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, 2002
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 (I.R.S. Employer
Incorporation or organization) Identification No.)
801 Cherry Street, Suite 3900, Fort Worth, Texas 76102
------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(817) 302-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 85,534,477 shares of common stock, $0.01 par value outstanding as of
April 30, 2002.
AMERICREDIT CORP.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 2002
and June 30, 2001 ............................................. 3
Consolidated Statements of Income and Comprehensive
Income - Three Months and Nine Months Ended March
31, 2002 and 2001 ............................................. 4
Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2002 and 2001 ................................. 5
Notes to Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................. 43
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 44
Item 2. Changes in Securities ....................................... 44
Item 3. Defaults upon Senior Securities ............................. 44
Item 4. Submission of Matters to a Vote of Security Holders ......... 44
Item 5. Other Information ........................................... 44
Item 6. Exhibits and Reports on Form 8-K ............................ 45
SIGNATURE .......................................................................... 46
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMERICREDIT CORP.
Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)
March 31, 2002 June 30, 2001
-------------- -------------
ASSETS
Cash and cash equivalents $ 118,641 $ 77,053
Receivables held for sale, net 2,324,087 1,921,465
Interest-only receivables from Trusts 515,005 387,895
Investments in Trust receivables 603,340 493,022
Restricted cash 486,301 270,358
Property and equipment, net 112,675 67,828
Other assets 226,931 167,286
---------- ----------
Total assets $4,386,980 $3,384,907
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse credit facilities $1,889,188 $1,502,879
Credit enhancement facility 166,976 36,319
Senior notes 375,000 375,000
Other notes payable 58,475 23,077
Funding payable 115,935 60,460
Accrued taxes and expenses 210,959 114,041
Derivative financial instruments 82,595 82,796
Deferred income taxes 137,635 130,139
---------- ----------
Total liabilities 3,036,763 2,324,711
---------- ----------
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 and 120,000,000 shares authorized;
91,345,326 and 89,853,792 shares issued 913 899
Additional paid-in capital 559,068 520,077
Accumulated other comprehensive income 72,607 73,689
Retained earnings 735,920 484,963
---------- ----------
1,368,508 1,079,628
Treasury stock, at cost (6,061,959 and
6,439,737 shares) (18,291) (19,432)
---------- ----------
Total shareholders' equity 1,350,217 1,060,196
---------- ----------
Total liabilities and shareholders' equity $4,386,980 $3,384,907
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements
3
AMERICREDIT CORP.
Consolidated Statements of Income and Comprehensive Income
(Unaudited, Dollars in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2002 2001 2002 2001
--------------------------------------------------------
Revenue
Finance charge income $ 82,188 $ 61,017 $ 259,012 $ 158,512
Gain on sale of receivables 124,112 79,674 325,732 212,433
Servicing fee income 97,362 74,423 277,168 197,128
Other income 3,067 2,038 9,317 7,029
--------------------------------------------------------
306,729 217,152 871,229 575,102
--------------------------------------------------------
Costs and expenses
Operating expenses 107,885 79,342 315,651 219,837
Provision for loan losses 16,739 8,635 48,248 21,960
Interest expense 33,123 30,915 99,270 87,541
--------------------------------------------------------
157,747 118,892 463,169 329,338
--------------------------------------------------------
Income before income taxes 148,982 98,260 408,060 245,764
Income tax provision 57,358 37,830 157,103 94,619
--------------------------------------------------------
Net income 91,624 60,430 250,957 151,145
--------------------------------------------------------
Other comprehensive income
Unrealized (losses) gains on
credit enhancement assets (6,807) 18,583 (5,829) 102,100
Unrealized gains (losses) on
cash flow hedges 27,611 (30,189) 4,068 (76,473)
Income tax (provision) benefit (8,009) 4,469 679 (9,865)
--------------------------------------------------------
Comprehensive income $ 104,419 $ 53,293 $ 249,875 $ 166,907
========================================================
Earnings per share
Basic $ 1.08 $ 0.75 $ 2.97 $ 1.92
========================================================
Diluted $ 1.02 $ 0.70 $ 2.81 $ 1.78
========================================================
Weighted average shares outstanding 84,988,165 80,079,906 84,470,535 78,520,489
========================================================
Weighted average shares and
assumed incremental shares 89,509,209 86,709,986 89,334,924 84,817,718
========================================================
The accompanying notes are an integral part of these consolidated
financial statements
4
AMERICREDIT CORP.
Consolidated Statements of Cash Flows
(Unaudited, Dollars in Thousands)
Nine Months Ended March 31,
---------------------------
2002 2001
----------- -----------
Cash flows from operating activities
Net income $ 250,957 $ 151,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 18,557 14,893
Provision for loan losses 48,248 21,960
Deferred income taxes 26,573 36,706
Accretion of present value discount and other (82,617) (64,775)
Non-cash gain on sale of receivables (307,752) (169,725)
Distributions from Trusts 182,826 158,552
Changes in assets and liabilities:
Other assets (45,872) (7,615)
Accrued taxes and expenses 109,376 23,847
Purchases of receivables (6,490,011) (4,435,454)
Principal collections and recoveries on receivables 175,099 72,563
Net proceeds from sale of receivables 5,919,517 3,725,900
----------- -----------
Net cash used by operating activities (195,099) (472,003)
----------- -----------
Cash flows from investing activities
Initial deposits to credit enhancement assets (303,500) (149,999)
Purchases of property and equipment (14,724) (11,283)
Change in other assets (14,890) (53,481)
----------- -----------
Net cash used by investing activities (333,114) (214,763)
----------- -----------
Cash flows from financing activities
Net change in warehouse credit facilities 386,309 660,645
Borrowings under credit enhancement facility 182,500 56,998
Net change in notes payable (12,357) (9,049)
Proceeds from issuance of common stock 13,349 36,767
----------- -----------
Net cash provided by financing activities 569,801 745,361
----------- -----------
Net increase in cash and cash equivalents 41,588 58,595
Cash and cash equivalents at beginning of period 77,053 42,916
----------- -----------
Cash and cash equivalents at end of period $ 118,641 $ 101,511
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
5
AMERICREDIT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of AmeriCredit Corp.
and its wholly-owned subsidiaries (the "Company"). All significant intercompany
transactions and accounts have been eliminated in consolidation.
The consolidated financial statements as of March 31, 2002, and for the nine
months ended March 31, 2002 and 2001, are unaudited, but in management's opinion
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for such interim periods. Certain
prior year amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or
shareholders' equity as previously reported. The results for interim periods are
not necessarily indicative of results for a full year.
The interim period financial statements, including the notes thereto, are
condensed and do not include all disclosures required by generally accepted
accounting principles. These interim period financial statements should be read
in conjunction with the Company's consolidated financial statements which are
included in the Company's Annual Report on Form 10-K for the year ended June 30,
2001.
NOTE 2 - RECEIVABLES HELD FOR SALE
Receivables held for sale consist of the following (in thousands):
March 31, 2002 June 30, 2001
-------------- -------------
Auto receivables $2,390,298 $1,973,828
Less nonaccretable acquisition fees (30,488) (27,839)
Less allowance for loan losses (35,723) (24,524)
---------- ----------
$2,324,087 $1,921,465
========== ==========
Receivables held for sale are carried at the lower of cost or fair value. Fair
value is measured on an aggregate basis since the receivables have relatively
homogenous obligor, collateral and loan size and structure characteristics and
are subject to similar risks. Finance charge income related to receivables held
for sale is recognized using the interest method. Accrual of finance charge
income is suspended on accounts which are more than 60 days delinquent. Fees and
commissions received (other than acquisition fees described below) and direct
costs of originating loans are deferred and amortized over the term of the
related receivables using the interest method.
Finance contracts are generally purchased by the Company from auto dealers
without recourse, and accordingly, the dealer usually has no liability to the
Company if the consumer defaults on the contract. To mitigate the risk from
6
potential credit losses, the Company may charge dealers a non-refundable
acquisition fee when purchasing individual finance contracts. The Company
records such acquisition fees as a nonaccretable reduction in the carrying value
of the related finance contract. Nonaccretable acquisition fees are removed from
the accounts when the related finance contract is sold, charged-off or paid in
full.
A summary of the nonaccretable acquisition fees is as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- ------------------
2002 2001 2002 2001
------------------------------------------
Balance at beginning of period $ 30,772 $ 16,205 $ 27,839 $ 14,567
Purchases of receivables 46,386 37,962 126,334 102,178
Nonaccretable acquisition fees
related to receivables removed (46,105) (31,999) (122,347) (94,341)
Net charge-offs (565) (179) (1,338) (415)
------------------------------------------
Balance at end of period $ 30,488 $ 21,989 $ 30,488 $ 21,989
==========================================
Provisions for loan losses are charged to operations in amounts sufficient to
maintain the allowance for loan losses at a level considered adequate to cover
probable credit losses on receivables that are either currently ineligible for
sale or may in the future become ineligible for sale and thus may be held
indefinitely by the Company. Receivables are ineligible for sale if they do not
meet certain criteria established in connection with securitization
transactions, the most significant of which is that receivables must be less
than 31 days delinquent at the time of sale. As of March 31, 2002, $108.9
million of receivables held for sale were ineligible for sale. The Company
reviews charge-off experience factors, delinquency reports, historical
collection rates, estimates of the value of the underlying collateral, economic
trends and other information in order to make the necessary judgments as to
probable credit losses on receivables that may be held indefinitely by the
Company and the appropriateness of the related provision for loan losses and the
allowance for loan losses. Receivables are charged-off to the allowance for loan
losses when the Company repossesses and disposes of the collateral or the
account is otherwise deemed uncollectable.
A summary of the allowance for loan losses is as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -------------------
2002 2001 2002 2001
----------------------------------------
Balance at beginning of period $ 34,998 $17,145 $ 24,524 $ 9,807
Provision for loan losses 16,739 8,635 48,248 21,960
Net charge-offs (16,014) (4,386) (37,049) (10,373)
----------------------------------------
Balance at end of period $ 35,723 $21,394 $ 35,723 $ 21,394
========================================
7
NOTE 3 - SECURITIZATIONS
A summary of the Company's securitization activity and cash inflows and outflows
from special purpose entities used for securitizations (the "Trusts") is as
follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
-------------------------------------------------
Receivables sold $2,400,000 $1,300,005 $6,049,997 $3,800,002
Net proceeds from sale of receivables 2,340,923 1,259,377 5,919,517 3,725,900
Gain on sale of receivables 124,112 79,674 325,732 212,433
Servicing fees 75,995 49,180 199,535 132,353
Distributions from Trusts 54,963 51,483 182,826 158,552
The Company retains servicing responsibilities and interests in the receivables
sold in the form of credit enhancement assets. As of March 31, 2002, and June
30, 2001, the Company was servicing $11,237.5 million and $8,229.9 million,
respectively, of auto receivables which have been sold to the Trusts. The
Company earns a monthly base servicing fee of 2.25% per annum on the outstanding
principal balance of serviced receivables and any supplemental fee collections
(such as late charges) for servicing the receivables sold. The Company believes
that its servicing fees would fairly compensate a substitute servicer should one
be required, and, accordingly, the Company records neither a servicing asset or
a servicing liability.
The Trusts and the investors in the asset-backed securities sold by the Trusts
have no recourse to the Company's assets other than the credit enhancement
assets. The credit enhancement assets are subordinate to the interests of the
investors in the Trusts and the value of such assets is subject to the credit
risks related to the receivables sold to the Trusts.
Credit enhancement assets consist of the following (in thousands):
March 31, 2002 June 30, 2001
-------------- -------------
Interest-only receivables from Trusts $ 515,005 $ 387,895
Investments in Trust receivables 603,340 493,022
Restricted cash 486,301 270,358
---------- ----------
$1,604,646 $1,151,275
========== ==========
8
A summary of activity in the credit enhancement assets is as follows (in
thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
-------------------------------------------------
Balance at beginning of period $1,500,674 $1,019,378 $1,151,275 $ 824,618
Initial deposits to credit enhancement
assets 48,000 43,999 303,500 149,999
Non-cash gain on sale of auto
receivables 118,215 66,179 307,752 169,725
Payments on credit enhancement facility (26,824) (32,082) (51,843) (62,848)
Distributions from Trusts (54,963) (51,483) (182,826) (158,552)
Accretion of present value discount
and other 26,351 25,243 82,617 64,775
Change in unrealized gain (6,807) 18,583 (5,829) 102,100
-------------------------------------------------
Balance at end of period $1,604,646 $1,089,817 $1,604,646 $1,089,817
=================================================
Credit enhancement assets consist of interest-only receivables from Trusts,
investments in Trust receivables and restricted cash. At the time of sale of
receivables, the Company is required to pledge assets equal to a specified
percentage of the securitization pool to support the securitization transaction.
Typically, the assets pledged are cash deposited to a restricted account and/or
additional receivables delivered to the Trust creating overcollateralization.
These assets represent initial deposits to credit enhancement assets. Also at
the time of sale of receivables, a non-cash gain on sale of receivables is
recognized consisting of interest-only receivables from Trust and a present
value discount related to the assets pledged as initial deposits to credit
enhancement assets. The interest-only receivables from Trust represent the
present value of the estimated future excess cash flows to be received by the
Company over the life of the securitization.
The securitization transactions require the percentage of assets pledged to
support the transaction to increase thereafter until a specified level is
attained. Excess cash flows generated by the securitization trusts are added to
the restricted cash account or used to pay down outstanding debt in the
securitization trusts creating overcollateralization until the required
percentage level of assets has been reached. Collections of excess cash flows
reduce the interest-only receivables from Trusts and the additional assets
pledged represent increases in restricted cash and investments in Trust
receivables. Once the targeted percentage of assets is reached, additional
excess cash flows generated by the securitization trusts are released to the
Company 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 becomes smaller. Assets in excess of the required
percentage are released to the Company as distributions from Trusts.
9
Accretion of present value discount represents accretion of the discount used to
estimate the present value of future distributions from Trusts using the
interest method over the expected life of the securitization.
Unrealized gains (losses) generally represent changes in the fair value of
credit enhancement assets as a result of differences between actual
securitization pool performance and the original assumptions for such
performance or changes in the assumptions as to future securitization pool
performance.
A summary of the allowance for loan losses included as a component of the
interest-only receivables is as follows (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
---------------------------------------------
Balance at beginning of period $1,093,244 $695,854 $ 868,184 $563,102
Assumptions for cumulative credit losses 291,074 150,614 728,451 413,916
Net charge-offs (138,356) (72,477) (350,673) (203,027)
---------------------------------------------
Balance at end of period $1,245,962 $773,991 $1,245,962 $773,991
=============================================
Significant assumptions used in determining the gain on sale of auto receivables
were as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2002 2001 2002 2001
--------------------------------------
Cumulative credit losses (including
unrealized gains at time of sale) 12.5% 11.7% 12.5% 11.2%
Discount rate used to estimate present value:
Interest-only receivables
from Trusts 14.0% 14.0% 14.0% 14.0%
Investment in Trust receivables 9.8% 9.8% 9.8% 9.8%
Restricted cash 9.8% 9.8% 9.8% 9.8%
Significant assumptions used in measuring the fair value of credit enhancement
assets at the balance sheet dates were as follows:
March 31, 2002 June 30, 2001
-------------- -------------
Cumulative credit losses (including remaining
unrealized gains at time of sale) 9.9%-12.5% 8.7%-11.7%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0%
Investment in Trust receivables 9.8% 9.8%
Restricted cash 9.8% 9.8%
10
The Company has not presented the expected weighted average life and prepayment
assumptions used in determining the gain on sale and in measuring the fair value
of credit enhancement assets since a significant portion of the Company's
prepayment experience relates to defaults. Defaults are considered in the
cumulative credit loss assumption. The Company's voluntary prepayment experience
on its receivables portfolio typically would not fluctuate with changes in
market interest rates and has historically been stable.
NOTE 4 - WAREHOUSE CREDIT FACILITIES
Warehouse credit facilities consist of the following (in thousands):
March 31, 2002 June 30, 2001
-------------- -------------
Commercial paper facilities $ 54,999 $ 228,794
Medium term notes 1,750,000 1,250,000
Canadian credit agreement 84,189 24,085
---------- ----------
$1,889,188 $1,502,879
========== ==========
The Company has five separate funding agreements with administrative agents on
behalf of institutionally managed commercial paper conduits and bank groups with
aggregate structured warehouse financing availability of approximately $4,000.0
million. Certain of the commercial paper facilities are renewable annually and
provide for available structured warehouse financing of $550.0 million and
$250.0 million, respectively, through September 2002 and $200.0 million through
May 2002. Another facility provides for multi-year structured warehouse
financing with availability of $500.0 million through November 2003. In March
2002, the Company entered into a fifth facility that provides for available
structured warehouse financing of $2,500.0 million, of which $370.0 million
matures in March 2003 and the remaining $2,130.0 million matures in March 2005.
Under these funding agreements, the Company transfers auto receivables to
special purpose finance subsidiaries of the Company, and these subsidiaries in
turn issue notes, collateralized by such auto receivables, to the agents. The
agents provide funding under the notes to the subsidiaries pursuant to an
advance formula and the subsidiaries forward the funds to the Company in
consideration for the transfer of auto receivables. While these subsidiaries are
included in the Company's consolidated financial statements, these subsidiaries
are separate legal entities and the auto receivables and other assets held by
the subsidiaries are legally owned by these subsidiaries and are not available
to creditors of AmeriCredit Corp. or its other subsidiaries. Advances under the
funding agreements bear interest at commercial paper, LIBOR or prime rates plus
specified fees depending upon the source of funds provided by the agents. The
funding agreements contain various covenants requiring certain minimum financial
ratios and results. The funding agreements also require certain funds to be held
in restricted cash accounts to provide additional collateral for borrowings
under the facilities. As of March 31, 2002, and June 30, 2001, these restricted
cash accounts totaled $4.8 million and $6.0 million, respectively, and are
included in other assets in the consolidated balance sheets. As of March 31,
11
2002, and June 30, 2001, $59.4 million and $254.7 million, respectively, of auto
receivables held for sale were pledged under these funding agreements.
The Company also has three funding agreements with administrative agents on
behalf of institutionally managed medium term note conduits under which $500.0
million, $750.0 million and $500.0 million, respectively, of proceeds are
available through the terms of the agreements. Under these arrangements, the
conduits sold medium term notes and delivered the proceeds to special purpose
finance subsidiaries of the Company. These subsidiaries in turn issued notes,
collateralized by auto receivables and cash, to the agents. The funding
agreements allow for the substitution of auto receivables (subject to an
overcollateralization formula) for cash, and vice versa, during the term of the
agreements, thus allowing the Company to use the medium term note proceeds to
finance auto receivables on a revolving basis. The agreements mature in December
2003, June 2004 and February 2005, respectively. While the special purpose
finance subsidiaries are included in the Company's consolidated financial
statements, the subsidiaries are separate legal entities and the auto
receivables and other assets held by the subsidiaries are legally owned by the
subsidiaries and are not available to creditors of AmeriCredit Corp. or its
other subsidiaries. The notes issued by the subsidiaries under the funding
agreements bear interest at LIBOR plus specified fees. The funding agreements
contain various covenants requiring certain minimum financial ratios and
results. The funding agreements also require certain funds to be held in
restricted cash accounts to provide additional collateral under the notes. As of
March 31, 2002, and June 30, 2001, these restricted cash accounts totaled $28.4
million and $28.3 million, respectively, and are included in other assets in the
consolidated balance sheets. As of March 31, 2002, and June 30, 2001, $1,833.2
million and $1,293.8 million, respectively, of auto receivables held for sale
were pledged under these funding agreements.
The Company's Canadian subsidiary has a revolving credit agreement, under which
the subsidiary may borrow up to $200.0 million Cdn., subject to a defined
borrowing base. Borrowings under the credit agreement are collateralized by
certain Canadian auto receivables and bear interest at the Canadian Bankers
Acceptance Rate plus specified fees. The credit agreement, which expires in
August 2002, contains various covenants requiring certain minimum financial
ratios and results. As of March 31, 2002, $181.0 million Cdn. of auto
receivables held for sale were pledged under this agreement.
NOTE 5 - CREDIT ENHANCEMENT FACILITY
The Company has a credit enhancement facility with a financial institution which
the Company used to fund a portion of the initial restricted cash deposit
required in certain of its securitization transactions. Borrowings under the
credit enhancement facility were available on a revolving basis through October
2001 after which time outstanding borrowings are payable over time based on
future excess cash flows from certain of the Trusts. The facility contains
12
covenants requiring certain asset performance ratios. The Company has
alternatively utilized reinsurance arrangements to reduce the initial restricted
cash deposit on other of its securitization transactions. These reinsurance
arrangements do not represent funded debt, and therefore are not recorded as
such on the Company's consolidated balance sheets.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest costs and income taxes consist of the following (in
thousands):
Nine Months Ended
March 31,
------------------
2002 2001
------------------
Interest costs (none capitalized) $105,187 $84,062
Income taxes 75,197 60,334
During the nine months ended March 31, 2002 and 2001, the Company entered into
capital lease agreements for property and equipment of $47.8 million and $7.7
million, respectively.
NOTE 7 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of March 31, 2002, and June 30, 2001, the Company had interest rate swap
agreements with underlying notional amounts of $5,245.7 million and $1,719.2
million, respectively. These agreements had unrealized losses of approximately
$60.1 million and $64.2 million as of March 31, 2002, and June 30, 2001,
respectively. As of March 31, 2002, the ineffectiveness related to the interest
rate swap agreements was not material. The Company estimates that unrealized
losses included in other comprehensive income that will be reclassified into
earnings within the next twelve months will not be significant. Under the terms
of the interest rate swap agreements, the Company is required to pledge certain
funds to be held in restricted cash accounts if the market value of the interest
rate swap agreements exceed an agreed upon amount. As of March 31, 2002, and
June 30, 2001, these restricted cash accounts totaled $52.3 million and $41.9
million, respectively, and are included in other assets in the consolidated
balance sheets.
NOTE 8 - GUARANTOR CONSOLIDATING FINANCIAL STATEMENTS
The payment of principal, premium, if any, and interest on the Company's senior
notes is guaranteed by certain of the Company's subsidiaries (the "Subsidiary
Guarantors"). The following consolidating financial statement schedules present
consolidating financial data for (i) AmeriCredit Corp. (on a parent only basis),
(ii) the combined Subsidiary Guarantors, (iii) the combined Non-Guarantor
Subsidiaries, (iv) an elimination column for adjustments to arrive at the
information for the Company and its subsidiaries on a consolidated basis and (v)
the Company and its subsidiaries on a consolidated basis.
13
Investments in subsidiaries are accounted for by the parent company using the
equity method for purposes of this presentation. Earnings 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.
14
AmeriCredit Corp.
Consolidating Balance Sheet
March 31, 2002
(Unaudited, Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents $ 134,257 $ (15,616) $ 118,641
Receivables held for sale, net 499,196 1,824,891 2,324,087
Interest-only receivables
from Trusts 515,005 515,005
Investments in Trust
receivables 603,340 603,340
Restricted cash 486,301 486,301
Property and equipment, net $ 349 112,326 112,675
Other assets 7,348 166,864 52,719 226,931
Due (to) from affiliates 800,784 (2,660,598) 1,859,814
Investment in affiliates 899,394 2,975,633 21,270 $(3,896,297)
---------- ----------- ---------- ----------- ----------
Total assets $1,707,875 $ 1,227,678 $5,347,724 $(3,896,297) $4,386,980
========== =========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse credit facilities $ 84,189 $1,804,999 $1,889,188
Credit enhancement facility 166,976 166,976
Senior notes $ 375,000 375,000
Other notes payable 55,232 3,243 58,475
Funding payable 115,050 885 115,935
Accrued taxes and expenses 69,725 133,702 7,532 210,959
Derivative financial instruments 82,595 82,595
Deferred income taxes (142,299) (2,844) 282,778 137,635
---------- ----------- ---------- ----------- ----------
Total liabilities 357,658 415,935 2,263,170 3,036,763
---------- ----------- ---------- ----------- ----------
Shareholders' equity:
Common stock 913 44,054 $ (44,054) 913
Additional paid-in capital 559,068 51,570 2,127,094 (2,178,664) 559,068
Accumulated other
comprehensive income 72,607 (36,954) 109,561 (72,607) 72,607
Retained earnings 735,920 753,073 847,899 (1,600,972) 735,920
---------- ----------- ---------- ----------- ----------
1,368,508 811,743 3,084,554 (3,896,297) 1,368,508
Treasury stock (18,291) (18,291)
---------- ----------- ---------- ----------- ----------
Total shareholders' equity 1,350,217 811,743 3,084,554 (3,896,297) 1,350,217
---------- ----------- ---------- ----------- ----------
Total liabilities and
shareholders' equity $1,707,875 $ 1,227,678 $5,347,724 $(3,896,297) $4,386,980
========== =========== ========== =========== ==========
15
AmeriCredit Corp.
Consolidating Balance Sheet
June 30, 2001
(Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 58,954 $ 18,099 $ 77,053
Receivables held for sale, net 390,264 1,531,201 1,921,465
Interest-only receivables
from Trusts 13,686 374,209 387,895
Investments in Trust receivables 493,022 493,022
Restricted cash 270,358 270,358
Property and equipment, net $ 349 67,479 67,828
Other assets 9,606 117,058 40,622 167,286
Due (to) from affiliates 867,418 (2,171,157) 1,303,739
Investment in affiliates 605,397 2,286,788 16,995 $(2,909,180)
--------------------------------------------------------------------
Total assets $1,482,770 $ 763,072 $4,048,245 $(2,909,180) $3,384,907
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse credit facilities $ 24,085 $1,478,794 $1,502,879
Credit enhancement facility 36,319 36,319
Senior notes $ 375,000 375,000
Other notes payable 23,077 23,077
Funding payable 60,018 442 60,460
Accrued taxes and expenses 15,316 90,271 8,454 114,041
Derivative financial instruments 82,796 82,796
Deferred income taxes 9,181 (8,209) 129,167 130,139
--------------------------------------------------------------------
Total liabilities 422,574 248,961 1,653,176 2,324,711
--------------------------------------------------------------------
Shareholders' equity:
Common stock 899 899
Additional paid-in capital 520,077 51,768 1,699,642 $(1,751,410) 520,077
Accumulated other comprehensive
income 73,689 (39,456) 113,145 (73,689) 73,689
Retained earnings 484,963 501,799 582,282 (1,084,081) 484,963
--------------------------------------------------------------------
1,079,628 514,111 2,395,069 (2,909,180) 1,079,628
Treasury stock (19,432) (19,432)
--------------------------------------------------------------------
Total shareholders' equity 1,060,196 514,111 2,395,069 (2,909,180) 1,060,196
--------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,482,770 $ 763,072 $4,048,245 $(2,909,180) $3,384,907
====================================================================
16
AmeriCredit Corp.
Consolidating Income Statement
Nine Months Ended March 31, 2002
(Unaudited, Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
----------- ---------- ---------- ------------ ------------
Revenue
Finance charge income $ 74,858 $184,154 $259,012
Gain on sale of receivables 22,474 303,258 325,732
Servicing fee income 214,622 62,546 277,168
Other income $ 33,789 399,606 238,404 $ (662,482) 9,317
Equity in income of
affiliates 254,828 265,617 (520,445)
-------- -------- -------- ----------- --------
288,617 977,177 788,362 (1,182,927) 871,229
-------- -------- -------- ----------- --------
Costs and expenses
Operating expenses 7,530 290,503 17,618 315,651
Provision for loan losses 9,504 38,744 48,248
Interest expense 32,554 429,094 300,104 (662,482) 99,270
-------- -------- -------- ----------- --------
40,084 729,101 356,466 (662,482) 463,169
-------- -------- -------- ----------- --------
Income before income taxes 248,533 248,076 431,896 (520,445) 408,060
Income tax (benefit) provision (2,424) (6,752) 166,279 157,103
-------- -------- -------- ----------- --------
Net income $250,957 $254,828 $265,617 $ (520,445) $250,957
======== ======== ======== =========== ========
17
AmeriCredit Corp.
Consolidating Income Statement
Nine Months Ended March 31, 2001
(Unaudited, Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
----------- ---------- ---------- ------------ ------------
Revenue
Finance charge income $ 63,293 $ 95,219 $158,512
Gain on sale of receivables $ (263) 31,977 180,719 212,433
Servicing fee income 138,171 58,957 197,128
Other income 33,789 229,402 406,535 $(662,697) 7,029
Equity in income of
affiliates 153,222 145,968 (299,190)
-------- -------- -------- --------- --------
186,748 608,811 741,430 (961,887) 575,102
-------- -------- -------- --------- --------
Costs and expenses
Operating expenses 7,265 186,603 25,969 219,837
Provision for loan losses 6,260 15,700 21,960
Interest expense 29,636 258,186 462,416 (662,697) 87,541
-------- -------- -------- --------- --------
36,901 451,049 504,085 (662,697) 329,338
-------- -------- -------- --------- --------
Income before income taxes 149,847 157,762 237,345 (299,190) 245,764
Income tax (benefit) provision (1,298) 4,540 91,377 94,619
-------- -------- -------- --------- --------
Net income $151,145 $153,222 $145,968 $(299,190) $151,145
======== ======== ======== ========= ========
18
AmeriCredit Corp.
Consolidating Statement of Cash Flow
Nine Months Ended March 31, 2002
(Unaudited, Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ ------------
Cash flow from operating activities:
Net income $ 250,957 $ 254,828 $ 265,617 $ (520,445) $ 250,957
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 18,557 18,557
Provision for loan losses 9,504 38,744 48,248
Deferred income taxes (133,082) 3,799 155,856 26,573
Accretion of present value
discount and other (82,617) (82,617)
Non-cash gain on sale of
receivables (307,752) (307,752)
Distributions from Trusts 182,826 182,826
Equity in income of affiliates (254,828) (265,617) 520,445
Changes in assets and liabilities:
Other assets 2,258 (35,766) (12,364) (45,872)
Accrued taxes and expenses 54,409 55,889 (922) 109,376
Purchase of receivables (6,490,011) (6,412,262) 6,412,262 (6,490,011)
Principal collections and
recoveries on receivables 14,345 160,754 175,099
Net proceeds from sale of
receivables 6,412,262 5,919,517 (6,412,262) 5,919,517
--------- ----------- ----------- ----------- -----------
Net cash used by
operating activities (80,286) (22,210) (92,603) (195,099)
--------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Initial deposits to credit
enhancement assets (303,500) (303,500)
Purchases of property and
equipment (14,724) (14,724)
Change in other assets (15,157) 267 (14,890)
Net change in investment in
affiliates (32,777) (426,782) (4,275) 463,834
--------- ----------- ----------- ----------- -----------
Net cash used by investing
activities (32,777) (456,663) (307,508) 463,834 (333,114)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net change in warehouse
credit facilities 60,104 326,205 386,309
Borrowings under credit
enhancement facility 182,500 182,500
Net change in notes payable (12,357) (12,357)
Proceeds from issuance of
common stock 13,349 36,382 427,452 (463,834) 13,349
Net change in due (to) from
affiliates 112,071 457,690 (569,761)
--------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 113,063 554,176 366,396 (463,834) 569,801
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 75,303 (33,715) 41,588
Cash and cash equivalents at
beginning of period 58,954 18,099 77,053
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period $ $ 134,257 $ (15,616) $ $ 118,641
========= =========== =========== =========== ===========
19
AmeriCredit Corp.
Consolidating Statement of Cash Flows
Nine Months Ended March 31, 2001
(Unaudited, Dollars in Thousands)
AmeriCredit Non-
Corp. Guarantors Guarantors Eliminations Consolidated
----------- ----------- ----------- ------------ ------------
Cash flow from operating activities:
Net income $ 151,145 $ 153,222 $ 145,968 $ (299,190) $ 151,145
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 14,893 14,893
Provision for loan losses 6,260 15,700 21,960
Deferred income taxes (59,284) 4,611 91,379 36,706
Accretion of present value
discount (64,775) (64,775)
Non-cash gain on sale of
auto receivables (169,725) (169,725)
Distributions from Trusts 158,552 158,552
Equity in income of affiliates (153,222) (145,968) 299,190
Changes in assets and liabilities:
Other assets 1,053 (11,228) 2,560 (7,615)
Accrued taxes and expenses 543 22,875 429 23,847
Purchase of receivables (4,435,454) (4,444,511) 4,444,511 (4,435,454)
Principal collections and
recoveries on receivables (11,394) 83,957 72,563
Net proceeds from sale of
receivables 4,444,958 3,725,453 (4,444,511) 3,725,900
--------- ----------- ----------- ----------- -----------
Net cash (used) provided by
operating activities (59,765) 42,775 (455,013) (472,003)
--------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Initial deposits to credit
enhancement assets (149,999) (149,999)
Purchases of property and
equipment (11,283) (11,283)
Change in other assets (44,126) (9,355) (53,481)
Net change in investment in
affiliates (7,318) (1,067,754) (10,680) 1,085,752
--------- ----------- ----------- ----------- -----------
Net cash used by investing
activities (7,318) (1,123,163) (170,034) 1,085,752 (214,763)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net change in warehouse
credit facilities 13,959 646,686 660,645
Borrowings under credit
enhancement facility 56,998 56,998
Net change in notes payable (9,049) (9,049)
Proceeds from issuance of
common stock 36,767 7,301 1,078,451 (1,085,752) 36,767
Net change in due (to) from
affiliates 39,365 1,101,541 (1,140,906)
--------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 67,083 1,122,801 641,229 (1,085,752) 745,361
--------- ----------- ----------- ----------- -----------
Net increase in cash
and cash equivalents 42,413 16,182 58,595
Cash and cash equivalents at
beginning of period 30,705 12,211 42,916
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at
end of period $ $ 73,118 $ 28,393 $ $ 101,511
========= =========== =========== =========== ===========
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
GENERAL
The Company generates earnings and cash flow primarily from the purchase,
securitization and servicing of auto receivables. The Company purchases auto
finance contracts from franchised and select independent automobile dealerships
and, to a lesser extent, makes auto loans directly to consumers. To fund the
acquisition of receivables prior to securitization, the Company utilizes
borrowings under its warehouse credit facilities. The Company earns finance
charge income on its receivables pending securitization ("receivables held for
sale") and pays interest expense on borrowings under its warehouse credit
facilities.
The Company periodically sells receivables to securitization trusts ("Trusts")
that, in turn, sell asset-backed securities to investors. The Company recognizes
a gain on the sale of receivables to the Trusts, which represents the difference
between the sale proceeds to the Company, net of transaction costs, and the
Company's net carrying value of the receivables, plus the present value of the
estimated future excess cash flows to be received by the Company over the life
of the securitization. Excess cash flows result from the difference between the
interest received from the obligors on the receivables and the interest paid to
investors in the asset-backed securities, net of credit losses and expenses.
Excess cash flows from the Trusts are initially utilized to fund credit
enhancement requirements in order to attain specific credit ratings for the
asset-backed securities issued by the Trusts. Once predetermined credit
enhancement requirements are reached and maintained, excess cash flows are
distributed to the Company. In addition to excess cash flows, the Company earns
monthly base servicing fee income of 2.25% per annum on the outstanding
principal balance of receivables securitized ("serviced receivables") and
collects other fees such as late charges as servicer for the Trusts.
Since the Company is required to account for the securitization of its
receivables as a sale, a substantial portion of the Company's net earnings on it
receivables are recognized at the time of sale in a securitization transaction.
If the Company did not securitize its receivables or changed the structure of
its securitization transactions such that it would not be required to account
for securitizations as a sale in accordance with generally accepted accounting
principles in the United States of America ("GAAP"), net earnings on its
receivables would generally be recognized over the life of the receivables as
finance charge and fee income, less related funding costs and a provision for
loan losses.
21
SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosures of contingent assets and
liabilities as of the date of the financial statements and the amount of revenue
and costs and expenses during the reporting periods. Actual results could differ
from those estimates. The significant accounting policies which the Company
believes are the most critical to aid in fully understanding and evaluating the
Company's reported financial results include the following:
Gain on sale of receivables
The Company periodically sells receivables to Trusts that, in turn, sell
asset-backed securities to investors. The Company recognizes a gain on the sale
of receivables to the Trusts, which represents the difference between the sale
proceeds to the Company, net of transaction costs, and the Company's net
carrying value of the receivables, plus the present value of the estimated
future excess cash flows to be received by the Company over the life of the
securitization. The Company makes assumptions in order to determine the present
value of the estimated future excess cash flows to be generated by the pool of
receivables sold. The most significant assumptions made are the cumulative
credit losses to be incurred on the pool of receivables sold and the rate at
which the estimated future excess cash flows are discounted. The assumptions
used represent the Company's best estimates, and the use of different
assumptions could produce different financial results.
Fair value measurements
Certain of the Company's assets, including the Company's credit enhancement
assets and derivative financial instruments are recorded at fair value. Fair
values for derivative financial instruments are based on third party quoted
market prices, where possible. However, market prices are not readily available
for the Company's credit enhancement assets and, accordingly, fair value is
determined using discounted cash flow models. The most significant assumptions
made are the cumulative credit losses to be incurred on the pool of receivables
sold and the rate at which cash flows are discounted. The assumptions used
represent the Company's best estimates, and the use of different assumptions
could produce different financial results.
Allowance for Loan Losses
The Company reviews historical origination and charge-off relationships,
charge-off experience factors, collection data, delinquency reports, estimates
of the value of the underlying collateral, economic conditions and trends and
other information in order to make the necessary judgments as to the
appropriateness of the provision for loan losses and the allowance for loan
losses. Receivables are charged-off to the allowance for loan losses when the
Company repossesses and disposes of the collateral or the account is otherwise
deemed uncollectable. The Company believes that the allowance for loan losses is
adequate to cover future charge-offs; however, because the allowance for loan
losses is based on estimates, there can be no assurance that the ultimate
charge-off amount will not exceed such estimates.
22
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 as compared to
- ------------------------------------------------
Three Months Ended March 31, 2001
---------------------------------
Revenue:
The Company's average managed receivables outstanding consisted of the following
(in thousands):
Three Months Ended
March 31,
------------------------
2002 2001
----------- ----------
Auto:
Held for sale $ 1,697,140 $1,167,508
Serviced 11,293,534 7,451,125
----------- ----------
12,990,674 8,618,633
Other 2,619
----------- ----------
$12,990,674 $8,621,252
=========== ==========
Average managed receivables outstanding increased by 51% as a result of higher
loan purchase volume. The Company purchased $2,432.4 million of auto loans
during the three months ended March 31, 2002, compared to purchases of $1,653.2
million during the three months ended March 31, 2001. This growth resulted from
increased loan production at branches open during both periods as well as
expansion of the Company's branch network. Loan purchases at branch offices
opened prior to March 31, 2000, were 12% higher for the twelve months ended
March 31, 2002, versus the twelve months ended March 31, 2001. The Company
operated 252 auto lending branch offices as of March 31, 2002, compared to 217
as of March 31, 2001.
The average new loan size was $16,418 for the three months ended March 31, 2002,
compared to $15,321 for the three months ended March 31, 2001. The average
annual percentage rate for loans purchased during the three months ended March
31, 2002, was 17.6%, compared to 19.1% during the three months ended March 31,
2001. Decreasing short-term market interest rates have lowered the Company's
cost of funds, allowing the Company to pass along some of this benefit to
consumers in the form of lower loan pricing.
Finance charge income increased by 35% to $82.2 million for the three months
ended March 31, 2002, from $61.0 million for the three months ended March 31,
2001. Finance charge income was higher due primarily to an increase of 45% in
average auto receivables held for sale in the three months ended March 31, 2002,
versus the three months ended March 31, 2001. The Company's effective yield on
its auto receivables held for sale decreased to 19.6% for the three months ended
March 31, 2002, from 21.2% for the three months ended March 31, 2001. The
effective yield is higher than the contractual rates of the
23
Company's auto finance contracts as a result of finance charge income earned
between the date the auto finance contract is originated by the automobile
dealership and the date the auto finance contract is funded by the Company. The
effective yield decreased for the three months ended March 31, 2002, due to
lower loan pricing.
The gain on sale of receivables increased by 56% to $124.1 million for the three
months ended March 31, 2002, from $79.7 million for the three months ended March
31, 2001. The increase in gain on sale of auto receivables resulted from the
sale of $2,400.0 million of receivables in the three months ended March 31,
2002, as compared to $1,300.0 million of receivables sold in the three months
ended March 31, 2001. The gain as a percentage of the sales proceeds decreased
to 5.2% for the three months ended March 31, 2002, from 6.1% for the three
months ended March 31, 2001, primarily as a result of utilizing a higher
assumption for cumulative credit losses for the three months ended March 31,
2002.
Significant assumptions used in determining the gain on sale of auto receivables
were as follows:
Three Months Ended
March 31,
------------------
2002 2001
---- ----
Cumulative credit losses (including
unrealized gains at time of sale) 12.5% 11.7%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0%
Investment in Trust receivables 9.8% 9.8%
Restricted cash 9.8% 9.8%
The cumulative credit loss assumptions utilized at the time of sale of
receivables were determined using a range of possible outcomes based on
historical experience, credit attributes for the specific pool of receivables
and general economic factors. The Company increased the assumption for
cumulative credit losses used in determining the gain on sale of receivables
during the three months ended March 31, 2002, to incorporate an expected
increase in credit losses resulting from the general decline in the economy,
including higher unemployment rates.
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. The cumulative credit loss assumption,
including unrealized gains at time of sale, reflects the approximate level that
cumulative credit losses could reach (not withstanding other assumptions) in a
securitization before the fair value of the related credit enhancement assets
would be permanently impaired.
24
The discount rates used to estimate the present value of credit enhancement
assets are based on the relative risks of each asset type. Interest-only
receivables represent estimated future excess cash flows in Trusts and have a
first loss position to absorb any shortfall in Trust cash flows due to adverse
credit loss development or other adverse changes in Trust performance relative
to other assumptions. While the Company earns a higher yield on its securitized
receivables, the Company utilizes a 14% discount rate for interest-only
receivables since undiscounted estimated future excess cash flows already
incorporate a default assumption and the receivables underlying the
securitization represent a diverse pool of assets. Restricted cash and
investment in Trust receivables are backed by cash and receivables and are
senior to interest-only receivables for credit enhancement purposes.
Accordingly, restricted cash and investment in Trust receivables are assigned a
lower discount rate than the interest-only receivables from Trusts.
Servicing fee income increased to $97.4 million, or 3.5% of average serviced
auto receivables, for the three months ended March 31, 2002, compared to $74.4
million, or 4.1% of average serviced auto receivables, for the three months
ended March 31, 2001. Servicing fee income represents accretion of the present
value discount on estimated future excess cash flows from the Trusts, base
servicing fees and other fees earned by the Company as servicer of the auto
receivables sold to the Trusts. The growth in servicing fee income is
attributable to the increase in average serviced auto receivables outstanding
for the three months ended March 31, 2002, compared to the three months ended
March 31, 2001.
Costs and Expenses:
Operating expenses as an annualized percentage of average managed receivables
outstanding decreased to 3.4% for the three months ended March 31, 2002,
compared to 3.7% for the three months ended March 31, 2001. The ratio improved
as a result of economies of scale realized from a growing receivables portfolio
and automation of loan origination, processing and servicing functions. The
dollar amount of operating expenses increased by $28.5 million, or 36%,
primarily due to the addition of branch offices and loan processing and
servicing staff.
The provision for loan losses increased to $16.7 million for the three months
ended March 31, 2002, from $8.6 million for the three months ended March 31,
2001, primarily due to higher average amounts of receivables held for sale. As a
percentage of average receivables held for sale, the provision for loan losses
was 4.0% and 3.0% for the three months ended March 31, 2002 and 2001,
respectively. The increase in the rate of provision for loan losses reflects the
general expectation that continuing weakness in the economy, including higher
unemployment rates, will cause a higher number of delinquent accounts. Since
delinquent accounts are ineligible for securitization, receivables held
indefinitely by the Company may increase resulting in higher losses on
receivables prior to securitization.
25
Interest expense increased to $33.1 million for the three months ended March 31,
2002, from $30.9 million for the three months ended March 31, 2001, due to
higher debt levels. Average debt outstanding was $2,430.9 million and $1,377.1
million for the three months ended March 31, 2002 and 2001, respectively. The
Company's effective rate of interest paid on its debt decreased to 5.5% for the
three months ended March 31, 2002, from 9.1% for the three months ended March
31, 2001, as a result of lower short-term market interest rates.
The Company's effective income tax rate was 38.5% for the three months ended
March 31, 2002 and 2001.
Other Comprehensive Income:
The unrealized (losses) gains on credit enhancement assets consisted of the
following (in thousands):
Three Months Ended
March 31,
-------------------
2002 2001
-------- -------
Unrealized gains at time of sale $ 12,186 $ 7,505
Unrealized holding (losses) gains (18,993) 11,078
-------- -------
$ (6,807) $18,583
======== =======
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. Unrealized gains were higher for the three
months ended March 31, 2002, as compared to the three months ended March 31,
2001, due to a greater amount of receivables sold in the current period.
The Company recognized unrealized holding losses for the three months ended
March 31, 2002, compared to holding gains for the three months ended March 31,
2001. The credit loss assumptions used to measure the fair value of credit
enhancement assets were higher as of March 31, 2002, compared to March 31, 2001,
reflecting actual credit loss experience and expectations for adverse future
credit loss development as a result of continued weakness in the economy,
including higher unemployment rates. In addition, short-term market interest
rates increased during the three months ended March 31, 2002, which decreased
the fair value of credit enhancement assets due to the expectation that interest
rates on the floating rate securities issued by the Trusts would rise.
Short-term market interest rates decreased during the three months ended March
31, 2001, increasing the fair value of credit enhancement assets due to the
expectation that interest rates on the floating rate securities issued by the
Trusts would drop. The effect of interest rate fluctuations on the fair value of
credit enhancement assets for each period is substantially offset by unrealized
gains or losses on cash flow hedges as described below.
26
Unrealized gains on cash flow hedges were $27.6 million for the three months
ended March 31, 2002, compared to unrealized losses of $30.2 million for the
three months ended March 31, 2001. Short-term market interest rates increased
during the three months ended March 31, 2002, increasing the value of the
Company's interest rate swaps, while short-term market interest rates decreased
during the three months ended March 31, 2001, decreasing the value of the
Company's interest rate swaps.
Net Margin:
A key measure of the Company's performance is net margin. Net margin is the
difference between finance charge, fee and other income earned on the Company's
receivables and the cost to fund the receivables. Interest expense reflected on
the Company's income statement includes the cost of debt used to fund
receivables held for sale as well as the cost of debt incurred for general
corporate purposes.
An analysis of the Company's net margin as reflected on the income statement is
as follows (in thousands):
Three Months Ended
March 31,
-----------------------------
2002 2001
---------- ----------
Finance charge, fee and other income $ 85,255 $ 63,055
Funding costs - receivables held for sale (12,575) (15,593)
Funding costs - other (20,548) (15,322)
---------- ----------
Net margin $ 52,132 $ 32,140
========== ==========
The Company evaluates the profitability of its lending activities based upon the
net margin related to its managed auto loan portfolio, including receivables
held for sale and serviced receivables. The Company routinely securitizes its
receivables held for sale and records a gain on the sale of such receivables in
the income statement. The net margin on a managed basis presented below assumes
that securitized receivables have not been sold and are still on the Company's
consolidated balance sheet. Accordingly, no gain on sale or servicing fee income
would have been recognized. Instead, finance charges and fees would be
recognized over the life of the securitized receivables as accrued and interest
and other costs related to the asset-backed securities also would be recognized
as incurred.
Net margin for the Company's managed auto loan portfolio is as follows (in
thousands):
Three Months Ended
March 31,
-------------------------------
2002 2001
----------- -----------
Finance charge, fee and other income $ 589,677 $ 420,673
Funding costs - managed receivables (172,086) (149,697)
Funding costs - other (20,548) (15,322)
----------- -----------
Net margin $ 397,043 $ 255,654
=========== ===========
27
Net margin as a percentage of average managed receivables outstanding was as
follows ($ in thousands):
Three months ended March 31, 2002 2001
---------------------------
Finance charge, fee and other income 18.4% 19.8%
Funding costs (6.0) (7.8)
---------------------------
Net margin as a percentage of
average managed assets 12.4% 12.0%
===========================
Average managed auto receivables $12,990,674 $8,618,633
===========================
28
Nine Months Ended March 31, 2002 as compared to
Nine Months Ended March 31, 2001
--------------------------------
Revenue:
The Company's average managed receivables outstanding consisted of the following
(in thousands):
Nine Months Ended
March 31,
------------------------
2002 2001
----------- ----------
Auto:
Held for sale $ 1,771,980 $ 975,265
Serviced 10,098,419 6,857,243
----------- ----------
11,870,399 7,832,508
Other 3,379
----------- ----------
$11,870,399 $7,835,887
=========== ==========
Average managed receivables outstanding increased by 51% as a result of higher
loan purchase volume. The Company purchased $6,503.3 million of auto loans
during the nine months ended March 31, 2002, compared to purchases of $4,440.9
million during the nine months ended March 31, 2001. This growth resulted from
increased loan production at branches open during both periods as well as
expansion of the Company's branch network. Loan purchases at branch offices
opened prior to March 31, 2000, were 12% higher for the twelve months ended
March 31, 2002, versus the twelve months ended March 31, 2001. The Company
operated 252 auto lending branch offices as of March 31, 2002, compared to 217
as of March 31, 2001.
The average new loan size was $16,349 for the nine months ended March 31, 2002,
compared to $15,219 for the nine months ended March 31, 2001. The average annual
percentage rate for loans purchased during the nine months ended March 31, 2002,
was 17.8%, compared to 19.2% during the nine months ended March 31, 2001.
Decreasing short-term market interest rates have lowered the Company's cost of
funds, allowing the Company to pass along some of this benefit to consumers in
the form of lower loan pricing.
Finance charge income increased by 63% to $259.0 million for the nine months
ended March 31, 2002, from $158.5 million for the nine months ended March 31,
2001. Finance charge income was higher due primarily to an increase of 82% in
average auto receivables held for sale in the nine months ended March 31, 2002,
versus the nine months ended March 31, 2001. The Company's effective yield on
its auto receivables held for sale decreased to 19.5% for the nine months ended
March 31, 2002, from 21.7% for the nine months ended March 31, 2001. The
effective yield is higher than the contractual rates of the Company's auto
finance contracts as a result of finance charge income earned between the date
the auto finance contract is originated by the automobile dealership and the
29
date the auto finance contract is funded by the Company. The effective yield
decreased for the nine months ended March 31, 2002, due to lower loan pricing.
The gain on sale of receivables increased by 53% to $325.7 million for the nine
months ended March 31, 2002, from $212.4 million for the nine months ended March
31, 2001. The increase in gain on sale of auto receivables resulted from the
sale of $6,050.0 million of receivables in the nine months ended March 31, 2002,
as compared to $3,800.0 million of receivables sold in the nine months ended
March 31, 2001. The gain as a percentage of the sales proceeds decreased to 5.4%
for the nine months ended March 31, 2002, from 5.6% for the nine months ended
March 31, 2001, primarily as a result of utilizing a higher assumption for
cumulative credit losses for the nine months ended March 31, 2002.
Significant assumptions used in determining the gain on sale of auto receivables
were as follows:
Nine Months Ended
March 31,
-----------------
2002 2001
------- -------
Cumulative credit losses (including
unrealized gains at time of sale) 12.5% 11.2%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0%
Investment in Trust receivables 9.8% 9.8%
Restricted cash 9.8% 9.8%
The cumulative credit loss assumptions utilized at the time of sale of
receivables were determined using a range of possible outcomes based on
historical experience, credit attributes for the specific pool of receivables
and general economic factors. The Company increased the assumption for
cumulative credit losses used in determining the gain on sale of receivables
during the nine months ended March 31, 2002, to incorporate an expected increase
in credit losses resulting from the general decline in the economy, including
higher unemployment rates.
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. The cumulative credit loss assumption,
including unrealized gains at time of sale, reflects the approximate level that
cumulative credit losses could reach (not withstanding other assumptions) in a
securitization before the fair value of the related credit enhancement assets
would be permanently impaired.
The discount rates used to estimate the present value of credit enhancement
assets are based on the relative risks of each asset type. Interest-only
receivables represent estimated future excess cash flows in Trusts and have a
first loss position to absorb any shortfall in Trust cash flows due to adverse
30
credit loss development or other adverse changes in Trust performance relative
to other assumptions. While the Company earns a higher yield on its securitized
receivables, the Company utilizes a 14% discount rate for interest-only
receivables since undiscounted estimated future excess cash flows already
incorporate a default assumption and the receivables underlying the
securitization represent a diverse pool of assets. Restricted cash and
investment in Trust receivables are backed by cash and receivables and are
senior to interest-only receivables for credit enhancement purposes.
Accordingly, restricted cash and investment in Trust receivables are assigned a
lower discount rate than the interest-only receivables from Trusts.
Servicing fee income increased to $277.2 million, or 3.7% of average serviced
auto receivables, for the nine months ended March 31, 2002, as compared to
$197.1 million, or 3.8% of average serviced auto receivables, for the nine
months ended March 31, 2001. Servicing fee income represents accretion of the
present value discount on estimated future excess cash flows from the Trusts,
base servicing fees and other fees earned by the Company as servicer of the auto
receivables sold to the Trusts. The growth in servicing fee income is
attributable to the increase in average serviced auto receivables outstanding
for the nine months ended March 31, 2002, compared to the nine months ended
March 31, 2001.
Costs and Expenses:
Operating expenses as an annualized percentage of average managed receivables
outstanding decreased to 3.5% for the nine months ended March 31, 2002, compared
to 3.7% for the nine months ended March 31, 2001. The ratio improved as a result
of economies of scale realized from a growing receivables portfolio and
automation of loan origination, processing and servicing functions. The dollar
amount of operating expenses increased by $95.8 million, or 44%, primarily due
to the addition of branch offices and loan processing and servicing staff.
The provision for loan losses increased to $48.2 million for the nine months
ended March 31, 2002, from $22.0 million for the nine months ended March 31,
2001, primarily due to higher average amounts of receivables held for sale. As a
percentage of average receivables held for sale, the provision for loan losses
was 3.6% and 3.0% for the nine months ended March 31, 2002 and 2001,
respectively. The increase in the rate of provision for loan losses reflects the
expectation that continuing weakness in the economy, including higher
unemployment rates, will cause a higher number of delinquent accounts. Since
delinquent accounts are ineligible for securitization, receivables held
indefinitely by the Company may increase resulting in higher losses on
receivables prior to securitization.
Interest expense increased to $99.3 million for the nine months ended March 31,
2002, from $87.5 million for the nine months ended March 31, 2001, due to higher
debt levels. Average debt outstanding was $2,314.2 million and $1,191.4 million
for the nine months ended March 31, 2002 and 2001, respectively. The
31
Company's effective rate of interest paid on its debt decreased to 5.7% for the
nine months ended March 31, 2002, from 9.8% for the nine months ended March 31,
2001, as a result of lower short-term market interest rates.
The Company's effective income tax rate was 38.5% for the nine months ended
March 31, 2002 and 2001.
Other Comprehensive Income:
The unrealized (losses) gains on credit enhancement assets consisted of the
following (in thousands):
Nine Months Ended
March 31,
--------------------
2002 2001
-------- --------
Unrealized gains at time of sale $ 37,291 $ 20,140
Unrealized holding (losses) gains (43,120) 81,960
-------- --------
$ (5,829) $102,100
======== ========
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. Unrealized gains were higher for the nine
months ended March 31, 2002, as compared to the nine months ended March 31,
2001, due to a greater amount of receivables sold in the current period.
The Company recognized unrealized holding losses for the nine months ended March
31, 2002, compared to holding gains for the nine months ended March 31, 2001.
The credit loss assumptions used to measure the fair value of credit enhancement
assets were higher as of March 31, 2002, compared to March 31, 2001, reflecting
actual credit loss experience and expectations for adverse future credit loss
development as a result of continued weakness in the economy, including higher
unemployment rates. In addition, short-term market interest rates increased
during the nine months ended March 31, 2002, which decreased the fair value of
credit enhancement assets due to the expectation that interest rates on the
floating rate securities issued by the Trusts would rise. Short-term market
interest rates decreased during the nine months ended March 31, 2001, increasing
the fair value of credit enhancement assets due to the expectation that interest
rates on the floating rate securities issued by the Trusts would drop. The
effect of interest rate fluctuations on the fair value of credit enhancement
assets for each period is substantially offset by unrealized gains or losses on
cash flow hedges as described below.
Unrealized gains on cash flow hedges were $4.1 million for the nine months ended
March 31, 2002, compared to unrealized losses of $76.5 million for the nine
months ended March 31, 2001. Short-term market interest rates increased during
the nine months ended March 31, 2002, increasing the value of the
32
Company's interest rate swaps, while short-term market interest rates decreased
during the nine months ended March 31, 2001, decreasing the value of the
Company's interest rate swaps.
Net Margin:
A key measure of the Company's performance is net margin. Net margin is the
difference between finance charge, fee and other income earned on the Company's
receivables and the cost to fund the receivables. Interest expense reflected on
the Company's income statement includes the cost of debt used to fund
receivables held for sale as well as the cost of debt incurred for general
corporate purposes.
An analysis of the Company's net margin as reflected on the income statement is
as follows (in thousands):
Nine Months Ended
March 31,
------------------------------
2002 2001
----------- ----------
Finance charge, fee and other income $ 268,329 $165,541
Funding costs - receivables held for sale (45,746) (39,786)
Funding costs - other (53,524) (47,755)
----------- ----------
Net margin $ 169,059 $ 78,000
=========== ==========
The Company evaluates the profitability of its lending activities based upon the
net margin related to its managed auto loan portfolio, including receivables
held for sale and serviced receivables. The Company routinely securitizes its
receivables held for sale and records a gain on the sale of such receivables in
the income statement. The net margin on a managed basis presented below assumes
that securitized receivables have not been sold and are still on the Company's
consolidated balance sheet. Accordingly, no gain on sale or servicing fee income
would have been recognized. Instead, finance charges and fees would be
recognized over the life of the securitized receivables as accrued and interest
and other costs related to the asset-backed securities also would be recognized
as incurred.
Net margin for the Company's managed auto loan portfolio is as follows (in
thousands):
Nine Months Ended
March 31,
---------------------------------
2002 2001
------------ ------------
Finance charge, fee and other income $1,655,182 $1,163,248
Funding costs - managed receivables (506,911) (413,362)
Funding costs - other (53,524) (47,755)
------------ ------------
Net margin $1,094,747 $702,131
============ ============
33
Net margin as a percentage of average managed receivables outstanding was as
follows ($ in thousands):
Nine months ended March 31, 2002 2001
---------------------------
Finance charge, fee and other income 18.6% 19.8%
Funding costs (6.3) (7.9)
---------------------------
Net margin as a percentage of
average managed assets 12.3% 11.9%
===========================
Average managed auto receivables $11,870,399 $7,832,508
===========================
CREDIT QUALITY
The Company provides financing in relatively high-risk markets, and, therefore,
anticipates a corresponding high level of delinquencies and charge-offs.
Receivables purchased by the Company are held on the Company's balance sheet
until such loans are sold in a securitization transaction. However, receivables
may be ineligible for sale if they do not meet certain criteria established in
connection with securitization transactions, the most significant of which is
that receivables must be less than 31 days delinquent at the time of sale.
Provisions for loan losses are charged to operations in amounts sufficient to
maintain the allowance for loan losses on the balance sheet at a level
considered adequate to cover probable credit losses on receivables that are
either currently ineligible for sale or may in the future become ineligible for
sale and thus may be held indefinitely by the Company. Receivables held for sale
are charged-off to the allowance for loan losses when the Company repossesses
and disposes of the collateral or the account is otherwise deemed uncollectable.
The Company periodically sells receivables in securitization transactions to
Trusts and retains an interest in the receivables sold in the form of credit
enhancement assets. Credit enhancement assets are reflected on the Company's
balance sheet at fair value, calculated based upon the present value of
estimated excess future cash flows from the Trusts using, among other
assumptions, estimates of future cumulative credit losses on the receivables
sold. Charge-offs of receivables which have been sold to Trusts decrease the
amount of excess future cash flows from the Trusts. If such charge-offs are
expected to exceed the Company's estimates of cumulative credit losses utilized
to measure the fair value of credit enhancement assets, the fair value of credit
enhancement assets could result in a write-down through an impairment charge.
34
The following table presents certain data related to the Company's managed
receivables portfolio (dollars in thousands):
March 31, 2002
-----------------------------------------
Held for Total
Sale Serviced Managed
---------- ----------- -----------
Principal amount of receivables $2,390,298 $11,237,512 $13,627,810
=========== ===========
Nonaccretable acquisition fees (30,488)
Allowance for loan losses (35,723) $(1,245,962)(a) $(1,312,173)
---------- =========== ===========
Receivables, net $2,324,087
==========
Number of outstanding contracts 165,498 887,122 1,052,620
========== =========== ===========
Average principal amount of
outstanding contract (in dollars) $ 14,443 $ 12,667 $ 12,947
========== =========== ===========
Allowance for loan losses and
nonaccretable acquisition fees
as a percentage of receivables 2.8% 11.1% 9.6%
========== =========== ===========
(a) The allowance for loan losses related to serviced auto receivables is
factored into the valuation of interest-only receivables from Trusts in the
Company's consolidated balance sheets. Assumptions for cumulative credit
losses are added and charge-offs of receivables which have been sold to
Trusts reduce the allowance for loan losses.
The following is a summary of auto receivables which are (i) more than 30 days
delinquent, but not yet in repossession, and (ii) in repossession (dollars in
thousands):
March 31, 2002
---------------------------------------------------------------
Held for Sale Serviced Total Managed
---------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------- ------- ---------- ------- ---------- -------
Delinquent contracts:
31 to 60 days $46,967 2.0% $ 869,307 7.7% $ 916,274 6.7%
Greater than 60 days 35,783 1.5 388,990 3.5 424,773 3.1
------- --- ---------- ---- ---------- ----
82,750 3.5 1,258,297 11.2 1,341,047 9.8
In repossession 15,877 0.6 137,030 1.2 152,907 1.1
------- --- ---------- ---- ---------- ----
$98,627 4.1% $1,395,327 12.4% $1,493,954 10.9%
======= === ========== ==== ========== ====
March 31, 2001
---------------------------------------------------------------
Held for Sale Serviced Total Managed
---------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------- ------- -------- ------- --------- -------
Delinquent contracts:
31 to 60 days $21,252 1.4% $ 575,357 7.6% $ 596,609 6.6%
Greater than 60 days 15,245 1.0 193,366 2.6 208,611 2.3
------- --- ---------- ---- ---------- ----
36,497 2.4 768,723 10.2 805,220 8.9
In repossession 8,127 0.5 85,166 1.1 93,293 1.0
------- --- ---------- ---- ---------- ----
$44,624 2.9% $ 853,889 11.3% $ 898,513 9.9%
======= === ========== ==== ========== ====
Delinquencies in the Company's managed receivables portfolio may vary from
period to period based upon the average age or seasoning of the portfolio,
35
seasonality within the calendar year and economic factors. Due to the Company's
target customer base, a relatively high percentage of accounts become delinquent
at some point in the life of a loan and there is a fairly high rate of account
movement between current and delinquent status in the portfolio. Delinquencies
were higher as of March 31, 2002, compared to March 31, 2001, due to continued
weakness in the economy, including higher unemployment rates, and, to a lesser
extent, an increase in the average age of the Company's managed receivables
portfolio.
In accordance with its policies and guidelines, the Company at times offers
payment deferrals to consumers, whereby the consumer is allowed to move a
delinquent payment to the end of the loan typically by paying a fee
(approximately the interest portion of the payment deferred). An account for
which all delinquent payments are deferred is classified as current at the time
the deferment is granted. Thereafter, such account is aged based on the timely
payment of future installments in the same manner as any other account.
Contracts receiving a payment deferral as an average quarterly percentage of
average managed auto receivables outstanding were 4.9% for the three and nine
months ended March 31, 2002, and 4.6% and 4.8% for the three and nine months
ended March 31, 2001, respectively. Receivables held for sale receiving a
payment deferral were less than 3.0% and less than 1.0% of total deferrals for
the three and nine months ended March 31, 2002 and 2001, respectively. The
Company evaluates the results of its deferment strategies based upon the amount
of cash installments that are collected on accounts which have been deferred
versus the extent to which the collateral underlying deferred accounts has
depreciated over the same period of time. The Company believes that payment
deferrals granted according to its policies and guidelines are an effective
portfolio management technique and result in higher ultimate cash collections
from the portfolio.
36
The following table presents charge-off data with respect to the Company's
managed receivables portfolio (dollars in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
---------------------------------------------
Held for sale:
Repossession charge-offs $ 25,546 $ 7,061 $ 54,615 $ 16,630
Less: Recoveries (12,877) (3,908) (27,648) (8,746)
Mandatory charge-offs (1) 3,910 1,412 11,420 2,904
---------------------------------------------
Net charge-offs $ 16,579 $ 4,565 $ 38,387 $ 10,788
=============================================
Serviced:
Repossession charge-offs $ 200,149 $ 107,400 $ 493,482 $ 297,880
Less: Recoveries (98,720) (54,850) (235,485) (153,226)
Mandatory charge-offs (1) 36,927 19,927 92,676 58,373
---------------------------------------------
Net charge-offs $ 138,356 $ 72,477 $ 350,673 $ 203,027
=============================================
Total managed:
Repossession charge-offs $ 225,695 $ 114,461 $ 548,097 $ 314,510
Less: Recoveries (111,597) (58,758) (263,133) (161,972)
Mandatory charge-offs (1) 40,837 21,339 104,096 61,277
---------------------------------------------
Net charge-offs $ 154,935 $ 77,042 $ 389,060 $ 213,815
=============================================
Net charge-offs as an annualized
percentage of average managed
receivables outstanding 4.8% 3.6% 4.4% 3.6%
=============================================
Net recoveries as a percentage
percentage of gross
repossession charge-offs 49.4% 51.3% 48.0% 51.5%
=============================================
(1) Mandatory charge-offs represent accounts charged off in full with no
recovery amounts realized at time of charge off.
Net charge-offs as an annualized percentage of average managed receivables
outstanding may vary from period to period based upon the average age or
seasoning of the portfolio and economic factors. Net charge-offs increased for
the periods ended March 31, 2002, compared to the corresponding periods ended
March 31, 2001, due to continued weakness in the economy, including higher
unemployment rates. In addition, net recoveries as a percentage of gross
repossession charge-offs decreased due to a general decline in used car auction
values.
37
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows are summarized as follows (in thousands):
Nine Months Ended
March 31,
---------------------
2002 2001
--------- ---------
Operating activities $(195,099) $(472,003)
Investing activities (333,114) (214,763)
Financing activities 569,801 745,361
--------- ---------
Net increase in cash and
cash equivalents $ 41,588 $ 58,595
========= =========
The Company's primary sources of cash have been borrowings under its warehouse
credit facilities and sales of auto receivables to Trusts in securitization
transactions. The Company's primary uses of cash have been purchases of
receivables and funding credit enhancement requirements for securitization
transactions.
The Company required cash of $6,490.0 million and $4,435.5 million for the
purchase of auto finance contracts during the nine months ended March 31, 2002
and 2001, respectively. These purchases were funded initially utilizing
warehouse credit facilities and subsequently through the sale of auto
receivables in securitization transactions.
The Company has five separate funding agreements with administrative agents on
behalf of institutionally managed commercial paper conduits and bank groups with
aggregate structured warehouse financing availability of approximately $4,000.0
million. Certain of the commercial paper facilities are annually renewable and
provide for available structured warehouse financing of $550.0 million and
$250.0 million, respectively, through September 2002 and $200.0 million through
May 2002. Another facility provides for multi-year structured warehouse
financing with availability of $500.0 million through November 2003. In March
2002, the Company entered into a fifth facility that provides for available
structured warehouse financing of $2,500.0 million, of which $370.0 million
matures in March 2003 and the remaining $2,130.0 million matures in March 2005.
A total of $55.0 million was outstanding under these facilities as of March 31,
2002.
The Company also has three funding agreements with administrative agents on
behalf of institutionally managed medium term note conduits under which $500.0
million, $750.0 million and $500.0 million, respectively, of proceeds are
available through the terms of the agreements. The funding agreements allow for
the substitution of auto receivables (subject to an overcollateralization
formula) for cash, and vice versa, thus allowing the Company to use the medium
term note proceeds to finance auto receivables on a revolving basis. The
agreements mature in December 2003, June 2004 and February 2005. A total of
$1,750.0 million was outstanding under these facilities as of March 31, 2002.
38
The Company's Canadian subsidiary has a revolving credit agreement, under which
the subsidiary may borrow up to $200.0 million Cdn., subject to a defined
borrowing base. The credit agreement expires in August 2002. A total of $84.2
million was outstanding under the Canadian facility as of March 31, 2002.
As is customary in the Company's industry, certain of the Company's warehouse
credit facilities need to be renewed on an annual basis. The Company has
historically been successful in renewing and expanding these facilities on an
annual basis. If the Company was unable to renew these facilities on acceptable
terms, there could be a material adverse effect on the Company's financial
position, results of operations and liquidity.
The Company has completed thirty auto receivable securitization transactions
through March 31, 2002. The proceeds from the transactions were primarily used
to repay borrowings outstanding under the Company's warehouse credit facilities.
A summary of these transactions is as follows (dollars in millions):
Original Balance at
Transaction (a) Date Amount March 31, 2002
- --------------- -------------- --------- --------------
1998-C August 1998 $ 575.0 $ 67.6
1998-D November 1998 625.0 93.8
1999-A February 1999 700.0 128.3
1999-B May 1999 1,000.0 237.6
1999-C August 1999 1,000.0 304.6
1999-D October 1999 900.0 304.9
2000-A February 2000 1,300.0 506.6
2000-B May 2000 1,200.0 557.3
2000-C August 2000 1,100.0 575.1
2000-1 November 2000 495.0 270.0
2000-D November 2000 600.0 363.8
2001-A February 2001 1,400.0 905.6
2001-1 April 2001 1,089.0 754.5
2001-B July 2001 1,850.0 1,507.1
2001-C September 2001 1,600.0 1,411.0
2001-D October 2001 1,800.0 1,626.1
2002-A February 2002 1,600.0 1,584.1
--------- ---------
$18,834.0 $11,198.0
========= =========
(a) Transactions 1994-A, 1995-A and B, 1996-A, B, C and D, 1997-A, B, C and D,
and 1998-A and B originally totaling $2,945.5 million have been paid off as
of March 31, 2002.
In connection with securitization transactions, the Company is required to
provide credit enhancement in order to attain specific credit ratings for the
39
asset-backed securities issued by the Trusts. The Company typically makes an
initial deposit to a restricted cash account and subsequently uses excess cash
flows generated by the Trusts to either increase the restricted cash account or
repay the outstanding asset-backed securities on an accelerated basis, thus
creating additional credit enhancement through overcollateralization in the
Trusts. When the credit enhancement levels reach specified percentages of the
Trust's pool of receivables, excess cash flows are distributed to the Company.
The Company expects to begin to receive excess cash flow distributions
approximately 14 to 16 months after receivables are securitized.
The reinsurance used to reduce the Company's initial cash deposit has typically
been arranged by the insurer of the asset-backed securities. As of March 31,
2002, the Company had commitments from the insurer for an additional $195.5
million of reinsurance. These commitments expire in December 2002. In addition,
the Company has a credit enhancement facility with a financial institution which
the Company used to fund a portion of the initial cash deposit in securitization
transactions through October 2001, similar to the amount covered by the
reinsurance described above. Borrowings under the credit enhancement facility
are collateralized by the Company's credit enhancement assets. A total of $167.0
million was outstanding under this facility at March 31, 2002.
During fiscal 2001, the Company completed two securitization transactions
(2000-1 and 2001-1) involving the sale of subordinate asset-backed securities in
order to provide credit enhancement for the senior asset-backed securities. The
Company's other securitization transactions have included the sale of senior
asset-backed securities only and the purchase of a financial guaranty insurance
policy for the benefit of investors. The subordinate asset-backed securities
replace a portion of the Company's initial credit enhancement deposit otherwise
required in a securitization transaction in a manner similar to the utilization
of reinsurance or other alternative credit enhancements described in the
preceding paragraph.
Initial deposits for credit enhancement purposes were $303.5 million and $150.0
million for the nine months ended March 31, 2002 and 2001, respectively.
Borrowings under the credit enhancement facility were $182.5 million and $57.0
million for the nine months ended March 31, 2002 and 2001, respectively. Excess
cash flows distributed to the Company were $182.8 million and $158.6 million for
the nine months ended March 31, 2002 and 2001, respectively.
With respect to the Company's securitization transactions covered by a financial
guaranty policy, certain agreements with the insurer provide that if
delinquency, default and net loss ratios in a Trust's pool of receivables exceed
certain targets, the specified credit enhancement levels would be increased. As
of March 31, 2002, none of the Company's securitizations had delinquency,
default or net loss ratios in excess of the targeted levels. In addition, the
Company believes that it is unlikely that the targeted delinquency, default or
net loss ratios will be exceeded in any securitizations
40
during the next twelve months. However, if the targeted ratios were exceeded in
any securitization and a waiver was not granted by the insurer, excess cash
flows from all of the Company's insured securitizations would be used to
increase credit enhancement for the securitizations in which a ratio was
exceeded to higher specified levels rather than being distributed to the
Company. If a targeted ratio were exceeded for an extended period of time in
larger securitizations requiring a greater amount of additional credit
enhancement, there could be a material adverse effect on the Company's
liquidity.
The Company operated 252 branch offices as of March 31, 2002, and plans to
expand loan production capacity at existing branch offices where appropriate.
While the Company has been able to establish and grow its auto finance business
thus far, there can be no assurance that future expansion will be successful due
to competitive, regulatory, market, economic or other factors.
As of March 31, 2002, the Company had $118.6 million in cash and cash
equivalents. The Company also had available borrowing capacity of $219.2 million
under its warehouse credit facilities pursuant to the borrowing base
requirements of such agreements. The Company believes that its existing capital
resources along with expected cash flows from operating activities will be
sufficient to fund the Company's liquidity needs, exclusive of the purchase of
auto finance contracts, for the next twelve months.
However, the Company anticipates that it will require additional external
capital in the form of securitization transactions and renewal of its existing
warehouse credit facilities in order to fund auto loan purchases for the next
twelve months. There can be no assurance that funding will be available to the
Company through these sources or, if available, that it will be on terms
acceptable to the Company.
INTEREST RATE RISK
The Company's earnings are affected by changes in interest rates as a result of
its dependence upon the issuance of interest-bearing securities and the
incurrence of debt to fund its lending activities. Several factors can influence
the Company's ability to manage interest rate risk. First, auto finance
contracts are purchased at fixed interest rates, while the amounts borrowed
under warehouse credit facilities bear interest at variable rates that are
subject to frequent adjustment to reflect prevailing market interest rates.
Second, the interest rate demanded by investors in securitizations is a function
of prevailing market rates for comparable transactions and the general interest
rate environment. Because the auto finance contracts purchased by the Company
have fixed interest rates, the Company bears the risk of smaller gross interest
rate spreads in the event interest rates increase during the period between the
date receivables are purchased and the completion and pricing of securitization
transactions. In addition, the securities issued by the Trusts in the Company's
securitization transactions
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may bear interest at floating rates that are subject to monthly adjustment to
reflect prevailing market interest rates.
The Company utilizes several strategies to minimize the risk of interest rate
fluctuations, including the use of derivative financial instruments, the regular
sale of auto receivables to the Trusts and pre-funding of securitization
transactions. Pre-funding securitizations is the practice of issuing more
asset-backed securities than the amount of receivables initially sold to the
Trust. The proceeds from the pre-funded portion are held in an escrow account
until additional receivables are sold to the Trust in amounts up to the balance
of the pre-funded escrow account. In pre-funded securitizations, borrowing costs
are locked in with respect to the loans subsequently delivered to the Trust.
However, the Company incurs an expense in pre-funded securitizations equal to
the difference between the money market yields earned on the proceeds held in
escrow prior to subsequent delivery of receivables and the interest rate paid on
the asset-backed securities outstanding.
Derivative financial instruments are utilized to manage the gross interest rate
spread on the Company's securitization transactions. The Company sells fixed
rate auto 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"). The
floating rates on securities issued by the Trusts are indexed to LIBOR. The
Company uses interest rate swap agreements to convert the floating rate
exposures on these securities to a fixed rate. The Company utilizes these
derivative financial instruments to modify its net interest sensitivity to
levels deemed appropriate based on the Company's risk tolerance.
The Company also utilizes interest rate cap agreements as part of its interest
rate risk management strategy for securitization transactions as well as for
warehouse credit facilities. The purchaser of the interest rate cap agreement
pays a premium in return for the right to receive the difference in the interest
cost at any time a specified index of market interest rates rises above the
stipulated "cap" rate. The interest rate cap agreement purchaser bears no
obligation or liability if interest rates fall below the "cap" rate. The
Company's special purpose finance subsidiaries are contractually required to
purchase interest rate cap agreements as credit enhancement in connection with
securitization transactions and warehouse credit facilities. The Company
simultaneously sells a corresponding interest rate cap agreement in order to
offset the purchased interest rate cap agreement.
Management monitors the Company's hedging activities to ensure that the value of
hedges, their correlation to the contracts being hedged and the amounts being
hedged continue to provide effective protection against interest rate risk. All
transactions are entered into for purposes other than trading.
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There can be no assurance that the Company's strategies will be effective in
minimizing interest rate risk or that increases in interest rates will not have
an adverse effect on the Company's profitability.
FORWARD LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of Financial Condition and
Results of Operations section contains several "forward-looking statements".
Forward-looking statements are those which use words such as "believe",
"expect", "anticipate", "intend", "plan", "may", "will", "should", "estimate",
"continue" or other comparable expressions. These words indicate future events
and trends. Forward-looking statements are the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to many risks and uncertainties which could cause actual
results to differ significantly from historical results or from those
anticipated by the Company. The most significant risks are detailed from time to
time in the Company's filings and reports with the Securities and Exchange
Commission including the Company's Annual Report on Form 10-K for the year ended
June 30, 2001. It is advisable not to place undue reliance on the Company's
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because the Company's funding strategy is dependent upon the issuance of
interest-bearing securities and the incurrence of debt, fluctuations in interest
rates impact the Company's profitability. Therefore, the Company employs various
hedging strategies to minimize the risk of interest rate fluctuations. See
"Management's Discussion and Analysis - Interest Rate Risk" for additional
information regarding such market risks.
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Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As a consumer finance company, the Company is subject to various consumer claims
and litigation seeking damages and statutory penalties, based upon, among other
things, usury, disclosure inaccuracies, wrongful repossession, violations of
bankruptcy stay provisions, certificate of title disputes, fraud and breach of
contract. Some litigation against the Company may take the form of class action
complaints by consumers. The Company, as the assignee of finance contracts
originated by dealers, may also be named as a co-defendant in lawsuits filed by
consumers principally against dealers. The damages and penalties claimed by
consumers in these types of matters can be substantial. The relief requested by
the plaintiffs varies but includes requests for compensatory, statutory and
punitive damages.
Management believes that the Company has taken prudent steps to address the
litigation risks associated with the Company's business activities. However,
there can be no assurance that the Company will be able to successfully defend
against all such claims or that the determination of any such claim in a manner
adverse to the Company would not have a material adverse effect on the Company's
automobile finance business.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment No. 2, dated as of February 1, 2002, to the Credit
Agreement, dated as of August 23, 2001, between AmeriCredit
Financial Services of Canada Ltd., AmeriCredit Financial
Services, Inc., and Merrill Lynch Capital Canada Inc.
10.2 Amended and Restated Sale and Servicing Agreement, dated as of
February 22, 2002, among AmeriCredit Master Trust, AmeriCredit
Funding Corp. VII, AmeriCredit Financial Services, Inc., and Bank
One, NA
10.3 Annex A to the Amended and Restated Sale and Servicing Agreement,
dated as of February 22, 2002, among AmeriCredit Master Trust,
AmeriCredit Funding Corp. VII, AmeriCredit Financial Services,
Inc., and Bank One, NA
10.4 Amended and Restated Indenture, dated as of February 22, 2002,
among AmeriCredit Master Trust, Bank One, NA, and Bankers Trust
Company
10.5 Master Receivables Purchase Agreement, dated as of February 25,
2002, among AmeriCredit MTN Receivables Trust III, JPMorgan Chase
Bank, AmeriCredit MTN Corp. III, and AmeriCredit Financial
Services, Inc.
10.6 Servicing and Custodian Agreement, dated as of February 25, 2002,
between AmeriCredit Financial Services, Inc., AmeriCredit MTN
Receivables Trust III, and JPMorgan Chase Bank
10.7 Security Agreement, dated as of February 25, 2002, by and among
AmeriCredit MTN Receivables Trust III, AmeriCredit Financial
Services, Inc., AmeriCredit MTN Corp. III, and JPMorgan Chase
Bank
10.8 Amendment No. 3, dated as of March 8, 2002, to the Amended and
Restated Security Agreement, dated as of August 31, 2000, by and
among AmeriCredit Barclays Trust, AmeriCredit Financial Services,
Inc., AmeriCredit Funding Corp. III, Sheffield Receivables
Corporation, and Bank One, NA
11.1 Statement Re: Computation of Per Share Earnings
(b) Report on Form 8-K
The Company did not file any reports on Form 8-K during the
quarterly period ended March 31, 2002.
Certain subsidiaries and affiliates of the Company filed
reports on Form 8-K during the quarterly period ended March
31, 2002, reporting monthly information related to
securitization trusts.
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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.
AmeriCredit Corp.
-------------------------------
(Registrant)
Date: May 15, 2002 By: /s/ Daniel E. Berce
-------------------------------
(Signature)
Daniel E. Berce
Vice Chairman and
Chief Financial Officer
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