EXHIBIT 13.1
Lift
Many have heard of the "American Dream." And while the Dream may call America
home, it really is the Dream of anyone anywhere striving for something more. But
sometimes, life throws people a curve, and all the things they've wished for and
worked for hang in the balance. What happens then? We finance their cars. We get
them on the road again. We'd love to say AmeriCredit is the driving force of the
American Dream, but the truth is, we just give it a lift. And usually, that's
enough.
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Profile
AmeriCredit Corp. (NYSE: ACF) is the largest independent middle-market auto
finance company in North America. Using its branch network and strategic
alliances with auto groups and banks, the Company purchases installment
contracts made by auto dealers to consumers who are typically unable to obtain
financing from traditional sources. AmeriCredit has more than one million
customers throughout the United States and Canada and almost $15 billion in
managed auto receivables.
AmeriCredit was founded in 1992 and is headquartered in Fort Worth, Texas. The
company's 10th anniversary and record results affirm the strength of its i4
Company values: Integrity, Investment, Innovation and Information. They also
affirm the strength of the marketplace and the vital role that AmeriCredit has
served in making life better for more than one million customers.
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To Our Shareholders
Fiscal 2002 was another successful year for AmeriCredit. The Company achieved
record loan volume and earnings and accomplished the goals we set a year ago. We
improved our net interest margins and lowered our costs in order to offset
rising credit losses and maintain strong profitability.
While our business model has held up well, the environment in which we operate
remains challenging. The economy appears to have stabilized albeit on weaker
footing, but the path to a recovery is uncertain. The capital markets are
experiencing unprecedented volatility in reaction to mixed economic signals and
recent corporate failures. Against this backdrop, we are taking the steps we
believe are necessary to preserve our strong middle market auto lending
franchise. Specifically, we are slowing growth, tightening credit, managing our
cost structure and focusing on improving our balance sheet and cash flow. We are
seeking to have AmeriCredit positioned to endure a period of extended weakness
and be ready to take advantage of more prosperous times.
Fiscal 2002 Results
One of our primary objectives for fiscal 2002 was to maintain our profitability
in the face of expected deterioration in the economy. We were able to accomplish
this goal through growth in our managed receivables and by sustaining strong
returns on our managed assets.
For fiscal 2002, AmeriCredit grew its managed auto loan portfolio by 45% to
$14.8 billion. New loan volume was $8.9 billion for the year. While the majority
of our originations came from our branch network, we supplemented this core
source of business by developing other distribution channels. Loan production
from marketing representatives in smaller markets, our Valued Customer Program,
aimed at retaining qualified AmeriCredit customers when they purchase their next
vehicle, and our direct to the consumer initiatives via the Internet all
contributed to growth.
We realized pre-tax economic returns on our managed assets of 4.3% for fiscal
2002, down from 4.7% in fiscal 2001. Knowing from our planning tools that credit
losses would likely rise as unemployment levels ticked up, we focused on
managing other controllable aspects of our business model. Consequently, we
improved our net interest margin on a managed basis and lowered our operating
expense ratio.
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We were able to increase our managed net interest margin to 12.3% for fiscal
2002 from 12.0% last year. In a declining interest rate environment, our loan
pricing strategies allowed us to capture some of the benefit of lower funding
costs while still offering competitive risk-adjusted pricing to our customers.
Operating expenses for fiscal 2002 were 3.4% of average managed receivables, 30
basis points better than the fiscal 2001 ratio of 3.7%. In the fourth quarter,
we achieved an operating expense rate of 3.1%. Driving this improved ratio were
economies of scale, technology initiatives and prudent expense management.
Historically, we have invested heavily in our infrastructure, including customer
service facilities and branch expansion. Our growth in fiscal 2002 enabled us to
more fully utilize our infrastructure capacity and benefit from our past
investments. Examples of technology initiatives that helped our cost ratio
include development of automated loan decisioning capability combined with
leveraging our participation in DealerTrack, a web-based loan processing
platform in which we have an ownership interest. Auto dealers submitting credit
applications to AmeriCredit through DealerTrack receive prompt automated
responses as a result of our online decisioning tools, a more efficient process
for both AmeriCredit and dealers.
Increased credit losses hurt our returns in fiscal 2002. Net charge-offs as a
percentage of the managed portfolio increased to 4.6% for fiscal 2002 from 3.6%
last year. Charge-offs for the fourth quarter of fiscal 2002 were 5.2%. A rise
in the frequency, or number, of defaulted loans was expected considering the
recessionary lift in unemployment. What was not as predictable was the
deterioration in severity, which is a function of how much cash we recover when
repossessed cars are sold at auction. The events of last fall, along with heavy
incentives from automakers, have pressured used car values. While AmeriCredit
has typically recovered 50-54% of the loan balance in the past, we averaged
closer to 48% this year. We believe used car values will remain weak for the
foreseeable future and have built this factor into our credit loss expectations
for next year.
Fiscal 2003 Strategies
The growth we experienced in recent years enabled us to gain the leadership
position in middle market auto finance. We have developed significant brand
value among auto dealers and have attained the scale to be a low cost producer.
The downside of our growth was that we had to deploy financial and management
resources into rapid infrastructure development. We also
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added leverage to our balance sheet, and, coupled with the economic downturn,
our investment in growth restrained cash flow. In light of the current business
climate, we believe it's the right decision to slow our growth in fiscal 2003.
Our current target is in the 15% range, but we are prepared to adjust our
objectives as changing conditions warrant. Among other benefits, a more moderate
rate of growth will allow us to refocus our resources on streamlining our
current processes. For example, achieving a better level of effectiveness,
efficiency and scalability in our customer servicing platform has become our
highest operational priority.
As a means of reducing our growth rate, we have instituted a number of credit
tightening steps. First we increased the minimum credit score necessary for any
loan approval. We also implemented some targeted strategies such as further
restricting loan to values on longer-term contracts. Finally, we introduced our
fourth generation scorecards in July 2002. These new scorecards provide us with
finer segmentations allowing us to more accurately underwrite various consumer
profiles. Each generation of scorecard has improved our decisioning ability,
and, after extensive testing, we expect the same this time.
AmeriCredit is also moving further up the credit spectrum by offering dealers
competitive pricing on near-prime loans. This wider range of loan programs
allows us to improve credit quality overall and gain efficiency at the same time
by leveraging existing dealer relationships. We are prepared to implement
further restrictions in our underwriting practices depending upon future
economic developments.
Financial Position
In the past year we increased the borrowing capacity available under our
warehouse lines by $2.2 billion to $5.8 billion. We also reduced annual renewal
risk since $4.6 billion of our credit lines now have maturities of more than one
year.
We accessed the asset-backed securities market seven times during fiscal 2002
raising more than $9 billion. This included another senior subordinate
transaction in which credit enhancement is provided by subordinate securities
instead of purchasing a financial guaranty insurance policy. We also completed
our initial Canadian asset-backed transaction, the first middle-market
securitization in Canada and only the third Canadian automobile receivables
backed transaction
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in history. AmeriCredit has issued in excess of $25 billion in asset-backed
securities since our first securitization in December 1994.
However, a key measure of our balance sheet leverage, the ratio of adjusted
equity to managed assets, declined in fiscal 2002, primarily because of our high
rate of growth. We are committed to restoring this ratio to previous levels
through reduced growth targets, and, if capital market conditions permit,
raising new capital.
Finally, a key focus of our strategies for fiscal 2003 is to improve cash flow
generation. Because of our securitization financing structures, we will not see
immediate results, but we believe that moderating growth, tightening credit and
managing costs should prove effective over time.
Culture
AmeriCredit was started 10 years ago with the idea of creating a successful
business model in an underserved market niche. Today AmeriCredit is the leader
in middle market auto finance. We attribute much of our success to our unique
culture, which is best summarized by the term i4. I4 stands for our belief in
Integrity, Innovation, Information and Investment. We formalized these concepts
three years ago, but i4 has been a mainstay of our Company since day one.
Of particular note is our long-standing commitment to Integrity. We have always
strived to be forthright and candid about our performance in our financial
reporting and corporate communications. In these difficult times, the value of
integrity is at a particular premium. As stakeholders, we want to reassure you
that our passion to uphold these values has never been stronger.
Conclusion
Although, the current economic climate is challenging, it is nonetheless
providing us a clear opportunity to validate our business model. We have always
maintained that AmeriCredit has the ability to operate successfully in a weak
economic environment. We believe we are taking the steps necessary to meet our
long-term objectives and position AmeriCredit to remain the leader in middle
market auto finance.
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We want to thank each of our employees, shareholders and customers for their
continued support of AmeriCredit.
Sincerely,
Clifton H. Morris, Jr.
Executive Chairman of the Board
Michael R. Barrington
Vice Chairman, President and
Chief Executive Officer
Daniel E. Berce
Vice Chairman and Chief Financial Officer
September 12, 2002
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AMERICREDIT CORP.
SUMMARY FINANCIAL AND OPERATING INFORMATION
(dollars in thousands, except per share data)
Years Ended June 30, 2002 2001 2000/(a)/ 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Operating Data
Auto loan originations $ 8,929,352 $ 6,378,652 $ 4,427,945 $ 2,879,796 $ 1,737,813
Finance charge income 339,430 225,210 124,150 75,288 55,837
Gain on sale of receivables 448,544 301,768 209,070 169,892 103,194
Servicing fee income 389,371 281,239 170,251 85,966 47,910
Total revenue 1,190,232 818,224 509,680 335,456 209,336
Net income 347,483 222,852 114,501 74,840 49,301
Basic earnings per share 4.10 2.80 1.57 1.19 0.82
Diluted earnings per share 3.87 2.60 1.48 1.11 0.76
Weighted average shares and
assumed incremental shares 89,800,621 85,852,086 77,613,652 67,191,235 65,203,460
June 30, 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Receivables held for sale, net $ 2,198,391 $ 1,921,465 $ 871,511 $ 456,009 $ 342,853
Credit enhancement assets /(b)/ 1,549,132 1,151,275 824,618 494,862 286,309
Total assets 4,224,931 3,384,907 1,862,269 1,063,487 713,671
Medium term notes/(c)/ 1,750,000 1,250,000
Senior notes 418,074 375,000 375,000 375,000 175,000
Total liabilities 2,792,615 2,324,711 1,173,690 663,757 425,823
Shareholders' equity 1,432,316 1,060,196 688,579 399,730 287,848
Managed auto receivables 14,762,461 10,203,746 6,649,981 4,105,468 2,302,516
(a) The Company closed its mortgage operations in fiscal 2000 and recorded a
related charge of $9.0 million, or $0.11 per share, net of income tax
benefits.
(b) Credit enhancement assets consist of interest-only receivables from Trusts,
investments in Trust receivables and restricted cash.
(c) Medium term notes are included in warehouse credit facilities on the
Company's consolidated balance sheets.
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With our help, people can keep their lives moving
An auto loan from AmeriCredit gives people more than a car. It gives them an
opportunity to move their lives forward. To get to their jobs, pick up their
kids from school, grab some groceries, see the Grand Canyon. After all, even the
American dream can use a little get-up-and-go.
Our customers are everyday people. Like all of America, they come from a variety
of backgrounds, but are above average in many ways. Their incomes are 14 percent
above the national average. They've been in their current jobs and residences
about six years and have built 12 years of credit history. Their stability has
earned our trust, and we're honored to have earned their business.
Annually, these middle-market consumers represent a $200 billion slice of the
$700 billion new/used auto finance industry. And although we operate in the
middle market, we don't believe in the middle ground. Our strategy is to lead -
by example and with results. So we aim everything toward achieving a growing
market share with industry-leading returns and transparent financial reporting.
We are meticulous about the way we manage our business and portfolios, and it
shows in our bottom line.
We're also meticulous about understanding our customers - who they are, what
they need and how we can best provide it. Just as when we started 10 years ago,
we grow our business one loan at a time. And as we strengthen our position,
we'll always look to innovate by broadening our range of products - including
expanding our offerings to the near-prime consumer when appropriate - and adding
new channels to our distribution spectrum.
People need AmeriCredit and the products we provide. We're not saving the world.
But it's nice to save soccer practice every once in a while.
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We believe in the power of individuals
Our business is powered by technology and people. To develop excellence in both,
we've identified what we call our i4 values: Information. Innovation.
Investment. Integrity. These values are intrinsic to all that's best about
AmeriCredit.
We've originated over 1.7 million loans in our first 10 years, and we never
forget that each one goes to a particular person at a given time in life.
Sometimes it's less-than-perfect time, with a bump in the road that caused an
unusual financial strain. So we study this person. We use proprietary risk
assessments and fair, rational pricing models.
We believe that an individual is more than the tally of a generic rating system.
So we rate each applicant on his or her unique characteristics - such as past
credit performance and the specific vehicle being purchased - using adaptable,
customized scoring system. It's a better approach to risk management and a
superior predictor of return. First introduced in 1994, our scorecards have
entered their fourth generation of innovation. Each upgrade has yielded
significantly greater insight into our customers' credit needs and potentials.
We also believe in the power of individual relationships - both with our
end-user customers and the auto dealers who facilitate the purchase and lending
process. We've built a company that knows how to interface with both, providing
easy access, fast answers and good options. And we safeguard both with
state-of-the-art controls that help ensure the security of our lending system.
We invest heavily in our human resources so that we can always hold up our
end of those relationships. As part of our mission to be employer of choice for
talented, productive individuals, we've centered our culture on our i4 values.
They form basis of all we do.
Our sophisticated technology has been key to our success, but it's the
intellectual capital of our employees that really moves us forward. And it's the
people who need our loans who drive our value home. We never forget how much
getting an AmeriCredit loan means to every single one.
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What's in it for me?
That's what we ask ourselves when we take a walk in our customers' shoes. Be it
for a dealer or a loan-holder, we create products and services based on the "me"
factor. We don't just serve our customers - we surpass their expectations.
Becoming their lender of choice demands no less.
We approach this goal the same way we manage our loans: by acquiring information
to understand the situation at a higher level. We conduct extensive focus groups
and sponsor independent research to understand our customers' needs, and we
structure ourselves to be nimble so that we can respond to those needs when
appropriate.
Making ourselves easily accessible to dealers and loan customers is one such
aspect of good service, and it builds opportunities for our continued growth.
Our branch network gives us vital face-to-face contact with major-market auto
dealers throughout North America, and our investment in and presence on
DealerTrack (TM) helps us reach these dealers via the Web.
For customers who already know us, americredit.com provides ways to apply for a
loan, retrieve account information or make a payment from the comfort of home.
Our partnerships with other lending portals connect us to people who might not
have met us just yet.
Our customer service center teams are engineered and trained to provide helpful,
responsive action. For every new customer, we send a comprehensive "welcome kit"
to introduce AmeriCredit and make sure everything is in order. In a loan's
middle stages, we closely review our customers' accounts looking for even
greater insight into their needs, which helps us make sound business
projections. And, as loans reach maturity, we can offer customers an invitation
to continue the relationship with a new AmeriCredit loan as part of our Valued
Customer Program.
In the end, it's all about people, technology and infrastructure. Knowing what
to do with these resources has helped AmeriCredit build for growth in both up
markets or down - while building relationships and developing products that we
hope will create customers for life.
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Taking the American Dream on the road
One piece of the American dream that translates well across all borders is the
freedom of the open road and the independence that owning a car can bring.
AmeriCredit's experience in Canada so far bears this out. Operating with the
same business models that have delivered in the U.S., we've found that while
Canadian transactions are only a small portion of our business, they're growing
fast - over 300 percent in the last year alone. So we've established 11 branch
offices across Canada and a state-of-the-art call center in Peterborough,
Ontario. In more remote areas, mobile AmeriCredit representatives travel from
dealer to dealer, supported by a national service center. And in May 2002, we
launched our first-ever offering of asset-backed securities in Canada -
introducing new investors to AmeriCredit, and providing capital to support
future expansion.
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0 to 1,000,000 in 10 years
We've seen a lot in our first 10 years - and achieved a lot more. AmeriCredit
has gone from just an idea to becoming the largest middle-market auto finance
company in North America. The secrets of our success? Plenty of hard work, of
course, but also a dedication to fundamental principles that define our loan
decision process. The same factors that led us to approve loan # 1 also paved
the way for loan # 1,000,000 - along with numerous enhancements that help us to
turn intuition into science, and projections into results. Our commitment to our
fundamental Company values - Integrity, Investment, Innovation and Information -
has also been key, helping us build AmeriCredit into a proud business where
success is measured by a higher standard than financial results alone.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Historically, the Company has generated 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. As used herein, "loans" include auto finance contracts originated by
dealers and purchased by the Company and extensions of credit made directly by
the Company to consumer borrowers. 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 domestic receivables securitized ("serviced receivables")
and collects other fees such as late charges as servicer for those Trusts.
Historically, except for two securitization transactions in fiscal 1995, the
Company has structured its securitization transactions to meet the criteria for
sales of auto receivables under generally accepted accounting principles in the
United States of America ("GAAP"). Thus, for all securitizations completed to
date, except for the transactions in fiscal 1995, the Company recorded a gain on
sale of receivables when it sold the auto receivables to a Trust. The
gain-on-sale that it recorded was based on the net present value of expected
excess cash flows from the securitized receivables.
The Company has made a decision to alter the structure of its future
securitization transactions to no longer meet the criteria for sales of auto
recievables. Accordingly, following a securitization, the receivables and the
related securitization indebtedness will remain on its balance sheet. The
Company will recognize finance charge and fee income on the receivables and
interest expense on the securities issued in the securitization and will record
a provision for loan losses over the life of the securitization. This change
will significantly impact the Company's future results of operations compared to
its historical results. Therefore, its historical results and management's
discussion of such results may not be indicative of its future results. This
structure, combined with its strategy to increase its initial credit enhancement
deposits, will allow the Company's reported earnings to be more closely aligned
with cash flow distributions from securitization trusts than its previous
structure. Additionally, this structure will decrease the Company's reliance on
origination growth in order to achieve earnings growth and will provide greater
visibility of future finance charge income and net margins related to its
managed auto loan portfolio.
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CRITICAL 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 and those differences may be material. The accounting
policies that the Company believes are the most critical to understanding and
evaluating the Company's reported financial results include the following:
Gain on sale of receivables
The Company periodically sells receivables to Trusts that, in turn, sell
asset-backed securities to investors. Historically, the Company has recognized a
gain on the sale of receivables to the Trusts, which represents the difference
between the sale proceeds to the Company, net of transaction costs, and the
Company's net carrying value of the receivables, plus the present value of the
estimated future excess cash flows to be received by the Company over the life
of the securitization. The Company has made assumptions in order to determine
the present value of the estimated future excess cash flows to be generated by
the pool of receivables sold. The most significant assumptions made are the
cumulative 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 are described under
the caption "Revenue" below. The use of different assumptions could produce
different financial results.
The Company has made a decision to alter the structure of its future
securitization transactions to no longer meet the criteria for sales of auto
receivables. Accordingly, following a securitization, the receivables and the
related securitization indebtedness will remain on its balance sheet. The
Company will recognize finance charge and fee income on the receivables and
interest expense on the securities issued in the securitization and will record
a provision for loan losses over the life of a securitization. Therefore, the
Company's historical results and management's discussion of such results may not
be indicative of its future results.
Fair value measurements
Certain of the Company's assets, including the Company's derivative financial
instruments and credit enhancement assets, 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
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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 estimated future excess cash flows are
discounted. The assumptions used represent the Company's best estimates and are
described under the caption "Revenue" below. 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 probable losses inherent in its receivables; however, because
the allowance for loan losses is based on estimates, there can be no assurance
that the ultimate charge-off amount will not exceed such estimates.
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RESULTS OF OPERATIONS
Year Ended June 30, 2002 as compared to
- ---------------------------------------
Year Ended June 30, 2001
------------------------
Revenue
The Company's average managed receivables outstanding consisted of the following
(in thousands):
Years Ended June 30, 2002 2001
- -----------------------------------------------------------
Auto:
Held for sale $ 1,753,182 $ 1,046,306
Serviced 10,711,164 7,245,330
---------------- ---------------
12,464,346 8,291,636
Other 2,969
---------------- ---------------
$ 12,464,346 $ 8,294,605
================ ===============
Average managed receivables outstanding increased by 50% as a result of higher
loan purchase volume. The Company purchased $8,929.4 million of auto loans
during fiscal 2002, compared to purchases of $6,378.7 million during fiscal
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 June 30, 2000, were 10% higher in
fiscal 2002 versus fiscal 2001. The Company operated 251 auto lending branch
offices as of June 30, 2002, compared to 232 as of June 30, 2001.
The average new loan size was $16,428 for fiscal 2002, compared to $15,430 for
fiscal 2001. The average annual percentage rate on loans purchased during fiscal
2002 was 17.7%, compared to 19.0% during fiscal 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 in the form of lower loan pricing.
Finance charge income increased by 51% to $339.4 million for fiscal 2002 from
$225.2 million for fiscal 2001. Finance charge income was higher due primarily
to an increase of 68% in average auto receivables held for sale in fiscal 2002
versus fiscal 2001. The Company's effective yield on its auto receivables held
for sale decreased to 19.4% for fiscal 2002 from 21.5% for fiscal 2001.
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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
date the auto finance contract is funded by the Company. The effective yield
decreased for fiscal 2002 due to lower loan pricing.
The gain on sale of receivables increased by 49% to $448.5 million for fiscal
2002 from $301.8 million for fiscal 2001. The increase in gain on sale of auto
receivables resulted from the sale of $8,608.9 million of receivables in fiscal
2002 as compared to $5,300.0 million of receivables sold in fiscal 2001. The
gain as a percentage of auto receivables sold decreased to 5.2% for fiscal 2002
from 5.7% for fiscal 2001 primarily due to the use of higher cumulative credit
loss assumptions.
Significant assumptions used in determining the gain on sale of auto receivables
were as follows:
Years Ended June 30, 2002 2001
- -------------------------------------------------------------------
Cumulative credit losses (including
unrealized gains at time of sale) 12.5% 11.3%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0%
Investments in Trust receivables 9.8% 9.8%
Restricted cash 9.8% 9.8%
The cumulative credit loss assumptions utilized at the time of sale of
receivables were determined using a range of possible outcomes based on
historical experience, credit attributes for the specific pool of receivables
and general economic factors. The Company increased the assumption for
cumulative credit losses used in determining the gain on sale of receivables
during fiscal 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 (notwithstanding other assumptions) in a
securitization pool before the credit enhancement assets would suffer an other
than temporary impairment.
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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 from Trusts represent estimated future excess cash flows in the
Trusts and have a first loss position to absorb any shortfall in Trust cash
flows due to adverse credit loss development or 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 from Trusts since net 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 investments in Trust receivables are backed by cash and
receivables and are senior to interest-only receivables from Trusts for credit
enhancement purposes. Accordingly, restricted cash and investments in Trust
receivables are assigned a lower discount rate than the interest-only
receivables from Trusts.
Servicing fee income increased to $389.4 million, or 3.6% of average serviced
auto receivables, for fiscal 2002, compared to $281.2 million, or 3.9% of
average serviced auto receivables, for fiscal 2001. Servicing fee income
represents accretion of the present value discount on estimated future excess
cash flows from the Trusts, base servicing fees and other fees earned by the
Company as servicer of the receivables sold to the Trusts. The growth in
servicing fee income is primarily attributable to the increase in average
serviced auto receivables outstanding for fiscal 2002 compared to fiscal 2001.
Costs and Expenses
Operating expenses as a percentage of average managed receivables outstanding
decreased to 3.4% for fiscal 2002, compared to 3.7% for fiscal 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 $115.7 million,
or 38%, primarily due to the addition of branch offices and loan processing and
servicing staff.
The provision for loan losses increased to $65.2 million for fiscal 2002 from
$31.4 million for fiscal 2001 primarily due to higher average amounts of
receivables held for sale and the use of a higher provision for loan loss rate.
As a percentage of average receivables held for sale, the provision for loan
losses was 3.7% and 3.0% for fiscal 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 an increase in unemployment rates,
will cause a higher number of delinquent accounts. Since accounts delinquent for
greater than 30 days are ineligible for securitization, receivables held
19
indefinitely by the Company may increase, resulting in higher losses on
receivables prior to securitization.
Interest expense increased to $135.9 million for fiscal 2002 from $116.0 million
for fiscal 2001 due to higher debt levels. Average debt outstanding was $2,366.3
million and $1,255.0 million for fiscal 2002 and 2001, respectively. The
Company's effective rate of interest paid on its debt decreased to 5.7% from
9.2% as a result of lower short-term market interest rates.
The Company's effective income tax rate was 38.5% for fiscal 2002 and 2001.
Other Comprehensive Income
The unrealized (losses) gains on credit enhancement assets consisted of the
following (in thousands):
Years Ended June 30, 2002 2001
- ------------------------------------------------------------------
Unrealized gains at time of sale $ 47,634 $ 27,424
Unrealized holding (losses) gains related
to changes in credit loss assumptions (68,224) 36,056
Unrealized holding (losses) gains
related to changes in interest rates (22,276) 55,191
Net reclassification into earnings (7,939) (7,546)
---------- ----------
$ (50,805) $ 111,125
========== ==========
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. Unrealized gains at time of sale were
higher for fiscal 2002 as compared to fiscal 2001 due to a greater amount of
receivables sold in fiscal 2002.
The cumulative credit loss assumptions used to estimate the fair value of credit
enhancement assets are periodically reviewed by the Company and modified to
reflect the actual credit performance for each securitization pool through the
reporting date as well as estimates of future losses considering several factors
including changes in the general economy. Changes in the fair value of credit
enhancement assets as a result of modifications to the credit loss assumptions
are reported as
20
unrealized holding gains or losses in other comprehensive income until realized,
or, in the case of unrealized holding losses considered to be other than
temporary, as a charge to operations.
The Company increased the cumulative credit loss assumptions (including
remaining unrealized gains at time of sale) used in measuring the fair value of
credit enhancement assets to a range of 10.4% to 12.7% as of June 30, 2002, from
a range of 8.7% to 11.7% as of June 30, 2001, resulting in an unrealized holding
loss of $68.2 million for fiscal 2002. The range of cumulative credit loss
assumptions was increased to reflect adverse actual credit performance compared
to previous assumptions as well as expectations for higher future losses due to
deterioration in the general economy during fiscal 2002.
The Company decreased the cumulative credit loss assumptions (including
remaining unrealized gain at time of sale) used in measuring the fair value of
credit enhancement assets to a range of 8.7% to 11.7% as of June 30, 2001, from
a range of 9.4% to 12.6% as of June 30, 2000, resulting in an unrealized holding
gain of $36.1 million for fiscal 2001. The range of cumulative credit loss
assumptions was decreased to reflect favorable actual credit performance
compared to previous assumptions.
Differences between cumulative credit loss assumptions used in individual
securitization pools can be attributed to the original credit attributes of a
pool, actual credit performance through the reporting date and pool seasoning to
the extent that changes in economic trends will have more of an impact on the
expected future performance of less seasoned pools.
Unrealized holding losses related to changes in interest rates of $22.3 million
for fiscal 2002 resulted primarily from a decline in estimated future cash flows
to be generated from investment income earned on restricted cash and Trust cash
collection accounts due to lower short-term market interest rates. Unrealized
holding gains related to changes in interest rates of $55.2 million for fiscal
2001 resulted primarily from an increase in estimated future cash flows from the
Trusts due to lower interest rates payable to investors on the floating rate
tranches of securitization transactions. This unrealized gain was offset by the
unrealized losses on cash flow hedges for fiscal 2001 described below.
21
Net unrealized gains of $7.9 million and $7.5 million were reclassified into
earnings during fiscal 2002 and 2001, respectively, and relate primarily to
recognition of excess estimated cash flows over the Company's initial investment
and cash collected to date as well as recognition of unrealized gains at time of
sale.
Another component of other comprehensive income is unrealized losses on cash
flow hedges. Unrealized losses on cash flow hedges were $11.8 million for fiscal
2002, compared to $64.2 million for fiscal 2001. Short-term market interest
rates decreased during fiscal 2002 and 2001, resulting in an increase in the
liability related to the Company's interest rate swap agreements. The unrealized
losses were less in fiscal 2002, since, commencing in January 2001, interest
rate swap agreements have been executed within the Trusts, thus neutralizing the
impact of changes in interest rates (except relative to investment income) on
the fair value of credit enhancement assets for Trusts established thereafter.
Unrealized gains or losses on cash flow hedges are reclassified into earnings as
the Company's unrealized gain or loss related to interest rate fluctuations on
its credit enhancement assets are reclassified. Net unrealized losses
reclassified into earnings were $9.1 million for fiscal 2002.
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 as well as the cost of debt
incurred for general corporate purposes.
The Company's net margin as reflected in the consolidated income statements is
as follows (in thousands):
Years Ended June 30, 2002 2001
- ---------------------------------------------------------------
Finance charge, fee and other income $ 352,317 $ 235,217
Funding costs (135,928) (116,024)
----------- -----------
Net margin $ 216,389 $ 119,193
=========== ===========
The Company evaluates the profitability of its lending activities based partly
upon the net margin related to its managed auto loan portfolio, including
receivables held for sale and serviced receivables. The Company has historically
securitized its receivables held for sale and recorded a gain on the sale of
such receivables. 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
22
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 would be recognized as incurred.
Net margin for the Company's managed auto loan portfolio is as follows (in
thousands):
Years Ended June 30, 2002 2001
- ------------------------------------------------------------------------------
Finance charge, fee and other income $2,298,439 $1,628,483
Funding costs (759,324) (630,982)
------------ -----------
Net margin $1,539,115 $ 997,501
============ ===========
Net margin as a percentage of average managed auto receivables outstanding is as
follows (dollars in thousands):
Years Ended June 30, 2002 2001
- ------------------------------------------------------------------------------
Finance charge, fee and other income 18.4% 19.6%
Funding costs (6.1) (7.6)
------------ -----------
Net margin as a percentage of
average managed auto receivables
12.3% 12.0%
============ ===========
Average managed auto receivables $12,464,346 $8,291,636
============ ===========
Net margin as a percentage of average managed auto receivables increased for
fiscal 2002 compared to fiscal 2001 as the Company was able to retain some of
the benefit of declining interest rates in its loan pricing strategies.
23
Year Ended June 30, 2001 as compared to
Year Ended June 30, 2000
Revenue
The Company's average managed receivables outstanding consisted of the following
(in thousands):
Years Ended June 30, 2001 2000
- -------------------------------------------------------------------
Auto:
Held for sale $1,046,306 $ 543,518
Serviced 7,245,330 4,791,062
------------- -------------
8,291,636 5,334,580
Other 2,969 22,011
------------- -------------
$8,294,605 $5,356,591
============= =============
Average managed receivables outstanding increased by 55% as a result of higher
loan purchase volume. The Company purchased $6,378.7 million of auto loans
during fiscal 2001, compared to purchases of $4,427.9 million during fiscal
2000. 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 June 30, 1999, were 19% higher in
fiscal 2001 versus fiscal 2000. The Company operated 232 auto lending branch
offices as of June 30, 2001, compared to 196 as of June 30, 2000.
The average new loan size was $15,430 for fiscal 2001, compared to $14,257 for
fiscal 2000. The average annual percentage rate on loans purchased during fiscal
2001 was 19.0%, compared to 18.9% during fiscal 2000.
Finance charge income consisted of the following (in thousands):
Years Ended June 30, 2001 2000
- -------------------------------------------------------------------
Auto $225,210 $123,093
Other 1,057
-------------------------------
$225,210 $124,150
===============================
24
The increase in finance charge income was primarily due to an increase of 93% in
average auto receivables held for sale in fiscal 2001 versus fiscal 2000. The
Company's effective yield on its auto receivables held for sale decreased to
21.5% for fiscal 2001 from 22.7% for fiscal 2000. The effective yield is higher
than the contractual rates of the Company's auto finance contracts primarily 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
fiscal 2001 due to lower levels of finance charges earned between the
origination date and funding date.
The gain on sale of receivables consisted of the following (in thousands):
Years Ended June 30, 2001 2000
- -------------------------------------------------------
Auto $301,768 $207,559
Other 1,511
------------------------
$301,768 $209,070
========================
The increase in gain on sale of auto receivables of 45% resulted from the sale
of $5,300.0 million of receivables in fiscal 2001 as compared to $4,000.0
million of receivables sold in fiscal 2000. The gain as a percentage of auto
receivables sold increased to 5.7% for fiscal 2001 from 5.2% for fiscal 2000
primarily due to increased interest margins as a result of a decrease in
short-term market interest rates.
Significant assumptions used in determining the gain on sale of auto receivables
were as follows (the weighted average discount rate was used in fiscal 2000 due
to the discount rate change during that year):
Years Ended June 30, 2001 2000
- ----------------------------------------------------------------------------
Cumulative credit losses (including
unrealized gains at time of sale) 11.3% 10.9%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 12.3%
Investments in Trust receivables 9.8% 8.1%
Restricted cash 9.8% 8.1%
25
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 fiscal 2001 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 (notwithstanding other assumptions) in a
securitization pool before the credit enhancement assets would suffer an other
than temporary impairment.
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 from Trusts represent estimated future excess cash flows in the
Trusts and have a first loss position to absorb any shortfall in Trust cash
flows due to adverse credit loss development or adverse changes in Trust
performance relative to other assumptions. While the Company earns a higher
yield on its securitized receivables, the Company utilizes a 14.0% discount rate
for interest-only receivables from Trusts 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 investments in Trust receivables are backed by cash and receivables and
are senior to interest-only receivables from Trusts for credit enhancement
purposes. Accordingly, restricted cash and investments in Trust receivables are
assigned a lower discount rate than the interest-only receivables from Trusts.
The Company increased the discount rate used in determining the gain on sale of
auto receivables effective for auto receivables sold subsequent to June 1, 2000.
The discount rate used to estimate the present value of interest-only
receivables from Trusts increased to 14.0% from 12.0% and the discount rate used
to estimate the present value of investments in Trust receivables and restricted
cash increased to 9.8% from 7.8%. The increased discount rate results only in a
difference in the timing of revenue recognition from securitizations and has no
effect on the Company's estimate of expected excess cash flows from such
transactions. While the total amount of revenue recognized over the term of a
securitization transaction is the same, a higher discount rate results in (i)
lower
26
initial gains on the sale of receivables and (ii) higher subsequent servicing
fee income from accretion of the additional discount.
Servicing fee income increased to $281.2 million, or 3.9% of average serviced
auto receivables, for fiscal 2001, compared to $170.3 million, or 3.6% of
average serviced auto receivables, for fiscal 2000. 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 fiscal 2001 compared to fiscal 2000.
Costs and Expenses
Operating expenses as a percentage of average managed receivables outstanding
decreased to 3.7% for fiscal 2001, compared to 4.2% for fiscal 2000. 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 $85.2 million,
or 38%, primarily due to the addition of branch offices and loan processing and
servicing staff.
The provision for loan losses increased to $31.4 million for fiscal 2001 from
$16.4 million for fiscal 2000 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 3.0% for fiscal 2001 and 2000.
Interest expense increased to $116.0 million for fiscal 2001 from $69.3 million
for fiscal 2000 due to higher debt levels. Average debt outstanding was $1,255.0
million and $697.3 million for fiscal 2001 and 2000, respectively. The Company's
effective rate of interest paid on its debt decreased to 9.2% from 9.9% as a
result of lower short-term market interest rates.
The Company's effective income tax rate was 38.5% for fiscal 2001 and 39.8% for
2000. The effective tax rate was higher for fiscal 2000 due to the
non-deductible write-off of goodwill related to the closing of the mortgage
operations.
27
Other Comprehensive Income
The unrealized gains on credit enhancement assets consisted of the following (in
thousands):
Years Ended June 30, 2001 2000
- -------------------------------------------------------------------------------
Unrealized gains at time of sale $ 27,424 $21,283
Unrealized holding gains related
to changes in credit loss assumptions 36,056 19,073
Unrealized holding gains
related to changes in interest rates 55,191
Net reclassification into earnings (7,546) (2,361)
----------- -----------
$111,125 $37,995
=========== ===========
The unrealized gains at time of sale represent the excess of the fair value of
credit enhancement assets over the Company's carrying value related to such
interests when receivables are sold. Unrealized gains at time of sale were
higher for fiscal 2001 as compared to fiscal 2000 due to a greater amount of
receivables sold in fiscal 2001.
The cumulative credit loss assumptions used to estimate the fair value of credit
enhancement assets are periodically reviewed by the Company and modified to
reflect the actual credit performance for each securitization pool through the
reporting date as well as estimates of future losses considering several factors
including changes in the general economy. Changes in the fair value of credit
enhancement assets as a result of modifications to the credit loss assumptions
are reported as unrealized holding gains or losses in other comprehensive income
until realized, or, in the case of unrealized holding losses considered to be
other than temporary, as a charge to operations.
The Company decreased the cumulative credit loss assumptions (including
remaining unrealized gains at time of sale) used in measuring the fair value of
credit enhancement assets to a range of 8.7% to 11.7% as of June 30, 2001, from
a range of 9.4% to 12.6% as of June 30, 2000, resulting in an unrealized holding
gain of $36.1 million for fiscal 2001. The range of cumulative credit loss
assumptions was decreased to reflect favorable actual credit performance
compared to previous assumptions.
The Company decreased the cumulative credit loss assumptions (including
remaining unrealized gains at time of sale) used in measuring the fair value of
credit enhancement assets on certain of its
28
securitization pools as of June 30, 2000, resulting in an unrealized holding
gain of $19.1 million for fiscal 2000. The cumulative credit loss assumptions
were decreased in those securitization pools to reflect favorable actual credit
performance compared to previous assumptions.
Differences between cumulative credit loss assumptions used in individual
securitization pools can be attributed to the original credit attributes of a
pool, actual credit performance through the reporting date and pool seasoning to
the extent that changes in economic trends will have more of an impact on the
expected future performance of less seasoned pools.
Unrealized holding gains related to changes in interest rates of $55.2 million
for fiscal 2001 resulted primarily from an increase in estimated future cash
flows from the Trusts due to lower interest rates payable to investors on the
floating rate tranches of securitization transactions. This gain was offset by
the unrealized losses on cash flow hedges for fiscal 2001 described below. There
were no unrealized holding gains related to changes in interest rates for fiscal
2000.
Net unrealized gains of $7.5 million and $2.4 million were reclassified into
earnings during fiscal 2001 and 2000, respectively, and relate primarily to
recognition of excess estimated cash flows over the Company's initial investment
and cash collected to date as well as recognition of unrealized gains at time of
sale.
Another component of other comprehensive income is unrealized losses on cash
flow hedges. Unrealized losses on cash flow hedges were $64.2 million for fiscal
2001. Short-term market interest rates decreased during fiscal 2001, resulting
in an increase in the liability related to the Company's interest rate swap
agreements. Prior to the Company's adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an amendment of FASB Statement No.
133," and Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133" ("SFAS 133"), on July 1, 2000, the Company recognized
its derivative financial instruments as a part of its credit enhancement assets
rather than as a separate liability on its consolidated balance sheets.
Accordingly, no unrealized
29
gains or losses on cash flow hedges were recognized in fiscal 2000. Unrealized
gains or losses on cash flow hedges are reclassified into earnings as the
Company's unrealized gain or loss related to interest rate fluctuations on its
credit enhancement assets are reclassified.
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 as well as the cost of debt
incurred for general corporate purposes.
The Company's net margin as reflected in the consolidated income statements is
as follows (in thousands):
Years Ended June 30, 2001 2000
- ------------------------------------------------------------------------------
Finance charge, fee and other income $ 235,217 $ 130,359
Funding costs (116,024) (69,310)
--------------------------------
Net margin $ 119,193 $ 61,049
================================
The Company evaluates the profitability of its lending activities based partly
upon the net margin related to its managed auto loan portfolio, including
receivables held for sale and serviced receivables. The Company has historically
securitized its receivables held for sale and recorded a gain on the sale of
such receivables. 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 would be recognized as
incurred.
Net margin for the Company's managed auto loan portfolio is as follows (in
thousands):
Years Ended June 30, 2001 2000
- ---------------------------------------------------------------------------
Finance charge, fee and other income $1,628,483 $1,048,382
Funding costs (630,982) (404,724)
------------ -------------
Net margin $ 997,501 $ 643,658
============ =============
30
Net margin as a percentage of average managed auto receivables outstanding is as
follows (dollars in thousands):
Years Ended June 30, 2001 2000
- -------------------------------------------------------------- --------------
Finance charge, fee and other income 19.6% 19.6%
Funding costs (7.6) (7.6)
------------- --------------
Net margin as a percentage of
average managed auto receivables 12.0% 12.0%
============= ==============
Average managed auto receivables $8,291,636 $5,334,580
============= ==============
CREDIT QUALITY
The Company provides financing in relatively high-risk markets, and, therefore,
anticipates a corresponding high level of delinquencies and charge-offs.
Historically, receivables purchased by the Company have been 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 has periodically sold receivables in securitization transactions to
Trusts and retained an interest in the receivables sold in the form of credit
enhancement assets. Credit enhancement assets are reflected on the Company's
balance sheet at fair value, calculated based upon the present value of
estimated excess future cash flows from the Trusts using, among other
assumptions, estimates of future cumulative credit losses on the receivables
sold. Charge-offs of receivables that have been sold to Trusts decrease the
amount of excess future cash flows from the Trusts. If such charge-offs are
expected to exceed the Company's original estimates of cumulative credit losses,
the fair value of credit enhancement assets could be written down through an
impairment charge to earnings.
31
The following tables present certain data related to the Company's managed
receivables portfolio (dollars in thousands):
Total
June 30, 2002 Held for Sale Serviced Managed
- --------------------------------------------------------------------------------
Principal amount of receivables $2,261,718 $12,500,743 $14,762,461
=========== ===========
Nonaccretable acquisition fees (40,618) (40,618)
Allowance for loan losses (22,709) $(1,380,213)(a) $(1,402,922)
---------- =========== ===========
Receivables, net $2,198,391
==========
Number of outstanding contracts 148,826 975,562 1,124,388
========== =========== ===========
Average principal amount of
outstanding contract (in dollars) $ 15,197 $ 12,814 $ 13,129
========== =========== ===========
Allowance for loan losses and
nonaccretable acquisition fees
as a percentage of receivables 2.8% 11.0% 9.8%
========== =========== ===========
(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 that have been sold to
Trusts reduce the allowance for loan losses.
Total
June 30, 2001 Held for Sale Serviced Managed
- --------------------------------------------------------------------------------
Principal amount of receivables $1,973,828 $8,229,918 $10,203,746
========== ===========
Nonaccretable acquisition fees (42,280) (42,280)
Allowance for loan losses (10,083) $ (868,184)(a) $ (878,267)
---------- ========== ===========
Receivables, net $1,921,465
==========
Number of outstanding contracts 133,214 690,705 823,919
========== ========== ===========
Average principal amount of
outstanding contract (in dollars) $ 14,817 $ 11,915 $ 12,384
========== ========== ===========
Allowance for loan losses and
nonaccretable acquisition fees
as a percentage of receivables 2.7% 10.6% 9.0%
========== ========== ===========
(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.
32
The following is a summary of auto receivables that are (i) more than 30 days
delinquent, but not yet in repossession, and (ii) in repossession (dollars in
thousands):
June 30, 2002 Held for Sale Serviced Total Managed
- ------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------ -------- ----------- ---------- ------------ ---------
Delinquent contracts:
31 to 60 days $ 41,512 1.8% $1,000,753 8.0% $1,042,265 7.0%
Greater than 60 days 34,084 1.5 450,934 3.6 485,018 3.3
------------ ------- ----------- ------- ------------ ---------
75,596 3.3 1,451,687 11.6 1,527,283 10.3
In repossession 14,257 0.7 147,272 1.2 161,529 1.1
------------ ------- ----------- ------- ------------ ---------
$ 89,853 4.0% $1,598,959 12.8% $1,688,812 11.4%
============ ======= =========== ======= ============ =========
June 30, 2001 Held for Sale Serviced Total Managed
- ------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------------- --------------------------------- -------------- ---------
Delinquent contracts:
31 to 60 days $ 36,791 1.9% $ 639,634 7.7% $ 676,425 6.6%
Greater than 60 days 14,778 0.8 235,313 2.9 250,091 2.5
------------ ------ ----------- ------- ------------ ---------
51,569 2.7 874,947 10.6 926,516 9.1
In repossession 8,737 0.4 96,766 1.2 105,503 1.0
------------ ------ ----------- ------- ------------ ---------
$ 60,306 3.1% $ 971,713 11.8% $1,032,019 10.1%
============ ======= ============ ======= ============ =========
Delinquencies in the Company's managed receivables portfolio may vary from
period to period based upon the average age or seasoning of the portfolio,
seasonality within the calendar year and economic factors. Due to the Company's
target customer base, a relatively high percentage of accounts become delinquent
at some point in the life of a loan and there is a fairly high rate of account
movement between current and delinquent status in the portfolio. Delinquencies
were higher as of June 30, 2002, compared to June 30, 2001, due to continued
weakness in the economy, including higher unemployment rates, and, to a lesser
extent, an increase in the average age of the Company's managed receivables
portfolio.
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). The Company's
policies and guidelines, as well as certain contractual restrictions in the
Company's securitization transactions, limit the number and frequency of
deferments that may be granted. An account for which all delinquent payments are
deferred is classified as current at the time the deferment is granted.
Thereafter, such account is aged based on the timely payment of future
installments in the same manner as any other account. Contracts receiving a
payment deferral as an
33
average quarterly percentage of average managed auto receivables outstanding
were 4.9%, 4.7% and 4.4% for fiscal 2002, 2001 and 2000, respectively.
Receivables held for sale receiving a payment deferral were less than 2.0% of
the total amount deferred in fiscal 2002, 2001 and 2000.
The Company evaluates the results of its deferment strategies based upon the
amount of cash installments that are collected on accounts that 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.
The following table presents charge-off data with respect to the Company's auto
receivables portfolio (dollars in thousands):
Years Ended June 30, 2002 2001 2000
- -------------------------------------------------------------------------------
Held for sale:
Repossession charge-offs $ 76,799 $ 26,554 $ 16,080
Less: Recoveries (39,520) (13,850) (8,490)
Mandatory charge-offs (1) 17,141 4,630 2,033
----------------------------------
Net charge-offs $ 54,420 $ 17,334 $ 9,623
==================================
Serviced:
Repossession charge-offs $ 740,016 $ 432,590 $ 325,115
Less: Recoveries (355,252) (220,565) (173,591)
Mandatory charge-offs (1) 134,634 72,332 53,129
----------------------------------
Net charge-offs $ 519,398 $ 284,357 $ 204,653
==================================
Total managed:
Repossession charge-offs $ 816,815 $ 459,144 $ 341,195
Less: Recoveries (394,772) (234,415) (182,081)
Mandatory charge-offs (1) 151,775 76,962 55,162
----------------------------------
Net charge-offs $ 573,818 $ 301,691 $ 214,276
==================================
Net charge-offs as a percentage of average
managed receivables outstanding 4.6% 3.6% 4.0%
==================================
Recoveries as a percentage of
repossession charge-offs 48.3% 51.1% 53.4%
==================================
(1) Mandatory charge-offs represent accounts charged-off in full with no
recovery amounts realized at time of charge-off.
34
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
fiscal 2002 compared to fiscal 2001 due to continued weakness in the economy,
including higher unemployment rates, and due to lower net recoveries on
repossessed vehicles. Net charge-offs decreased for fiscal 2001 compared to
fiscal 2000 due to changes in the Company's credit strategies and favorable
economic conditions. Recoveries as a percentage of repossession charge-offs
decreased due to general declines in used car auction values.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash have been borrowings under its warehouse
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 $9,055.0 million, $6,367.8 million and $4,425.8
million for the purchase of auto finance contracts during fiscal 2002, 2001 and
2000, respectively. These purchases were funded initially utilizing warehouse
facilities and subsequently through the sale of auto receivables in
securitization transactions.
The Company has four separate funding agreements with administrative agents on
behalf of institutionally managed commercial paper conduits and bank groups with
aggregate structured warehouse financing availability of approximately $3,845.0
million. Two of the commercial paper facilities are renewable annually and
provide for available structured warehouse financing of $550.0 million and
$250.0 million, respectively, currently through September 2002. Another facility
provides for multi-year structured warehouse financing with availability of
$500.0 million through November 2003. A fourth facility provides for available
structured warehouse financing of $2,545.0 million, of which $380.0 million
matures in March 2003 and the remaining $2,165.0 million matures in March 2005.
No amounts were outstanding under these facilities as of June 30, 2002.
The Company also has three funding agreements with administrative agents on
behalf of institutionally managed medium term note conduits under which $500.0
million, $750.0 million and $500.0 million, respectively, of proceeds are
available through the terms of the agreements.
35
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, respectively. A total of $1,750.0 million was outstanding under these
facilities as of June 30, 2002.
The Company's Canadian subsidiary has a revolving credit agreement, under which
the subsidiary may borrow up to $150.0 million Cdn., subject to a defined
borrowing base. This facility matures in August 2003. A total of $2.0 million
was outstanding under the Canadian revolving credit agreement as of June 30,
2002. Additionally, the Company's Canadian subsidiary has a warehouse credit
facility with availability of $100.0 million Cdn., subject to a defined
borrowing base. The warehouse credit facility expires in May 2003. No amounts
were outstanding under the warehouse credit facility as of June 30, 2002.
As is customary in the Company's industry, certain of the Company's warehouse
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.
In June 2002, the Company issued $175.0 million of 9.25% senior notes that are
due in May 2009. Interest on the notes is payable semiannually in May and
November. The proceeds from the senior notes issuance were used to redeem $135.4
million of its $175.0 million 9.25% senior notes due in 2004. Subsequent to June
2002, the Company redeemed the remaining $39.6 million of senior notes due in
2004.
The following table summarizes the scheduled payments under the Company's
contractual long-term debt obligations (in thousands):
Years Ending June 30, 2003 2004 - 2005 2006 - 2007 After 2007 Total
- -------------------------------------------------------------------------------
Operating leases $ 80,605 $ 28,572 $ 21,280 $ 33,002 $ 163,459
Other notes payable 37,291 17,976 7,674 3,870 66,811
Medium term notes 1,750,000 1,750,000
Senior notes 39,631 200,000 175,000 414,631
------------------------------------------------------
Total $157,527 $1,796,548 $228,954 $211,872 $2,394,901
======================================================
36
The Company has completed thirty-three auto receivables securitization
transactions through June 30, 2002. The proceeds from the transactions were
primarily used to repay borrowings outstanding under the Company's warehouse
facilities.
A summary of the active transactions through June 30, 2002, is as follows (in
millions):
Original Balance at
Transaction/(a)/ Date Amount June 30, 2002
- ----------------------------------------------------------
1998-D November 1998 $ 625.0 $ 74.5
1999-A February 1999 700.0 104.1
1999-B May 1999 1,000.0 196.9
1999-C August 1999 1,000.0 257.9
1999-D October 1999 900.0 260.5
2000-A February 2000 1,300.0 437.8
2000-B May 2000 1,200.0 488.0
2000-C August 2000 1,100.0 506.2
2000-1 November 2000 495.0 235.3
2000-D November 2000 600.0 319.4
2001-A February 2001 1,400.0 794.2
2001-1 April 2001 1,089.0 663.9
2001-B July 2001 1,850.0 1,342.8
2001-C September 2001 1,600.0 1,269.0
2001-D October 2001 1,800.0 1,469.2
2002-A February 2002 1,600.0 1,466.3
2002-1 April 2002 990.0 922.7
2002-A Canada /(b)/ May 2002 158.9 147.5
2002-B June 2002 1,200.0 1,191.5
-----------------------
$20,607.9 $12,147.7
=======================
(a) Transactions 1994-A, 1995-A and B, 1996-A, B, C and D, 1997-A, B, C and D,
and 1998-A, B and C originally totaling $3,520.5 million have been paid off
as of June 30, 2002.
(b) The balance at June 30, 2002 reflects fluctuations in foreign currency
translation rates in addition to principal pay downs.
In connection with securitization transactions, the Company is required to
provide credit enhancement in order to attain specific credit ratings for the
asset-backed securities issued by the Trusts. The Company typically makes an
initial deposit to a restricted cash account and 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
37
flows are distributed to the Company. The Company generally expects to begin to
receive excess cash flow distributions from its insured securization
transactions approximately 15 to 18 months after receivables are securitized,
although the timing of cash flow distributions is dependent upon the structure
of the securitization transaction.
The Company employs two types of securitization structures. The structure the
Company utilizes most frequently involves the purchase of a financial guaranty
policy issued by an insurer to cover the asset-backed securities and the use of
reinsurance and other alternative credit enhancements to reduce the required
initial deposit to the restricted cash account. 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 June 30, 2002, the Company had commitments
from the insurer for an additional $125.5 million of reinsurance that expires in
December 2002. In August 2002, the Company obtained an additional $200.0 million
of reinsurance commitments that will expire in December 2003. The new
reinsurance commitments increase the Company's initial cash deposit requirement
to a level of 3%, compared to 2% under the previous commitments, which will
require an additional $50.0 million of cash deposits over the term of the new
commitments. Also, in August 2002, the Company entered into a revolving credit
enhancement facility that provides for borrowing up to $290.0 million for the
financing of bonds rated BBB- and BB- by Standard and Poor's in connection with
securitization transactions. This credit facility provides additional liquidity
for credit enhancement in the future. The Company relies on these reinsurance
arrangements and the credit facility to supplement the amount of cash the
Company would otherwise require to support its securitization program. If the
Company was unable to access reinsurance or alternative credit enhancements on
acceptable terms, there could be a material adverse effect on the Company's
liquidity.
The Company had a credit enhancement facility with a financial institution which
the Company used to 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
were collateralized by the Company's credit enhancement assets. In June 2002,
this credit enhancement facility was terminated by mutual agreement and
borrowings under this facility have been repaid with a corresponding release of
restricted cash. The Company replaced the credit enhancement provided by such
facility with a $130.0 million letter of credit from another financial
institution. This letter of credit does not represent funded debt and,
therefore, is not recorded as debt on the Company's consolidated balance sheet.
The Company's second securitization structure involves the sale of subordinate
asset-backed securities in order to provide credit enhancement for the senior
asset-backed securities. 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
paragraphs.
38
Initial deposits for credit enhancement purposes were $368.5 million, $180.0
million and $192.0 million for fiscal 2002, 2001 and 2000, respectively.
Borrowings under the credit enhancement facility of $182.5 million, $57.0
million and $72.0 million for fiscal 2002, 2001 and 2000, respectively, were
used to fund initial deposits for credit enhancement purposes. Excess cash flows
distributed to the Company were $243.6 million, $214.6 million and $125.1
million for fiscal 2002, 2001 and 2000, respectively.
With respect to the Company's securitization transactions covered by a financial
guaranty insurance policy, agreements with the insurer provide that if
delinquency, default or net loss ratios in a Trust's pool of receivables exceed
certain targets, the specified credit enhancement levels would be increased. If
a targeted ratio were exceeded in any insured securitization and a waiver were
not granted by the insurer, excess cash flows from all of the Company's insured
securitizations could be used by the insurer to increase credit enhancement for
the securitization in which a ratio was exceeded to higher specified levels
rather than being distributed to the Company. If a targeted ratio 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.
As of August 31, 2002, none of the Company's securitizations had delinquency,
default or net loss ratios in excess of the targeted levels. However, as a
result of expected seasonal increases in delinquency levels through February
2003 and the prospects for continued economic weakness, the Company believes
that it is likely that the initially targeted delinquency ratios will be
exceeded in certain of its securitizations during that time period. In September
2002, the insurer agreed to revise the targeted delinquency trigger levels
through and including the March 2003 distribution date. As a result, the Company
does not expect to exceed the revised targets with respect to any Trusts. The
Company anticipates that expected seasonal improvements in delinquency levels
after February 2003 will result in the ratios being reduced below applicable
target levels. However, further deterioration in the economy subsequent to March
2003 could cause targeted ratios to be exceeded, resulting in greater stress on
its liquidity position in the event additional waivers are not granted. The
Company may be required to significantly decrease loan origination activities,
and implement other significant expense reductions, if securitization
distributions to it are materially decreased for a prolonged period of time.
On September 12, 2002, Moody's Investors Service announced its intention to
review the Company for a potential credit rating downgrade. In the event of a
downgrade, certain of the Company's derivative collateral lines will be reduced.
The Company anticipates that the reductions in these derivative collateral lines
would require it to pledge an additional $25 million to $40 million in cash to
maintain its open derivative positions.
The Company believes that, in addition to its existing capital resources, it
will require at least $150 million of additional external capital in the form of
equity capital financing, as well as continued execution of securitization
transactions and renewal of its existing warehouse facilities, in order to fund
its liquidity needs in fiscal 2003. 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 it. If the Company is unable to obtain additional
equity capital or execute securitization transactions on a regular basis before
December 2002, it may be required to significantly decrease loan origination
activities and implement significant expense reductions, all of which may have a
material adverse affect on the Company's ability to achieve its business and
financial objectives.
39
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 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
40
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 the 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 securities issued by the Trusts to a fixed rate hedging the
variability in future excess cash flows to be received by the Company over the
life of the securitization attributable to interest rate risk. 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 uses an interest rate swap agreement to hedge the fair value of
certain of its fixed rate senior notes. The carrying value of the senior notes
is adjusted to reflect the effective portion of the fair value hedge. The fair
value of the interest rate swap agreement is included on the Company's
consolidated balance sheets in other assets.
In addition, the Company utilizes interest rate cap agreements as part of its
interest rate risk management strategy for securitization transactions as well
as for warehouse credit facilities. The purchaser of the interest rate cap
agreement pays a premium in return for the right to receive the difference in
the interest cost at any time a specified index of market interest rates rises
above the stipulated "cap" rate. The interest rate cap agreement purchaser bears
no obligation or liability if interest rates fall below the "cap" rate. The
Company's special purpose finance subsidiaries are contractually required to
purchase interest rate cap agreements as credit enhancement in connection with
securitization transactions involving notes with floating interest rates and
warehouse credit facilities. The Company simultaneously sells
41
a corresponding interest rate cap agreement in order to offset cash needed to
purchase the interest rate cap agreement. The fair value of the interest rate
cap agreements purchased and sold by the Company is included in other assets and
liabilities on the Company's consolidated balance sheets. The fair value of the
interest rate cap agreements purchased by the Trusts is reflected in the
valuation of the credit enhancement assets.
The following table provides information about the Company's interest
rate-sensitive financial instruments by expected maturity date as of June 30,
2002 (dollars in thousands):
Years Ending June 30, 2003 2004 2005 2006 2007 Thereafter Fair Value
- ----------------------------------------------------------------------------------------------------------------
Assets:
Receivables held for sale $2,198,391 $2,315,010
Interest-only receivables
from Trusts $ 138,748 $ 177,201 $ 167,402 $ 31,146 $ 514,497
Interest rate swaps
Notional amounts $ 200,000 $ 200,000 $ 200,000 $ 166,667 $ 5,548
Average pay rate 6.95% 8.68% 9.73% 10.21%
Average receive rate 9.88% 9.88% 9.88% 9.88%
Interest rate caps purchased
Notional amounts $1,668,864 $1,444,276 $1,192,558 $ 911,248 $595,942 $242,017 $ 16,741
Average strike rate 6.61% 6.60% 6.60% 6.59% 6.59% 6.59%
Liabilities:
Warehouse credit facilities
Principal amounts $ 1,974 $1,250,000 $ 500,000 $1,751,974
Weighted average effective
interest rate 2.78% 4.57% 5.58%
Senior notes
Principal amounts $ 39,631 $ 200,000 $175,000 $ 403,798
Weighted average effective
interest rate 9.25% 9.88% 9.36%
Interest rate swaps
Notional amounts $1,086,341 $ 535,780 $ 162,288 $ 9,655 $ 66,869/(a)/
Average pay rate 7.08% 7.13% 7.07% 6.86%
Average receive rate 2.50% 4.26% 5.48% 5.91%
Interest rate caps sold
Notional amounts $3,016,192 $2,273,768 $1,561,615 $ 980,597 $600,015 $242,017 $ 19,053
Average strike rate 6.77% 6.81% 6.84% 6.66% 6.60% 6.59%
(a) Unrealized losses on interest rate swap agreements are offset by unrealized
gains on credit enhancement assets.
42
The following table provides information about the Company's interest
rate-sensitive financial instruments by expected maturity date as of June 30,
2001 (dollars in thousands):
Years Ending June 30, 2002 2003 2004 2005 2006 Thereafter Fair Value
- ------------------------------------------------------------------------------------------------------------------------
Assets:
Receivables held for sale $1,921,465 $2,032,603
Interest-only receivables
from Trusts $ 148,016 $ 107,034 $ 113,310 $ 19,535 $ 387,895
Interest rate caps purchased
Notional amounts $3,285,879 $2,822,020 $2,101,618 $1,301,145 $516,854 $152,013 $ 18,640
Average strike rate 7.36% 7.40% 7.44% 7.46% 7.37% 7.31%
Liabilities:
Warehouse credit facilities
Principal amounts $ 252,879 $1,250,000 $1,502,879
Weighted average effective
interest rate 4.61% 6.64%
Senior notes
Principal amounts $ 175,000 $200,000 $ 374,125
Weighted average effective
interest rate 9.25% 9.88%
Interest rate swaps
Notional amounts $1,564,897 $1,070,612 $ 520,980 $ 144,440 $ 8,538 $ 64,156/(a)/
Average pay rate 7.03% 7.08% 7.13% 7.08% 6.82%
Average receive rate 4.14% 4.14% 4.10% 4.06% 4.06%
Interest rate caps sold
Notional amounts $3,285,879 $2,822,020 $2,101,618 $1,301,145 $516,854 $152,013 $ 18,640
Average strike rate 7.36% 7.40% 7.44% 7.46% 7.37% 7.31%
(a) Unrealized losses on interest rate swap agreements are offset by unrealized
gains on credit enhancement assets.
The Company assumes that receivables held for sale will be sold within one year
of origination. Interest-only receivables from Trusts are estimated to be
realized by the Company in future periods using discount rate, prepayment and
credit loss assumptions similar to the Company's historical experience. Notional
amounts on interest rate swap and cap agreements are based on contractual terms.
Warehouse credit facilities and senior notes principal amounts have been
classified based on expected payoff.
Notional amounts, which are used to calculate the contractual payments to be
exchanged under the contracts, represent average amounts that will be
outstanding for each of the years included in the table. Notional amounts do not
represent amounts exchanged by parties and, thus, are not a measure of the
Company's exposure to loss through its use of these agreements.
43
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.
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.
CURRENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142, "Accounting for
Goodwill and Intangible Assets" ("SFAS 142"). SFAS 141 and SFAS 142 require that
all business combinations initiated after June 30, 2001, be accounted for under
the purchase method and establish the specific criteria for the recognition of
intangible assets separately from goodwill. Under SFAS 142, goodwill will no
longer be amortized, but will be subject to impairment tests at least annually.
The Company adopted SFAS 141 on July 1, 2001, and it did not impact the
Company's financial position or results of operations. SFAS 142 will be
effective for the Company's fiscal year ending June 30, 2003. The Company does
not believe that the adoption of SFAS 142 will have any impact on the Company's
financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). The statement
requires that retirement obligations be recorded as a liability using the
present value of the estimated cash flows and a corresponding amount would be
capitalized as part of the asset's carrying amount. The capitalized asset
retirement cost would be amortized to expense over the asset's useful life using
a systematic and rational allocation method. The estimate of the asset
retirement obligation will change and have to be revised over time. The Company
does not believe that the adoption of this statement will have any impact on the
Company's financial position or results of operations. This statement will be
effective for the Company's fiscal year ending June 30, 2003.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144
44
superceded Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company does not believe that the adoption of this statement will have
any impact on the Company's financial position or results of operations. This
statement will be effective for the Company's fiscal year ending June 30, 2003.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections as of April 2002" ("SFAS 145"). SFAS
145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that statement,
Statement of Financial Accounting Standards No. 64, "Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds Statement of
Financial Accounting Standards No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. The Company does not believe that the adoption of this statement
will have a material effect on the Company's financial position or results of
operations. This statement will be effective for the Company's fiscal year
ending June 30, 2003.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 addresses the accounting and reporting for costs associated with
exit or disposal activities and certain costs associated with those activities.
The Company does not believe that the adoption of this statement will have any
impact on the Company's financial position or results of operations. This
statement will be effective for the Company's fiscal year ending June 30, 2003.
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 that could cause actual
results to differ significantly from historical results or from those
anticipated by the Company. The most significant risks are detailed from time to
time in the Company's filings and reports with the Securities and Exchange
Commission including the Company's Annual Report on Form 10-K for the year ended
June 30, 2002. It is advisable not to place undue reliance on the Company's
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
45
AMERICREDIT CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, 2002 2001
- ------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 119,445 $ 77,053
Receivables held for sale, net 2,198,391 1,921,465
Interest-only receivables from Trusts 514,497 387,895
Investments in Trust receivables 691,065 493,022
Restricted cash 343,570 270,358
Property and equipment, net 120,505 67,828
Other assets 237,458 167,286
----------------------------
Total assets $4,224,931 $3,384,907
============================
Liabilities and Shareholders' Equity
Liabilities:
Warehouse credit facilities $1,751,974 $1,502,879
Credit enhancement facility 36,319
Senior notes 418,074 375,000
Other notes payable 66,811 23,077
Funding payable 126,893 60,460
Accrued taxes and expenses 194,260 114,041
Derivative financial instruments 85,922 82,796
Deferred income taxes 148,681 130,139
----------------------------
Total liabilities 2,792,615 2,324,711
----------------------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $.01 par value per share,
20,000,000 shares authorized; none issued
Common stock, $.01 par value per share,
230,000,000 and 120,000,000 shares
authorized; 91,716,416 and 89,853,792
shares issued 917 899
Additional paid-in capital 573,956 520,077
Accumulated other comprehensive income 42,797 73,689
Retained earnings 832,446 484,963
----------------------------
1,450,116 1,079,628
Treasury stock, at cost (5,899,241 and
6,439,737 shares) (17,800) (19,432)
----------------------------
Total shareholders' equity 1,432,316 1,060,196
----------------------------
Total liabilities and shareholders' equity $4,224,931 $3,384,907
============================
The accompanying notes are an integral part of these consolidated financial
statements.
46
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
Years Ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Revenue
Finance charge income $ 339,430 $ 225,210 $ 124,150
Gain on sale of receivables 448,544 301,768 209,070
Servicing fee income 389,371 281,239 170,251
Other income 12,887 10,007 6,209
----------------------------------------------------------
1,190,232 818,224 509,680
----------------------------------------------------------
Costs and expenses
Operating expenses 424,131 308,453 223,219
Provision for loan losses 65,161 31,387 16,359
Interest expense 135,928 116,024 69,310
Charge for closing mortgage operations 10,500
----------------------------------------------------------
625,220 455,864 319,388
----------------------------------------------------------
Income before income taxes 565,012 362,360 190,292
Income tax provision 217,529 139,508 75,791
----------------------------------------------------------
Net income 347,483 222,852 114,501
----------------------------------------------------------
Other comprehensive income (loss)
Unrealized (losses) gains on
credit enhancement assets (50,805) 111,125 37,995
Unrealized losses on
cash flow hedges (2,712) (64,156)
Foreign currency translation adjustment 2,022
Income tax benefit (provision) 20,603 (18,083) (14,602)
----------------------------------------------------------
Other comprehensive income (30,892) 28,886 23,393
----------------------------------------------------------
Comprehensive income $ 316,591 $ 251,738 $ 137,894
==========================================================
Earnings per share
Basic $ 4.10 $ 2.80 $ 1.57
==========================================================
Diluted $ 3.87 $ 2.60 $ 1.48
==========================================================
Weighted average shares outstanding 84,748,033 79,562,495 73,038,005
==========================================================
Weighted average shares and
assumed incremental shares 89,800,621 85,852,086 77,613,652
==========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
47
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Retained Treasury Stock
------------ --------------
Shares Amount Capital Income (Loss) Earnings Shares Amount
- ---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 71,498,474 $ 715 $ 252,194 $ 21,410 $ 147,610 7,357,030 $ (22,199)
Common stock issued on
exercise of options 3,028,060 30 23,825
Income tax benefit from
exercise of options 11,583
Common stock issued in
public offering 9,200,000 92 111,455
Other comprehensive income, net
of income taxes of $14,602 23,393
Common stock issued for
employee benefit plans 2,922 (348,171) 1,048
Net income 114,501
-----------------------------------------------------------------------------------
Balance at June 30, 2000 83,726,534 837 401,979 44,803 262,111 7,008,859 (21,151)
Common stock issued on
exercise of options 6,075,558 61 49,313 (200,000) 604
Income tax benefit from
exercise of options 63,293
Other comprehensive income, net
of income taxes of $18,083 28,886
Common stock issued for
employee benefit plans 51,700 1 5,492 (369,122) 1,115
Net income 222,852
-----------------------------------------------------------------------------------
Balance at June 30, 2001 89,853,792 899 520,077 73,689 484,963 6,439,737 (19,432)
Common stock issued on
exercise of options 1,710,451 17 20,800
Income tax benefit from
exercise of options 22,304
Other comprehensive loss, net of
income taxes of $20,603 (30,892)
Common stock issued for
employee benefit plans 152,173 1 10,775 (540,496) 1,632
Net income 347,483
-----------------------------------------------------------------------------------
Balance at June 30, 2002 91,716,416 $ 917 $ 573,956 $ 42,797 $ 832,446 5,899,241 $ (17,800)
===================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
48
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 347,483 $ 222,852 $ 114,501
Adjustments to reconcile net income
to net cash used by operating activities:
Non-cash charge for closing mortgage operations 6,566
Depreciation and amortization 38,372 19,740 19,357
Provision for loan losses 65,161 31,387 16,359
Deferred income taxes 61,373 82,947 15,388
Accretion of present value discount and other (111,880) (93,449) (44,083)
Non-cash gain on sale of auto receivables (424,771) (243,991) (186,176)
Loss on retirement of senior notes 4,153
Distributions from Trusts 243,596 214,629 125,104
Initial deposits to credit enhancement assets (368,495) (180,008) (192,000)
Discount on issuance of senior notes (2,135)
Changes in assets and liabilities:
Other assets (41,979) (5,377) (23,841)
Accrued taxes and expenses 88,017 43,414 27,699
Purchases of receivables (9,055,028) (6,367,796) (4,535,524)
Principal collections and recoveries on receivables 235,323 110,812 43,756
Net proceeds from sale of receivables 8,546,229 5,174,439 4,082,270
-----------------------------------------------
Net cash used by operating activities (374,581) (990,401) (530,624)
-----------------------------------------------
Cash flows from investing activities
Net purchases of property and equipment (11,559) (34,278) (9,751)
Change in other assets (15,099) (64,580) (11,232)
-----------------------------------------------
Net cash used by investing activities (26,658) (98,858) (20,983)
-----------------------------------------------
Cash flows from financing activities
Net change in warehouse credit facilities 248,073 1,015,179 373,041
Proceeds from issuance of senior notes 175,000
Retirement of senior notes (139,522)
Borrowings under credit enhancement facility 182,500 57,000 72,000
Debt issuance costs (22,518)
Net change in notes payable (21,484) (5,369) (11,079)
Proceeds from issuance of common stock 20,818 56,586 139,372
-----------------------------------------------
Net cash provided by financing activities 442,867 1,123,396 573,334
Effect of exchange rate changes on cash
and cash equivalents 764
-----------------------------------------------
Net increase in cash and cash equivalents 42,392 34,137 21,727
Cash and cash equivalents at beginning of year 77,053 42,916 21,189
-----------------------------------------------
Cash and cash equivalents at end of year $ 119,445 $ 77,053 $ 42,916
===============================================
The accompanying notes are an integral part of these consolidated financial
statements.
49
AMERICREDIT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
History and Operations
AmeriCredit Corp. ("Company") was formed on August 1, 1986, and, since September
1992, has been in the business of purchasing and servicing automobile sales
finance contracts. The Company operated 251 auto lending branch offices in 42
states and five Canadian provinces as of June 30, 2002. The Company acquired a
subsidiary in November 1996 that originated and sold mortgage loans. During
October 1999, the Company ceased the operations of this subsidiary and has
liquidated its assets.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company's investment in DealerTrack Holdings,
Inc. ("DealerTrack"), a company that provides an auto finance transaction
processing channel, is accounted for using the cost method since the Company
owns less than a 20% voting interest in DealerTrack and does not otherwise
exercise significant influence over DealerTrack. All significant intercompany
transactions and accounts have been eliminated in consolidation. Certain prior
year amounts, including initial deposits to credit enhancement assets and
purchases, sales, and principal collections and recoveries on receivables in the
consolidated statements of cash flows, have been reclassified to conform to the
current year presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions which affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities as of the
date of the financial statements and the amount of revenue and costs and
expenses during the reporting periods. Actual results could differ from those
estimates and those differences may be material. These estimates include, among
other things, assumptions for cumulative credit losses, timing of cash flows and
discount rates on receivables sold in securitization transactions and the
determination of the allowance for loan losses on receivables held for sale.
50
Cash Equivalents
Investments in highly liquid securities with original maturities of 90 days or
less are included in cash and cash equivalents.
Receivables Held for Sale
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 obligors, collateral, 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 that 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 and are removed from the
consolidated balance sheets when the related finance contract is sold,
charged-off or paid in full.
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
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 consolidated balance sheets when the related finance contract is sold,
charged-off or paid in full.
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. 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 and allowance for loan losses. Receivables, including
accrued interest, 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.
51
Credit Enhancement Assets
The Company periodically sells receivables to certain special purpose financing
trusts ("Trusts"), and the Trusts, in turn, issue asset-backed securities to
investors in securitization transactions. The Company retains an interest in the
receivables sold in the form of a residual or interest-only receivables from
Trust and may also retain other subordinated interests in the receivables sold
to the Trusts. The residual or interest-only receivables from Trusts represents
the present value of future excess cash flows resulting from the difference
between the finance charge income received from the obligors on the receivables
and the interest paid to the investors in the asset-backed securities, net of
credit losses, servicing fees and other expenses.
Upon the transfer of receivables to the Trusts, the Company removes the net book
value of the receivables sold from its consolidated balance sheet and allocates
such carrying value between the assets transferred and the interests retained,
based upon their relative fair values at the settlement date. The difference
between the sales proceeds, net of transaction costs, and the allocated basis of
the assets transferred is recognized as a gain on sale of receivables.
The allocated basis of the interests retained is classified as either
interest-only receivables from Trusts, investments in Trust receivables or
restricted cash in the Company's consolidated balance sheets depending upon the
form of interest retained by the Company. These interests are collectively
referred to as credit enhancement assets.
Since auto receivables held by the Trusts can be contractually prepaid or
otherwise settled in such a way that the Company would not recover all of its
recorded investment in the retained interests, credit enhancement assets are
classified as available for sale and are measured at fair value. Unrealized
holding gains or temporary holding losses are reported net of income tax effects
as accumulated other comprehensive income that is a separate component of
shareholders' equity until realized. If a decline in fair value is deemed other
than temporary, the assets are written down through an impairment charge to
operations.
The fair value of credit enhancement assets is estimated by calculating the
present value of the excess cash flows from the Trusts using discount rates
commensurate with the risks involved. Such calculations include estimates of
cumulative credit losses for the remaining term of the receivables transferred
to the Trusts since this factor most impacts the amount and timing of future
excess cash flows. If cumulative credit losses exceed the Company's original
estimates, the credit
52
enhancement assets could be written down through a charge to operations as an
other than temporary impairment. Favorable credit loss experience compared to
the Company's original estimates could result in additional earnings when
realized. The discount used to estimate the present value of future excess cash
flows is accreted into income using the interest method over the expected life
of the securitization and is recorded as part of servicing fee income.
In connection with securitization transactions, the Company is required to
provide credit enhancement in order to attain specific credit ratings for the
asset-backed securities issued by the Trusts. The Company typically makes a
deposit to a restricted cash account and may also retain a subordinated interest
in the receivables sold to the Trusts to establish initial credit enhancement
levels. Monthly cash collections from the pools of receivables in excess of
required principal and interest payments on the asset-backed securities and
servicing fees and other expenses are either added to the restricted cash
accounts or used to repay the outstanding asset-backed securities on an
accelerated basis, thus creating additional credit enhancement through
overcollateralization in the Trusts. This overcollateralization, as well as any
initial retained interest in the receivables sold to the Trusts, is recorded
as investments in Trust receivables in the Company's consolidated balance
sheets. When the credit enhancement levels reach specified percentages of the
pools of receivables, excess cash flows are distributed to the Company. In the
event that monthly cash collections are insufficient to make required principal
and interest payments to the investors and pay servicing fees and other
expenses, any shortfall would be first drawn from the restricted cash accounts.
A financial guaranty insurance company ("Insurer") has provided a financial
guaranty insurance policy for the benefit of investors in certain of the
Company's securitization transactions. The agreements with the Insurer provide
that if delinquency, default or net loss ratios in the pools of receivables
supporting the asset-backed securities exceed certain targets, the specified
levels of credit enhancement would be increased and, in certain cases, the
Company would be removed as servicer of the receivables.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is generally provided on a straight-line basis over the estimated
useful lives of the assets. The cost of assets sold or retired and the related
accumulated depreciation are removed from the accounts at the time of
disposition and any resulting gain or loss is included in operations.
Maintenance, repairs
53
and minor replacements are charged to operations as incurred; major replacements
and betterments are capitalized.
Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an amendment of FASB Statement No. 133," and Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" ("SFAS 133"), on July 1, 2000. Unrealized gains and losses on derivatives
that arose prior to the initial application of SFAS 133 and that were previously
deferred as adjustments of the carrying amount of hedged items were not
adjusted. Accordingly, the Company did not record a transition adjustment from
the adoption of SFAS 133.
The Company sells fixed rate auto receivables to Trusts that, in turn, sell
either fixed rate or floating rate securities to investors. The interest rates
on the floating rate securities issued by the Trusts are indexed to various
London Interbank Offered Rates ("LIBOR"). The Company utilizes interest rate
swap agreements to convert floating rate exposures on securities issued by the
Trusts to fixed rates, hedging the variability in future excess cash flows to be
received by the Company over the life of the securitization attributable to
interest rate risk. These interest rate swap agreements are designated as cash
flow hedges of the credit enhancement assets.
The Company's interest rate swap agreements qualify for hedge accounting
treatment. Since the underlying credit enhancement assets being hedged by the
interest rate swap agreements expose the Company to interest rate risk, the
interest rate swap agreements reduce the Company's sensitivity to interest rate
risk. The interest rate swap agreements are designated and deemed effective in
hedging the Company's exposure to interest rate risk.
The fair value of the interest rate swap agreements is included in the Company's
consolidated balance sheets, and the related unrealized gains or losses on these
agreements are deferred and included in shareholders' equity as a component of
other comprehensive income. These deferred gains or losses are recognized as an
adjustment to income over the same period in which cash flows from the related
credit enhancement assets affect earnings. However, to the extent that any of
these
54
contracts are not considered to be perfectly effective in offsetting the change
in the value of the cash flows being hedged, any changes in fair value relating
to the ineffective portion of these contracts are recognized in income.
The Company also utilized an interest rate swap agreement to hedge the change in
fair value of certain of its fixed rate senior notes. The change in fair value
of the interest rate swap agreement and the senior notes are recognized in
income. If the interest rate swap agreement terminates prior to maturity,
previous adjustments to the carrying value of the senior notes will be
recognized in income over the life of the senior notes on an effective yield
basis.
The Company formally documents all relationships between interest rate swap
agreements and the underlying asset and liability being hedged, as well as its
risk management objective and strategy for undertaking the hedge transactions.
At hedge inception and at least quarterly, the Company also formally assesses
whether the interest rate swap agreements that are used in hedging transactions
have been highly effective in offsetting changes in the cash flows or fair value
of the hedged items and whether those interest rate swap agreements may be
expected to remain highly effective in future periods. The Company will
discontinue hedge accounting prospectively when it is determined that an
interest rate swap agreement has ceased to be highly effective as a hedge.
The Company also utilizes interest rate cap agreements as part of its interest
rate risk management strategy for securitization transactions as well as for
warehouse credit facilities. The Trusts and the Company's wholly owned special
purpose finance subsidiaries typically purchase interest rate cap agreements to
limit variability in excess cash flows from receivables sold to the Trusts or
financed under warehouse credit facilities due to potential increases in
interest rates. The purchaser of the interest rate cap agreement pays a premium
in return for the right to receive the difference in the interest cost at any
time a specified index of market interest rates rises above the stipulated "cap"
rate. The interest rate cap agreement purchaser bears no obligation or liability
if interest rates fall below the "cap" rate. The Company's special purpose
finance subsidiaries are contractually required to purchase interest rate cap
agreements as credit enhancement in connection with securitization transactions
and warehouse credit facilities. The Company simultaneously sells a
corresponding interest rate cap agreement in order to offset the cash used to
purchase the interest rate cap agreement. The fair value of the interest rate
cap agreements purchased and sold by the Company is included in other assets and
liabilities on the Company's consolidated balance sheets. The fair value of the
interest rate cap agreements purchased by the Trusts is reflected in the
valuation of the credit enhancement assets.
55
The Company does not hold any interest rate cap or swap agreements for trading
purposes.
Interest rate risk management contracts are generally expressed in notional
principal or contract amounts that are much larger than the amounts potentially
at risk for nonpayment by counterparties. Therefore, in the event of
nonperformance by the counterparties, the Company's credit exposure is limited
to the uncollected interest and contract market value related to the contracts
that have become favorable to the Company. The Company manages the credit risk
of such contracts by using highly rated counterparties, established risk limits
and monitoring of the credit ratings of the counterparties.
Income Taxes
Deferred income taxes are provided in accordance with the asset and liability
method of accounting for income taxes to recognize the tax effects of temporary
differences between financial statement and income tax accounting. Valuation
allowances for deferred tax assets are provided when realization of such assets
are not likely.
2. Receivables Held for Sale
Receivables held for sale consist of the following (in thousands):
June 30, 2002 2001
- -------------------------------------------------------------------------------
Auto receivables $ 2,261,718 $ 1,973,828
Less nonaccretable acquisition fees (40,618) (42,280)
Less allowance for loan losses (22,709) (10,083)
----------------------------
$ 2,198,391 $ 1,921,465
============================
Auto receivables are collateralized by vehicle titles and the Company has the
right to repossess the vehicle in the event the consumer defaults on the payment
terms of the contract.
The accrual of finance charge income has been suspended on approximately $79.1
million and $40.9 million of delinquent auto receivables as of June 30, 2002 and
2001, respectively.
56
As of June 30, 2002 and 2001, $120.0 million and $74.8 million, respectively, of
receivables held for sale were ineligible for sale.
A summary of the nonaccretable acquisition fees and allowance for loan losses is
as follows (in thousands):
Years Ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Balance at beginning of year $ 52,363 $ 24,374 $ 11,841
Purchases of receivables 171,537 144,403 97,659
Receivables sold (171,314) (130,467) (91,862)
Provision for loan losses 65,161 31,387 16,359
Net charge-offs (54,420) (17,334) (9,623)
---------------------------------------
Balance at end of year $ 63,327 $ 52,363 $ 24,374
=======================================
3. Securitizations
A summary of the Company's securitization activity and cash inflows and outflows
from the Trusts is as follows (in thousands):
Years Ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Receivables sold $8,608,909 $5,300,004 $3,999,999
Net proceeds from sale of receivables 8,546,229 5,173,763 3,955,404
Gain on sale of receivables 448,544 301,768 207,559
Servicing fees 277,491 187,790 126,168
Distributions from Trusts 243,596 214,629 125,104
The Company retains interests in the receivables sold in the form of credit
enhancement assets and servicing responsibilities for receivables sold. As of
June 30, 2002 and 2001, the Company was servicing $12,500.7 million and $8,229.9
million, respectively, of auto receivables that 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 its domestic serviced receivables and any
supplemental fee collections (such as late charges) for servicing the
receivables sold. The Company believes that servicing fees received on its
domestic securitization pools would fairly compensate a substitute servicer
should one be required, and, accordingly, the Company records neither a
servicing asset
57
nor a servicing liability. The Company recorded a servicing liability related to
the servicing of its Canadian securitization pool because it does not receive a
monthly servicing fee for its servicing obligations. The servicing liability is
included in accrued taxes and expenses on the Company's consolidated balance
sheet.
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):
June 30, 2002 2001
- ------------------------------------------------------------------------
Interest-only receivables from Trusts $ 514,497 $ 387,895
Investments in Trust receivables 691,065 493,022
Restricted cash 343,570 270,358
-----------------------
$1,549,132 $1,151,275
=======================
A summary of activity in the credit enhancement assets is as follows (in
thousands):
Years Ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------
Balance at beginning of year $1,151,275 $ 824,618 $ 494,862
Initial deposits to credit enhancement assets 368,495 180,008 192,000
Non-cash gain on sale of auto receivables 430,243 243,991 186,176
Payments on credit enhancement facility (218,819) (87,287) (5,394)
Distributions from Trusts (243,596) (214,629) (125,104)
Accretion of present value discount and other 111,880 93,449 44,083
Change in unrealized (loss) gain (50,805) 111,125 37,995
Foreign currency translation adjustment 459
-----------------------------------
Balance at end of year $1,549,132 $1,151,275 $ 824,618
===================================
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 or
additional receivables delivered to the Trust, or both, thus creating
overcollateralization. These assets represent initial deposits to credit
enhancement assets. Also at the time of sale of receivables, a non-cash
58
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 Trusts 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 Trusts are added to the restricted
cash account or used to pay down outstanding debt in the Trusts creating
overcollateralization until the required percentage level of assets has been
reached. Collections of excess cash flows reduce the interest-only receivables
from Trusts and 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 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.
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.
Significant assumptions used in determining the gain on sale of auto receivables
were as follows:
Years Ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Cumulative credit losses (including
unrealized gains at time of sale) 12.5% 11.3% 10.9%
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0% 12.3%
Investments in Trust receivables 9.8% 9.8% 8.1%
Restricted cash 9.8% 9.8% 8.1%
59
Significant assumptions used in measuring the fair value of credit enhancement
assets at the balance sheet dates are as follows:
June 30, 2002 2001
- --------------------------------------------------------------------------------
Cumulative credit losses (including remaining 10.4% - 12.7% 8.7% - 11.7%
unrealized gains at time of sale)
Discount rate used to estimate present value:
Interest-only receivables from Trusts 14.0% 14.0%
Investments in Trust receivables 9.8% 9.8%
Restricted cash 9.8% 9.8%
The Company has not presented the expected weighted average life and prepayment
assumptions used in determining the gain on sale and in measuring the fair value
of credit enhancement assets due to the stability of these two attributes over
time. A significant portion of the Company's prepayment experience relates to
defaults that are considered in the cumulative credit loss assumption. The
Company's voluntary prepayment experience on its receivables portfolio typically
has not fluctuated with changes in market interest rates or other economic or
market factors.
The sensitivity to an immediate 10% and 20% unfavorable change in the
assumptions used to measure the fair value of the credit enhancement assets as
of June 30, 2002, is as follows (in thousands):
Expected
Cumulative
Credit Losses Discount Rate
- ----------------------------------------------------------
Impact on fair value of
10% adverse change $ (135,698) $(31,663)
20% adverse change (277,317) (61,387)
The impact on fair value of these hypothetical adverse changes (net of related
income tax benefits) would generally first reduce accumulated other
comprehensive income in the consolidated balance sheets prior to resulting in a
charge to income.
The adverse changes to the key assumptions and estimates are hypothetical. The
change in fair value based on a 10% variation in assumptions cannot be
extrapolated because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in this table, the
60
effect of a variation in a particular assumption on fair value is calculated
independently from any change in another assumption. In reality, changes in one
factor may contribute to changes in another, which might magnify or counteract
the sensitivities. Furthermore, due to potential changes in current economic
conditions, the estimated fair values as disclosed should not be considered
indicative of the future performance of these assets. The sensitivities do not
reflect actions management might take to offset the impact of any adverse
change.
Expected future cumulative static pool credit losses on receivables that have
been sold to the Trusts are shown below:
Securitizations Completed in
Years Ended June 30,
--------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Estimated cumulative credit losses as of: /(a)/
June 30, 2002 11.6% 11.4% 11.1%
June 30, 2001 10.3% 8.8%
June 30, 2000 9.6%
(a) Cumulative credit losses are calculated by adding the actual and projected
future credit losses and dividing them by the original balance of each pool
of assets. The amount shown for each year is a weighted average for all
securitizations during the period.
4. Warehouse Credit Facilities
Warehouse credit facilities consist of the following (in thousands):
June 30, 2002 2001
- --------------------------------------------------------------------------------
Commercial paper facilities $ 228,794
Medium term notes $1,750,000 1,250,000
Canadian facilities 1,974 24,085
---------------------------
$1,751,974 $1,502,879
===========================
The Company has four separate funding agreements with administrative agents on
behalf of institutionally managed commercial paper conduits and bank groups with
aggregate structured warehouse financing availability of approximately $3,845.0
million. Two of the commercial paper facilities are renewable annually and
provide for available structured warehouse financing of
61
$550.0 million and $250.0 million, respectively, through September 2002. Another
facility provides for multi-year structured warehouse financing with
availability of $500.0 million through November 2003. A fourth facility provides
for available structured warehouse financing of $2,545.0 million, of which
$380.0 million matures in March 2003 and the remaining $2,165.0 million matures
in March 2005.
Under these funding agreements, the Company transfers 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 June 30, 2002 and 2001, these restricted cash
accounts totaled $1.6 million and $6.0 million, respectively, and are included
in other assets in the consolidated balance sheets. As of June 30, 2001, $254.7
million 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
62
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
June 30, 2002 and 2001, these restricted cash accounts totaled $27.8 million and
$28.3 million, respectively, and are included in other assets in the
consolidated balance sheets. As of June 30, 2002 and 2001, $1,831.8 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. In August 2002, the Company renewed this
revolving credit agreement providing for borrowings of up to $150.0 million Cdn.
through August 2003. Additionally, the Company's Canadian subsidiary has a
warehouse credit facility with availability of $100.0 million Cdn. subject to a
defined borrowing base. The warehouse credit facility expires in May 2003. The
Canadian facilities contain various covenants requiring certain minimum
financial ratios and results. As of June 30, 2002, $4.0 million Cdn. of auto
receivables held for sale were pledged under the credit agreement.
5. Credit Enhancement Facility
The Company had a credit enhancement facility with a financial institution that
was 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 were payable over time based on future
excess cash flows from certain of the Trusts. In June 2002, the Company replaced
this facility with a letter of credit from a financial institution. The
remaining balance on the credit enhancement facility was paid off with a
corresponding release of restricted cash.
6. Senior Notes
In June 2002, the Company issued $175.0 million of senior notes that are due in
May 2009. Interest on the notes is payable semiannually at a rate of 9.25% per
annum. The notes, which are
63
uncollateralized, may be redeemed at the option of the Company after May 2006 at
a premium declining to par in May 2008. The proceeds from the senior note
issuance were used to redeem the $175.0 million 9.25% senior notes that were due
in May 2004. As of June 30, 2002, $135.4 million of the senior notes due in May
2004 were tendered and redeemed. The remainder of the senior notes due in May
2004 was redeemed subsequent to June 30, 2002.
Additionally, the Company has outstanding $200.0 million of senior notes that
are due in April 2006. Interest on the notes is payable semiannually at a rate
of 9.875% per annum. In April 2002, the Company entered into an interest rate
swap agreement to hedge the fair value of these senior notes. At June 30, 2002,
the carrying value of the senior notes was adjusted by $5.5 million to reflect
the effective use of the fair value hedge. On August 2, 2002, the Company
terminated the interest rate swap agreement. The fair value of the interest rate
swap was $9.7 million at termination date. This amount will be reflected in the
carrying value of the senior notes and will be amortized into interest expense
over the expected term of the senior notes. The notes, which are
uncollateralized, may be redeemed at the option of the Company after April 2003
at a premium declining to par in April 2005.
The Indentures pursuant to which the senior notes were issued contain
restrictions including limitations on the Company's ability to incur additional
indebtedness other than certain collateralized indebtedness, pay cash dividends
and repurchase common stock. Debt issuance costs and original issue discounts
are being amortized over the expected term of the notes, and unamortized costs
of $6.3 million and $6.7 million as of June 30, 2002 and 2001, respectively, are
included in other assets in the consolidated balance sheets.
7. Commitments and Contingencies
Leases
Branch lending offices are generally leased for terms of up to five years with
certain rights to extend for additional periods. The Company also leases space
for its administrative offices and loan servicing activities under leases with
terms up to twelve years with renewal options. Certain leases contain lease
escalation clauses for real estate taxes and other operating expenses and
renewal option clauses calling for increased rents. Lease expense was $24.4
million, $17.3 million and $13.6 million for the years ended June 30, 2002, 2001
and 2000, respectively.
64
The financing arrangement for one of the Company's loan servicing centers is
structured as a synthetic lease pursuant to which the Company is considered to
lease the property for accounting purposes but is considered to own the
property, subject to the indebtedness incurred to acquire and construct the
property, for federal income tax and other purposes. This arrangement provides
for rental payments to be made through the scheduled termination date in
September 2003, at which time the Company may be required to purchase the
property from the lessor for a purchase price equal to the amount of the
outstanding debt. The lessor may accelerate the Company's purchase obligation in
the event of certain defaults specified in the lease financing documents. The
Company may also elect to purchase the property and terminate the lease
financing arrangement prior to the scheduled termination date. As of June 30,
2002, the amount of outstanding debt under this lease financing arrangement was
$33.2 million. Neither the property nor the outstanding debt incurred to acquire
and construct the property is recorded on the Company's consolidated balance
sheets.
Operating lease commitments for years ending June 30 are as follows (in
thousands):
2003 $ 80,605
2004 15,380
2005 13,192
2006 11,668
2007 9,612
Thereafter 33,002
--------
$163,459
========
Other Notes Payable
Maturities of other notes payable for years ending June 30 are as follows (in
thousands):
2003 $37,291
2004 11,645
2005 6,331
2006 4,769
2007 2,905
Thereafter 3,870
-------
$66,811
=======
65
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash equivalents, restricted cash, derivative
financial instruments and managed auto receivables, which include auto
receivables held for sale and auto receivables serviced by the Company on behalf
of the Trusts. The Company's cash equivalents and restricted cash represent
investments in highly rated securities placed through various major financial
institutions. The counterparties to the Company's derivative financial
instruments are various major financial institutions. Managed auto receivables
represent contracts with consumers residing throughout the United States and, to
a limited extent, in Canada, with borrowers located in California and Texas each
accounting for 13% of the managed auto receivables portfolio as of June 30,
2002. No other state accounted for more than 10% of managed auto receivables.
Guarantees of Indebtedness
The Company has guaranteed certain subordinated asset-backed securities issued
in its securitization transactions. The total outstanding balance of the
subordinated asset-backed securities guaranteed by the Company was $78.3 million
and $78.8 million at June 30, 2002 and 2001, respectively. Subordinated
asset-backed securities guaranteed by the Company are expected to mature by the
end of calendar 2003. Because the Company does not expect the guarantees to be
funded prior to expiration, the guaranteed amount does not reflect estimates of
future cash flows for settlement of the guarantees.
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 could take the form of class
action complaints by consumers. As the assignee of finance contracts originated
by dealers, the Company may also be named as a co-defendant in lawsuits filed by
consumers principally against dealers. The damages and penalties claimed by
consumers in these types of matters can be substantial. The relief requested by
the plaintiffs varies but includes requests for compensatory, statutory and
punitive damages.
66
The Company believes that it has taken prudent steps to address the litigation
risks associated with its business activities. As of June 30, 2002, there were
no lawsuits pending or, to the best knowledge of the Company, threatened against
it, the outcome of which will have a material effect on the Company's financial
condition, results of operations or cash flows.
8. Stock Options
General
The Company has certain stock-based compensation plans for employees,
non-employee directors and key executive officers.
A total of 21,500,000 shares have been authorized for grants of options and
other stock-based awards under the employee plans, of which 2,000,000 shares are
available for grants to non-employee directors as well as employees. As of June
30, 2002, 1,397,567 shares remain available for future grants. The exercise
price of each option must equal the market price of the Company's stock on the
date of grant, and the maximum term of each option is ten years. The vesting
period is typically four years, although certain options granted to non-officers
vest over a two-year period. A committee of the Company's Board of Directors
establishes policies and procedures for option grants, vesting periods and the
term of each option.
A total of 1,500,000 shares have been authorized for grants of options under the
non-employee director plans. These plans have expired and no shares remain
available for future grants as of June 30, 2001. The exercise price of each
option must equal the market price of the Company's stock on the date of grant
and the maximum term of each option is ten years. Option grants, vesting periods
and the term of each option are established by the terms of the plans.
A total of 6,300,000 shares have been authorized for grants of options under the
key executive officer plans, none of which remain available for future grants as
of June 30, 2001. Option grants, vesting periods and the exercise price and term
of each option are established by the terms of the plans.
The Company has elected not to adopt the fair value-based method of accounting
for stock-based awards and, accordingly, no compensation expense has been
recognized for options granted under the plans described above. Had compensation
expense for the Company's plans been determined using the fair value-based
method, pro forma net income would have been $323.2 million, $206.5
67
million and $101.7 million, pro forma basic earnings per share would have been
$3.81, $2.60 and $1.39 and pro forma diluted earnings per share would have been
$3.60, $2.41 and $1.31 for the years ended June 30, 2002, 2001 and 2000,
respectively.
The following tables present information related to the Company's stock-based
compensation plans. The fair value of each option grant was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Years Ended June 30, 2002 2001 2000
- -------------------------------------------------------------------
Expected dividends 0 0 0
Expected volatility 101% 51% 45%
Risk-free interest rate 4.28% 5.31% 6.10%
Expected life 5 years 5 years 5 years
Employee Plans
A summary of stock option activity under the Company's employee plans is as
follows (shares in thousands):
Years Ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 8,303 $19.40 10,582 $12.22 10,856 $ 9.92
Granted 3,906 24.18 2,319 32.54 3,009 16.67
Exercised (1,290) 15.25 (4,411) 9.14 (2,665) 7.70
Canceled (600) 24.96 (187) 17.60 (618) 14.31
---------------------------------------------------------------------
Outstanding at
end of year 10,319 $21.40 8,303 $19.40 10,582 $12.22
=====================================================================
Options exercisable at
end of year 4,695 $17.57 3,823 $15.69 6,229 $10.05
=====================================================================
Weighted average fair value
of options granted
during year $18.58 $16.50 $ 7.93
======== ======== ========
68
A summary of options outstanding under employee plans as of June 30, 2002, is as
follows (shares in thousands):
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Average Years Average Average
Range of Number of Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Outstanding Price
- --------------------------------------------------------------------- -----------------------------
$ 2.75 to 5.00 5 2.33 $ 3.55 5 $ 3.55
$ 5.01 to 10.00 451 4.47 7.41 451 7.41
$10.01 to 15.00 1,859 6.03 12.67 1,406 12.31
$15.01 to 20.00 5,383 7.60 16.67 2,081 16.95
$20.01 to 25.00 450 8.11 21.13 119 21.16
$25.01 to 30.00 491 7.99 27.79 212 27.94
$30.01 to 35.00 79 9.15 34.74 18 34.61
$35.01 to 40.00 251 8.42 35.79 90 35.78
$40.01 to 45.00 110 5.99 42.16 3 42.49
$45.01 to 55.00 802 8.78 45.91 310 45.60
$55.01 to 65.00 438 2.08 63.63 63.63
---------- ----------
10,319 4,695
========== ==========
Restricted stock with an approximate aggregate market value of $2.4 million and
$2.3 million at the time of grant was also issued under the employee plans
during the years ended June 30, 2002 and 2001, respectively. The market value of
these restricted shares at the date of grant is being amortized into expense
over a period that approximates the restriction period. As of June 30, 2002 and
2001, unamortized compensation expense related to the restricted stock awards
was $3.3 million and $2.2 million, respectively.
69
Non-Employee Director Plans
A summary of stock option activity under the Company's non-employee director
plans is as follows (shares in thousands):
Years Ended June 30, 2002 2001 2000
- ---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------
Outstanding at
beginning of year 480 $ 9.75 1,380 $4.33 1,385 $ 3.37
Granted 80 17.81
Exercised (120) 3.18 (900) 1.44 (85) 1.40
---------------------------------------------------------
Outstanding at
end of year 360 $11.94 480 $9.75 1,380 $ 4.33
=========================================================
Options exercisable at
end of year 360 $11.94 480 $9.75 1,380 $ 4.33
=========================================================
Weighted average fair value of
options granted during year $ 8.55
======
A summary of options outstanding under non-employee director plans as of June
30, 2002, is as follows (shares in thousands):
Options Outstanding and Exercisable
- ------------------------------------------------------------------------------
Weighted Weighted
Average Years Average
Range of Number of Remaining Exercise
Exercise Prices Outstanding Contractual Life Price
- ------------------------------------------------------------------------------
$ 1.40 to 3.75 60 1.37 $ 2.85
$ 3.76 to 10.00 80 3.92 7.92
$10.01 to 15.00 140 5.92 14.77
$15.01 to 20.00 80 7.35 17.81
-----------
360
===========
70
Key Executive Officer Plans
A summary of stock option activity under the Company's key executive officer
plans is as follows (shares in thousands):
Years Ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 5,300 $ 11.25 6,200 $ 10.90 6,300 $ 10.92
Exercised (300) 8.00 (900) 8.89 (100) 12.00
--------------------------------------------------------------------------
Outstanding at end of year 5,000 $ 11.44 5,300 $ 11.25 6,200 $ 10.90
==========================================================================
Options exercisable at
end of year 3,850 $ 11.27 3,000 $ 10.67 2,750 $ 9.53
==========================================================================
A summary of options outstanding under key executive officer plans as of June
30, 2002, is as follows (shares in thousands):
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Years Average Average
Range of Number of Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Outstanding Price
- --------------------------------------------------------------------------------------------------------------------
$ 8.00 700 3.81 $ 8.00 700 $ 8.00
$ 12.00 4,300 5.58 12.00 3,150 12.00
--------------- ----------------
5,000 3,850
=============== ================
9. Employee Benefit Plans
The Company has a defined contribution retirement plan covering substantially
all employees. The Company's contributions to the plan were $5.0 million, $2.4
million and $2.2 million for the years ended June 30, 2002, 2001 and 2000,
respectively.
The Company also has an employee stock purchase plan that allows participating
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85% of the
71
market value at specified dates. A total of 3,000,000 shares have been reserved
for issuance under the plan. Shares purchased under the plan were 359,485,
322,015 and 250,495 for the years ended June 30, 2002, 2001 and 2000,
respectively.
10. Related Party Transactions
The Company has provided interest-bearing loans to certain executive officers
and directors. These loans in the aggregate were $5.7 million and $1.8 million
at June 30, 2002 and 2001, respectively. All loans are due and payable to the
Company by December 31, 2003.
11. Income Taxes
The income tax provision consists of the following (in thousands):
Years Ended June 30, 2002 2001 2000
- ----------------------------------------------------------------
Current $ 156,156 $ 56,561 $ 60,403
Deferred 61,373 82,947 15,388
-------------------------------------
$ 217,529 $ 139,508 $ 75,791
=====================================
The Company's effective income tax rate on income before income taxes differs
from the U.S. statutory tax rate as follows:
Years Ended June 30, 2002 2001 2000
- -------------------------------------------------------------
U.S. statutory tax rate 35.0% 35.0% 35.0%
Other 3.5 3.5 4.8
---------------------------------
38.5% 38.5% 39.8%
=================================
72
The tax effects of temporary differences that give rise to deferred tax
liabilities and assets are as follows (in thousands):
June 30, 2002 2001
- --------------------------------------------------------------------------
Deferred tax liabilities:
Gain on sale of receivables $ (123,847) $ (85,556)
Unrealized gain on credit enhancement assets (25,529) (46,132)
Other (17,422) (6,595)
------------------------
(166,798) (138,283)
------------------------
Deferred tax assets:
Net operating loss carryforward - domestic 1,204
Net operating loss carryforward - Canadian 1,869 2,066
Other 16,248 4,874
------------------------
18,117 8,144
------------------------
Net deferred tax liability $ (148,681) $ (130,139)
========================
As of June 30, 2002, the Company has a net operating loss carryforward of
approximately $4.8 million for Canadian income tax reporting purposes that
expires between June 30, 2006 and June 30, 2008.
12. Earnings Per Share
A reconciliation of weighted average shares used to compute basic and diluted
earnings per share is as follows (dollars in thousands, except per share
amounts):
Years Ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------------
Net income $ 347,483 $ 222,852 $ 114,501
================ =============== ================
Weighted average shares
outstanding 84,748,033 79,562,495 73,038,005
Incremental shares resulting from
assumed exercise of stock options 5,052,588 6,289,591 4,575,647
---------------- --------------- ----------------
Weighted average shares and
assumed incremental shares 89,800,621 85,852,086 77,613,652
================ =============== ================
Earnings per share:
Basic $ 4.10 $ 2.80 $ 1.57
================ =============== ================
Diluted $ 3.87 $ 2.60 $ 1.48
================ =============== ================
73
Basic earnings per share have been computed by dividing net income by weighted
average shares outstanding.
Diluted earnings per share have been computed by dividing net income by the
weighted average shares and assumed incremental shares. Assumed incremental
shares were computed using the treasury stock method. The average common stock
market prices for the period were used to determine the number of incremental
shares.
13. Supplemental Cash Flow Information
Cash payments for interest costs and income taxes consist of the following (in
thousands):
Years Ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------
Interest costs ($345 capitalized in 2002) $ 152,031 $ 113,923 $ 69,630
Income taxes 122,682 59,733 62,714
During the years ended June 30, 2002, 2001 and 2000, the Company entered into
capital lease agreements for property and equipment of $65.1 million, $8.8
million and $12.9 million, respectively.
74
14. Supplemental Disclosure for Accumulated Other Comprehensive Income
A summary of changes in accumulated other comprehensive income is as follows (in
thousands):
Years Ended June 30, 2002 2001 2000
- -------------------------------------------------------------------- ------------- -------------
Net unrealized gains on credit
enhancement assets:
Balance at beginning of year $ 113,145 $ 44,803 21,410
Unrealized holding (losses) gains, net of taxes
of $(16,503), $45,688 and $15,511,
respectively (26,363) 72,983 24,845
Reclassification into earnings, net of taxes
of $(3,056), $(2,905) and $(909),
respectively (4,883) (4,641) (1,452)
-------------- ------------- -------------
Balance at end of year 81,899 113,145 44,803
-------------- ------------- -------------
Unrealized losses on cash flow hedges:
Balance at beginning of year (39,456)
Change in fair value associated with
current period hedging activities, net of
taxes of $(4,544) and $(24,700),
respectively (7,260) (39,456)
Reclassification into earnings, net of
taxes of $3,500 5,592
-------------- ------------- -------------
Balance at end of year (41,124) (39,456)
-------------- ------------- -------------
Accumulated foreign currency
translation adjustment:
Balance at beginning of year
Translation gain 2,022
-------------- ------------- -------------
Balance at end of year 2,022
-------------- ------------- -------------
Total accumulated other comprehensive
income $ 42,797 $ 73,689 $ 44,803
============== ============= =============
75
15. Derivative Financial Instruments and Hedging Activities
As of June 30, 2002 and 2001, the Company had interest rate swap agreements with
underlying notional amounts of $1,595.7 million and $1,719.2 million,
respectively. These agreements had unrealized losses of approximately $66.9
million and $64.2 million as of June 30, 2002 and 2001, respectively. The
ineffectiveness related to the interest rate swap agreements was not material
for the year ended June 30, 2002. The Company estimates approximately $30.2
million of unrealized losses included in other comprehensive income will be
reclassified into earnings within the next twelve months. The Company maintains
a policy of requiring that all derivative contracts be governed by an
International Swaps and Derivatives Association Master Agreement. When the
Company is engaged in more than one outstanding derivative transaction with the
same counterparty and also has a legally enforceable master netting agreement
with that counterparty, the net mark-to-market exposure represents the netting
of the positive and negative exposures with that counterparty. When there is a
net negative exposure, the Company regards its credit exposure to the
counterparty as being zero. The net mark-to-market position with a particular
counterparty represents a reasonable measure of credit risk when there is a
legally enforceable master netting agreement (i.e. a legal right of a setoff of
receivable and payable derivative contracts) between the Company and the
counterparty. Under the terms of the interest rate swap and cap 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 and cap agreements exceed
an agreed upon amount. As of June 30, 2002 and 2001, these restricted cash
accounts totaled $56.5 million and $41.9 million, respectively, and are included
in other assets in the consolidated balance sheets.
16. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether recognized or not in the
Company's consolidated balance sheets. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted market prices
are not available. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated timing and
amount of future cash flows. Therefore, the estimates of fair value may differ
substantially from amounts that ultimately may be realized or paid at settlement
or maturity of the financial instruments and those differences may be material.
SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
76
Estimated fair values, carrying values and various methods and assumptions used
in valuing the Company's financial instruments are set forth below (in
thousands):
June 30, 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ---------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents (a) $ 119,445 $ 119,445 $ 77,053 $ 77,053
Receivables held for sale, net (b) 2,198,391 2,315,010 1,921,465 2,032,603
Interest-only receivables from Trusts (c) 514,497 514,497 387,895 387,895
Investments in Trust receivables (c) 691,065 691,065 493,022 493,022
Restricted cash (c) 343,570 343,570 270,358 270,358
Interest rate swap agreements (e) 5,548 5,548
Interest rate cap agreements purchased (e) 16,741 16,741 18,640 18,640
Financial liabilities:
Warehouse credit facilities (d) 1,751,974 1,751,974 1,502,879 1,502,879
Credit enhancement facility (d) 36,319 36,319
Senior notes (e) 418,074 403,798 375,000 374,125
Interest rate swap agreements (e) 66,869 66,869 64,156 64,156
Interest rate cap agreements sold (e) 19,053 19,053 18,640 18,640
Other notes payable (f) 66,811 66,811 23,077 23,077
(a) The carrying value of cash and cash equivalents is considered to be a
reasonable estimate of fair value since these investments bear interest at
market rates and have maturities of less than 90 days.
(b) Since the Company periodically sells its receivables in securitization
transactions, fair value is estimated by discounting future net cash flows
expected to be realized from the sale of the receivables using discount
rate, prepayment and credit loss assumptions similar to the Company's
historical experience.
(c) The fair value of interest-only receivables from Trusts, investments in
Trust receivables and restricted cash is estimated by discounting the
associated future net cash flows using discount rate, prepayment and credit
loss assumptions similar to the Company's historical experience.
(d) The warehouse credit facilities and credit enhancement facility have
variable rates of interest and maturities of three years or less.
Therefore, carrying value is considered to be a reasonable estimate of fair
value.
(e) The fair values of the senior notes and interest rate cap and swap
agreements are based on quoted market prices.
(f) The fair value of other notes payable is estimated based on rates currently
available for debt with similar terms and remaining maturities.
77
REPORT OF INDEPENDENT ACCOUNTANTS
BOARD OF DIRECTORS AND SHAREHOLDERS
AMERICREDIT CORP.
We have audited the accompanying consolidated balance sheets of AmeriCredit
Corp. as of June 30, 2002 and 2001, and the related consolidated statements of
income and comprehensive income, shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. U.S. standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmeriCredit Corp. as
of June 30, 2002 and 2001, and the results of its operations and its cash flows
for the three years in the period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
PricewaterhouseCoopers LLP
Fort Worth, Texas
August 6, 2002
78
AMERICREDIT CORP.
Common Stock Data
The Company's common stock trades on the New York Stock Exchange under the
symbol ACF. There were 85,817,175 shares of common stock outstanding as of June
30, 2002. The following table sets forth the range of the high, low and closing
sale prices for the Company's common stock as reported on the Composite Tape of
the New York Stock Exchange Listed Issues.
High Low Close
- ------------------------------------------------------------------------
Fiscal year ended June 30, 2001
First Quarter $31.13 $17.38 $28.81
Second Quarter 29.38 20.38 27.25
Third Quarter 37.92 26.00 32.43
Fourth Quarter 54.95 30.22 51.95
Fiscal year ended June 30, 2002
First Quarter $64.90 $26.75 $31.62
Second Quarter 36.90 14.00 31.55
Third Quarter 40.30 18.50 37.99
Fourth Quarter 46.93 24.70 28.05
As of June 30, 2002, there were approximately 275 shareholders of record of the
Company's common stock.
79
AMERICREDIT CORP.
Quarterly Data (Unaudited)
(dollars in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
Fiscal year ended June 30, 2001
Finance charge income $45,400 $52,095 $61,017 $ 66,698
Gain on sale of receivables 61,586 71,173 79,674 89,335
Servicing fee income 59,270 63,435 74,423 84,111
Income before income taxes 68,737 78,767 98,260 116,596
Net income 42,273 48,442 60,430 71,707
Basic earnings per share 0.55 0.62 0.75 0.87
Diluted earnings per share 0.51 0.57 0.70 0.81
Weighted average shares and
assumed incremental shares 83,358,230 84,418,806 86,709,986 88,966,281
Fiscal year ended June 30, 2002
Finance charge income $ 96,797 $ 80,027 $ 82,188 $ 80,418
Gain on sale of receivables 92,930 108,690 124,112 122,812
Servicing fee income 85,235 94,571 97,362 112,203
Income before income taxes 128,027 131,051 148,982 156,952
Net income 78,737 80,596 91,624 96,526
Basic earnings per share 0.94 0.95 1.08 1.13
Diluted earnings per share 0.88 0.91 1.02 1.06
Weighted average shares and
assumed incremental shares 89,836,898 88,669,914 89,509,209 91,200,763
80
AMERICREDIT CORP.
SHAREHOLDER INFORMATION
Directors
Clifton H. Morris, Jr.
Executive Chairman of the Board, AmeriCredit Corp.
Michael R. Barrington
Vice Chairman, President and Chief Executive Officer, AmeriCredit Corp.
Daniel E. Berce
Vice Chairman and Chief Financial Officer, AmeriCredit Corp.
A.R. Dike
President and Chief Executive Officer, The Dike Company, Inc.
Edward H. Esstman
Vice Chairman, AmeriCredit Corp.
James H. Greer
Chairman of the Board, Greer Capital Corp. Investments
Douglas K. Higgins
Owner, Higgins & Associates
Kenneth H. Jones, Jr.
Private Investor
Executive Management Team
Clifton H. Morris, Jr.
Executive Chairman of the Board
Michael R. Barrington
Vice Chairman, President and Chief Executive Officer
Daniel E. Berce
Vice Chairman and Chief Financial Officer
Steven P. Bowman
Executive Vice President, Chief Credit Officer
Chris A. Choate
Executive Vice President, Chief Legal Officer and Secretary
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Richard E. Daly
Executive Vice President, Chief Learning Officer
Edward H. Esstman
Vice Chairman
S. Mark Floyd
President, Dealer Services
Joseph E. McClure
Executive Vice President, Chief Information Officer
Cheryl L. Miller
President, Consumer Services
Michael T. Miller
Executive Vice President, Chief Operating Officer
Preston A. Miller
Executive Vice President, Treasurer
Karl J. Reeb
Executive Vice President, Chief Administration Officer
Corporate Headquarters
801 Cherry Street
Suite 3900
Fort Worth, Texas 76102
817-302-7000
Annual Meeting
The annual meeting of the Company will be held on November 26, 2002, at 10:00
a.m. at the Fort Worth Club, 306 West Seventh Street, Fort Worth, Texas. All
shareholders are cordially invited to attend.
Investor Relations Information
For financial/investment data and general information about AmeriCredit Corp.,
write the Investor Relations Department at the above address or telephone
817-302-7009. Information about the Company may also be found at
www.americredit.com.
82
Transfer Agent and Registrar
Mellon Investor Services
85 Challenger Rd., Overpeck Centre
Ridgefield Park, NJ 07660-2104
800-635-9270
www.melloninvestor.com
Independent Accountants
PricewaterhouseCoopers LLP
301 Commerce Street, Suite 1900
Fort Worth, Texas 76102-4183
Form 10-K
Shareholders may obtain without charge a copy of the Company's annual report on
Form 10-K, as filed with the Securities and Exchange Commission, by writing the
Investor Relations Department at the corporate headquarters address or by
accessing Investor Information on the Company's website at www.americredit.com.
83