UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ___________________ Commission file number 1-10667 ------------------------------------------------ AmeriCredit Corp. - ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Texas 75-2291093 - ------------------------------ ------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 200 Bailey Avenue, Fort Worth, Texas 76107 - ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (817) 332-7000 - ------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- There were 63,882,481 shares of common stock, $.01 par value outstanding as of April 30, 1999. AMERICREDIT CORP. INDEX TO FORM 10-Q Part I. FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Consolidated Balance Sheets - March 31, 1999 and June 30, 1998................................. 3 Consolidated Statements of Income and Comprehensive Income - Three Months and Nine Months Ended March 31, 1999 and 1998.......................................... 4 Consolidated Statements of Cash Flows - Nine Months Ended March 31, 1999 and 1998........................ 5 Notes to Consolidated Financial Statements....................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................... 35 Part II. OTHER INFORMATION SIGNATURE................................................................. 37 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS AMERICREDIT CORP. Consolidated Balance Sheets (Unaudited, Dollars in Thousands) March 31, June 30, ASSETS 1999 1998 ---- ---- Cash and cash equivalents $ 36,846 $ 33,087 Receivables held for sale, net 415,421 342,853 Interest-only receivables from Trusts 173,643 131,694 Investments in Trust receivables 157,201 98,857 Restricted cash 82,809 55,758 Property and equipment, net 34,115 23,385 Other assets 37,947 28,037 --------- --------- Total assets $ 937,982 $ 713,671 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Warehouse credit facilities $ 255,531 $ 165,608 Senior notes 175,000 175,000 Other notes payable 12,759 6,410 Accrued taxes and expenses 72,396 47,132 Deferred income taxes 61,532 31,673 --------- --------- Total liabilities 577,218 425,823 --------- --------- Shareholders' equity: Preferred Stock, $.01 par value per share; 20,000,000 shares authorized, none issued Common stock, $.01 par value per share; 120,000,000 shares authorized; 70,790,686 and 69,272,948 shares issued 708 693 Additional paid-in capital 244,194 230,269 Accumulated other comprehensive income 13,319 7,234 Retained earnings 125,133 72,770 --------- --------- 383,354 310,966 Treasury stock, at cost (7,486,585 and 7,667,318 shares) (22,590) (23,118) --------- --------- Total shareholders' equity 360,764 287,848 --------- --------- Total liabilities and shareholders' equity $ 937,982 $ 713,671 ========= ========= The accompanying notes are an integral part of these consolidated financial statements 3 AMERICREDIT CORP. Consolidated Statements of Income and Comprehensive Income (Unaudited, Dollars in Thousands, Except Per Share Data) Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenue: Finance charge income $18,361 $13,862 $ 51,538 $40,052 Gain on sale of receivables 42,531 27,503 116,551 71,838 Servicing fee income 23,691 12,218 61,702 34,389 Other income 484 879 3,361 1,901 ------- ------ ------- ------- 85,067 54,462 233,152 148,180 ------- ------- ------- ------- Costs and expenses: Operating expenses 42,025 24,186 115,760 66,102 Provision for losses 2,286 1,791 6,589 5,546 Interest expense 9,041 6,928 25,660 18,973 ------- ------- ------- ------- 53,352 32,905 148,009 90,621 ------- ------- ------- ------- Income before income taxes 31,715 21,557 85,143 57,559 Income tax provision 12,210 8,299 32,780 22,159 ------- ------- ------- ------- Net income 19,505 13,258 52,363 35,400 ------ ------ ------- ------- Other comprehensive income: Unrealized gain on credit enhancement assets 2,778 (2,487) 9,895 (1,487) Less related income tax provision (1,070) 957 (3,810) 572 ------ ------ ------ ------ Comprehensive income $21,213 $11,728 $58,448 $34,485 ====== ====== ====== ====== Earnings per share: Basic $ .31 $ .22 $ .83 $ .59 ======= ======= ======= ======= Diluted $ .29 $ .20 $ .78 $ .55 ======= ======= ======= ======= Weighted average shares 63,187,789 60,293,708 62,872,858 59,732,984 ========== ========== ========== ========== Weighted average shares and assumed incremental shares 66,514,367 64,969,618 66,822,426 64,644,030 ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements 4 AMERICREDIT CORP. Consolidated Statements of Cash Flows (Unaudited, Dollars in Thousands) Nine Months Ended March 31, --------------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 52,363 $ 35,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,902 3,084 Provision for losses 6,589 5,546 Deferred income taxes 33,041 1,561 Non-cash servicing fee income (10,739) (9,246) Non-cash gain on sale of auto receivables (107,642) (64,378) Distributions from Trusts 35,182 27,083 Changes in assets and liabilities: Other assets (2,746) (6,162) Accrued taxes and expenses 25,264 18,274 ----------- ----------- Net cash provided by operating activities 38,214 11,162 ----------- ----------- Cash flows from investing activities: Purchases of auto receivables (1,983,758) (1,162,952) Originations of mortgage receivables (203,518) (94,537) Principal collections and recoveries on receivables 14,783 30,187 Net proceeds from sale of auto receivables 1,894,383 1,102,614 Net proceeds from sale of mortgage receivables 198,953 70,729 Initial deposits to restricted cash (57,250) (43,400) Return of deposits from restricted cash 23,000 Purchases of property and equipment (8,431) (5,971) Increase in other assets (7,387) (2,490) ----------- ----------- Net cash used by investing activities (129,225) (105,820) ----------- ----------- Cash flows from financing activities: Net change in warehouse credit facilities 89,923 51,983 Proceeds from issuance of senior notes 47,762 Payments on other notes payable (2,629) (13,857) Proceeds from issuance of common stock 7,476 11,837 ----------- ----------- Net cash provided by financing activities 94,770 97,725 ----------- ----------- Net increase in cash and cash equivalents 3,759 3,067 Cash and cash equivalents at beginning of period 33,087 6,027 ----------- ----------- Cash and cash equivalents at end of period $ 36,846 $ 9,094 =========== =========== The accompanying notes are an integral part of these consolidated financial statements 5 AMERICREDIT CORP. Notes to Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of AmeriCredit Corp. and its wholly-owned subsidiaries ("the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements as of March 31, 1999 and for the periods ended March 31, 1999 and 1998 are unaudited, but in management's opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Certain prior year amounts have been reclassified to conform to the current period presentation. The results for interim periods are not necessarily indicative of results for a full year. The interim period financial statements, including the notes thereto, are condensed and do not include all disclosures required by generally accepted accounting principles. These interim period financial statements should be read in conjunction with the Company's consolidated financial statements which are included in the Company's Annual Report on Form 10-K/A for the year ended June 30, 1998. The Company's Board of Directors approved a two for one stock split on August 6, 1998 which was effected in the form of a 100% stock dividend for shareholders of record on September 11, 1998 and paid on September 30, 1998. In connection with the stock split, $347,000 was transferred from retained earnings to common stock representing the par value of the additional shares issued. All share data for the periods presented, except shares authorized, have been adjusted to reflect the stock split on a retroactive basis. The Company adopted the requirements of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective July 1, 1998. SFAS 130 establishes standards for reporting comprehensive income and its components in a full set of financial statements. The new standard requires that all items that are required to be recognized under accounting standards as components of comprehensive income, including an amount representing total comprehensive income, be reported in a financial statement that is displayed with the same prominence as other financial statements. Pursuant to SFAS 130, the Company has reported comprehensive income in the accompanying Consolidated Statements of Income and Comprehensive Income. All prior periods presented have been restated to conform to the requirements of SFAS 130. 6 NOTE 2 - RESTATEMENT On January 14, 1999, the Company issued a press release reporting a restatement of its financial statements for the fiscal years ended June 30, 1998, 1997, and 1996 as well as for the first quarter of fiscal 1999. Interim periods in the fiscal years ended June 30, 1998, 1997 and 1996 were also restated. As required by the Financial Accounting Standards Board's ("FASB") Special Report, "A Guide to Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, Second Edition", dated December 1998, and related guidance set forth in statements made by the staff of the Securities and Exchange Commission ("SEC") on December 8, 1998, the Company retroactively changed its practice of measuring and accounting for credit enhancement assets to the cash-out method from the cash-in method. Initial deposits to restricted cash accounts and subsequent cash flows received by securitization trusts sponsored by the Company accumulate as credit enhancement assets until certain targeted levels are achieved, after which cash is distributed to the Company on an unrestricted basis. Under the cash-in method previously used by the Company, (i) the assumed discount period for measuring the present value of credit enhancement assets ended when cash flows were received by the securitization trusts and (ii) initial deposits to restricted cash accounts were recorded at face value. Under the cash-out method required by the FASB and SEC, the assumed discount period for measuring the present value of credit enhancement assets ends when cash, including return of the initial deposits, is distributed to the Company on an unrestricted basis. The change to the cash-out method results only in a difference in the timing of revenue recognition from a securitization and has no effect on the total cash flows of such transactions. While the total amount of revenue recognized over the term of a securitization transaction is the same under either method, the cash-out method results in (i) lower initial gains on the sale of receivables due to the longer discount period and (ii) higher subsequent servicing fee income from accretion of the additional cash-out discount. 7 NOTE 3 - RECEIVABLES HELD FOR SALE Receivables held for sale consist of the following (in thousands): March 31, June 30, 1999 1998 ---- ---- Auto receivables $400,722 $334,110 Less allowance for losses (10,549) (12,756) -------- -------- Auto receivables, net 390,173 321,354 Mortgage receivables 25,248 21,499 -------- -------- $415,421 $342,853 ======== ======== The Company has established an allowance for losses with respect to auto receivables held for sale to provide for potential credit losses on such receivables prior to their sale in a securitization transaction. A summary of the allowance for losses is as follows (in thousands): Three Months Ended Nine Months Ended March 31, March 31, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Balance at beginning of period $ 8,377 $11,350 $12,756 $12,946 Provision for losses 2,286 1,791 6,589 5,546 Acquisition fees 17,185 13,499 44,614 35,545 Allowance related to auto receivables sold to Trusts (15,014) (12,257) (47,702) (34,030) Net charge-offs (2,285) (1,904) (5,708) (7,528) ------ ------ ------- ------- Balance at end of period $10,549 $12,479 $10,549 $12,479 ====== ====== ====== ====== NOTE 4 - CREDIT ENHANCEMENT ASSETS As of March 31, 1999 and June 30, 1998, the Company was servicing $3,152.5 million and $1,968.4 million, respectively, of auto receivables which have been sold to certain special purpose financing trusts (the "Trusts"). The Company has retained an interest in these receivables in the form of credit enhancement assets. 8 Credit enhancement assets consist of the following (in thousands): March 31, June 30, 1999 1998 ---- ---- Interest-only receivables from Trusts $173,643 $131,694 Investments in Trust receivables 157,201 98,857 Restricted cash 82,809 55,758 ------- ------- $413,653 $286,309 ------- ------- ------- ------- A summary of credit enhancement assets is as follows (in thousands): Three Months Ended Nine Months Ended March 31, March 31, ------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Balance at beginning of period $381,701 $220,792 $286,309 $161,395 Non-cash gain on sale of auto receivables 37,239 28,144 107,642 64,378 Accretion of present value discount 9,196 5,470 24,139 13,646 Initial deposits from restricted cash 21,000 11,549 57,250 43,400 Return of deposits from restricted cash (23,000) (23,000) Change in unrealized gain 2,778 (2,487) 9,895 (1,487) Distributions from Trusts (10,261) (10,219) (35,182) (27,083) Permanent impairment write-down (5,000) (3,400) (13,400) (4,400) ------- ------- ------- ------ Balance at end of period $413,653 $249,849 $413,653 $249,849 ======= ======= ======= ======= A summary of the allowance for losses included as a component of the interest-only receivables is as follows (in thousands): Three Months Ended Nine Months Ended March 31, March 31, ------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Balance at beginning of period $ 256,599 $112,794 $179,359 $74,925 Assumptions for cumulative credit losses 73,251 46,874 204,441 116,192 Permanent impairment write-down 5,000 3,400 13,400 4,400 Net charge-offs (35,833) (20,941) (98,183) (53,390) ------- ------- ------- ------- Balance at end of period $ 299,017 $ 142,127 $299,017 $142,127 ------- ------- ------- ------- ------- ------- ------- ------- 9 NOTE 5 - WAREHOUSE CREDIT FACILITIES Warehouse credit facilities consist of the following (in thousands): March 31, June 30, 1999 1998 ---- ---- Bank lines of credit $ 603 Commercial paper facilities 233,661 $140,708 Mortgage facility 21,267 24,900 -------- -------- $255,531 $165,608 -------- -------- -------- -------- In September 1998, the Company renewed its funding agreement with an administrative agent on behalf of an institutionally managed commercial paper conduit and a group of banks and increased the amount of structured warehouse financing available under the agreement from $245 million to $505 million. Under the funding agreement, the Company transfers auto receivables to CP Funding Corp. ("CPFC"), a special purpose finance subsidiary of the Company, and CPFC in turn issues a note, collateralized by such auto receivables, to the agent. The agent provides funding under the note to CPFC pursuant to an advance formula and CPFC forwards the funds to the Company in consideration for the transfer of auto receivables. While CPFC is a consolidated subsidiary of the Company, CPFC is a separate legal entity and the auto receivables transferred to CPFC and the other assets of CPFC are legally owned by CPFC and not available to creditors of AmeriCredit Corp. or its other subsidiaries. Advances under the note bear interest at commercial paper, London Interbank Offered Rates ("LIBOR") or prime rates plus specified fees depending upon the source of funds provided by the agent to CPFC. The funding agreement, which expires in September 1999, contains various covenants requiring certain minimum financial ratios and results. Borrowings of $233,661,000 were outstanding under this agreement as of March 31, 1999. In March 1999, the Company entered into a funding agreement with an administrative agent on behalf of an institutionally managed commercial paper conduit and a bank under which up to $150 million of structured warehouse financing is available. Advances under the facility bear interest at commercial paper rates plus specified fees. The funding agreement, which expires in March 2000, contains various covenants requiring certain minimum financial ratios and results. There were no outstanding balances under this agreement as of March 31, 1999. In March 1999, the Company renewed its revolving credit agreement with a group of banks under which the Company may borrow up to $115 million, subject to a defined borrowing base. Borrowings under the credit agreement are collateralized by certain auto receivables and bear interest, based upon the Company's option, at either the prime rate or LIBOR plus 1.25%. The credit agreement, which expires in April 2000, contains various restrictive covenants 10 requiring certain minimum financial ratios and results and placing certain limitations on the incurrence of additional debt, capital expenditures, cash dividends and repurchase of common stock. There were no outstanding balances under the credit agreement as of March 31, 1999. In November 1998, the Company's Canadian subsidiary entered into a revolving credit agreement with a bank under which the Company may borrow up to (Cdn)$20 million, subject to a defined borrowing base. Borrowings under the credit facility are collateralized by certain Canadian auto receivables and bear interest at the Canadian prime rate. The credit agreement, which expires in November 1999, contains various restrictive covenants requiring certain minimum financial ratios and results and placing certain limitations on the incurrence of additional debt, capital expenditures, cash dividends and repurchase of common stock. Borrowings of (U.S.) $603,000 were outstanding under this agreement as of March 31, 1999. In February 1999, the Company renewed its mortgage warehouse facility with a bank under which the Company may borrow up to $75 million, subject to a defined borrowing base. Borrowings under the facility are collateralized by certain mortgage receivables and bear interest, based upon the Company's option, at either the prime rate or LIBOR plus 1.50%. The facility expires in July 1999. Borrowings of $21,267,000 were outstanding under this agreement as of March 31, 1999. NOTE 6 - SUPPLEMENTAL INFORMATION Cash payments for interest costs and income taxes consist of the following (in thousands): Nine Months Ended March 31, ----------------- 1999 1998 ---- ---- Interest costs (none capitalized) $29,237 $22,577 Income taxes (14,000) 14,520 During the nine months ended March 31, 1999 and 1998, the Company entered into lease agreements for property and equipment of $8,978,000 and $3,574,000, respectively. NOTE 7 - SUBSEQUENT EVENT In April 1999, the Company issued $200 million of senior notes which are due in April 2006. Interest on the notes is payable semi-annually at the rate of 9.875% per annum, commencing in October 1999. The notes, which are unsecured, may be redeemed at the option of the Company after April 2003 at a premium declining to par in April 2005. The Indenture pursuant to which the notes were issued contains restrictions including limitations on the Company's ability to 11 incur additional indebtedness other than certain secured indebtedness, pay cash dividends and repurchase common stock. NOTE 8 - GUARANTOR CONSOLIDATING FINANCIAL STATEMENTS The payment of principal, premium, if any, and interest on the Company's senior notes is guaranteed by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). The separate financial statements of the Subsidiary Guarantors are not included herein because the Subsidiary Guarantors are wholly-owned consolidated subsidiaries of the Company and are jointly, severally and unconditionally liable for the obligations represented by the senior notes. The Company believes that the condensed consolidating financial information for the Company, the combined Subsidiary Guarantors and the combined Non-Guarantor Subsidiaries provide information that is more meaningful in understanding the financial position of the Subsidiary Guarantors than separate financial statements of the Subsidiary Guarantors. Therefore, the separate financial statements of the Subsidiary Guarantors are not deemed material. The following supplemental schedules present consolidating financial information for (i) AmeriCredit Corp. (on a parent only basis), (ii) the combined Subsidiary Guarantors, (iii) the combined Non-Guarantor Subsidiaries, (iv) an elimination column for adjustments to arrive at the information for the Company and its subsidiaries on a consolidated basis and (v) the Company and its subsidiaries on a consolidated basis. Investments in subsidiaries are accounted for by the parent company on the equity method for purposes of the presentation set forth below. Earnings of subsidiaries are therefore reflected in the parent company's investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions. 12 AmeriCredit Corp. Consolidating Balance Sheet March 31, 1999 (Unaudited, Dollars in Thousands) AmeriCredit Corp. Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ ASSETS Cash and cash equivalents $ $ 30,955 $ 5,891 $ $ 36,846 Receivables held for sale, net 50,354 365,067 415,421 Interest-only receivables from Trusts (661) 1,730 172,574 173,643 Investments in Trust receivables 564 156,637 157,201 Restricted cash (87) 82,896 82,809 Property and equipment, net 34,115 34,115 Other assets 7,145 23,686 7,116 37,947 Due (to) from affiliates 347,248 (148,776) (198,472) Investment in affiliates 173,331 13,921 2 (187,254) -------- --------- --------- --------- -------- Total assets $527,063 $ 6,462 $ 591,711 $(187,254) $937,982 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Warehouse credit facilities $ $ 21,870 $ 233,661 $ $255,531 Senior notes 175,000 175,000 Other notes payable 12,737 22 12,759 Accrued taxes and expenses 4,979 66,873 544 72,396 Deferred income taxes (26,417) (35,707) 123,656 61,532 -------- --------- --------- --------- -------- Total liabilities 166,299 53,058 357,861 577,218 -------- --------- --------- --------- -------- Shareholders' equity: Common stock 708 203 3 (206) 708 Additional paid-in capital 244,194 108,485 13,921 (122,406) 244,194 Accumulated other comprehensive income 13,319 13,319 (13,319) 13,319 Retained earnings 125,133 (155,284) 206,607 (51,323) 125,133 -------- --------- --------- --------- -------- 383,354 (46,596) 233,850 (187,254) 383,354 Treasury stock (22,590) (22,590) -------- --------- --------- --------- -------- Total shareholders' equity 360,764 (46,596) 233,850 (187,254) 360,764 -------- --------- --------- --------- -------- Total liabilities and shareholders' equity $527,063 $ 6,462 $ 591,711 $(187,254) $937,982 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- 13 AmeriCredit Corp. Consolidating Balance Sheet June 30, 1998 (Unaudited, Dollars in Thousands) AmeriCredit Corp. Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ ASSETS Cash and cash equivalents $ $ 30,157 $ 2,930 $ $ 33,087 Receivables held for sale, net 178,219 164,634 342,853 Interest-only receivables (2,151) 3,623 130,222 131,694 from Trusts Investments in Trust receivables 2,109 96,748 98,857 Restricted cash 55,758 55,758 Property and equipment, net 175 23,210 23,385 Other assets 8,911 13,003 6,123 28,037 Due (to) from affiliates 330,924 (226,892) (104,032) Investment in affiliates 110,623 13,921 2 (124,546) -------- --------- --------- --------- -------- Total assets $448,482 $ 37,350 $ 352,385 $(124,546) $713,671 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Warehouse credit facilities $ $ 24,900 $ 140,708 $ $165,608 Senior notes 175,000 175,000 Other notes payable 6,384 26 6,410 Accrued taxes and expenses (2,280) 53,950 (4,538) 47,132 Deferred income taxes (18,470) (16,637) 66,780 31,673 -------- --------- --------- --------- -------- Total liabilities 160,634 62,239 202,950 425,823 -------- --------- --------- --------- -------- Shareholders' equity: Common stock 693 203 3 (206) 693 Additional paid-in capital 230,269 108,336 13,921 (122,257) 230,269 Accumulated other comprehensive income 7,234 7,234 (7,234) 7,234 Retained earnings 72,770 (133,428) 128,277 5,151 72,770 -------- --------- --------- --------- -------- 310,966 (24,889) 149,435 (124,546) 310,966 Treasury stock (23,118) (23,118) -------- --------- --------- --------- -------- Total shareholders'equity 287,848 (24,889) 149,435 (124,546) 287,848 -------- --------- --------- --------- -------- Total liabilities and shareholders' equity $448,482 $ 37,350 $ 352,385 $(124,546) $713,671 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- 14 AmeriCredit Corp. Consolidating Income Statement Nine Months Ended March 31, 1999 (Unaudited, Dollars in Thousands) AmeriCredit Corp. Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ Revenue: Finance charge income $ $ 27,503 $ 24,035 $ $ 51,538 Gain on sale of receivables (6,394) 3,202 119,743 116,551 Servicing fee income 80,403 7,975 (26,676) 61,702 Other income 22,134 2,657 584 (22,014) 3,361 Equity in income of affiliates 56,474 (56,474) -------- --------- --------- --------- -------- 72,214 113,765 152,337 (105,164) 233,152 -------- --------- --------- --------- -------- Costs and expenses: Operating expenses 7,513 134,886 37 (26,676) 115,760 Provision for losses 2,471 4,118 6,589 Interest expense 13,566 16,918 17,190 (22,014) 25,660 -------- --------- --------- --------- -------- 21,079 154,275 21,345 (48,690) 148,009 -------- --------- --------- --------- -------- Income before income taxes 51,135 (40,510) 130,992 (56,474) 85,143 Income tax provision (1,228) (18,654) 52,662 32,780 -------- --------- --------- --------- -------- Net income $ 52,363 $ (21,856) $ 78,330 $ (56,474) $ 52,363 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- 15 AmeriCredit Corp. Consolidating Income Statement Nine Months Ended March 31, 1998 (Unaudited, Dollars in Thousands) AmeriCredit Corp. Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ Revenue: Finance charge income $ $ 29,421 $ 10,631 $ $ 40,052 Gain on sale of receivables (5,199) 1,653 75,384 71,838 Servicing fee income 65,131 9,513 (40,255) 34,389 Other income 22,335 965 627 (22,026) 1,901 Equity in income of affiliates 36,111 (36,111) -------- --------- --------- --------- -------- 53,247 97,170 96,155 (98,392) 148,180 -------- --------- --------- --------- -------- Costs and expenses: Operating expenses 7,801 98,566 (10) (40,255) 66,102 Provision for losses 5,546 5,546 Interest expense 10,325 17,923 12,751 (22,026) 18,973 -------- --------- --------- --------- -------- 18,126 122,035 12,741 (62,281) 90,621 -------- --------- --------- --------- -------- Income before income taxes 35,121 (24,865) 83,414 (36,111) 57,559 Income tax provision (279) (7,991) 30,429 22,159 -------- --------- --------- --------- -------- Net income $ 35,400 $ (16,874) $ 52,985 $ (36,111) $ 35,400 -------- --------- --------- --------- -------- -------- --------- --------- --------- -------- 16 AmeriCredit Corp. Consolidating Statement of Cash Flow Nine Months Ended March 31, 1999 (Unaudited, Dollars in Thousands) AmeriCredit Corp Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ Cash flow from operating activities: Net income $ 52,363 $ (21,856) $ 78,330 $ (56,474) $ 52,363 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41 6,861 6,902 Provision for losses 2,471 4,118 6,589 Deferred income taxes (955) (19,070) 53,066 33,041 Non-cash servicing fee income (10,739) (10,739) Non-cash gain on sale of auto receivables (107,642) (107,642) Distributions from Trusts 35,182 35,182 Equity in income of affiliates (56,474) 56,474 Changes in assets and liabilities: Other assets 1,766 (6,811) 2,299 (2,746) Accrued taxes and expenses 7,259 12,923 5,082 25,264 ----------- ----------- ----------- ----------- ----------- Net cash provided by operating activities 4,000 (25,482) 59,696 38,214 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of auto receivables (1,983,758) (2,121,174) 2,121,174 (1,983,758) Originations of mortgage receivables (203,518) (203,518) Principal collections and recoveries on receivables (6,744) 21,527 14,783 Net proceeds from sale of auto receivables 2,121,174 1,894,383 (2,121,174) 1,894,383 Net proceeds from sale of mortgage receivables 198,953 198,953 Initial deposits to restricted cash (57,250) (57,250) Return of deposits from restricted cash 23,000 23,000 Purchases of property and equipment 134 (8,565) (8,431) Increase in other assets (4,094) (3,293) (7,387) ----------- ----------- ----------- ----------- ----------- Net cash used by investing activities 134 113,448 (242,807) (129,225) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net change in warehouse credit facilities (3,030) 92,953 89,923 Payments on other notes payable (2,625) (4) (2,629) Proceeds from issuance of common stock 7,327 149 7,476 Net change in due (to) from affiliates (8,836) (84,283) 93,119 ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities (4,134) (87,168) 186,072 94,770 ----------- ----------- ----------- ----------- ----------- Net increase in cash and cash equivalents 798 2,961 3,759 Cash and cash equivalents at beginning of period 30,157 2,930 33,087 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ $ 30,955 $ 5,891 $ $ 36,846 =========== =========== =========== =========== =========== 17 AmeriCredit Corp. Consolidating Statement of Cash Flow Nine Months Ended March 31, 1998 (Unaudited, Dollars in Thousands) AmeriCredit Corp Guarantors Non-Guarantors Eliminations Consolidated ----------- ---------- -------------- ------------ ------------ Cash flow from operating activities: Net income $ 35,400 $ (16,874) $ 52,985 $ (36,111) $ 35,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35 3,049 3,084 Provision for losses 5,546 5,546 Deferred income taxes (14,830) (8,298) 24,689 1,561 Non-cash servicing fee income (9,246) (9,246) Non-cash gain on sale of auto receivables (64,378) (64,378) Distributions from Trusts 27,083 27,083 Equity in income of affiliates (36,111) 36,111 Changes in assets and liabilities: Other assets (953) (2,216) (2,993) (6,162) Accrued taxes and expenses 473 16,359 1,442 18,274 -------- ----------- ----------- ----------- ----------- Net cash provided by operating activities (15,986) (2,434) 29,582 11,162 -------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchases of auto receivables (1,162,952) (1,356,973) 1,356,973 (1,162,952) Originations of mortgage receivables (94,537) (94,537) Principal collections and recoveries on receivables (23,328) 53,515 30,187 Net proceeds from sale of auto receivables 1,356,973 1,102,614 (1,356,973) 1,102,614 Net proceeds from sale of mortgage receivables 70,729 70,729 Initial deposits to restricted cash (43,400) (43,400) Purchases of property and equipment (53) (5,918) (5,971) Net change in investment in affiliates (9,998) (3,921) (2) 13,921 Increase in other assets (2,490) (2,490) -------- ----------- ----------- ----------- ----------- Net cash used by investing activities (10,051) 137,046 (246,736) 13,921 (105,820) -------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net change in warehouse credit facilities (45,609) 97,592 51,983 Proceeds from issuance of senior notes 47,762 47,762 Payments on other notes payable (888) (5) (12,964) (13,857) Proceeds from issuance of common stock 11,837 13,921 (13,921) 11,837 Net change in due (to) from affiliates (32,674) (85,430) 118,104 -------- ----------- ----------- ----------- ----------- Net cash provided by financing activities 26,037 (131,044) 216,653 (13,921) 97,725 -------- ----------- ----------- ----------- ----------- Net increase in cash and cash equivalents 3,568 (501) 3,067 Cash and cash equivalents at beginning of period 3,988 2,039 6,027 -------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ $ 7,556 $ 1,538 $ $ 9,094 ======== =========== =========== =========== =========== 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company generates earnings and cash flow primarily from the purchase, securitization and servicing of auto receivables. The Company purchases auto finance contracts from franchised and select independent automobile dealerships. To fund the acquisition of receivables prior to securitization, the Company utilizes borrowings under its warehouse credit facilities. The Company generates 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 sells receivables to securitization trusts ("Trusts") that, in turn, sell asset-backed securities to investors. By securitizing its receivables, the Company is able to lock in the gross interest rate spread between the yield on such receivables and the interest rate payable on the asset-backed securities. 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 to secure financial guaranty insurance policies issued by an insurance company to protect investors in the asset-backed securities from losses. Once predetermined credit enhancement requirements are reached and maintained, excess cash flows are distributed to the Company. In addition to excess cash flows, the Company earns monthly base servicing fee income of 2.25% per annum on the outstanding principal balance of receivables securitized ("serviced receivables"). In November 1996, the Company acquired AmeriCredit Mortgage Services ("AMS"), which originates and sells mortgage loans. Receivables originated in this business are referred to as mortgage receivables. Such receivables are generally packaged and sold for cash on a servicing released whole-loan basis. The Company recognizes a gain at the time of sale. 19 RESULTS OF OPERATIONS Three Months Ended March 31, 1999 as compared to - ------------------------------------------------ Three Months Ended March 31, 1998 --------------------------------- REVENUE: The Company's average managed receivables outstanding consisted of the following (in thousands): Three Months Ended March 31, ---------------- 1999 1998 ---- ---- Auto: Held for sale $ 308,375 $ 242,002 Serviced 2,970,569 1,500,798 --------- --------- 3,278,944 1,742,800 Mortgage 29,290 20,975 --------- --------- $3,308,234 $1,763,775 ========== ========== Average managed receivables outstanding increased by 88% as a result of higher loan purchase volume. The Company purchased $766.8 million of auto loans during the three months ended March 31, 1999, compared to purchases of $480.5 million during the three months ended March 31, 1998. This growth resulted from higher loan production at branches open during both periods as well as expansion of the Company's loan production capacity. The Company operated 168 auto lending branch offices as of March 31, 1999, compared to 119 as of March 31, 1998. The Company originated $79.1 million of mortgage loans during the three months ended March 31, 1999, compared to $43.0 million during the three months ended March 31, 1998. Finance charge income consisted of the following (in thousands): Three Months Ended March 31, --------------- 1999 1998 ---- ---- Auto $ 17,652 $ 13,387 Mortgage 709 475 -------- -------- $ 18,361 $ 13,862 ======== ======== The increase in finance charge income is due primarily to an increase of 27% in average auto receivables held for sale in the three months ended March 31, 1999 versus the three months ended March 31, 1998. In addition, the Company's effective yield on its auto receivables held for sale increased to 23.2% for the three months ended March 31, 1999 from 22.4% for the three months ended March 31, 1998. The effective yield is higher than the contractual rates of the Company's auto finance contracts as a result of finance charge income 20 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 rose for the three months ended March 31, 1999 due to increased auto loan purchases and correspondingly higher levels of finance charges earned between the origination date and funding date. The gain on sale of receivables consisted of the following (in thousands): Three Months Ended March 31, --------------- 1999 1998 ---- ---- Auto $40,514 $26,737 Mortgage 2,017 766 ------- ------- $42,531 $27,503 ======= ======= The increase in gain on sale of auto receivables resulted from the sale of $700.0 million of receivables in the three months ended March 31, 1999 as compared to $435.0 million of receivables sold in the three months ended March 31, 1998. The gain as a percentage of the sales proceeds decreased to 5.8% for the three months ended March 31, 1999 from 6.2% for the three months ended March 31, 1998 primarily as a result of lower gross interest rate spreads. Significant assumptions used in determining the gain on sale of auto receivables were as follows: Three Months Ended March 31, ---------------- 1999 1998 ---- ---- Cumulative credit losses 10.5% 10.8% Discount rate used to estimate present value: Interest-only receivables from Trusts 12.0% 12.0% Investments in Trust receivables 7.8% 7.8% Restricted cash 7.8% 7.8% The discount rates used to estimate the present value of credit enhancement assets are based on the relative risk of each asset type. Interest-only receivables represent estimated future net cash flows in the Trusts, which involves a greater degree of risk than investments in Trust receivables and restricted cash. Investments in Trust receivables and restricted cash represent assets currently held by the trustee and are senior to interest-only receivables for credit enhancement purposes. The increase in the gain on sale of mortgage receivables resulted from the sale of $77.5 million of receivables in the three months ended March 31, 1999, compared to $22.6 million of receivables sold in the three months ended March 31, 1998. The average premium received on sales decreased to 2.6% for the 21 three months ended March 31, 1999 from 3.4% for the three months ended March 31, 1998 because of lower prices for non-conforming mortgage loans in the secondary markets. Servicing fee income increased to $23.7 million for the three months ended March 31, 1999, as compared to $12.2 million for the three months ended March 31, 1998. Servicing fee income as a percentage of average serviced auto receivables decreased to 3.2% for the three months ended March 31, 1999 from 3.3% for the three months ended March 31, 1998 as a result of charges to increase credit loss reserves. 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. Servicing fee income for the three months ended March 31, 1999 and 1998 also includes charges of $5.0 million and $3.4 million, respectively, to increase credit loss reserves related to certain of the Company's fiscal 1997 and 1996 securitization transactions since the Company's current estimates of cumulative credit losses for these transactions exceed the original estimates. The Company has raised the assumptions for cumulative credit losses for securitization transactions completed subsequent to fiscal 1997 compared to assumptions used for transactions completed in fiscal 1997 and 1996. The growth in servicing fee income exclusive of the aforementioned charge is attributable to the increase in average serviced auto receivables outstanding for the three months ended March 31, 1999 compared to the three months ended March 31, 1998. COSTS AND EXPENSES: Operating expenses as an annualized percentage of average managed receivables outstanding decreased to 5.2% (4.9% excluding operating expenses of $2.4 million related to the mortgage business) for the three months ended March 31, 1999, compared to 5.6% (5.3% excluding operating expenses of $1.3 million related to the mortgage business) for the three months ended March 31, 1998. 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 $17.8 million, or 74%, primarily due to the addition of auto lending branch offices and management and auto loan processing and servicing staff. The provision for losses increased to $2.3 million for the three months ended March 31, 1999 from $1.8 million for the three months ended March 31, 1998 due to higher average amounts of auto receivables held for sale. As a percentage of average auto receivables held for sale, the provision for losses was 3.0% for the three months ended March 31, 1999 and 1998, respectively. Interest expense increased to $9.0 million for the three months ended March 31, 1999 from $6.9 million for the three months ended March 31, 1998 due to higher debt levels. Average debt outstanding was $447.6 million and $300.5 million for the three months ended March 31, 1999 and 1998, respectively. The Company's effective rate of interest paid on its debt decreased to 8.2% from 9.4% as a result of larger amounts of debt outstanding under the Company's 22 warehouse credit facilities for the three months ended March 31, 1999. Interest rates on the warehouse credit facilities are lower than rates on the senior notes. The Company's effective income tax rate was 38.5% for the three months ended March 31, 1999 and 1998. Nine Months Ended March 31, 1999 as compared to - ----------------------------------------------- Nine Months Ended March 31, 1998 -------------------------------- REVENUE: The Company's average managed receivables outstanding consisted of the following (in thousands): Nine Months Ended March 31, -------------- 1999 1998 ---- ---- Auto: Held for sale $ 292,629 $ 244,218 Serviced 2,600,123 1,251,566 ---------- ---------- 2,892,752 1,495,784 Mortgage 24,903 14,635 ---------- ---------- $2,917,655 $1,510,419 ========== ========== Average managed receivables outstanding increased by 93% as a result of higher loan purchase volume. The Company purchased $1,990.9 million of auto loans during the nine months ended March 31, 1999, compared to purchases of $1,176.7 million during the nine months ended March 31, 1998. This growth resulted from higher loan production at branches open during both periods as well as expansion of the Company's loan production capacity. The Company operated 168 auto lending branch offices as of March 31, 1999, compared to 119 as of March 31, 1998. The Company originated $203.5 million of mortgage loans during the nine months ended March 31, 1999, compared to $94.5 million during the nine months ended March 31, 1998. Finance charge income consisted of the following (in thousands): Nine Months Ended March 31, --------------- 1999 1998 ---- ---- Auto $ 49,798 $ 39,032 Mortgage 1,740 1,020 -------- -------- $ 51,538 $ 40,052 ======== ======== 23 The increase in finance charge income is due primarily to an increase of 20% in average auto receivables held for sale in the nine months ended March 31, 1999 versus the nine months ended March 31, 1998. In addition, the Company's effective yield on its auto receivables held for sale increased to 22.7% for the nine months ended March 31, 1999 from 21.3% for the nine months ended March 31, 1998. 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 rose for the nine months ended March 31, 1999 due to increased auto loan purchases and correspondingly higher levels of finance charges earned between the origination date and funding date. The gain on sale of receivables consisted of the following (in thousands): Nine Months Ended March 31, -------------- 1999 1998 ---- ---- Auto $111,452 $68,828 Mortgage 5,099 3,010 -------- ------- $116,551 $71,838 ======== ======= The increase in gain on sale of auto receivables resulted from the sale of $1,920.0 million of receivables in the nine months ended March 31, 1999 as compared to $1,117.5 million of receivables sold in the nine months ended March 31, 1998. The gain as a percentage of the sales proceeds decreased to 5.8% for the nine months ended March 31, 1999 from 6.2% for the nine months ended March 31, 1998 primarily as a result of lower gross interest rate spreads. Significant assumptions used in determining the gain on sale of auto receivables were as follows: Nine Months Ended March 31, --------------- 1999 1998 ---- ---- Cumulative credit losses 10.6% 10.4% Discount rate used to estimate present value: Interest-only receivables from Trusts 12.0% 12.0% Investments in Trust receivables 7.8% 7.8% Restricted cash 7.8% 7.8% The increase in the gain on sale of mortgage receivables resulted from the sale of $199.0 million of receivables in the nine months ended March 31, 1999, compared to $70.7 million of receivables sold in the nine months ended March 31, 1998. The average premium received on sales decreased to 2.6% for the nine months ended March 31, 1999 from 4.3% for the nine months ended March 31, 1998 24 because of lower prices for non-conforming mortgage loans in the secondary markets. Servicing fee income increased to $61.7 million for the nine months ended March 31, 1999, as compared to $34.4 million for the nine months ended March 31, 1998. Servicing fee income as a percentage of average serviced auto receivables decreased to 3.2% for the nine months ended March 31, 1999 from 3.7% for the nine months ended March 31, 1998 as a result of charges to increase credit loss reserves. 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. Servicing fee income for the nine months ended March 31, 1999 and 1998 also includes charges of $13.4 million and $4.4 million, respectively, to increase credit loss reserves related to certain of the Company's fiscal 1997 and 1996 securitization transactions since the Company's current estimates of cumulative credit losses for these transactions exceed the original estimates. The Company has raised the assumptions for cumulative credit losses for securitization transactions completed subsequent to fiscal 1997 compared to assumptions used for transactions completed in fiscal 1997 and 1996. The growth in servicing fee income exclusive of the aforementioned charge is attributable to the increase in average serviced auto receivables outstanding for the nine months ended March 31, 1999 compared to the nine months ended March 31, 1998. COSTS AND EXPENSES: Operating expenses as an annualized percentage of average managed receivables outstanding decreased to 5.3% (5.0% excluding operating expenses of $6.7 million related to the mortgage business) for the nine months ended March 31, 1999, compared to 5.9% (5.5% excluding operating expenses of $3.9 million related to the mortgage business) for the nine months ended March 31, 1998. 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 $49.7 million, or 75%, primarily due to the addition of auto lending branch offices and management and auto loan processing and servicing staff. The provision for losses increased to $6.6 million for the nine months ended March 31, 1999 from $5.5 million for the nine months ended March 31, 1998 due to higher average amounts of auto receivables held for sale. As a percentage of average auto receivables held for sale, the provision for losses was 3.0% for the nine months ended March 31, 1999 and 1998, respectively. Interest expense increased to $25.7 million for the nine months ended March 31, 1999 from $19.0 million for the nine months ended March 31, 1998 due to higher debt levels. Average debt outstanding was $396.0 million and $271.7 million for the nine months ended March 31, 1999 and 1998, respectively. The Company's effective rate of interest paid on its debt decreased to 8.6% from 9.3% as a result of larger amounts of debt outstanding under the Company's warehouse credit facilities for the nine months ended March 31, 1999. Interest 25 rates on the warehouse credit facilities are lower than rates on the senior notes. The Company's effective income tax rate was 38.5% for the nine months ended March 31, 1999 and 1998. PRO FORMA "PORTFOLIO-BASED" EARNINGS DATA In addition to reporting results of operations in accordance with generally accepted accounting principles ("GAAP"), the Company has elected to present pro-forma results of operations which treat securitization transactions as financings rather than sales of receivables. The Company refers to this presentation as pro-forma "portfolio based" earnings data. In its consolidated financial statements prepared in accordance with GAAP, the Company records a gain on the sale of receivables in securitization transactions primarily representing the present value of estimated future net cash flows related to the receivables sold. Future net cash flows consist of finance charges and fees to be collected on the receivables less interest payable on the asset-backed securities, credit losses and expenses of the securitization trust. The Company also earns servicing fees for managing the receivables sold. The pro forma "portfolio-based" earnings data presents the Company's operating results under the assumption that securitization transactions are financings and no gain on sale or servicing fee income is recognized. Instead, finance charges and fees are recognized over the life of the securitized receivables as accrued and interest and other costs related to the asset-backed securities are also recognized as accrued. Credit losses are recorded as incurred. While the pro forma "portfolio-based" earnings data does not purport to present the Company's operating results in accordance with GAAP, the Company believes such presentation provides another measure for assessing the Company's performance. 26 The pro forma "portfolio-based" earnings data are as follows (in thousands): Three Months Ended Nine Months Ended March 31, March 31, -------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Finance charge, fee and other income $ 160,312 $ 89,136 $ 431,346 $ 231,966 Funding costs (55,284) (32,193) (151,166) (82,719) ------- ------- ------- ------- Net margin 105,028 56,943 280,180 149,247 Operating expenses (42,025) (24,186) (115,760) (66,102) Credit losses (38,118) (22,845) (103,891) (60,918) ------- ------- ------- ------- Pre-tax "portfolio-based" income 24,885 9,912 60,529 22,227 Income taxes (9,581) (3,816) (23,304) (8,557) ------- ------- ------- ------ Net "portfolio-based" income $ 15,304 $ 6,096 $ 37,225 $ 13,670 ========= ======== ======== ======== Diluted "portfolio-based" earnings per share $ 0.23 $ 0.09 $ 0.56 $ 0.21 ========= ======== ======== ======== CREDIT QUALITY The Company provides financing in relatively high-risk markets, and therefore, charge-offs are anticipated. The Company records a periodic provision for losses as a charge to operations and a related allowance for losses in the consolidated balance sheets as a reserve against estimated losses which may occur in the receivables held for sale portfolio prior to the sale of such receivables in securitization transactions. The Company typically purchases individual finance contracts for a non-refundable acquisition fee on a non-recourse basis. Such acquisition fees are also recorded in the consolidated balance sheets as an allowance for losses. When the Company sells auto receivables to the Trusts, the calculation of the gain on sale of receivables is reduced by an estimate of cumulative credit losses expected over the life of the auto receivables sold. The Company sells mortgage receivables for cash on a servicing released, whole-loan basis. Such receivables are generally held by the Company for less than 90 days. Accordingly, no allowance for losses is provided by the Company for the mortgage receivables. The Company reviews static pool 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 assumptions for cumulative credit losses, provision for losses and allowance for losses. Although the Company uses many resources to 27 assess the adequacy of loss reserves, there is no precise method for estimating the ultimate losses in the receivables portfolio. The following table presents certain data related to the receivables portfolio (dollars in thousands): March 31, 1999 ------------------------------------------------------- Held for Sale --------------------- Auto Managed Auto Auto Mortgage Total Serviced Portfolio (2) ---- -------- ----- -------- ------------- Principal amount of receivables $400,722 $ 25,248 $425,970 $3,152,486 $3,553,208 ========== ========== Allowance for losses (10,549) (10,549) $ (299,017)(1) $(309,566) --------- --------- --------- ========== ========== Receivables, net $390,173 $25,248 $415,421 ========== ========== ========= Number of outstanding contracts 30,495 279 290,368 320,863 ========== ========= ========== ========== Average amount of outstanding contract (principal amount) (in dollars) $ 13,141 $ 90,495 $ 10,857 $ 11,074 ========== ========== ========== ========== Allowance for losses as a percentage of receivables 2.6% 9.5% 8.7% ========== ========== ========== (1) The allowance for losses related to serviced auto receivables is netted against interest-only receivables from Trusts in the Company's consolidated balance sheets. (2) Includes auto receivables only. 28 The following is a summary of managed auto receivables which are (i) more than 30 days delinquent, but not in repossession, and (ii) in repossession (dollars in thousands): March 31, March 31, 1999 1998 ---- ---- Amount Percent Amount Percent ------ ------- ------ ------- Delinquent contracts: 31 to 60 days $220,022 6.2% $102,421 5.4% Greater than 60 days 80,668 2.3 50,653 2.6 -------- ---- -------- ---- 300,690 8.5 153,074 8.0 In repossession 31,431 0.9 23,274 1.2 -------- ----- -------- ---- $332,121 9.4% $176,348 9.2% ======== ===== ======== ===== 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 by paying a fee (approximately the interest portion of the payment deferred). Contracts receiving a payment deferral as a quarterly percentage of average managed auto receivables outstanding were 4.6% for the three months ended March 31, 1999 and 1998 and 4.6% and 4.5% for the nine months ended March 31, 1999 and 1998, respectively. The Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio. The following table presents charge-off data with respect to the Company's managed auto receivables portfolio (dollars in thousands): Three Months Ended Nine Months Ended March 31, March 31, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net charge-offs: Held for sale $ 2,285 $ 1,904 $ 5,708 $ 7,528 Serviced 35,833 20,941 98,183 53,390 ------- ------- -------- ------- $38,118 $22,845 $103,891 $60,918 ======= ======= ======== ======= Net charge-offs as an annualized percentage of average managed auto receivables outstanding 4.7% 5.3% 4.8% 5.4% === === === === Net recoveries as a percentage of gross repossession charge-offs 53.6% 50.0% 51.4% 50.0% ==== ==== ==== ==== Delinquency and charge-off ratios typically fluctuate over time as a portfolio matures. Accordingly, the delinquency and charge-off data above is not 29 necessarily indicative of delinquency and charge-off experience that could be expected for a portfolio with a different level of seasoning. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows are summarized as follows (in thousands): Nine Months Ended March 31, ------------- 1999 1998 ---- ---- Operating activities $ 38,214 $ 11,162 Investing activities (129,225) (105,820) Financing activities 94,770 97,725 ---------- ---------- Net increase in cash and cash equivalents $ 3,759 $ 3,067 ========== ========== The Company's primary sources of cash have been cash flows from operating activities, including excess cash flow distributions from the Trusts, borrowings under its warehouse credit facilities and sales of auto receivables to Trusts in securitization transactions. The Company's primary uses of cash have been purchases and originations of receivables and funding credit enhancement requirements for securitization transactions. The Company purchased $1,990.9 million and $1,176.7 million of auto finance contracts during the nine months ended March 31, 1999 and 1998, respectively, requiring cash of $1,983.8 million and $1,163.0 million, respectively, net of acquisition fees and other items. These purchases were funded initially utilizing warehouse credit facilities and subsequently through the sale of auto receivables in securitization transactions. In September 1998, the Company renewed its funding agreement with an administrative agent on behalf of an institutionally managed commercial paper conduit and a group of banks and increased the amount of structured warehouse financing available under the agreement from $245 million to $505 million. The Company utilizes this facility to fund auto receivables pending securitization. A total of $233.7 million was outstanding under this facility as of March 31, 1999. The facility matures in September 1999. In March 1999, the Company entered into a funding agreement with an administrative agent on behalf of an institutionally managed commercial paper conduit and a bank under which up to $150 million of structured warehouse financing is available. The Company utilizes this facility to fund auto receivables pending securitization. There were no outstanding balances under this agreement as of March 31, 1999. The facility matures in March 2000. In March 1999, the Company renewed its revolving credit agreement with a group of banks under which the Company may borrow up to $115 million, subject to a defined borrowing base. The Company utilizes the facility to fund its auto 30 lending activities and daily operations. The facility matures in March 2000. There were no outstanding balances under the credit agreement as of March 31, 1999. In February 1999, the Company renewed its mortgage warehouse facility with a bank under which the Company may borrow up to $75 million, subject to a defined borrowing base, to fund mortgage loan originations. The facility expires in July 1999. A total of $21.3 million was outstanding under the mortgage facility as of March 31, 1999. As is customary in the Company's industry, 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 is unable to renew these facilities on acceptable terms, it could have a material adverse effect on the Company's financial position, results of operations and liquidity. The Company has completed sixteen auto receivables securitization transactions through March 31, 1999. The proceeds from the transactions were primarily used to repay borrowings outstanding under the Company's warehouse credit facilities. A summary of these transactions is as follows: Original Balance at Amount March 31, 1999 Transaction Date (in millions) (in millions) - ----------- ---- ------------- ------------- 1994-A December 1994 $ 51.0 Paid in full 1995-A June 1995 99.2 Paid in full 1995-B December 1995 65.0 Paid in full 1996-A March 1996 89.4 $ 8.6 1996-B May 1996 115.9 18.7 1996-C August 1996 175.0 26.5 1996-D November 1996 200.0 54.3 1997-A March 1997 225.0 76.4 1997-B May 1997 250.0 98.4 1997-C August 1997 325.0 153.7 1997-D November 1997 400.0 225.4 1998-A February 1998 425.0 272.0 1998-B May 1998 525.0 376.0 1998-C August 1998 575.0 463.9 1998-D November 1998 625.0 553.3 1999-A February 1999 700.0 675.4 ----- ----- $4,845.5 $3,002.6 ======= ======= In connection with securitization transactions, the Company is required to fund certain credit enhancement levels set by the insurer of 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 31 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 overcolleratization in the Trusts. When the credit enhancement levels reach specified percentages of the Trust's pool of receivables, excess cash flows are distributed to the Company. Initial deposits to restricted cash accounts were $57.3 million and $43.4 million for the nine months ended March 31, 1999 and 1998, respectively. Excess cash flows distributed to the Company were $35.2 million and $27.1 million for the nine months ended March 31, 1999 and 1998, respectively. In addition, the Company received $23.0 million representing a return of deposits to restricted cash accounts during the nine months ended March 31, 1999. Certain agreements with the insurer provide that if delinquency, default and net loss ratios in a Trust's pool of receivables exceed certain targets, the specified credit enhancement levels would be increased. As of March 31, 1999, none of the Company's securitizations had delinquency, default and net loss ratios in excess of the targeted levels. The Company operated 168 auto lending branch offices as of March 31, 1999 and plans to open a minimum of 6 additional branches through the remainder of fiscal 1999. The Company may also expand loan production capacity at existing auto lending branch offices where appropriate. While the Company has been able to establish and grow its finance businesses thus far, there can be no assurance that future expansion will be successful due to competitive, regulatory, market, economic or other factors. As of March 31, 1999, the Company had $36.8 million in cash and cash equivalents. The Company also had available borrowing capacity of $76.3 million under its bank credit agreement pursuant to the borrowing base requirement of such facility. In April 1999, the Company issued $200 million of 9.875% Senior Notes which are due in April 2006. Interest on the notes is payable semi-annually commencing in October 1999. The notes, which are unsecured, may be redeemed at the option of the company after April 2003 at a premium declining to par in April 2005. The Company estimates that it will require additional external capital for fiscal 1999 in addition to existing capital resources in order to fund expansion of its lending activities. The Company anticipates that such funding will be in the form of additional securitization transactions and expansion of its warehouse credit facilities. There can be no assurance that funding will be available to the Company through these sources or, if available, that it will be on terms acceptable to the Company. 32 INTEREST RATE RISK Since the Company's funding strategy is dependent upon the issuance of interest-bearing securities and the incurrence of debt, fluctuations in interest rates impact the Company's profitability. The Company utilizes several strategies to minimize the risk of interest rate fluctuations, including the use of derivative financial instruments, the regular sale of auto receivables to the Trusts and pre-funding securitizations, whereby the amount of asset-backed securities issued in a securitization exceeds the amount of receivables initially sold to the Trust. The proceeds from the pre-funded portion are held in an escrow account until the Company sells additional receivables to the Trust in amounts up to the balance of the pre-funded escrow account. In pre-funded securitizations, the Company locks in the borrowing costs with respect to the loans it subsequently delivers to the Trust. However, the Company incurs an expense in pre-funded securitizations equal to the difference between the money market yields earned on the proceeds held in escrow prior to subsequent delivery of receivables and the interest rate paid on the asset-backed securities outstanding. 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. YEAR 2000 ISSUE The year 2000 issue is whether the Company's or its vendors' computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail. The Company has developed a comprehensive project plan for achieving year 2000 readiness. An inventory of critical hardware and software has been completed and information technology components have been assessed. This assessment included major suppliers and business partners and the Company is monitoring their continued progress toward year 2000 compliance; however, the Company does not rely on any single supplier or partner to conduct business. The Company has completed the process of renovating or replacing critical systems. Integrated testing and installation of all renovated systems has been completed. In addition, the Company is currently developing contingency plans for critical systems. Year 2000 project costs incurred through March 31, 1999 have been approximately $900,000. The Company expects to incur an additional $100,000 of costs to fund year 2000 project efforts through the end of calendar year 1999. The Company presently believes that the year 2000 issue will not pose significant operational problems for the Company. However, there can be no assurance that unforeseen problems in the Company's computer systems, or the systems of third parties on which the Company's computers rely, would not have an adverse effect on the Company's systems or operations. 33 FORWARD LOOKING STATEMENTS Except for the historical information contained herein, the matters discussed above are forward looking statements that involve risks and uncertainties 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/A for the year ended June 30, 1998. Such statements are only predictions and actual events or results may differ materially. 34 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 rates on U.S. Treasury Notes with similar average maturities. The Company periodically uses Forward U.S. Treasury Rate Lock agreements to lock in the indexed rate for specific anticipated securitization transactions. The floating rates on securities issued by the Trusts are indexed to London Interbank Offered Rates (LIBOR). The Company uses Interest Rate Swap agreements to convert the floating rate exposures on these securities to a fixed rate. The Company made cash payments of $5.8 million and $6.2 million for the nine months ended March 31, 1999 and 1998, respectively, to settle Forward U.S. Treasury Rate Lock agreements. These amounts were included in the gain on sale of receivables in securitization transactions and are recovered over time through a higher gross interest rate spread on the related securitization transaction. There were no outstanding Forward U.S. Treasury Rate Lock agreements as of March 31, 1999. All of the Company's Interest Rate Swap agreements are associated with securitization transactions completed prior to March 31, 1999 and the net market risk to the Company is not material. 35 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not Applicable Item 2. CHANGES IN SECURITIES Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable Item 5. OTHER INFORMATION Not Applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 11.1 Statement Re Computation of Per Share Earnings 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarterly period ended March 31, 1999. Certain subsidiaries and affiliates of the Company filed reports on Form 8-K during the quarterly period ended March 31, 1999 reporting monthly information related to securitization trusts. 36 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AmeriCredit Corp. ------------------------------------- (Registrant) Date: May 14, 1999 By: /s/ Daniel E. Berce ------------------------------------- (Signature) Daniel E. Berce Chief Financial Officer 37