UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT (Date of earliest event reported): March 20, 2006
AMERICAN GENERAL FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Indiana
1-6155
35-0416090
(STATE OR OTHER
(COMMISSION FILE
(IRS EMPLOYER
JURISDICTION OF
NUMBER)
IDENTIFICATION
INCORPORATION)
NUMBER)
601 N.W. Second Street, Evansville, IN 47708
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (812) 424-8031
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Item 2.02.
Results of Operations and Financial Condition.
On March 20, 2006, American General Finance Corporation (“AGFC”, or collectively with its subsidiaries, whether directly or indirectly owned, the “Company” or “we”) determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. The restatement relates to the correction of our accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities(SFAS 133).
Item 4.02(a).
Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
Restatement and Non-Reliance
On March 20, 2006, we determined that it was necessary to restate our unaudited condensed consolidated financial statements and other financial information at and for the quarters ended March 31, June 30, and September 30, 2005. The restatement relates to the correction of errors in our accounting for four cross currency swaps designated as hedges of our foreign currency denominated debt, the first of which we entered into in June 2004. As a result, the previously issued unaudited condensed consolidated financial statements and other related financial information for these periods should no longer be relied upon. We will include the restated financial information at and for each of the periods being restated in our Annual Report on Form 10-K for the year ended December 31, 2005.
We evaluated the effect of correcting the errors related to our original accounting on our previously reported unaudited condensed consolidated financial statements for each quarter in 2004 and on our annual audited consolidated financial statements at and for the year ended December 31, 2004 using qualitative and quantitative factors and determined that the effect was immaterial. We concluded that the cumulative effect of the correction for the year 2004 should be accounted for in the fourth quarter of 2005.
Our Chief Financial Officer (CFO) and other authorized officers of the Company have discussed the matters disclosed in this Current Report on Form 8-K with senior management at American International Group, Inc. (AIG) and PricewaterhouseCoopers LLP, our independent registered public accounting firm.
Background
We reviewed our existing accounting for cross currency swaps under SFAS 133 and determined that our four cross currency swaps do not meet the requirements for hedge accounting under SFAS 133. Previously, we had designated these swaps as hedges of changes in foreign exchange rates related to our foreign currency denominated debt (liabilities of the Company). We documented these swaps originally as “matched terms” hedges, in accordance with paragraph 65 of SFAS 133. However, upon completing our review of these transactions, we concluded that certain significant terms did not meet the requirements of paragraph 65 of SFAS 133. We have determined that the hedge documentation, contemporaneously created on the trade date, is not consistent with the requirements to support hedge accounting treatment. The swaps might have
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qualified for “long-haul” hedge accounting, with ineffectiveness reflected in current income; however, SFAS 133 does not allow for subsequent documentation modifications. Since these swaps do not qualify for hedge accounting, we will record all changes in the fair value of each of our cross currency swaps to income.
As a result of this restatement, we are requesting waivers from our credit facility banks regarding representations we previously made to them with respect to prior period financial statements. While there can be no assurance that the banks will grant these waivers, we expect to receive the waivers in due course, based on our discussions with representatives of the credit facility banks.
Effect of the Restatement
The correction of our accounting treatment related to the cross currency swaps will not adversely affect the Company's financial position. The hedge accounting correction will have no effect on total shareholder’s equity but does affect net income. For future periods, we anticipate greater fluctuations in net income as a result of not using hedge accounting for our cross currency swaps.
The effect of the restatement on net income is as follows:
(dollars in thousands) | Net Income Adjustment |
Three Months ended March 31, 2005 | $25,113 |
Three Months ended June 30, 2005 | (5,013) |
Three Months ended September 30, 2005 | 21,369 |
Nine months ended September 30, 2005 | $41,469 |
In addition, net income for the quarter ended December 31, 2005 includes $7.6 million related to the correction of cumulative hedge accounting errors under SFAS 133 arising in the quarters ended June 30, September 30, and December 31, 2004 and a $21,100 charge for other out of period items that were corrected in fourth quarter 2005 as part of our normal year-end financial reporting process. These errors were immaterial to the unaudited condensed consolidated financial statements for each of the related quarters and to the respective annual audited consolidated financial statements.
The effect of the restatement on the components of shareholder’s equity is as follows:
(dollars in thousands) | Retained Earnings | Accumulated Other Comprehensive Income |
March 31, 2005 | $25,113 | $(25,113) |
June 30, 2005 | 20,100 | (20,100) |
September 30, 2005 | 41,469 | (41,469) |
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Restated Unaudited Condensed Consolidated Financial Statements
The following tables show the restatement adjustments to our previously reported unaudited condensed consolidated statements of income and balance sheets at and for the quarters ended March 31, June 30, and September 30, 2005.
Restated
Condensed Consolidated Statement of Income (Unaudited):
Three Months Ended March 31, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Revenues Finance charges | $531,324 | $ - | $531,324 |
Insurance | 42,509 | - | 42,509 |
Net service fees | 59,992 | - | 59,992 |
Investment | 20,922 | - | 20,922 |
Other | 9,774 | 36,317 | 46,091 |
Total revenues | 664,521 | 36,317 | 700,838 |
Expenses Interest expense | 192,829 | (2,320)* | 190,509 |
Operating expenses: Salaries and benefits | 130,449 | - | 130,449 |
Other operating expenses | 73,639 | - | 73,639 |
Provision for finance receivable losses | 63,217 | - | 63,217 |
Insurance losses and loss adjustment expenses | 17,148 | - | 17,148 |
Total expenses | 477,282 | (2,320) | 474,962 |
Income before provision for income taxes | 187,239 | 38,637 | 225,876 |
Provision for Income Taxes | 68,897 | 13,524 | 82,421 |
Net Income | $118,342 | $25,113 | $143,455 |
*
Represents the swaps net interest settlements that have been reclassified to other revenue in conjunction with the correction of the accounting.
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Restated
Condensed Consolidated Balance Sheet (Unaudited):
March 31, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Assets Net finance receivables: Real estate loans | $16,811,170 | $ - | $16,811,170 |
Non-real estate loans | 2,971,165 | - | 2,971,165 |
Retail sales finance | 1,297,603 | - | 1,297,603 |
Net finance receivables | 21,079,938 | - | 21,079,938 |
Allowance for finance receivable losses | (445,926) | - | (445,926) |
Net finance receivables, less allowance for finance receivable losses | 20,634,012 | - | 20,634,012 |
Investment securities | 1,381,421 | - | 1,381,421 |
Cash and cash equivalents | 206,194 | - | 206,194 |
Notes receivable from parent | 299,573 | - | 299,573 |
Other assets | 958,143 | - | 958,143 |
Total assets | $23,479,343 | $ - | $23,479,343 |
Liabilities and Shareholder’s Equity Long-term debt | $15,586,553 | $ - | $15,586,553 |
Short-term debt | 3,958,603 | - | 3,958,603 |
Insurance claims and policyholder liabilities | 411,208 | - | 411,208 |
Other liabilities | 528,313 | - | 528,313 |
Accrued taxes | 105,985 | - | 105,985 |
Total liabilities | 20,590,662 | - | 20,590,662 |
Shareholder’s equity: Common stock | 5,080 | - | 5,080 |
Additional paid-in capital | 1,139,906 | - | 1,139,906 |
Accumulated other comprehensive income | 60,279 | (25,113) | 35,166 |
Retained earnings | 1,683,416 | 25,113 | 1,708,529 |
Total shareholder’s equity | 2,888,681 | - | 2,888,681 |
Total liabilities and shareholder’s equity | $23,479,343 | $ - | $23,479,343 |
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Restated
Condensed Consolidated Statement of Income (Unaudited):
Three Months Ended June 30, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Revenues Finance charges | $562,685 | $ - | $562,685 |
Insurance | 40,809 | - | 40,809 |
Net service fees | 79,378 | - | 79,378 |
Investment | 21,609 | - | 21,609 |
Other | 10,567 | (11,706) | (1,139) |
Total revenues | 715,048 | (11,706) | 703,342 |
Expenses Interest expense | 212,377 | (3,992)* | 208,385 |
Operating expenses: Salaries and benefits | 138,364 | - | 138,364 |
Other operating expenses | 71,856 | - | 71,856 |
Provision for finance receivable losses | 69,500 | - | 69,500 |
Insurance losses and loss adjustment expenses | 15,953 | - | 15,953 |
Total expenses | 508,050 | (3,992) | 504,058 |
Income before provision for income taxes | 206,998 | (7,714) | 199,284 |
Provision for Income Taxes | 76,967 | (2,701) | 74,266 |
Net Income | $130,031 | $(5,013) | $125,018 |
*
Represents the swaps net interest settlements that have been reclassified to other revenue in conjunction with the correction of the accounting.
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Restated
Condensed Consolidated Balance Sheet (Unaudited):
June 30, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Assets Net finance receivables: Real estate loans | $18,062,189 | $ - | $18,062,189 |
Non-real estate loans | 3,066,105 | - | 3,066,105 |
Retail sales finance | 1,334,106 | - | 1,334,106 |
Net finance receivables | 22,462,400 | - | 22,462,400 |
Allowance for finance receivable losses | (457,093) | - | (457,093) |
Net finance receivables, less allowance for finance receivable losses | 22,005,307 | - | 22,005,307 |
Investment securities | 1,400,045 | - | 1,400,045 |
Cash and cash equivalents | 168,088 | - | 168,088 |
Notes receivable from parent | 292,705 | - | 292,705 |
Other assets | 859,664 | - | 859,664 |
Total assets | $24,725,809 | $ - | $24,725,809 |
Liabilities and Shareholder’s Equity Long-term debt | $16,428,013 | $ - | $16,428,013 |
Short-term debt | 4,375,728 | - | 4,375,728 |
Insurance claims and policyholder liabilities | 408,868 | - | 408,868 |
Other liabilities | 417,693 | - | 417,693 |
Accrued taxes | 27,748 | - | 27,748 |
Total liabilities | 21,658,050 | - | 21,658,050 |
Shareholder’s equity: Common stock | 5,080 | - | 5,080 |
Additional paid-in capital | 1,179,906 | - | 1,179,906 |
Accumulated other comprehensive income | 69,330 | (20,100) | 49,230 |
Retained earnings | 1,813,443 | 20,100 | 1,833,543 |
Total shareholder’s equity | 3,067,759 | - | 3,067,759 |
Total liabilities and shareholder’s equity | $24,725,809 | $ - | $24,725,809 |
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Restated
Condensed Consolidated Statement of Income (Unaudited):
Three Months Ended September 30, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Revenues Finance charges | $579,503 | $ - | $579,503 |
Insurance | 39,334 | - | 39,334 |
Net service fees | 97,855 | - | 97,855 |
Investment | 21,896 | - | 21,896 |
Other | 11,627 | 29,918 | 41,545 |
Total revenues | 750,215 | 29,918 | 780,133 |
Expenses Interest expense | 233,653 | (2,957)* | 230,696 |
Operating expenses: Salaries and benefits | 138,880 | - | 138,880 |
Other operating expenses | 76,098 | - | 76,098 |
Provision for finance receivable losses | 116,372 | - | 116,372 |
Insurance losses and loss adjustment expenses | 17,357 | - | 17,357 |
Total expenses | 582,360 | (2,957) | 579,403 |
Income before provision for income taxes | 167,855 | 32,875 | 200,730 |
Provision for Income Taxes | 62,833 | 11,506 | 74,339 |
Net Income | $105,022 | $21,369 | $126,391 |
*
Represents the swaps net interest settlements that have been reclassified to other revenue in conjunction with the correction of the accounting.
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Restated
Condensed Consolidated Balance Sheet (Unaudited):
September 30, 2005 (dollars in thousands) | As Previously | As | |
Reported | Adjustment | Restated | |
Assets Net finance receivables: Real estate loans | $18,427,052 | $ - | $18,427,052 |
Non-real estate loans | 3,088,988 | - | 3,088,988 |
Retail sales finance | 1,384,522 | - | 1,384,522 |
Net finance receivables | 22,900,562 | - | 22,900,562 |
Allowance for finance receivable losses | (512,288) | - | (512,288) |
Net finance receivables, less allowance for finance receivable losses | 22,388,274 | - | 22,388,274 |
Investment securities | 1,382,140 | - | 1,382,140 |
Cash and cash equivalents | 151,765 | - | 151,765 |
Notes receivable from parent | 286,651 | - | 286,651 |
Other assets | 1,053,701 | - | 1,053,701 |
Total assets | $25,262,531 | $ - | $25,262,531 |
Liabilities and Shareholder’s Equity Long-term debt | $17,714,009 | $ - | $17,714,009 |
Short-term debt | 3,495,341 | - | 3,495,341 |
Insurance claims and policyholder liabilities | 404,050 | - | 404,050 |
Other liabilities | 487,595 | - | 487,595 |
Accrued taxes | 23,405 | - | 23,405 |
Total liabilities | 22,124,400 | - | 22,124,400 |
Shareholder’s equity: Common stock | 5,080 | - | 5,080 |
Additional paid-in capital | 1,179,906 | - | 1,179,906 |
Accumulated other comprehensive income | 84,662 | (41,469) | 43,193 |
Retained earnings | 1,868,483 | 41,469 | 1,909,952 |
Total shareholder’s equity | 3,138,131 | - | 3,138,131 |
Total liabilities and shareholder’s equity | $25,262,531 | $ - | $25,262,531 |
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Internal Control over Financial Reporting
We have determined that our internal control over financial reporting was ineffective since the inception of our cross currency swaps in June 2004 and continuing until fourth quarter 2005. We did not maintain effective controls over the accounting for derivatives. Specifically, our controls were not effective in ensuring the proper designation and documentation of our foreign currency swaps. This control deficiency resulted in the restatement of the Company’s 2005 first, second, and third quarter unaudited condensed consolidated financial statements. This control deficiency could result in a misstatement of derivative related income, interest expense, and retained earnings that would cause a material misstatement of the Company’s annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that this control de ficiency constitutes a material weakness. This material weakness existed as of December 31, 2005 and has been remediated in the first quarter of 2006, prior to the filing of this report and our 2005 Annual Report on Form 10-K. As a result, we will disclose this material weakness, as well as our plan for remediating this weakness, which is being executed in the first quarter of 2006, in our 2005 Annual Report on Form 10-K.
As of the date of this filing, management has taken the following actions to remediate this weakness:
·
Management has established enhanced procedures to be performed by accounting personnel over documentation, evaluation, and classification of new hedge relationships.
·
Management and accounting personnel involved in derivative transactions will perform quarterly reviews of the derivative portfolio to ensure that acceptable methods for measuring hedge effectiveness are utilized.
·
Management will review the effect of new interpretations and accounting changes with respect to the application of hedge accounting on existing significant hedging relationships quarterly.
·
All new hedge accounting policies, strategies, and transactions will be approved by the CFO after consultation with financial management at AIG.
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Signature
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.
AMERICAN GENERAL FINANCE CORPORATION | |||||||
(Registrant) | |||||||
Date: | March 24, 2006 | By | /s/ | Donald R. Breivogel, Jr. | |||
Donald R. Breivogel, Jr. | |||||||
Senior Vice President and Chief Financial Officer | |||||||
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