0 609.0 April 2007 1,500.0 866.1 May 2007 1,000.0 580.8 July 2007 1,500.0 977.6 September 2007 1,000.0 697.5 October 2007 1,000.0 699.7 May 2008 750.0 667.6 February 2005 232.1 42.9 July 2005 185.6 41.1 December 2005 220.1 63.9 December 2004 350.0 45.0 June 2005 350.0 66.8 October 2005 350.0 83.5 May 2006 450.0 142.7 September 2006 500.0 212.0 March 2007 486.0 269.7 $ 22,818.8 $ 9,290.0
We structure our securitization transactions as secured financings. Finance receivables are transferred to a securitization Trust, which is one of our special purpose finance subsidiaries, and the Trusts issue one or more series of asset-backed securities (securitization notes payable). While these Trusts are included in our consolidated financial statements, these Trusts are separate legal entities; thus the finance receivables and other assets held by
these Trusts are legally owned by these Trusts, are available to satisfy the related securitization notes payable and are not available to our creditors or our other subsidiaries.
At the time of securitization of finance receivables, we are required to pledge assets equal to a specified percentage of the securitization pool to provide credit enhancement required for specific credit ratings for the asset-backed securities issued by the Trusts.
Generally, we employ two types of securitization structures. The structure we have utilized most frequently involves the purchase of a financial guaranty insurance policy issued by an insurer. Our most recent transaction for sub-prime receivables, completed in September 2007, had an initial cash deposit and overcollateralization level of 9.0% and target credit enhancement of 13.0%. Under this structure, we typically expect to begin to receive cash distributions approximately seven to nine months after receivables are securitized. Our most recent transaction for prime and near-prime receivables, completed in October 2007, had an initial cash deposit and overcollateralization level of 3.5% and target credit enhancement of 7.75%. Under this structure, we typically expect to begin to receive cash distributions approximately ten to twelve months after receivables are securitized.
Several of the financial guaranty insurers used by us in the past are facing financial stress and have been downgraded by the rating agency downgradesagencies due to risk exposures on insurance policies that guarantee mortgage debt and related structured products.products and one of the financial guaranty insurers we have utilized in the past, has decided to no longer issue insurance policies on asset-backed securities. As a result, there is little demand for securities guaranteed by insurance, particularly securities backed by sub-prime collateral, has generally weakened. One of the insurersand we have used, Financial Security Assurance, Inc. (“FSA”), has been able to maintain its capital position and triple-A rating. We have an offer of capacity from FSA for $4,500.0 million for our sub-prime securitizations throughout calendar year 2008. Underdo not anticipate utilizing this
arrangement, which is not a commitment, prior to issuing an insurance policy, FSA will evaluate each securitization we propose to execute on a transaction by transaction basis as to timing, collateral composition, size, market conditions and other factors. While we believe that FSA will issue insurance policies to guarantee the securities issued in these securitizations to investors and that such policies will be accepted by investors and enhance the execution of our securitization transactions, we can provide no assurance on any of these matters.
Credit enhancement requirements in our sub-prime securitization structures will increase in calendar 2008 driven by bond insurance requirements, a reduction in excess spread due to higher cost of funds, and to a lesser extent, the credit deterioration we are experiencing in our portfolio. Historically, the level of credit enhancement required by the bond insurers in our securitization transactions would support a “shadow rating” to the bond insurer, or attachment point, of triple-B. The insurance policy provided by the bond insurer then allows for the actual rating on the securitization notes to be triple-A. The attachment point also determines the amount of capital the bond insurer is charged. As part of our arrangement with FSA, FSA will require us to increase the amount of credit enhancement we provide in a transaction to increase the attachment point to a rating of single-A-minus. With these changes, we expect enhancement levels on our securitization transactions to increase to initial and target credit enhancement levels structure in the low 20% range. This increase in enhancement levels will adversely impact our liquidity position.
These events could have a material adverse effect on the cost and availability of capital to finance our receivables, which in turn could have a material adverse effect on our financial position, liquidity and results of operations.foreseeable future.
The second type of securitization structure we use and the structure we anticipate utilizing for the foreseeable future, involves the sale of subordinated asset-backed securities in order to provide credit enhancement for the senior asset-backed securities.
Our most recent In October 2008, we entered into a senior subordinated securitization, transaction for primarily sub-prime receivables involving the sale of subordinated asset-backed securities was completed in March 2006 and required anAMCAR 2008-1, that has initial cash deposit and overcollateralization requirements of 24.4%. This level of 7.0%credit enhancement requires significantly greater use of our capital than in similar securitization transactions we have completed in the original receivable pool balance, and a targetpast. Increases or decreases to the credit enhancement level of 16.5%required in future securitization transactions will depend on the net interest margin of the receivable pool balance must be reached before excess cash is usedfinance receivables transferred, the collateral characteristics of the receivables transferred, credit performance trends of our finance receivables, our financial condition and the economic environment.
In April 2008, we entered into a one year, $2 billion forward purchase commitment agreement with Deutsche. Under this agreement and subject to repaycertain terms, Deutsche will purchase triple-A rated asset-backed securities issued by our sub-prime AMCAR securitization platform in registered public offerings, including the Class E bonds.senior asset-backed securities under the senior subordinated structure described above. Subsequent to the payoff of Class E bonds, excess cash is distributed to us. Under this structure,September 30, 2008, we typically expect to begin to receive cash distributions approximately 22 to 26 months after receivables are securitized.
In May 2007, we executed our first transaction under our securitization program for prime and near-prime receivables and the structure involved the sale of subordinated asset-backed securities. This transaction required an initial cash deposit and overcollateralization level of 0.5%utilized $376.0 million of the original receivable pool balance, and a target credit enhancement levelcommitment in conjunction with the execution of 4.5%our AMCAR 2008-1 transaction.
This agreement with Deutsche is subject to several performance covenants. We consider the most restrictive of these covenants to be the receivable pool balance must be reached before excess cash is used to pay down
the principal balance of the Class E bondsrequirement to maintain a specified amount outstanding. Excess cash not utilizedportfolio annualized net loss ratio of less than eight percent of average receivables on a rolling six month basis. If we were to pay downbreach any covenant in the agreement, Deutsche would no longer be obligated to purchase triple-A rated asset-backed securities under our AMCAR securitization program.
In September 2008, we entered into agreements with Wachovia Capital Markets, LLC and Wachovia Bank, National Association (together, “Wachovia”), to establish two funding facilities under which Wachovia would provide total funding of $117.7 million, during the one year term of the facilities, secured by asset-backed securities as collateral. Subsequent to September 30, 2008, and in conjunction with our AMCAR 2008-1 transaction, we obtained funding of $48.9 million by pledging AA/Aa2-rated asset-backed securities (the “Class B Notes”) as collateral and $68.8 million by pledging A/A3-rated asset-backed securities (the “Class C Notes”) as collateral. Under these funding facilities, we retained the Class E bondsB Notes and the Class C Notes and then sold the retained notes to a special purpose subsidiary, which in turn pledged such retained notes as collateral to secure the fundings under the two facilities. Currently, the facilities are fully utilized. At the end of the one year term, the facilities, if not renewed, will be released to us. Under this structure, we typically expect to begin to receive cash distributions approximately ten to twelve months after receivables are securitized.
We anticipate that it may be difficult to sell subordinated asset-backed securities given current capital market conditions or, if we are able to sell subordinated securities,amortize in accordance with the overall pricing for a senior-subordinated securitization may be materially higher than for a securitization guaranteed by an insurance policy.transaction until paid off.
Cash flows related to securitization transactions were as follows (in millions):
Nine Months Ended March 31, | Three Months Ended September 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Initial credit enhancement deposits: | ||||||||||||
Restricted cash | $ | 64.0 | $ | 93.3 | $ | 53.8 | ||||||
Overcollateralization | 213.8 | 290.9 | 188.2 | |||||||||
Distributions from Trusts: | ||||||||||||
Gain on sale Trusts | 7.5 | 93.0 | 0.2 | |||||||||
Secured financing Trusts | 548.9 | 597.9 | $ | 170.9 | 243.6 |
The agreements with the insurers of our securitization transactions covered by a financial guaranty insurance policy provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.
The securitization transactions insured by some of our financial guaranty insurance providers are cross-collateralized to a limited extent. In the event of a shortfall in the original target credit enhancement requirement for any of these securitization Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount.
AsDuring the three months ended September 30, 2008, we exceeded the cumulative default ratio target in the AMCAR 2007-D-F securitization. Accordingly, $6.7 million of March 31,cash otherwise distributable to us has been used to fund increased credit enhancement levels.
During fiscal 2008 and at September 30, 2008, three LBACLong Beach Acceptance Corporation (“LBAC”) securitizations (LB2006-A, LB2006-B and LB2007-A) insured by FSA had delinquency ratios in excess of the targeted levels. As part of the an
arrangement with FSA described above,the insurer of these transactions, the excess cash flows from our other FSAsecuritizations insured securitizations are beingby this insurer were used to fund higher credit enhancement requirements in the LBAC Trusts which exceeded the portfolio performance ratios. As of March 31, 2008, cash otherwise distributable to us of $24 million has been used to buildThe higher required credit enhancement levels in these three LBAC Trusts. An additional $17 millionTrusts were reached as of excess cash will be needed to fund the higher credit enhancement levels. We anticipate that we will reach these requirements in MayJune 30, 2008. Additionally, twoone other LBAC securitizations (LB2005-A and LB2005-B) insured by FSAsecuritization (LB2005-A) had
a delinquency ratiosratio in excess of its targeted levels.level as of September 30, 2008. Excess cash flows from these LBAC securitizationsthis trust are being used to build higher credit enhancement levels in the respective Trusts that breached the portfolio performance ratios, instead of being distributed to us.
During the March 2008 quarter, we entered into an agreement with MBIA, Inc. (“MBIA”) to increase the portfolio performance ratios in the 2007-2-M securitization insured by MBIA. In return for higher portfolio performance ratios, we agreed to use excess cash flow from other MBIA insured securitizations to fund the higher credit enhancement requirement for the 2007-2-M Trust. We anticipate that it will take approximately three months to build the credit enhancement up to the new target requirement and $34 million otherwise distributable to us will be used to fund the higher credit enhancement requirements in this securitization transaction.
The agreements that we enter into with our financial guaranty insurance providers in connection with securitization transactions contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss) that are higher than the limits referred to above. 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 financial guaranty insurance providers to terminate our 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 financial guaranty insurance provider to terminate our servicing rights under all servicing agreements for securitization Trusts in which they issued a financial guaranty insurance policy. Additionally, if these higher targeted portfolio performance levels were exceeded, the financial guaranty insurance providers may elect to retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement. This, in turn, could result in defaults under our other securitizations and other material indebtedness. Although we have never exceeded these additional targeted portfolio performance ratios, and do not anticipate violating any event of default triggers for our securitizations, there can be no assurance that our servicing rights with respect to the automobile receivables in such Trusts or any other Trusts will not be terminated if (i) such targeted portfolio performance ratios are breached, (ii) we breach our obligations under the servicing agreements, (iii) the financial guaranty insurance providers are required to make payments under a policy, or (iv) certain bankruptcy or insolvency events were to occur. As of March 31,September 30, 2008, no such termination events have occurred with respect to any of the Trusts formed by us.
Stock RepurchasesConvertible Senior Notes
DuringIn November 2003, we issued $200.0 million of contingently convertible senior notes that are due in November 2023. Interest on the nine months ended March 31, 2008 and 2007, we repurchased 5,734,850notes is payable semiannually at a rate of 1.75% per annum. The notes, which are uncollateralized, are convertible prior to maturity into shares of our common stock at an average cost$18.68 per share. Additionally, we may exercise our option to repurchase the notes, or holders of $22.30 per share and 13,462,430 sharesthe convertible senior notes may require us to repurchase the notes, on November 15, 2008, at a price equal to 100.25% of our common stockthe principal amount of the notes redeemed, or after November 15, 2008 at an average cost of $24.06 per share, respectively.
As of Aprilpar. During the three months ended September 30, 2008, we had repurchased $1,374.8 $114.7
million of our common stock since April 2004 andthese convertible notes at a small discount. On October 20, 2008, we hadmade a tender offer for the remaining authorization to repurchase $172.0balance of $85.3 million of our common stock. A covenant in our senior note indenture entered into in June 2007 limits our abilitythese convertible notes which expires November 17, 2008, at a price equal to repurchase stock. As100.25% of April 30, 2008, we have approximately $55 million available for share repurchases under the covenant limits. We have no current plans to continue repurchase activity.principal amount of the notes redeemed.
Contractual Obligations
We adopted the provisionsAs of FIN 48 on July 1, 2007. As a result of the implementation of FIN 48,September 30, 2008, we had liabilities, included in accrued taxes and expenses on the consolidated balance sheets, associated with uncertain tax positions of $53.6$95.4 million. Due to uncertainty regarding the timing of future cash flows associated with FIN 48those liabilities, a reasonable estimate of the period of cash settlement is not determinable.
Recent Market DevelopmentsAccounting Pronouncements and Accounting Changes
We anticipate that a numberIn the first quarter of factors will continue to adversely impact our liquidity in calendar 2008: higher credit enhancement levels in our securitization transactions driven by bond insurance requirements, a reduction in excess spread due to higher cost of funds,2009, we adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) for all financial assets and to a lesser extent, the credit deterioration we are experiencing in our portfolio; disruptionsfinancial liabilities and for all non-financial assets and non-financial liabilities recognized or disclosed at fair value in the capital marketsfinancial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and weakened demand for securities guaranteed by insurance policies, making the executionenhances fair value measurement disclosure. The adoption of securitization transactions more challenging and expensive; decreased cash distributions fromSFAS No. 157 did not have a significant impact on our securitization Trusts due to weaker credit performance;consolidated financial statements, and the breachresulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance.
In October 2008, the FASB issued FSP 157-3 “Determining the Fair Value of portfolio performance ratiosa Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in certaina market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The adoption of FSP 157-3 did not have a significant impact on our consolidated financial statements or the fair values of our securitization Trusts supported by auto receivables originated through our Long Beach Acceptance Corporation (“LBAC”) platform, as well as an amendment to the 2007-2-M securitization transaction to increase the portfolio performance ratios, resulting in higher credit enhancement requirements for those Trustsfinancial assets and a delay in cash distributions to us while those higher credit enhancement levels are built.liabilities.
Since January 2008, we have implemented a revised operating plan in an effort to preserve and strengthen our capital and liquidity position, and to maintain sufficient capacity on our warehouse lines to fund new loan originations until capital market conditions improve for securitization transactions. Under this plan, we increased the minimum credit score requirements for new loan originations, decreased our originations infrastructure by closing and consolidating branch underwriting locations, selectively decreased the number of dealers from whom we purchase loans and reduced operating and overhead headcounts. We have discontinued new originations in our direct lending and leasing platforms as well as certain partner relationships. Our target for annualized loan origination levels has been reduced to approximately $3.0 billion. We recognized a restructuring charge of $9.1 million for the three months ended March 31, 2008, related to reductions which align our infrastructure with reduced origination targets.
We believe that we have sufficient liquidity and warehouse capacity to operate under this plan through calendar 2008. However, if the asset-backed securities market or the credit markets, in general, continue to deteriorate, or if economic factors further deteriorate resulting in weaker credit performance, we may need to reduce our targeted origination volume below the $3.0 billion level to sustain adequate liquidity.
The asset-backed securities market, along with credit markets in general, has been experiencing unprecedented disruptions. Market conditions began deteriorating in mid-2007 and remain impaired in 2008. Current conditions in the asset-backed securities market include increased risk premiums for issuers, reduced investor demand for asset-backed securities, particularly those securities backed by sub-prime collateral, financial stress and rating agency downgrades impacting the financial guaranty insurance providers, and a general tightening of availability of credit. These conditions, which may increase our cost of funding and reduce our access to the asset-backed securities market or other types of receivable financings, may continue or worsen in the future.
There have been some signs of improvement as several prime auto, equipment and credit card securitizations, as well as, one sub-prime auto securitization have been completed. Although the successful completion of these recent securitizations may evidence improving conditions in the asset-backed securities markets, there continues to be uncertainty about effective execution of larger scale sub-prime securitization transactions. We have not accessed the securitization market with a securitization transaction since October 2007.
In April 2008, we entered into a one year, $2 billion forward purchase commitment agreement with Deutsche Bank AG, Cayman Islands Branch (“Deutsche”). Under this agreement and subject to certain terms, Deutsche will purchase triple-A rated asset-backed securities in registered public offerings on our sub-prime AmeriCredit Automobile Receivables Trust (AMCAR) securitization platform. We anticipate using this commitment in connection with securitizations backed by a financial guaranty insurance policy pursuant to an arrangement we have with FSA for $4.5 billion of insurance capacity.
However, if we are unable to execute securitization transactions in connection with the above plans, and are otherwise unable to issue any other debt or equity, we would not have sufficient funds to finance new loan originations and, in such event, we would be required to revise the scale of our business, including possible further reduction of loan origination activities, which would have a material adverse effect on our ability to achieve our business and financial objectives. For a more complete description of the financing risks that we face, please review the Risk Factors Part I, Item I in our Annual Report on Form 10-K for the year ended June 30, 2007.
INTEREST RATE RISK
Fluctuations in market interest rates impact our credit facilities and securitization transactions. Our gross interest rate spread, which is the difference between interest earned on our finance receivables and interest paid, is affected by changes in interest rates as a result of our dependence upon the issuance of variable rate securities and the incurrence of variable rate debt to fund our purchases of finance receivables.
Credit Facilities
Finance receivables purchased by us and pledged to secure borrowings under our credit facilities bear fixed interest rates. Amounts borrowed under our credit facilities bear interest at variable rates that are subject to frequent adjustments to reflect prevailing market interest rates. To protect the interest rate spread within each credit facility, our special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements in connection with borrowings under our 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 our interest rate risk management strategy and when economically feasible, we may simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid by our special purpose finance subsidiary to purchase the interest rate cap agreement and thus retain the interest rate risk. The fair value of the interest rate cap agreement purchased by the special purpose finance subsidiary is included in other assets and the fair value of the interest rate cap agreement sold by us is included in other liabilities on our consolidated balance sheets.
Securitizations
The interest rate demanded by investors in our securitization transactions depends on prevailing market interest rates for comparable transactions and the general interest rate environment. We utilize several strategies to minimize the impact of interest rate fluctuations on our gross interest rate margin, including the use of derivative financial instruments, the regular sale or pledging of receivables to securitization Trusts, pre-funding of securitization transactions and the use of revolving structures.
In our securitization transactions, we transfer fixed rate finance 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. We use interest rate swap agreements to convert the variable rate exposures on securities issued by our securitization Trusts to a fixed rate, thereby locking in the gross interest rate spread to be earned by us over the life of a securitization. Interest rate swap agreements purchased by us do not impact the amount of cash flows to be received by holders of the asset-backed securities issued by the Trusts. The interest rate swap agreements serve to offset the impact of increased or decreased interest paid by the Trusts on floating rate asset-backed securities on the cash flows to be
received by us from the Trusts. We utilize such arrangements to modify our net interest sensitivity to levels deemed appropriate based on our risk tolerance. In circumstances where the interest rate risk is deemed to be tolerable, usually if the risk is less than one year in term at inception, we may choose not to hedge potential fluctuations in cash flows due to changes in interest rates. Our special purpose finance subsidiaries are contractually required to purchase a financial instrument to protect the net spread in connection with the issuance of floating rate securities even if we choose not to hedge our future cash flows. Although the interest rate cap agreements are purchased by the Trusts, cash outflows from the Trusts ultimately impact our retained interests in the securitization transactions as cash expended by the securitization Trusts will decrease the ultimate amount of cash to be received by us. Therefore, when economically feasible, we may simultaneously sell a corresponding interest rate cap agreement to offset the premium paid by the Trust to purchase the interest rate cap agreement. The fair value of the interest rate cap agreements purchased by the special purpose finance subsidiaries in connection with securitization transactions are included in other assets and the fair value of the interest rate cap agreements sold by us are included in other liabilities on our consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are reflected in interest expense on our consolidated statements of incomeoperations and comprehensive income.operations.
Pre-funding securitizations is the practice of issuing more asset-backed securities than needed to cover finance 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 delivered to the Trust in amounts up to the pre-funded balance held in the escrow account. The use of pre-funded securitizations allows us to lock in borrowing costs with respect to the finance receivables subsequently delivered to the Trust. However, we incur an expense in pre-funded securitizations during the period between the initial delivery of finance receivables and the subsequent delivery of finance receivables equal to the difference between the interest earned on the proceeds held in the escrow account and the interest rate paid on the asset-backed securities outstanding.
Additionally, in May 2006, we issued a “revolving” securitization transaction that allows us to replace receivables as they amortize down rather than paying down the outstanding debt balance for a period of one year subject to compliance with certain covenants. The use of this type of transaction allows us to lock in borrowing costs for the revolving period and allows us to finance approximately 50% more receivables than in our typical amortizing securitization structure at that borrowing cost.
We have entered into interest rate swap agreements to hedge the variability in interest payments on our most recent securitization transactions. Portions of these interest rate swap agreements are designated and qualify as cash flow hedges.
Management monitors our hedging activities to ensure that the value of derivative financial instruments, their correlation to the contracts being hedged and the amounts being hedged continue to provide effective protection against interest rate risk. However, there can be no assurance that our strategies will be effective in minimizing interest rate risk or that increases in interest rates will not have an adverse effect on our profitability. All transactions are entered into for purposes other than trading.
Current Accounting Pronouncements
Statement of Financial Accounting Standards No. 141R
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, “Business Combinations” (“SFAS 141R”), which replaces Statement of Financial Accounting Standards No. 141, “Business Combinations”. SFAS 141R establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R will be applicable prospectively to business combinations beginning in our 2010 fiscal year.
Statement of Financial Accounting Standards No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of SFAS No. 161 will not affect our financial condition and results of operations, but may require additional disclosures for our derivative and hedging activities.
FORWARD LOOKING STATEMENTS
The preceding Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains several “forward-looking statements”.statements.” Forward-looking statements are those that use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “may”, “likely”, “should”, “estimate”, “continue”,“believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “likely,” “should,” “estimate,” “continue,” “future” or other comparable expressions. These words indicate future events and trends. Forward-looking statements are our 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 us. The most significant risks are detailed from time to time in our filings and reports with the Securities and
Exchange Commission including our Annual Report on Form 10-K for the year ended June 30, 2007.2008. It is advisable not to place undue reliance on our forward-looking statements. We undertake no obligation to, and do not, publicly update or revise any forward-looking statements, except as required by federal securities laws, whether as a result of new information, future events or otherwise.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Because our funding strategy is dependent upon the issuance of interest-bearing securities and the incurrence of debt, fluctuations in interest rates impact our profitability. Therefore, we employ various hedging strategies to minimize the risk of interest rate fluctuations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk” for additional information regarding such market risks.
Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.
The CEO and CFO, with the participation of management, have evaluated the effectiveness of our disclosure controls and procedures as of March 31,September 30, 2008. Based on their evaluation, they have concluded that the disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
There were no changes made in our internal control over financial reporting during the three months ended March 31,September 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Limitations Inherent in all Controls
Our management, including the CEO and CFO, recognize that the disclosure controls and internal controls (discussed above) cannot prevent all errors or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in any control system, no
evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
Item 1. | LEGAL PROCEEDINGS |
As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants. Some litigation against us could take the form of class action complaints by consumers and/or shareholders. As the assignee of finance contracts originated by dealers, we 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 can include requests for compensatory, statutory and punitive damages. We believe that we have taken prudent steps to address and mitigate the litigation risks associated with our business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened litigation will not be material to our consolidated financial position or our results of operations.
Item 1A. | RISK FACTORS |
In addition to the other information set forth in this report, the factors discussed in Part I, Item 1, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2007,2008, should be carefully considered as these risk factors could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and/or operating results.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not Applicable
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
Not Applicable
Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not ApplicableThe Annual Meeting of Shareholders was held on October 28, 2008.
The following proposals were adopted by the margins indicated:
1. | Election of four directors. One to terms of office expiring at the Annual Meeting of Shareholders in 2009, and three to terms of office expiring at the Annual Meeting of Shareholders in 2011, or until their successors are elected and qualified. |
Nominees for Terms Expiring in 2009 For Withheld Ian M. Cumming Nominee for Terms Expiring in 2011 For Withheld John R. Clay Clifton H. Morris, Jr. Justin R. Wheeler 101,040,685 557,560 101,175,065 423,180 100,869,841 728,404 101,237,583 360,662
The directors who are continuing to hold office are Daniel E. Berce, James H. Greer, A.R. Dike, Douglas K. Higgins, and Kenneth H. Jones, Jr.
2. | Proposal to amend the Company’s Articles of Incorporation to increase the authorized number of shares of Common Stock from 230,000,000 to 350,000,000. |
For | Against | Withheld | ||
100,363,947 | 1,197,252 | 37,046 |
3. | Proposal to approve the 2008 Omnibus Incentive Plan for AmeriCredit Corp. |
For | Against | Withheld | ||
75,257,146 | 7,608,075 | 22,626 |
4. | Proposal to amend the AmeriCredit Corp. Employee Stock Purchase Plan (the “Purchase Plan”) to increase the number of shares of Common Stock reserved under the Purchase Plan from 5,000,000 to 8,000,000. |
For | Against | Withheld | ||
82,596,604 | 282,382 | 8,862 |
5. | Proposal to approve the ratification of the appointment by the Audit Commmittee of Deloitte and Touche LLP as the independent registered public accounting firm for the fiscal year ending June 30, 2009. |
For | Against | Withheld | ||
101,232,548 | 144,419 | 13,277 |
Item 5. | OTHER INFORMATION |
Not Applicable
Item 6. | EXHIBITS |
31.1 | Officers’ Certifications of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
32.1 | Officers’ Certifications of Periodic Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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/ Chris A. Choate | ||||
(Signature) | ||||||
Chris A. Choate | ||||||
Executive Vice President, | ||||||
Chief Financial Officer and Treasurer |
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