ITEM 1. BUSINESS
General
AmeriCredit Corp. was incorporated in Texas on May 18, 1988, and succeeded to the business, assets and liabilities of a predecessor corporation formed under the laws of Texas on August 1, 1986. The Company’s predecessor began operations in March 1987, and the business has been operated continuously since that time. As used herein, the term “Company” refers to AmeriCredit Corp., its wholly-owned subsidiaries and its predecessor corporation. The Company’s principal executive offices are located at 801 Cherry Street, Suite 3900, Fort Worth, Texas, 76102 and its telephone number is (817) 302-7000.
The Company and its subsidiaries have been operating in the automobile finance business since September 1992. The Company purchases auto finance contracts without recourse from franchised and select independent automobile dealerships. As used herein, “loans” includes auto finance contracts originated by dealers and purchased by the Company. The Company targets consumers who are typically unable to obtain financing from traditional sources. Funding for the Company’s auto lending activities is obtained primarily through the transfer of loans in securitization transactions. The Company services its automobile lending portfolio at regional centers using automated loan servicing and collection systems.
The Company implemented a revised operating plan in February 2003 targeted at preserving and strengthening its capital and liquidity position in light of a weak economic environment and a decline in used car pricing and the resulting breach of cumulative net loss triggers on securitization transactions insured by Financial Security Assurance, Inc. (“FSA”) prior to October 2002, referred to herein as the FSA Program. The breach of triggers in the FSA Program caused a postponement of substantially all of the cash otherwise distributable to the Company from its FSA Program securitizations as this cash was used to fund increased credit enhancement requirements on FSA Program securitizations. The revised operating plan included a decrease in the Company’s targeted loan origination volume and a reduction in operating expenses through downsizing its workforce, consolidating its branch office network and closing its Canadian lending activities. The stated objectives of the plan were substantially met by the end of calendar 2003. In the first half of calendar 2004, the Company resumed growth in its loan originations and has since added staff to its branch office network and related areas to support new loan growth. The Company intends to continue to expand loan origination volume at a moderate pace during fiscal 2006.
On January 24, 2005, the Company announced the realignment of responsibilities for its executive leadership in order to provide each executive a greater breadth of experience in connection with the Company’s long-term succession plan. Under the new organizational structure, Steven P. Bowman is Chief Credit and Risk Officer, Chris A. Choate is Chief Financial Officer and Treasurer, Mark Floyd is Chief Operating Officer-Servicing and Preston A. Miller is Chief Operating Officer-Originations.
On August 8, 2005, the Company announced that Daniel E. Berce had been named the Company’s Chief Executive Officer. Mr. Berce, who has served as the Company’s President since 2003, will now serve as President and CEO. As CEO, Mr. Berce succeeds Clifton H. Morris, Jr., who will retain his position as Chairman of the Board.
Automobile Finance Operations
Target Market. The Company’s automobile lending programs are designed to serve customers who have limited access to traditional automobile financing. The Company’s typical borrowers have experienced prior credit difficulties or have limited credit histories and generally have credit bureau scores ranging from 500 to 700. Because the Company serves customers who are unable to meet the credit standards imposed by most
traditional automobile financing sources, the Company generally charges higher interest rates than those charged by traditional financing sources. As the Company provides financing in a relatively high risk market, the Company also expects to sustain a higher level of credit losses than traditional automobile financing sources.
Marketing. As an indirect lender, the Company focuses its marketing activities on automobile dealerships. The Company is selective in choosing the dealers with whom it conducts business and primarily pursues manufacturer franchised dealerships with used car operations and select independent dealerships. The Company prefers to finance later model, low mileage used vehicles and moderately priced new vehicles. Of the contracts purchased by the Company during fiscal 2005, approximately 97% were originated by manufacturer franchised dealers and 3% by select independent dealers; further, approximately 67% were used vehicles and 33% were new vehicles. The Company purchased contracts from 14,875 dealers during fiscal 2005. No dealer location accounted for more than 1% of the total volume of contracts purchased by the Company for that same period.
Prior to entering into a relationship with a dealer, the Company considers the dealer’s operating history and reputation in the marketplace. The Company then maintains a non-exclusive relationship with the dealer. This relationship is actively monitored with the objective of maximizing the volume of applications received from the dealer that meet the Company’s underwriting standards and profitability objectives. Due to the non-exclusive nature of the Company’s relationships with dealerships, the dealerships retain discretion to determine whether to obtain financing from the Company or from another source for a loan made by the dealership to a customer seeking to make a vehicle purchase. Company representatives regularly contact and visit dealers to solicit new business and to answer any questions dealers may have regarding the Company’s financing programs and capabilities and to explain the Company’s underwriting philosophy. To increase the effectiveness of these contacts, marketing personnel have access to the Company’s management information systems which detail current information regarding the number of applications submitted by a dealership, the Company’s response and the reasons why a particular application was rejected.
Finance contracts are generally purchased by the Company without recourse to the dealer, and accordingly, the dealer usually has no liability to the Company if the consumer defaults on the contract. Depending upon the contract structure and consumer credit attributes, the Company may charge dealers a non-refundable acquisition fee when purchasing finance contracts. These acquisition fees are assessed on a contract-by-contract basis. Although finance contracts are purchased without recourse to the dealer, the dealer typically makes certain representations as to the validity of the contract and compliance with certain laws, and indemnifies the Company against any claims, defenses and set-offs that may be asserted against the Company because of assignment of the contract. Recourse based upon those representations and indemnities would be limited in circumstances in which the dealer has insufficient financial resources to perform upon such representations and indemnities. The Company does not view recourse against the dealer on these representations and indemnities to be of material significance in its decision to purchase finance contracts from a dealer.
Branch Office Network and Dealer Relationship Managers. The Company primarily uses a branch office network to market its indirect financing programs to selected dealers, develop relationships with these dealers and underwrite contracts submitted by the dealerships. Branch office and marketing personnel are responsible for the solicitation, enrollment and education of dealers regarding the Company’s financing programs. The Company believes a local presence enables it to be more responsive to dealer concerns and local market conditions. The Company selects markets for branch office locations based upon numerous factors, including demographic trends and data, competitive conditions, regulatory environment and availability of qualified personnel. Branch offices are typically situated in suburban office buildings that are accessible to local dealers. In addition to the branch office network, the Company uses dealer relationship managers to market its indirect financing programs to dealers in geographic areas where the Company has elected to not locate a branch office and to supplement application solicitation in geographic areas with an existing branch office. These dealer relationship managers maintain the Company’s relationship with these dealers, but generally do not have responsibility for credit approvals. Finance contracts solicited by the dealer relationship managers are underwritten at a branch office or at the Company’s central loan purchasing office, the National Service Center.
Each branch office solicits dealers for contracts and maintains the Company’s relationship with the dealers in the geographic vicinity of that branch office. Branch office locations are typically staffed by a branch manager, an assistant manager and several dealer and customer service representatives. Larger branch offices may also have additional assistant managers or dealer marketing representatives. The Company believes that the personal relationships its branch managers, other branch personnel and dealer relationship managers establish with the dealership staff are an important factor in creating and maintaining productive relationships with the Company’s dealer customer base. Branch managers are compensated with base salaries and incentives based on overall branch performance, including factors such as branch loan credit quality, loan pricing adequacy and loan volume objectives. The dealer relationship managers are compensated with base salaries and incentives based on loan volume objectives. The dealer relationship managers report to a branch manager. The branch managers report to regional vice presidents.
The Company’s regional vice presidents monitor branch office compliance with the Company’s underwriting guidelines and assist in local branch marketing activities. The Company’s management information systems provide the regional vice presidents with access to credit application information enabling them to consult with the branch managers on credit decisions and review exceptions to the Company’s underwriting guidelines. The regional vice presidents also make periodic visits to the branch offices to conduct operating reviews.
The following table sets forth information with respect to the number of branch offices, dollar volume of contracts purchased and number of producing dealerships for the periods set forth below.
(a)
A producing dealership refers to a dealership from which the Company had purchased contracts in the respective period.
Underwriting and Purchasing of Contracts
Proprietary Credit Scoring System and Risk-based Pricing. The Company utilizes a proprietary credit scoring system to support the credit approval process. The credit scoring system was developed through statistical analysis of the Company’s consumer demographic and portfolio databases. Credit scoring is used to differentiate credit applicants and to rank order credit risk in terms of expected default rates, which enables the Company to evaluate credit applications for approval and tailor loan pricing and structure according to this statistical assessment of credit risk. For example, a consumer with a lower score would indicate a higher probability of default and, therefore, the Company would either decline the application, or, if approved, compensate for this higher default risk through the structuring and pricing of the loan. While the Company employs a credit scoring system in the credit approval process, credit scoring does not eliminate credit risk. Adverse determinations in evaluating contracts for purchase could negatively affect the credit quality of the Company’s receivables portfolio.
The credit scoring system considers data contained in the customer’s credit application and credit bureau report as well as the structure of the proposed loan and produces a statistical assessment of these attributes. This assessment is used to segregate applicant risk profiles and determine whether the risk is acceptable and the price the Company should charge for that risk. The Company’s credit scorecards are monitored through comparison of actual versus projected performance by score. Periodically, the Company endeavors to refine its proprietary scorecards based on new information including identified correlations between receivables performance and data consistent in the underwriting process.
Loan Approval Process. The Company purchases individual contracts through its branch offices using a credit approval process tailored to local market conditions. Branch personnel have a specific credit authority based upon their experience and historical loan portfolio results as well as established credit scoring parameters. Contracts may also be purchased through the Company’s National Service Center for specific dealers requiring centralized service, in certain markets where a branch office is not present or, in some cases, outside of normal branch office working hours. Although the credit approval process is decentralized, the Company’s application processing system includes controls designed to ensure that credit decisions comply with the Company’s credit scoring strategies and underwriting policies and procedures.
Finance contract application packages completed by prospective obligors are received from dealers via facsimile, electronically or by telephone. Since the Company is a participating lender in DealerTrack Holdings, Inc. (“DealerTrack”), a service that facilitates electronic submission of consumer credit applications via the internet by dealers, automobile dealers can send application data to the Company electronically. Such data automatically interfaces with the Company’s application processing systems providing for faster processing. The Company received 88% of credit applications from dealers via DealerTrack for fiscal 2005. Upon receipt or entry of application data into the Company’s application processing system, a credit bureau report is automatically accessed and a credit score is computed. A substantial percentage of the applications received by the Company fail to achieve an adequate credit score and are automatically declined. For applications that are not automatically declined, Company personnel with credit authority review the application package and determine whether to approve the application, approve the application subject to conditions that must be met or deny the application. The credit decision is based primarily on the applicant’s credit score. The Company estimates that approximately 35-40% of applicants are approved for credit by the Company. Dealers are contacted regarding credit decisions electronically, by facsimile or by telephone. Declined and conditioned applicants are also provided with appropriate notification of the decision.
The Company’s underwriting and collateral guidelines, including credit scoring parameters, form the basis for the credit decision. Exceptions to credit policies and authorities must be approved by designated individuals with appropriate credit authority. Exceptions are also monitored by the Company’s centralized credit risk management department.
Completed contract packages are sent by the automobile dealers to the Company. Loan documentation is scanned to create electronic images and electronically forwarded to the Company’s centralized loan processing department. A loan processing representative verifies certain applicant employment, income and residency information when required by the Company’s credit policies. Loan terms, insurance coverages and other information may be verified or confirmed with the customer. The original documents are subsequently sent to the loan funding department and certain documents are stored in a fire resistant vault.
Upon electronic receipt of loan documentation, the loan funding department reviews the loan packages for proper documentation and regulatory compliance and completes the entry of information into the Company’s loan accounting system. Once cleared for funding, the funds are electronically transfered to the dealer or a check is issued. Upon funding of the contract, the Company acquires a perfected security interest in the automobile that was financed. Daily loan reports are generated for review by senior operations management. All of the Company’s contracts are fully amortizing with substantially equal monthly installments.
Servicing and Collections Procedures
General. The Company’s servicing activities consist of collecting and processing customer payments, responding to customer inquiries, initiating contact with customers who are delinquent in payment of an installment, maintaining the security interest in the financed vehicle, monitoring physical damage insurance coverage of the financed vehicle, and arranging for the repossession of financed vehicles, liquidation of collateral and pursuit of deficiencies when necessary.
The Company uses monthly billing statements to serve as a reminder to customers as well as an early warning mechanism in the event a customer has failed to notify the Company of an address change.
Approximately 15 days before a customer’s first payment due date and each month thereafter, the Company mails the customer a billing statement directing the customer to mail payments to a lockbox bank for deposit in a lockbox account. Payment receipt data is electronically transferred from the Company’s lockbox bank to the Company for posting to the loan accounting system. Payments may also be received directly by the Company from customers or via electronic transmission of funds. All payment processing and customer account maintenance is performed centrally at the Company’s operations center in Arlington, Texas.
The Company’s collections activities are performed at regional centers located in Arlington, Texas; Chandler, Arizona; Charlotte, North Carolina and Peterborough, Ontario. A predictive dialing system is utilized to make phone calls to customers whose payments are past due. The predictive dialer is a computer-controlled telephone dialing system that simultaneously dials phone numbers of multiple customers from a file of records extracted from the Company’s database. Once a live voice responds to the automated dialer’s call, the system automatically transfers the call to a collector and the relevant account information to the collector’s computer screen. Accounts that the system has been unable to reach within a specified number of days are flagged, thereby promptly identifying for management all customers who cannot be reached by telephone. By eliminating the time spent on attempting to reach customers, the system gives a single collector the ability to speak with a larger number of borrowers daily.
Once an account reaches a certain level of delinquency, the account moves to one of the Company’s advanced collection units. The objective of these collectors is to resolve the delinquent account. The Company may repossess a financed vehicle if an account is deemed uncollectible, the financed vehicle is deemed by collection personnel to be in danger of being damaged, destroyed or hidden, the customer deals in bad faith or the customer voluntarily surrenders the financed vehicle.
At times, the Company offers payment deferrals to customers who have encountered temporary financial difficulty, hindering their ability to pay as contracted. A deferral allows the customer to move delinquent payments to the end of the loan, usually by paying a fee that is calculated in a manner specified by applicable law. The collector reviews the customer’s past payment history and utilizes a behavioral score and assesses the customer’s desire and capacity to make future payments. Before agreeing to a deferral, the collector also considers whether the deferment transaction complies with the Company’s policies and guidelines. Exceptions to the Company’s policies and guidelines for deferrals must be approved by a collections officer. While payment deferrals are initiated and approved in the collections department, a separate department processes authorized deferment transactions. Exceptions are also monitored by the Company’s centralized credit risk management department.
Repossessions. Repossessions are subject to prescribed legal procedures, which include peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed automobile and return of personal items to the customer. Some jurisdictions provide the customer with reinstatement or redemption rights. Legal requirements, particularly in the event of bankruptcy, may restrict the Company’s ability to dispose of the repossessed vehicle. Repossessions are handled by independent repossession firms engaged by the Company. All repossessions, other than bankruptcy or previously charged off accounts, must be approved by a collections officer. Upon repossession and after any prescribed waiting period, the repossessed automobile is sold at auction. The Company does not sell any vehicles on a retail basis. The proceeds from the sale of the automobile at auction, and any other recoveries, are credited against the balance of the contract. Auction proceeds from sale of the repossessed vehicle and other recoveries are usually not sufficient to cover the outstanding balance of the contract, and the resulting deficiency is charged off. For fiscal 2005, the recovery rate upon the sale of repossessed assets was approximately 43%. The Company pursues collection of deficiencies when it deems such action to be appropriate.
Charge-Off Policy. The Company’s policy is to charge-off an account in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for
disposition. A charge-off represents the difference between the estimated net sales proceeds and the amount of the delinquent contract, including accrued interest. Accounts in repossession that have been charged off are removed from finance receivables and the related repossessed automobiles are included in other assets on the consolidated balance sheet pending disposal.
Risk Management
Overview. The Company’s credit risk management function is responsible for monitoring the contract approval process and supporting the supervisory role of senior operations management. Key variables, such as loan applicant data, credit bureau and credit score information, loan structures and terms and payment histories are tracked. The credit risk management function also regularly reviews the performance of the Company’s credit scoring system and is responsible for the development and enhancement of the Company’s credit scorecards.
The credit risk management function prepares regular credit indicator packages reviewing portfolio performance at various levels of detail including total Company, branch office and dealer. Various daily reports and analytical data are also generated to monitor credit quality as well as to refine the structure and mix of new loan originations. The Company reviews portfolio returns on a consolidated basis, as well as at the branch office, dealer and contract levels.
Behavioral Scoring. Statistically-based behavioral assessment models are used to project the relative probability that an individual account will default and to validate the credit scoring system after the receivable has aged for a sufficient period of time, generally six months. Default probabilities are calculated for each account independent of the credit score. Projected default rates from the behavioral assessment models and credit scoring systems are compared and analyzed to monitor the effectiveness of the Company’s credit strategies. The behavioral assessment models are also used to help develop servicing strategies for the portfolio or for targeted account groups within the portfolio.
Collateral Value Management. The value of the collateral underlying the Company’s receivables portfolio is updated monthly with a loan-by-loan link to national wholesale auction values. This data, along with the Company’s own experience relative to mileage and vehicle condition, are used for evaluating collateral disposition activities.
Compliance Audits. The Company’s centralized credit risk management department conducts regular reviews of and provides recurring reporting and monitoring on branch office operations, loan operations, processing and servicing, collections and other functional areas. The primary objective of the reviews is to identify risks and associated controls and measure compliance with the Company’s written policies and procedures as well as regulatory matters. Branch office reviews include a review of compliance with underwriting policies, completeness of loan documentation, collateral value assessment and applicant data investigation. In addition, this corporate department also performs reviews of the repossession, charge-off, deferment and bankruptcy processes. Written reports are distributed to departmental managers and officers for response and follow-up. Results and responses are also reviewed by senior management.
Securitization of Loans
Since December 1994, the Company has pursued a strategy of securitizing its receivables to diversify its funding, provide liquidity and obtain a cost-effective source of funds for the purchase of additional automobile finance contracts. Proceeds from securitizations approximate the Company’s investment in the automobile finance receivables securitized. The proceeds are primarily used to fund initial cash credit enhancement requirements in the securitization and to pay down borrowings under the Company’s warehouse credit facilities, thereby increasing availability thereunder for further contract purchases. Through June 30, 2005, the Company had securitized approximately $39.8 billion of automobile receivables since 1994.
In its securitizations, the Company, through wholly-owned subsidiaries, transfers automobile receivables to newly-formed securitization trusts (“Trusts”), which issue one or more classes of asset-backed securities. The asset-backed securities are in turn sold to investors.
The Company typically arranges for a financial guaranty insurance policy from one of several monoline insurers to achieve a AAA/Aaa credit rating on the asset-backed securities issued by the securitization Trusts. The financial guaranty insurance policies insure the timely payment of interest and the ultimate payment of principal due on the asset-backed securities. The Company has limited reimbursement obligations to the insurers; however, credit enhancement requirements, including the insurers’ encumbrance of certain restricted cash accounts and subordinated interests in Trusts, provide a source of funds to cover shortfalls in collections and to reimburse the insurers for any claims which may be made under the policies issued with respect to the Company’s securitizations.
The credit enhancement requirements represent retained interests in the securitization Trusts and include restricted cash accounts that are generally established with an initial deposit and subsequently funded through excess cash flows from securitized receivables. An additional form of credit enhancement is provided in the form of overcollateralization whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts. Funds may be withdrawn from the restricted cash accounts to cover any shortfalls in amounts payable on the asset-backed securities. With respect to insured securitization transactions, funds may also be withdrawn to reimburse the insurers for draws on financial guaranty insurance policies in an event of default. Additionally, agreements with the insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss triggers) in a Trust’s pool of receivables exceed certain targets, the specified enhancement levels would be increased. Cash would be retained in the restricted cash account and not released to the Company until the increased target levels of credit enhancement requirements have been reached and maintained. The Company is entitled to receive amounts from the restricted cash accounts to the extent the amounts deposited exceed the required target enhancement levels.
Prior to October 2002, the financial guaranty insurance policies for all of the Company’s insured securitization transactions were provided by FSA. The restricted cash account for each securitization Trust insured as part of the FSA Program was cross-collateralized to the restricted cash accounts established in connection with the Company’s other securitization Trusts in the FSA Program, such that excess cash flows from an FSA Program securitization that had already met its own credit enhancement requirement could be used to fund increased target credit enhancement requirements with respect to FSA Program securitizations in which specified portfolio performance ratios had been exceeded.
The Company’s securitization transactions insured by financial guaranty insurance providers, including FSA, since October 2002 are cross-collateralized to a limited extent. In the event of a shortfall in the original target credit enhancement requirement for any of these securitizations after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount. In one of the Company’s securitization transactions, if a secured party receives a notice of a rating agency review for downgrade or if there is a downgrade of any class of notes (without taking into consideration the presence of the financial guaranty insurance policy) excess cash flows from other securitization transactions insured by the same insurance provider would be utilized to satisfy any increased target credit enhancement requirements.
Since November 2000 and most recently in April 2005, the Company has completed five securitization transactions in the United States and two in Canada involving the sale of subordinate asset-backed securities in order to provide credit enhancement for the senior asset-backed securities and protect investors from potential losses. The Company provided credit enhancement in these transactions in the form of a restricted cash account and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts. Excess cash flows are used to increase the credit enhancement assets to required minimum levels, after which time excess cash flows are distributed to the Company. Since these transactions did
not involve the issuance of a financial guaranty insurance policy, the credit enhancement assets related to these Trusts are not cross-collateralized to the credit enhancement assets established in connection with any of the Company’s other securitization Trusts and do not contain portfolio performance ratios which could increase the minimum required credit enhancement levels.
Trade Names
The Company has obtained federal trademark protection for the “AmeriCredit” name and the logo that incorporates the “AmeriCredit” name. Certain other names, logos and phrases used by the Company in its business operations have also been trademarked.
Regulation
The Company’s operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations.
In most states in which the Company operates, a consumer credit regulatory agency regulates and enforces laws relating to consumer lenders and sales finance companies such as the Company. These rules and regulations generally provide for licensing as a sales finance company or consumer lender, limitations on the amount, duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. In certain states, the Company is subject to periodic examination by state regulatory authorities. Some states in which the Company operates do not require special licensing or provide extensive regulation of the Company’s business.
The Company is also subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require the Company to provide certain disclosures to prospective borrowers and protect against discriminatory lending practices and unfair credit practices. The principal disclosures required under the Truth in Lending Act include the terms of repayment, the total finance charge and the annual percentage rate charged on each contract or loan. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age or marital status. According to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. In addition, the credit scoring system used by the Company must comply with the requirements for such a system as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency and to respond to consumers who inquire regarding any adverse reporting submitted by the Company to the consumer reporting agencies. Additionally, the Company is subject to the Gramm-Leach-Bliley Act, which requires the Company to maintain the privacy of certain consumer data in its possession and to periodically communicate with consumers on privacy matters. The Company is also subject to the Servicemembers Civil Relief Act, which requires it, in most circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted or called to active military duty.
The dealers who originate automobile finance contracts purchased by the Company also must comply with both state and federal credit and trade practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on the Company.
The Company believes that it maintains all material licenses and permits required for its current operations and is in substantial compliance with all applicable local, state and federal regulations. There can be no assurance, however, that the Company will be able to maintain all requisite licenses and permits, and the failure
to satisfy those and other regulatory requirements could have a material adverse effect on its operations. Further, the adoption of additional, or the revision of existing, rules and regulations could have a material adverse effect on the Company’s business.
Competition
Competition in the field of sub-prime automobile finance is intense. The automobile finance market is highly fragmented and is served by a variety of financial entities including the captive finance affiliates of major automotive manufacturers, banks, thrifts, credit unions and independent finance companies. Many of these competitors have substantially greater financial resources and lower costs of funds than the Company. In addition, the Company’s competitors often provide financing on terms more favorable to automobile purchasers or dealers than the Company offers. Many of these competitors also have long standing relationships with automobile dealerships and may offer dealerships or their customers other forms of financing, including dealer floor plan financing or revolving credit products, which are not provided by the Company. Providers of automobile financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and customers. In seeking to establish itself as one of the principal financing sources at the dealers it serves, the Company competes predominately on the basis of its high level of dealer service and strong dealer relationships and by offering flexible loan terms. There can be no assurance that the Company will be able to compete successfully in this market or against these competitors.
Risk Factors
Dependence on Warehouse Financing. The Company depends on various credit facilities with financial institutions to finance its purchase of contracts pending securitization.
At June 30, 2005, the Company had four separate credit facilities, including (i) a warehouse credit facility with various financial institutions providing for available borrowings of up to a total of approximately $1,950.0 million, subject to a defined borrowing base, of which $150.0 million matures in November 2005 and the remaining $1,800.0 million matures in November 2007; (ii) a medium term note facility with an administrative agent on behalf of an institutionally managed medium term note conduit that in the aggregate provides $650.0 million of receivables financing which matures in October 2007; (iii) a repurchase facility pursuant to which the Company can finance the repurchase of finance receivables from securitization Trusts upon exercise of the cleanup call option. This repurchase facility provides $400.0 million of receivables financing. Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $500.0 million and extended its maturity to August 2006; and (iv) a near prime facility to fund higher credit quality receivables, providing $150.0 million of receivables financing which matures in January 2006. Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $400.0 million and extended its maturity to July 2006.
The Company cannot guarantee that any of these financing resources will continue to be available beyond the current maturity dates at reasonable terms or at all. The availability of these financing sources depends, in part, on factors outside of the Company’s control, including regulatory capital treatment for unfunded bank lines of credit and the availability of bank liquidity in general. If the Company is unable to extend or replace these facilities or arrange new warehouse credit facilities or other types of interim financing, it will have to curtail contract purchasing activities, which would have a material adverse effect on the Company’s financial position and results of operations.
The Company’s warehouse credit facilities contain various covenants requiring certain minimum financial ratios, asset quality, and portfolio performance ratios (cumulative net loss, delinquency and repossession ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests
against collateral pledged under these agreements or restrict the Company’s ability to obtain additional borrowings under these agreements. As of June 30, 2005, the Company’s warehouse credit facilities were in compliance with all covenants.
Dependence on Securitization Program. Since December 1994, the Company has relied upon its ability to transfer receivables to securitization Trusts and sell securities in the asset-backed securities market to generate cash proceeds for repayment of warehouse credit facilities and to purchase additional contracts from automobile dealers. Accordingly, adverse changes in the Company’s asset-backed securities program or in the asset-backed securities market for automobile receivables in general could materially adversely affect the Company’s ability to purchase and securitize loans on a timely basis and upon terms reasonably favorable to the Company. Any adverse change or delay would have a material adverse effect on the Company’s financial position, liquidity and results of operations.
The Company will continue to require the execution of securitization transactions in order to fund the Company’s future liquidity needs. 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. If these sources of funding are not available to the Company on a regular basis for any reason, including the occurrence of events of default, deterioration in loss experience on the receivables, breach of financial covenants, disruption of the asset-backed market or otherwise, the Company will be required to revise the scale of its business, including the possible discontinuation of loan origination activities, which would have a material adverse effect on the Company’s ability to achieve its business and financial objectives.
Dependence on Credit Enhancement. To date, all but five of the Company’s securitizations in the United States have utilized credit enhancement in the form of financial guaranty insurance policies provided by various monoline insurance providers in order to achieve AAA/Aaa ratings on the insured securities issued in the securitization transactions. These ratings may reduce the costs of securitizations relative to alternative forms of financing available to the Company and enhance the marketability of these transactions to investors in asset-backed securities. However, the financial guaranty insurance providers are not required to insure future Company-sponsored securitizations, and there can be no assurance that they will continue to do so or that future Company-sponsored securitizations will be similarly rated. The Company’s insurance providers’ willingness to insure the Company’s future securitizations is subject to many factors beyond the Company’s control, including concentrations of risk with any given insurance provider, the insurance providers’ own rating considerations, their ability to cede this risk to reinsurers and the performance of the portion of the Company’s portfolio for which the insurer has provided insurance. Alternatively, in lieu of relying on a financial guaranty insurance policy, in five of its securitizations in the United States, the Company has sold or retained subordinate asset-backed securities in order to provide credit enhancement for the senior asset-backed securities.
A downgrading of any of the Company’s insurance providers’ credit ratings, an increase in required credit enhancement levels or the inability to structure alternative credit enhancements, such as senior subordinated transactions, for the Company’s securitization program could result in higher interest costs for future Company-sponsored securitizations and larger initial credit enhancement requirements. The absence of a financial guaranty insurance policy may also impair the marketability of the Company’s securitizations. These events could have a material adverse effect on the Company’s financial position, liquidity and results of operations.
Liquidity and Capital Needs. The Company’s ability to make payments on or to refinance its indebtedness and to fund its operations and planned capital expenditures depends on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control.
The Company expects to continue to require substantial amounts of cash. The Company’s primary cash requirements include the funding of: (i) contract purchases pending their securitization; (ii) credit enhancement
requirements in connection with the securitization of the receivables; (iii) interest and principal payments under the Company’s warehouse credit facilities, its senior notes and other indebtedness; (iv) fees and expenses incurred in connection with the securitization and servicing of receivables; (v) ongoing operating expenses; (vi) income tax payments; and (vii) capital expenditures. Additionally, the Company has been using excess cash to fund its stock repurchase program since April 2004; to the extent the Company was unable to generate sufficient cash to fund the aforementioned items, it is anticipated that stock repurchases would be curtailed or discontinued.
The Company requires substantial amounts of cash to fund its contract purchase and securitization activities. Although the Company must fund certain credit enhancement requirements upon the closing of a securitization, it typically receives the cash representing excess cash flows and return of credit enhancement deposits over the actual life of the receivables securitized. Assuming that origination volume ranges from $5.8 billion to $6.2 billion in fiscal 2006 and the initial credit enhancement requirement for the Company’s securitization transactions remains at 9.5% (the level for the most recent securitization completed in August 2005), the Company would require $551.0 million to $589.0 million in cash or liquidity to fund initial credit enhancement in fiscal 2006. The initial credit enhancement requirement could increase in future securitizations, which would result in an increased requirement for cash on the Company’s part. The Company also incurs transaction costs in connection with a securitization transaction. Accordingly, the Company’s strategy of securitizing substantially all of its newly purchased receivables will require significant amounts of cash.
The Company’s primary sources of future liquidity are expected to be: (i) excess cash flows received from securitization Trusts; (ii) interest and principal payments on loans not yet securitized; (iii) servicing fees; (iv) borrowings under its warehouse credit facilities or proceeds from securitization transactions; (v) further issuances of debt or equity securities; and (vi) stock option exercises, depending on capital market conditions.
Because the Company expects to continue to require substantial amounts of cash for the foreseeable future, it anticipates that it will require the execution of additional securitization transactions and may choose to enter into debt or equity financings. The type, timing and terms of financing selected by the Company will be dependent upon its cash needs, the availability of other financing sources and the prevailing conditions in the financial markets. There can be no assurance that funding will be available to the Company through these sources or, if available, that the funding will be on acceptable terms. If the Company is unable to execute securitization transactions on a regular basis, it would not have sufficient funds to finance new loan originations and, in such event, the Company would be required to revise the scale of its business, including possible discontinuation of loan origination activities, which would have a material adverse effect on the Company’s ability to achieve its business and financial objectives.
Leverage. The Company currently has a substantial amount of outstanding indebtedness. The Company’s ability to make payments of principal or interest on, or to refinance, its indebtedness will depend on its future operating performance, including the performance of receivables transferred to securitization Trusts, and its ability to enter into additional securitization transactions as well as debt and equity financings, which, to a certain extent, is subject to economic, financial, competitive and other factors beyond its control.
If the Company is unable to generate sufficient cash flows in the future to service its debt, it may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that any refinancings will be possible or that any additional financing could be obtained on acceptable terms. The inability to obtain additional financing could have a material adverse effect on the Company’s financial position, liquidity and results of operations.
The degree to which the Company is leveraged creates risks including: (i) the Company may be unable to satisfy its obligations under its outstanding indebtedness; (ii) the Company may find it more difficult to fund future credit enhancement requirements, operating costs, capital expenditures, stock repurchases, acquisitions, general corporate purposes or other purposes; (iii) the Company may have to dedicate a substantial portion of its cash resources to the payments on its outstanding indebtedness, thereby reducing the funds available for
operations and future business opportunities; and (iv) the Company may be vulnerable to adverse general economic and industry conditions. The Company’s existing outstanding indebtedness restricts its ability to, among other things: (i) sell or transfer assets; (ii) incur additional debt; (iii) repay other debt; (iv) pay dividends; (v) make certain investments or acquisitions; (vi) repurchase or redeem capital stock; (vii) engage in mergers or consolidations; and (viii) engage in certain transactions with subsidiaries and affiliates.
The Company’s warehouse credit facilities and senior note and convertible senior note indentures require the Company to comply with certain financial ratios and covenants. Additionally, the Company’s warehouse credit facilities have minimum asset quality maintenance requirements. These restrictions may interfere with the Company’s ability to obtain financing or to engage in other necessary or desirable business activities. As of June 30, 2005, the Company was in compliance with all financial and portfolio performance covenants on its warehouse credit facilities and senior note and convertible senior note indentures.
If the Company cannot comply with the requirements in its warehouse credit facilities or its senior note and convertible senior note indentures, then the lenders may increase the Company’s borrowing costs or require it to repay immediately all of the outstanding debt under them. If its debt payments were accelerated, the Company’s assets might not be sufficient to fully repay the debt. These lenders may require the Company to use all of its available cash to repay its debt, foreclose upon their collateral or prevent the Company from making payments to other creditors on certain portions of the Company’s outstanding debt. These events may also result in a default under the Company’s senior note and convertible senior note indentures.
The Company may not be able to obtain a waiver of these provisions or refinance its debt, if needed. In such case, the Company’s financial condition, liquidity and results of operations would suffer.
Default and Prepayment Risks. The Company’s results of operations, financial condition and liquidity depend, to a material extent, on the performance of contracts purchased. Obligors under contracts acquired or originated by the Company may default during the term of their loan. The Company bears the full risk of losses resulting from defaults. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding loan balance and costs of recovery.
The Company maintains an allowance for loan losses on loans held on the Company’s balance sheet which reflects management’s estimates of inherent losses for these loans. If the allowance is inadequate, the Company would recognize the losses in excess of that allowance as an expense and results of operations could be adversely affected.
A large component of the gain recognized on the sale of finance receivables to securitization Trusts prior to October 1, 2002, and the corresponding retained interest recorded on the Company’s balance sheet as credit enhancement assets consisting of investments in Trust receivables, or overcollateralization, restricted cash and interest-only receivables from Trusts are based on estimated future cash flows. Credit enhancement assets are calculated on the basis of management’s assumptions concerning, among other things, defaults and recovery rates on repossessed vehicles. As of June 30, 2005, credit enhancement assets were valued at $541.8 million.
The Company regularly measures its default, recovery and other assumptions against the actual performance of securitized receivables. If the Company were to determine, as a result of such regular review or otherwise, that it underestimated defaults, overestimated recoveries or that any other material assumptions were inaccurate, the Company would be required to reduce the carrying value of its credit enhancement assets. If the change in assumptions and the impact of the change on the value of the credit enhancement assets were deemed other-than-temporary, the Company would record a charge to income. Although the Company believes that it has made reasonable assumptions as to the future cash flows of the various pools of receivables that have been sold in securitization transactions, actual rates of default and recovery rates on repossessed vehicles or other assumptions may differ from those assumed and may be required to be revised upon future events.
The Company is required to deposit substantial amounts of the cash flows generated by its interests in Company-sponsored securitizations to satisfy targeted credit enhancement requirements. An increase in defaults or prepayments would reduce the cash flows generated by the Company’s interests in securitization transactions lengthening the period required to build targeted credit enhancement levels in the securitization trusts. Distributions of cash from the securitizations to the Company would be delayed and the ultimate amount of cash distributable to the Company would be less, which could have an adverse effect on the Company’s liquidity. The targeted credit enhancement levels in future securitizations could also be increased, further impacting the Company’s liquidity.
In addition, an increase in defaults or prepayments would reduce the size of the Company’s servicing portfolio, which would reduce the Company’s servicing income from its gain on sale receivables and finance charge income on its finance receivables, further adversely affecting results of operations and cash flows. A material write-down of credit enhancement assets or adjustment to the Company’s allowance for loan losses and the corresponding decrease in earnings could limit the Company’s ability to enter into future securitizations and other financings.
Portfolio Performance-Negative Impact on Cash Flows. Generally, the form of credit enhancement agreements the Company enters into with its financial guaranty insurance providers in connection with securitization transactions contain specified limits on portfolio performance ratios (delinquency, cumulative default and cumulative net loss triggers) on the receivables included in each securitization Trust. If, at any measurement date, a portfolio performance ratio with respect to any Trust were to exceed the specified limits, provisions of the credit enhancement agreement would automatically increase the level of credit enhancement requirements for that Trust, if a waiver was not obtained. During the period in which the specified portfolio performance ratio was exceeded, excess cash flows, if any, from the Trust would be used to fund the increased credit enhancement levels instead of being distributed to the Company, which would have an adverse effect on the Company’s cash flows.
The Company’s securitization transactions insured by financial guaranty insurance providers, including FSA, since October 2002 are cross-collateralized to a limited extent. In the event of a shortfall in the original target credit enhancement requirement for any of these securitization Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount. In one of the Company’s securitization transactions, if a secured party receives a notice of a rating agency review for downgrade or if there is a downgrade of any class of notes (without taking into consideration the presence of the financial guaranty insurance policy) excess cash flows from other securitization transactions insured by the same insurance provider would be utilized to satisfy any increased target credit enhancement requirements.
As of June 30, 2005, the Company had exceeded its targeted cumulative net loss triggers in six of the seven remaining FSA Program securitizations. Accordingly, cash of approximately $120.3 million generated by FSA Program securitizations otherwise distributable to the Company was used to fund increased credit enhancement levels for the securitizations that breached their cumulative net loss triggers. The higher targeted credit enhancement levels have been reached and maintained in each of these six FSA Program securitizations. The remaining FSA Program securitization breached its cumulative net loss trigger as of June 30, 2005, and FSA granted a waiver. Additionally, the Company received a waiver for July and August 2005, however, the Company cannot guarantee that FSA will continue to grant a waiver; if a waiver is not granted, the credit enhancement level for such securitization would have increased by $21.2 million as of August 31, 2005. The impact of any delay in the amount of cash to be released to the Company during fiscal 2006 is not expected to be material to the Company’s liquidity position.
Right to Terminate Normal Servicing. The agreements that the Company enters into with its financial guaranty insurance providers in connection with securitization transactions contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss triggers) that are higher than the limits referred to in the preceding risk factor. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the financial guaranty insurance providers to terminate the Company’s servicing rights to the
receivables sold to that Trust. In addition, the servicing agreements on certain insured securitization Trusts are cross-defaulted so that a default under one servicing agreement would allow the financial guaranty insurance provider to terminate the Company’s servicing rights under all servicing agreements for securitization Trusts in which they issued a financial guaranty insurance policy. Additionally, if these higher targeted portfolio performance levels were exceeded, the financial guaranty insurance providers may elect to retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement. This, in turn, could result in defaults under the Company’s other securitizations and other material indebtedness. Although the Company has never exceeded these additional targeted portfolio performance ratios, and does not anticipate violating any event of default triggers for its securitizations, there can be no assurance that the Company’s servicing rights with respect to the automobile receivables in such Trusts or any other Trusts will not be terminated if (i) such targeted portfolio performance ratios are breached, (ii) the Company breaches its obligations under the servicing agreements, (iii) the financial guaranty insurance providers are required to make payments under a policy, or (iv) certain bankruptcy or insolvency events were to occur. As of June 30, 2005, no such termination events have occurred with respect to any of the Trusts formed by the Company. The termination of any or all of the Company’s servicing rights would have a material adverse effect on the Company’s financial position, liquidity and results of operations.
Implementation of Business Strategy. The Company’s financial position, liquidity and results of operations depend on management’s ability to execute its business strategy. Key factors involved in the execution of the business strategy include achieving the desired contract purchase volume, continued and successful use of proprietary scoring models for credit risk assessment and risk-based pricing, the use of effective credit risk management techniques and servicing strategies, implementation of effective loan servicing and collection practices, continued investment in technology to support operating efficiency and continued access to significant funding and liquidity sources. The failure or inability of the Company to execute any element of its business strategy could materially adversely affect its financial position, liquidity and results of operations.
Target Consumer Base. The Company specializes in purchasing and servicing predominately sub-prime automobile receivables. Sub-prime borrowers are associated with higher-than-average delinquency and default rates. While the Company believes that it effectively manages these risks with its proprietary credit scoring system, risk-based loan pricing and other underwriting policies and collection methods, no assurance can be given that these criteria or methods will be effective in the future. In the event that the Company underestimates the default risk or under-prices contracts that it purchases, the Company’s financial position, liquidity and results of operations would be adversely affected, possibly to a material degree.
Economic Conditions. The Company is subject to changes in general economic conditions that are beyond its control. During periods of economic slowdown or recession, such as the United States economy has at times experienced, delinquencies, defaults, repossessions and losses generally increase. These periods also may be accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales. Additionally, higher gasoline prices or other factors that impact consumer confidence or disposable income could decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles. Because the Company focuses on sub-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, the Company’s servicing costs may increase without a corresponding increase in its servicing income or finance charge income. While the Company seeks to manage the higher risk inherent in loans made to sub-prime borrowers through the underwriting criteria and collection methods it employs, no assurance can be given that these criteria or methods will afford adequate protection against these risks. Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could also adversely affect the Company’s financial position, liquidity and results of operations and its ability to enter into future securitizations.
Wholesale Auction Values. The Company sells repossessed automobiles at wholesale auction markets located throughout the United States and Canada. Auction proceeds from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the outstanding balance of the contract, and the resulting deficiency is charged off. Decreased auction proceeds resulting from the depressed prices at which used automobiles may be sold during periods of economic slowdown or recession will result in higher credit losses for the Company. Furthermore, depressed wholesale prices for used automobiles may result from significant liquidations of rental or fleet inventories, and from increased volume of trade-ins due to promotional programs offered by new vehicle manufacturers. Additionally, higher gasoline prices may decrease the wholesale auction value of certain types of vehicles. The Company’s recoveries as a percentage of repossession charge-offs was 43% in fiscal 2005, 41% in fiscal 2004 and 42% in fiscal 2003, and there can be no assurance that the Company’s recovery rates will remain at historical levels.
Interest Rates. The Company’s profitability may be directly affected by the level of and fluctuations in interest rates, which affects the gross interest rate spread the Company earns on its receivables. As the level of interest rates increase, such as they have throughout calendar 2005, the Company’s gross interest rate spread on new originations generally declines since the rates charged on the contracts originated or purchased from dealers are limited by market and competitive conditions, restricting the Company’s opportunity to pass on increased interest costs. The Company believes that its profitability and liquidity could be adversely affected during any period of higher interest rates, possibly to a material degree. Further, the Company anticipates that the level of interest rates, and its borrowing costs, will likely increase throughout fiscal 2006. The Company monitors the interest rate environment and employs pre-funding and other hedging strategies designed to mitigate the impact of increases in interest rates. The Company can provide no assurance, however, that pre-funding or other hedging strategies will mitigate the impact of increases in interest rates.
Labor Market Conditions. Competition to hire personnel possessing the skills and experience required by the Company could contribute to an increase in the Company’s employee turnover rate. High turnover or an inability to attract and retain qualified replacement personnel could have an adverse effect on the Company’s delinquency, default and net loss rates, the Company’s ability to grow and, ultimately, the Company’s financial condition, results of operations and liquidity.
Regulation. Reference should be made to Item 1. “Business-Regulation” for a discussion of regulatory risk factors.
Competition. Reference should be made to Item 1. “Business-Competition” for a discussion of competitive risk factors.
Litigation. 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, breach of contract and discriminatory treatment of credit applicants. 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 can include requests for compensatory, statutory and punitive damages. The Company believes that it has taken prudent steps to address and mitigate the litigation risks associated with its business activities. However, any adverse resolution of litigation pending or threatened against the Company, including the matters referenced in Item 3, Legal Proceedings, could have a material adverse affect on the Company’s financial condition, results of operations and cash flows.
Employees
At June 30, 2005, the Company employed 3,653 persons in 43 states and one Canadian province. None of the Company’s employees are a part of a collective bargaining agreement, and the Company’s relationships with employees are satisfactory.
Executive Officers
The following sets forth certain data concerning the executive officers of the Company as of June 30, 2005.
Name
Age
Position
Clifton H. Morris, Jr.
Chairman of the Board and Chief Executive Officer
Daniel E. Berce
President
Steven P. Bowman
Executive Vice President, Chief Credit and Risk Officer
Chris A. Choate
Executive Vice President, Chief Financial Officer and Treasurer
Mark Floyd
Executive Vice President, Chief Operating Officer-Servicing
Preston A. Miller
Executive Vice President, Chief Operating Officer-Originations
CLIFTON H. MORRIS, JR. has been Chairman of the Board since May 1988 and has served as Chief Executive Officer from April 2003 to August 2005 and from May 1988 to July 2000. He also served as President from May 1988 until April 1991 and from April 1992 to November 1996. Mr. Morris joined the Company in 1988. Subsequent to June 30, 2005, Mr. Morris was succeeded by Mr. Berce as Chief Executive Officer. Mr. Morris retained his position as Chairman of the Board.
DANIEL E. BERCE has been President since April 2003. Mr. Berce was Vice Chairman and Chief Financial Officer from November 1996 until April 2003. He served as Executive Vice President, Chief Financial Officer and Treasurer from November 1994 until November 1996. Mr. Berce joined the Company in 1990. Subsequent to June 30, 2005, Mr. Berce was named President and Chief Executive Officer.
STEVEN P. BOWMAN has served as Executive Vice President, Chief Credit and Risk Officer since January 2005. Prior to that, he was Executive Vice President, Chief Credit Officer from March 2000 to January 2005. He served as Senior Vice President, Risk Management from May 1998 until March 2000 and was Vice President, Risk Management from June 1997 until May 1998. From February 1996, when he joined the Company, until June 1997, Mr. Bowman was Assistant Vice President, Risk Management.
CHRIS A. CHOATE has been Executive Vice President, Chief Financial Officer and Treasurer since January 2005. Before that, he was Executive Vice President, Chief Legal Officer and Secretary from November 1999 to January 2005. He served as Senior Vice President, General Counsel and Secretary from November 1996 to November 1999. Mr. Choate was Vice President, General Counsel and Secretary from November 1994 until November 1996. Mr. Choate joined the Company in 1991.
MARK FLOYD has served as Executive Vice President, Chief Operating Officer for Servicing since January 2005. Prior to that, he was Executive Vice President, Chief Operating Officer from April 2003 to January 2005. He served as President, Dealer Services from August 2001 until April 2003. Mr. Floyd served as Executive Vice President, Dealer Services from November 1999 to August 2001 and was Senior Vice President, Director Strategic Alliance from January 1998 to November 1999. He was Senior Vice President, Strategic Alliances from September 1997, when he joined the Company, to January 1998.
PRESTON A. MILLER has served as Executive Vice President, Chief Operating Officer for Originations since January 2005. Prior to that, he was Executive Vice President, Chief Financial Officer and Treasurer from April 2003 to January 2005. Mr. Miller was Executive Vice President, Treasurer from July 1998 until April 2003. He served as Senior Vice President, Treasurer from November 1996 until July 1998 and Vice President, Controller from November 1994 until November 1996. Mr. Miller joined the Company in 1989.
Available Information
The Company makes available free of charge through its website, www.americredit.com, securitization portfolio performance measures and all materials that it files electronically with the Securities and Exchange Commission (“SEC”), including the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practical after filing or furnishing such material with the SEC.
The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
ITEM 2.
ITEM 2. PROPERTIES
The Company’s executive offices are located at 801 Cherry Street, Suite 3900, Fort Worth, Texas, in a 227,000 square foot office space under a 12-year lease that commenced in July 1999. The Company also leases 76,000 square feet of office space in Charlotte, North Carolina, 85,000 square feet of office space in Peterborough, Ontario, 150,000 square feet of office space in Chandler, Arizona, and 85,000 square feet of office space in Jacksonville, Florida, all under ten-year agreements with renewal options. The Company also leases 250,000 square feet of office space in Arlington, Texas, under a twelve-year agreement with renewal options. This facility was previously owned by the Company; subsequent to June 30, 2005, the Company sold and leased back this office space. The Company also owns a 250,000 square foot servicing facility in Arlington, Texas. As of April 1, 2004, the Company abandoned certain office space at the Fort Worth offices and the Chandler facility and all of the Jacksonville facility. To date, the Company has sublet approximately 65% of the 235,000 square feet of abandoned space. The Company is seeking to sublease the remainder of the abandoned office space.
The Company’s branch office facilities are generally leased under agreements with original terms of three to five years. Such facilities are typically located in a suburban office building and consist of between 1,000 and 2,000 square feet of space.
ITEM 3.
ITEM 3. 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, breach of contract and discriminatory treatment of credit applicants. 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 can include requests for compensatory, statutory and punitive damages. The Company believes that it has taken prudent steps to address and mitigate the litigation risks associated with its business activities.
In fiscal 2003, several complaints were filed by shareholders against the Company and certain of the Company’s officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. These complaints have been consolidated into one action, styled Pierce v. AmeriCredit Corp., et al., pending in the United States District Court for the Northern District of Texas, Fort Worth Division; the plaintiff in Pierce seeks class action status. In Pierce, the plaintiff claims, among other allegations, that deferments were improperly granted by the Company to avoid delinquency triggers in securitization transactions and enhance cash flows and to incorrectly report charge-offs and delinquency percentages, thereby causing the Company to misrepresent its financial performance throughout the alleged class period. The Company believes that its granting of deferments, which is a common practice within the auto finance industry, complied with the covenants contained in its securitization and warehouse financing documents, and that its deferment activities were properly disclosed to all constituents, including shareholders, asset-backed investors, creditors and credit enhancement providers.
Additionally, a class action complaint, styled Lewis v. AmeriCredit Corp., was filed in the United States District Court for the Northern District of Texas, Fort Worth Division during the year ended June 30, 2003, against the Company and certain of its officers and directors alleging violations of Sections 11 and 15 of the Securities Act of 1933 in connection with the Company’s secondary public offering of common stock on October 1, 2002. In Lewis, the plaintiff alleges that the Company’s registration statement and prospectus for the offering contained untrue statements of material facts and omitted to state material facts necessary to make other statements in the registration statement not misleading.
In April 2004, two rulings were issued by the United States District Court for the Northern District of Texas, Fort Worth Division, affecting the Pierce and Lewis lawsuits. On April 1, 2004, the Court, in response to motions to dismiss filed by the Company and the other defendants, ruled that the plaintiff’s complaint in the Pierce lawsuit was deficient and ordered the plaintiff to cure such deficiencies or the case would be dismissed. On April 27, 2004, the Court issued an order consolidating the Lewis case into the Pierce case. In connection with the order consolidating the Lewis and Pierce cases, the Court granted the plaintiffs permission to file an amended, consolidated complaint, which they have done. The Company and the other defendants have filed motions to dismiss the amended complaint, and such motions are presently pending.
The Company believes that the claims alleged in the Pierce lawsuit, including the claims consolidated into Pierce from Lewis, are without merit and the Company intends to assert vigorous defenses to the litigation. Neither the likelihood of an unfavorable outcome nor the amount of ultimate liability, if any, with respect to this litigation can be determined at this time.
Two shareholder derivative actions have also been served on the Company. On February 27, 2003, the Company was served with a shareholder’s derivative action filed in the United States District Court for the Northern District of Texas, Fort Worth Division, entitled Mildred Rosenthal, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. A second shareholder derivative action was filed in the District Court of Tarrant County, Texas 48th Judicial District, on August 19, 2003, entitled David Harris, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. Both of these shareholder derivative actions allege, among other complaints, that certain officers and directors of the Company breached their respective fiduciary duties by causing the Company to make improper deferments, violate federal and state securities laws and issue misleading financial statements. The substantive allegations in both of the derivative actions are essentially the same as those in the above-referenced consolidated class action. A special litigation committee of the Board of Directors has been created to investigate the claims in the derivative actions. As a nominal defendant, the Company does not believe that it has any ultimate liability with respect to these derivative actions.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company’s security holders during the fourth quarter ended June 30, 2005.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s common stock trades on the New York Stock Exchange under the symbol ACF. As of September 9, 2005, there were 139,500,835 shares of common stock outstanding and approximately 260 shareholders of record.
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.
The Company has never paid cash dividends on its common stock. The indentures pursuant to which the Company’s senior notes and convertible senior notes were issued contain certain restrictions on the payment of dividends. The Company presently intends to retain future earnings, if any, for use in the operation and expansion of the business and for Board approved stock repurchases and does not anticipate paying any cash dividends in the foreseeable future.
During the year ended June 30, 2005, the Company repurchased shares as follows (dollars in thousands, except per share data):
(a)
On April 27, 2004, the Company announced the approval of a stock repurchase plan by its Board of Directors. The stock repurchase plan authorized the Company to repurchase up to $100.0 million of its common stock in the open market or in privately negotiated transactions, based on market conditions.
On August 17, 2004, the Company announced the approval of a stock repurchase plan by its Board of Directors. The stock repurchase plan authorized the Company to repurchase up to $100.0 million of its common stock in the open market or in privately negotiated transactions, based on market conditions.
All shares repurchased in July 2004 were repurchased under the April 2004 plan. All shares repurchased in October 2004, November 2004, December 2004, January 2005 and 31,996 shares repurchased in February 2005 were repurchased under the August 2004 plan.
(b)
Amounts include 20,012 shares at an average price per share of $20.02 resulting from tax withholdings upon the vesting of restricted share awards.
(c)
On January 25, 2005, the Company announced the approval of a stock repurchase plan by its Board of Directors which authorized the Company to repurchase up to $500.0 million of its common stock in the open market or in privately negotiated transactions, based on market conditions.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes selected financial information. For additional information, refer to the audited consolidated financial statements and notes thereto in Item 8. Financial Statements and Supplementary Data.
(a)
The Company changed the structure of its securitization transactions beginning with transactions closed subsequent to September 30, 2002, to no longer meet the accounting criteria for sales of finance receivables. Accordingly, no gain on sale of receivables was recognized after September 30, 2002.
(b)
Diluted earnings per share and weighted average shares and assumed incremental shares for fiscal year 2004 were revised to reflect the retroactive application of EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.”
(c)
Credit enhancement assets consist of interest-only receivables from Trusts, investments in Trust receivables and restricted cash-gain on sale Trusts.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a consumer finance company specializing in purchasing retail automobile installment sales contracts originated by franchised and select independent dealers in connection with the sale of used and new automobiles. The Company generates revenue and cash flows primarily through the purchase, retention, subsequent securitization and servicing of finance receivables. As used herein, “loans” include auto finance receivables originated by dealers and purchased by the Company. To fund the acquisition of receivables prior to securitization, and to fund the repurchase of receivables pursuant to cleanup call options, the Company uses available cash and borrowings under its warehouse credit facilities. The Company earns finance charge income on the finance receivables and pays interest expense on borrowings under its warehouse credit facilities.
The Company periodically transfers receivables to securitization trusts (“Trusts”) that, in turn, sell asset-backed securities to investors. Prior to October 1, 2002, these securitization transactions were structured as sales of finance receivables. Receivables sold under this structure are referred to herein as “gain on sale receivables.” At June 30, 2005, approximately 20% of the Company’s managed receivables were gain on sale receivables. The Company retains an interest in these securitization transactions in the form of credit enhancement assets, representing the estimated future excess cash flows expected to be received by the Company over the life of the securitization. Excess cash flows result from the difference between the finance charges received from the obligors on the receivables and the interest paid to investors in the asset-backed securities, net of credit losses and expenses.
Excess cash flows from the Trusts are initially utilized to fund credit enhancement requirements in order to attain specific credit ratings for the asset-backed securities issued by the Trusts. Once predetermined credit enhancement requirements are reached and maintained, excess cash flows are distributed to the Company. Credit enhancement requirements will increase if targeted portfolio performance ratios are exceeded (see Liquidity and Capital Resources section). In addition to excess cash flows, the Company receives monthly base servicing fees of 2.25% per annum on the outstanding principal balance of domestic receivables securitized and collects other fees, such as late charges, as servicer for securitization Trusts.
The Company changed the structure of its securitization transactions beginning with transactions closed subsequent to September 30, 2002, to no longer meet the accounting criteria for sales of finance receivables. Accordingly, following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance sheets. The Company recognizes finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction, and records a provision for loan losses to cover probable loan losses on the receivables. This change has significantly impacted the Company’s reported results of operations compared to its historical results because there is no gain on sale of receivables subsequent to September 30, 2002.
The Company implemented a revised operating plan in February 2003 targeted at preserving and strengthening its capital and liquidity position in light of a weak economic environment and a decline in used car pricing and the resulting breach of cumulative net loss triggers on securitization transactions insured by FSA prior to October 2002. The breach of triggers in the FSA Program caused a postponement of substantially all of the cash otherwise distributable to the Company from its FSA Program securitizations as this cash was used to fund increased credit enhancement requirements on FSA Program securitizations. The revised operating plan included a decrease in the Company’s targeted loan origination volume and a reduction in operating expenses through downsizing its workforce, consolidating its branch office network and closing its Canadian lending activities. The stated objectives of the plan were substantially met by the end of calendar 2003. In the first half of calendar 2004, the Company resumed growth in its loan origination targets and has since added staff to its branch office network and related areas to support new loan growth. The Company intends to continue to expand loan origination volume at a moderate pace during fiscal 2006.
RECENT DEVELOPMENTS
In late August 2005, Hurricane Katrina struck the Gulf Coast, causing extensive damage. Collateral supporting finance receivables in certain parts of Alabama, Louisiana and Mississippi may have been damaged by the storm. Additionally, there may be a period of higher unemployment in areas affected by the storm. Approximately 1.3% of managed receivables are secured by automobiles located in the affected areas.
On August 8, 2005, the Company announced that Daniel E. Berce had been named the Company’s Chief Executive Officer. Mr. Berce, who has served as the Company’s President since 2003, will now serve as President and Chief Executive Officer. As Chief Executive Officer, Mr. Berce succeeds Clifton H. Morris, Jr., who will retain his position as Chairman of the Board.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and 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 estimates that the Company believes are the most critical to understanding and evaluating the Company’s reported financial results include the following:
Allowance for loan losses
The allowance for loan losses is established systematically based on the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. The Company reviews charge-off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends, such as unemployment rates, and other information in order to make the necessary judgments as to the probable credit losses. The Company also uses historical charge-off experience to determine a loss confirmation period, which is defined as the time between when an event, such as delinquency status, giving rise to a probable credit loss occurs with respect to a specific account and when such account is charged off. This loss confirmation period is applied to the forecasted probable credit losses to determine the amount of losses inherent in finance receivables at the reporting date. Assumptions regarding credit losses and loss confirmation periods are reviewed periodically and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumption or loss confirmation period increase, there could be an increase in the amount of allowance for loan losses required, which could decrease the net carrying value of finance receivables and increase the amount of provision for loan losses recorded on the consolidated statements of income. A 10% and 20% increase in cumulative net credit losses over the loss confirmation period would increase the allowance for loan losses as of June 30, 2005, as follows (in thousands):
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 or that the Company’s credit loss assumptions will not increase.
Gain on sale of receivables
The Company periodically transfers receivables to Trusts that, in turn, sell asset-backed securities to investors. Prior to October 1, 2002, the Company recognized a gain on the sale of receivables to the Trusts, which represented 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, the timing of those losses and the rate at which the estimated future excess cash flows are discounted.
Significant assumptions used in determining the gain on sale of auto receivables were as follows:
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 cumulative credit loss assumption 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% 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-gain on sale Trusts and investments in Trust receivables represent cash and finance receivables held by the Trusts and are senior to interest-only receivables from Trusts for credit enhancement purposes. Accordingly, restricted cash-gain on sale Trusts and investments in Trust receivables are assigned a lower discount rate than the interest-only receivables from Trusts. The assumptions used represent the Company’s best estimates. The use of different assumptions would produce different financial results.
Credit enhancement assets
The Company’s credit enhancement assets, which represent retained interests in securitization Trusts accounted for as sales, are recorded at fair value. Because market prices are not readily available for the credit enhancement assets, fair value is determined using discounted cash flow models. The most significant assumptions made are the cumulative net credit losses to be incurred on the pool of receivables sold, the timing of those losses and the rate at which estimated future excess cash flows are discounted. The assumptions used represent the Company’s best estimates. The assumptions may change in future periods due to changes in the economy that may impact the performance of the Company’s finance receivables and the risk profiles of its credit enhancement assets. The use of different assumptions would result in different carrying values for the Company’s credit enhancement assets and may change the amount of accretion of present value discount and impairment of credit enhancement assets recognized through the consolidated statements of income. An immediate 10% and 20% adverse change in the assumptions used to measure the fair value of credit enhancement assets would decrease the credit enhancement assets as of June 30, 2005, as follows (in thousands):
The adverse changes to the key assumptions and estimates are hypothetical. The change in fair value based on the above variations 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 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.
Stock-based employee compensation
On July 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), prospectively for all awards granted or modified subsequent to June 30, 2003. The fair value of each option granted or modified was estimated using an option-pricing model based on the following weighted average assumptions:
These assumptions are reviewed each time there is a new grant or modification of a previous grant and may be impacted by actual fluctuation in the Company’s stock price, movements in market interest rates and option terms. The use of different assumptions would produce a different fair value for the options granted or modified and would impact the amount of compensation expense recognized on the consolidated statements of income. The impact of a 10% or 20% increase in the Company’s assumptions of volatility, risk-free interest rate and expected life on the amount of compensation expense recognized would not have been material for fiscal 2005 and 2004. The Company has separately disclosed the impact of SFAS 123R, which effects the manner by which assumptions are determined for compensation expense.
RESULTS OF OPERATIONS
Year Ended June 30, 2005 as compared to Year Ended June 30, 2004
Revenue
A summary of changes in the Company’s finance receivables is as follows (in thousands):
The increase in loans purchased during fiscal 2005 as compared to fiscal 2004 was due to the addition of staff in the Company’s branch office network and related areas in order to support new loan growth. The increase in liquidations and other resulted primarily from increased collections and charge-offs on finance receivables due to the increase in average finance receivables and average age, or seasoning, of the portfolio. As of June 30, 2005 and 2004, the Company operated 89 branch offices.
The average new loan size was $17,005 for fiscal 2005, compared to $16,647 for fiscal 2004. The average annual percentage rate for finance receivables purchased during fiscal 2005 increased to 16.4% from 16.0% during fiscal 2004 due to an increase in new loan pricing as a result of an increase in short term market interest rates.
Finance charge income increased by 31% to $1,217.7 million for fiscal 2005 from $927.6 million for fiscal 2004, primarily due to the increase in average finance receivables. The Company’s effective yield on its finance receivables increased to 15.9% for fiscal 2005 from 15.4% for fiscal 2004. The effective yield represents finance charges and fees taken into earnings during the period as a percentage of average finance receivables and is lower than the contractual rates of the Company’s auto finance contracts due to finance receivables in nonaccrual status. The increase in the effective yield is primarily due to the accretion of acquisition fees on loans acquired subsequent to June 30, 2004, due to the Company’s adoption of Statement of Position 03-3, “Accounting for Certain Loans on Debt Securities Acquired in a Transfer” (“SOP 03-3”).
Servicing income consists of the following (in thousands):
Servicing fees are earned from servicing domestic finance receivables sold to gain on sale Trusts. Servicing fees decreased as a result of the decrease in average gain on sale receivables caused by the change in the Company’s securitization transaction structure from gain on sale to secured financing. Servicing fees were 2.8% and 2.6% of average gain on sale receivables for fiscal 2005 and 2004, respectively.
Other-than-temporary impairment of $1.1 million and $33.4 million for fiscal 2005 and 2004, respectively, resulted from higher than forecasted default rates in certain gain on sale Trusts. Other-than-temporary impairment decreased for fiscal 2005 compared to fiscal 2004 as a result of seasoning of the gain on sale receivables which generally provides for greater predictability of default rates.
The present value discount related to the Company’s credit enhancement assets represents the risk-adjusted time value of money on estimated cash flows. The present value discount on credit enhancement assets is accreted into earnings over the life of credit enhancement assets using the effective interest method. Additionally, unrealized gains on credit enhancement assets reflected in accumulated other comprehensive income are also accreted into earnings over the life of the credit enhancement assets using the effective interest method. The Company recognized accretion of $78.1 million, or 9.3% of average credit enhancement assets, and $100.2 million, or 8.2% of average credit enhancement assets, during fiscal 2005 and 2004, respectively. The Company does not record accretion in a period when such accretion would cause an other-than-temporary impairment in a securitization pool. Accretion as a percentage of average credit enhancements was higher during fiscal 2005 as compared to fiscal 2004 as a result of fewer securitization transactions incurring other-than-temporary impairments.
Other income was $55.6 million for fiscal 2005, compared to $32.0 million for fiscal 2004. The increase in other income is primarily due to an increase in investment income, which resulted from higher cash balances combined with increased interest rates, and an increase in late fees and other fees associated with higher average finance receivables.
Costs and Expenses
Operating expenses decreased to $312.6 million for fiscal 2005 from $325.8 million for fiscal 2004. Operating expenses declined primarily as a result of lower costs to service a declining portfolio, partially offset by increased costs to support greater loan origination volume.
The Company recognized $2.8 million and $15.9 million in restructuring charges for fiscal 2005 and 2004, respectively. The restructuring charges for fiscal 2005 consisted primarily of a revision of assumed lease costs for office space and collections centers in connection with the Company’s restructuring activities in fiscal 2003 and continued into fiscal 2004. The restructuring charges for fiscal 2004 consisted primarily of facility costs related to the closing of the Company’s Jacksonville collections center, the elimination of excess space at its Chandler collections center and corporate headquarters, as well as adjustments to the restructuring charges related to the Company’s implementation of a revised operating plan in February 2003.
Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for fiscal 2005 and 2004 reflect inherent losses on receivables originated during those years and changes in the amount of inherent losses on receivables originated in prior years. The provision for loan losses increased to $418.7 million for fiscal 2005 from $257.1 million for fiscal 2004 primarily as a result of increased origination volume in fiscal 2005. As a percentage of average finance receivables, the provision for loan losses was 5.5% and 4.3% for fiscal 2005 and 2004, respectively. The provision for loan losses as a percentage of average finance receivables was higher for fiscal 2005, as compared to fiscal 2004, due to the Company’s adoption of SOP 03-3, for loans acquired subsequent to June 30, 2004. Under SOP 03-3, dealer acquisition fees on loans purchased by the Company are no longer considered credit related because there is no deterioration in credit quality between the time the loan is originated and when it is acquired. Accordingly, dealer acquisition fees reduce the carrying value of finance receivables and are accreted into earnings as an adjustment to yield over the life of the loans, instead of being used to cover losses inherent in the portfolio. This change resulted in a higher provision for loan losses in fiscal 2005 in order to maintain an appropriate level of allowance for loan losses.
Interest expense increased to $264.3 million for fiscal 2005 from $252.0 million for fiscal 2004. Average debt outstanding was $7,018.8 million and $5,891.2 million for fiscal 2005 and 2004, respectively. The Company’s effective rate of interest paid on the Company’s debt for fiscal 2005 was 3.8%. The effective rate of interest paid on the Company’s debt for fiscal 2004 was 3.8%, excluding the recognition of $29.0 million of deferred debt issuance costs related to the whole loan purchase facility that was repaid in September 2003.
The Company’s effective income tax rate was 36.8% for fiscal 2005 and 37.8% for fiscal 2004. The decrease in the Company’s effective income tax rate resulted from a change in the mix of business due to organizational restructuring and other changes that reduced federal and state tax exposures.
Other Comprehensive (Loss) Income
Other comprehensive (loss) income consisted of the following (in thousands):
Credit Enhancement Assets
Unrealized (losses) gains on credit enhancement assets consisted of the following (in thousands):
Changes in the fair value of credit enhancement assets as a result of modifications to the credit loss assumptions are reported as unrealized gains in other comprehensive income (loss) until realized. Unrealized losses are reported as a reduction in unrealized gains to the extent that there are unrealized gains. If there are no unrealized gains to offset the unrealized losses, the losses are considered to be other-than-temporary and are charged to operations. 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. 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.
The Company changed the cumulative credit loss assumptions used in measuring the fair value of credit enhancement assets to a range of 12.4% to 14.8% as of June 30, 2005, from a range of 12.4% to 14.9% as of June 30, 2004. On a Trust by Trust basis, certain Trusts experienced better than expected credit performance for fiscal 2005 and decreased cumulative credit loss assumptions. Certain other Trusts experienced worse than expected credit performance for fiscal 2005 and increased cumulative credit loss assumptions. The net impact resulted in the recognition of unrealized losses of $11.3 million for those securitization Trusts as well as other-than-temporary impairment of $1.1 million. The Company increased the cumulative credit loss assumptions used in measuring the fair value of credit enhancement assets to a range of 12.4% to 14.9% as of June 30, 2004, from a range of 11.3% to 14.7% as of June 30, 2003. For fiscal 2004, certain Trusts experienced better than expected credit performance and decreased cumulative credit loss assumptions resulting in the recognition of unrealized gains of $27.6 million for those securitization Trusts, while other Trusts experienced worse than expected credit performance and increased cumulative credit loss assumptions, resulting in the recognition of other-than-temporary impairment of $33.4 million.
Unrealized gains related to changes in interest rates of $0.5 million and $2.5 million for fiscal 2005 and 2004, respectively, resulted primarily from an increase in estimated future cash flows to be generated from investment income earned on the restricted cash and Trust collection accounts due to an increase in forward interest rate expectations.
Net unrealized gains of $12.3 million and $9.7 million were reclassified into earnings through accretion during fiscal 2005 and 2004, respectively, and relate primarily to recognition of actual excess cash collected over the Company’s prior estimate.
Cash Flow Hedges
Unrealized gains on cash flow hedges consisted of the following (in thousands):
Unrealized gains related to changes in the fair value for fiscal 2005 and 2004, were primarily due to changes in the fair value of interest rate swap agreements, including the interest rate swap agreements executed in January 2005 related to the Company’s medium term note facility, that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements fluctuate based upon changes in forward interest rate expectations.
Unrealized gains or losses on cash flow hedges of the Company’s credit enhancement assets are reclassified into earnings when unrealized gains or losses related to interest rate fluctuations on the Company’s credit enhancement assets are reclassified. However, if the Company expects that the continued reporting of a loss in accumulated other comprehensive income would lead to recognizing a net loss on the combination of the interest rate swap agreements and the credit enhancement assets, the loss is reclassified to earnings for the amount that is not expected to be recovered. Unrealized gains or losses on cash flow hedges of the Company’s floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment gains of $7.8 million and $1.3 million for fiscal 2005 and 2004, respectively, were included in other comprehensive (loss) income. The translation adjustment gains are due to the increase in the value of the Company’s Canadian dollar denominated assets related to the decline in the U.S. dollar to Canadian dollar conversion rates. The Company does not anticipate the settlement of intercompany transactions with its Canadian subsidiaries in the foreseeable future.
Net Margin
Net margin is the difference between finance charge 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 on the consolidated statements of income is as follows (in thousands):
Net margin as a percentage of average finance receivables is as follows:
The increase in net margin is due to an increase in earned acquisition fees on loans acquired subsequent to June 30, 2004, and a decline in cost of funds resulting from lower balance sheet leverage during fiscal 2005. Interest expense for fiscal 2004 also includes the recognition of deferred debt issuance costs related to the whole loan purchase facility that was repaid in September 2003.
The Company evaluates the profitability of its lending activities based partly upon the net margin related to its managed auto loan portfolio, including finance receivables and gain on sale receivables. The Company uses this information to analyze trends in the components of the profitability of its managed auto portfolio. Analysis of net margin on a managed basis allows the Company to determine which origination channels and loan products are most profitable, guides the Company in making pricing decisions for loan products and indicates if sufficient spread exists between the Company’s revenues and cost of funds to cover operating expenses and achieve corporate profitability objectives. Additionally, net margin on a managed basis facilitates comparisons of results between the Company and other finance companies (i) that do not securitize their receivables or (ii) have not structured any securitizations to qualify for gain on sale accounting treatment.
The Company routinely securitizes its receivables and prior to October 1, 2002, recorded a gain on the sale of such receivables. The net margin on a managed basis presented below assumes that all securitized receivables have not been sold and are still on the Company’s consolidated balance sheet. Accordingly, no servicing income would have been recognized. Instead, finance charges would be recognized over the life of the securitized receivables as earned, and interest and other costs related to the asset-backed securities would be recognized as incurred.
Average managed receivables consists of finance receivables held by the Company and finance receivables sold to the Company’s securitization Trusts in transactions accounted for as sales. The Company’s average managed receivables outstanding are as follows (in thousands):
Average managed receivables outstanding decreased by 15% from 2004 to 2005 because collections and other liquidations of the Company’s managed receivables have exceeded new loan purchase volume.
Net margin for the Company’s managed finance receivables portfolio is as follows (in thousands):
Net margin as a percentage of average managed finance receivables outstanding is as follows:
Net margin as a percentage of average managed finance receivables increased for fiscal 2005 compared to fiscal 2004 primarily due to an increase in earned acquisition fees on loans acquired subsequent to June 30, 2004, and a decline in cost of funds from lower balance sheet leverage during fiscal 2005. Interest expense for fiscal 2004 also includes recognition of deferred debt issuance costs related to the whole loan purchase facility that was repaid in September 2003.
The following is a reconciliation of finance charge income as reflected on the Company’s consolidated statements of income to the Company’s managed basis finance charge income (in thousands):
The following is a reconciliation of other income as reflected on the Company’s consolidated statements of income to the Company’s managed basis other income:
The following is a reconciliation of interest expense as reflected on the Company’s consolidated statements of income to the Company’s managed basis interest expense (in thousands):
Year Ended June 30, 2004 as compared to Year Ended June 30, 2003
Revenue
A summary of changes in the Company’s finance receivables is as follows (in thousands):
The decrease in loans purchased during fiscal 2004 as compared to fiscal 2003 resulted from a reduction in the number of the Company’s branch offices and a tightening of credit standards in connection with the Company’s revised operating plan implemented in February 2003. As of June 30, 2004, the Company operated 89 branch offices. During fiscal 2003, the Company operated as many as 251 branch offices. As of June 30, 2003, the Company operated 90 branch offices. The increase in liquidations and other resulted primarily from increased collections and charge-offs on finance receivables due to the increase in average finance receivables and average age, or seasoning, of the portfolio.
The average new loan size was $16,647 for fiscal 2004, compared to $16,833 for fiscal 2003. The average annual percentage rate for finance receivables purchased during fiscal 2004 was 16.0%, compared to 16.7% during fiscal 2003. The Company’s tightening of credit standards in connection with its revised operating plan implemented in February 2003 resulted in a lower average annual percentage rate.
Finance charge income increased by 51% to $927.6 million for fiscal 2004 from $613.2 million for fiscal 2003, primarily due to the increase in average finance receivables. The Company’s effective yield on its finance receivables decreased to 15.4% for fiscal 2004 from 16.5% for fiscal 2003. The effective yield represents finance charges and fees taken into earnings during the period as a percentage of average finance receivables and is lower than the contractual rates of the Company’s auto finance contracts due to finance receivables in nonaccrual status. The effective yield decreased primarily due to a decrease in average annual percentage rates for finance receivables originated during fiscal 2004.
Subsequent to September 30, 2002, the Company’s securitization transactions were structured as secured financings. Therefore, no gain on sale was recorded for finance receivables securitized during fiscal 2004. The gain on sale of receivables for fiscal 2003 was $132.1 million, or 5.3% of finance receivables securitized.
Servicing income consists of the following (in thousands):
Servicing fees are earned from servicing domestic finance receivables sold to gain on sale Trusts. Servicing fees decreased as a result of the decrease in average gain on sale receivables caused by the change in the Company’s securitization transaction structure from gain on sale to secured financing. Servicing fees were 2.6% and 2.5% of average gain on sale receivables for fiscal 2004 and 2003, respectively.
Other-than-temporary impairment of $33.4 million for fiscal 2004 resulted from higher than forecasted default rates in certain Trusts. Other-than-temporary impairment of $189.5 million for fiscal 2003, resulted from increased default rates caused by the continued weakness in the economy and lower than expected recovery proceeds caused by depressed used car values, as well as the expected delay in cash distributions from FSA Program securitizations which reduced the present value of such cash distributions.
The present value discount related to the Company’s credit enhancement assets represents the risk-adjusted time value of money on estimated cash flows. The present value discount on credit enhancement assets is accreted into earnings over the life of credit enhancement assets using the effective interest method. Additionally, unrealized gains on credit enhancement assets reflected in accumulated other comprehensive income are also accreted into earnings over the life of the credit enhancement assets using the effective interest method. The Company recognized accretion of $100.2 million, or 8.2% of average credit enhancement assets, and $99.4 million, or 6.2% of average credit enhancement assets, during fiscal 2004 and 2003, respectively. The Company does not record accretion in a period when such accretion would cause an other-than-temporary impairment in a securitization pool. Accretion as a percentage of average credit enhancement assets was higher during fiscal 2004 as compared to fiscal 2003 as a result of fewer securitization transactions incurring other-than-temporary impairments during fiscal 2004.
Other income was $32.0 million for fiscal 2004, compared to $24.6 million for fiscal 2003. The increase in other income is primarily due to an increase in late fees and other fees associated with higher average finance receivables.
Costs and Expenses
Operating expenses decreased to $325.8 million for fiscal 2004 from $373.7 million for fiscal 2003. Operating expenses declined primarily as a result of a reduction in workforce in November 2002, the implementation of a revised operating plan in February 2003 and the closing of the Company’s Jacksonville collections center in April 2004.
The Company recognized $15.9 million and $63.3 million in restructuring charges for fiscal 2004 and 2003, respectively. The restructuring charges for fiscal 2004 consisted primarily of facility costs related to the closing of the Company’s Jacksonville collections center, the elimination of excess space at its Chandler collections center and corporate headquarters, as well as adjustments to the restructuring charges related to the Company’s implementation of a revised operating plan in February 2003. The restructuring charges for fiscal 2003 included $6.9 million for the Company’s November 2002 reduction in workforce and $56.4 million related to the implementation of the February 2003 revised operating plan.
Provisions for loan losses are charged to income to bring the Company’s allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for the fiscal year reflects inherent losses on receivables originated during that year and changes in the amount of inherent losses on receivables originated in prior years. The provision for loan losses decreased to $257.1 million for fiscal 2004 from $307.6 million for fiscal 2003 as a result of decreased origination volume. As a percentage of average finance receivables, the provision for loan losses was 4.3% and 8.3% for fiscal 2004 and 2003, respectively. The provision for loan losses as a percentage of average finance receivables was higher for fiscal 2003, as compared to fiscal 2004, due to the Company’s transition to structuring securitization transactions as secured financings.
Interest expense increased to $252.0 million for fiscal 2004 from $202.2 million for fiscal 2003 due to higher debt levels. Average debt outstanding was $5,891.2 million and $4,167.8 million for fiscal 2004 and 2003, respectively. The Company’s effective rate of interest paid on its debt decreased to 4.3% from 4.9% as a result of lower short-term market interest rates. The increase in average debt outstanding resulted from the Company’s decision to structure securitization transactions subsequent to September 30, 2002, as secured financings.
The Company’s effective income tax rate was 37.8% for fiscal 2004 and 38.5% for fiscal 2003. The decrease in the Company’s effective income tax rate resulted primarily from lower Canadian tax rates combined with the impact of a change in the mix of business among states, resulting in a lower state tax rate.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) consisted of the following (in thousands):
Credit Enhancement Assets
Unrealized gains (losses) on credit enhancement assets consisted of the following (in thousands):
Changes in the fair value of credit enhancement assets as a result of modifications to the credit loss assumptions are reported as unrealized gains in other comprehensive income (loss) until realized. Unrealized losses are reported as a reduction in unrealized gains to the extent that there are unrealized gains. If there are no unrealized gains to offset the unrealized losses, the losses are considered to be other-than-temporary and are charged to operations. 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. 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.
The Company increased the cumulative credit loss assumptions used in measuring the fair value of credit enhancement assets to a range of 12.4% to 14.9% as of June 30, 2004, from a range of 11.3% to 14.7% as of June 30, 2003. On a Trust by Trust basis, certain Trusts experienced worse than expected credit performance for fiscal 2004, and increased cumulative credit loss assumptions resulting in other-than-temporary impairment. Certain other Trusts experienced better than expected credit performance for fiscal 2004, resulting in decreased cumulative credit loss assumptions resulting in unrealized gains of $27.6 million for those securitization Trusts. Unrealized losses of $96.9 million for fiscal 2003 resulted from an increase in the cumulative credit loss assumptions used in measuring the fair value of credit enhancement assets to a range of 11.3% to 14.7% as of June 30, 2003, from a range of 10.4% to 12.7% as of June 30, 2002.
Unrealized gains related to changes in interest rates of $2.5 million for fiscal 2004 resulted primarily from an increase in estimated future cash flows to be generated from investment income earned on the restricted cash and trust collection accounts due to an increase in forward interest rate expectations. Unrealized losses related to changes in interest rates of $19.5 million for fiscal 2003 resulted primarily from a decline in estimated future cash flows to be generated from investment income earned on the restricted cash and Trust collections accounts due to lower interest rates. The lower earnings were partially offset by an increase in value associated with a decrease in interest rates payable to investors on the floating rate tranches of securitization transactions.
Net unrealized gains of $9.7 million and $35.6 million were reclassified into earnings through accretion during fiscal 2004 and 2003, respectively, and relate primarily to recognition of actual excess cash collected over the Company’s prior estimate and recognition of unrealized gains at time of sale.
Cash Flow Hedges
Unrealized gains on cash flow hedges consisted of the following (in thousands):
Unrealized gains (losses) related to changes in fair value for fiscal 2004 and 2003, were primarily due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements fluctuate based upon changes in forward interest rate expectations.
Unrealized gains or losses on cash flow hedges of the Company’s credit enhancement assets are reclassified into earnings when unrealized gains or losses related to interest rate fluctuations on the Company’s credit enhancement assets are reclassified. However, if the Company expects that the continued reporting of a loss in accumulated other comprehensive income would lead to recognizing a net loss on the combination of the interest rate swap agreements and the credit enhancement assets, the loss is reclassified to earnings for the amount that is not expected to be recovered. Unrealized gains or losses on cash flow hedges of the Company’s floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.
Canadian Currency Translation Adjustment
Canadian currency translation adjustment gains of $1.3 million and $12.4 million for fiscal 2004 and 2003, respectively, were included in other comprehensive income (loss). The translation adjustment gains are due to the increase in the value of the Company’s Canadian dollar denominated assets related to the decline in the U.S. dollar to Canadian dollar conversion rates. The Company does not anticipate the settlement of intercompany transactions with its Canadian subsidiaries in the foreseeable future.
Net Margin
Net margin is the difference between finance charge 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 on the consolidated statements of income is as follows (in thousands):
Net margin as a percentage of average finance receivables is as follows:
The Company evaluates the profitability of its lending activities based partly upon the net margin related to its managed auto loan portfolio, including finance receivables and gain on sale receivables. The Company uses this information to analyze trends in the components of the profitability of its managed auto portfolio. Analysis of net margin on a managed basis allows the Company to determine which origination channels and loan products are most profitable, guides the Company in making pricing decisions for loan products and indicates if sufficient spread exists between the Company’s revenues and cost of funds to cover operating expenses and achieve corporate profitability objectives. Additionally, net margin on a managed basis facilitates comparisons of results between the Company and other finance companies (i) that do not securitize their receivables or (ii) have not structured any securitizations to qualify for gain on sale accounting treatment.
The Company routinely securitizes its receivables and prior to October 1, 2002, recorded a gain on the sale of such receivables. The net margin on a managed basis presented below assumes that all securitized receivables have not been sold and are still on the Company’s consolidated balance sheet. Accordingly, no gain on sale or servicing income would have been recognized. Instead, finance charges would be recognized over the life of the securitized receivables as earned, and interest and other costs related to the asset-backed securities would be recognized as incurred.
Average managed receivables consists of finance receivables held by the Company and finance receivables sold to the Company’s securitization Trusts in transactions accounted for as sales. The Company’s average managed receivables outstanding are as follows (in thousands):
Average managed receivables outstanding decreased by 16% because collections and other liquidations of the Company’s managed receivables have exceeded new loan purchase volume since implementation of the revised operating plan in February 2003.
Net margin for the Company’s managed finance receivables portfolio is as follows (in thousands):
Net margin as a percentage of average managed finance receivables outstanding is as follows:
The following is a reconciliation of finance charge income as reflected on the Company’s consolidated statements of income to the Company’s managed basis finance charge income (in thousands):
The following is a reconciliation of other income as reflected on the Company’s consolidated statements of income to the Company’s managed basis other income:
The following is a reconciliation of interest expense as reflected on the Company’s consolidated statements of income to the Company’s managed basis interest expense (in thousands):
CREDIT QUALITY
The Company provides financing in relatively high-risk markets, and, therefore, anticipates a corresponding high level of delinquencies and charge-offs.
Finance receivables on the Company’s balance sheets include receivables purchased but not yet securitized and receivables securitized by the Company after September 30, 2002. 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 inherent in finance receivables.
Prior to October 1, 2002, the Company periodically sold receivables to Trusts in securitization transactions accounted for as a sale of receivables 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 estimated fair value, calculated based upon the present value of estimated excess future cash flows from the Trusts using, among other assumptions, estimates of future credit losses on the receivables sold. Receivables sold to Trusts that are subsequently charged off decrease the amount of excess future cash flows from the Trusts. If such charge-offs are expected to exceed the Company’s estimates of cumulative credit losses or if the actual timing of these losses differs from expected timing, the fair value of credit enhancement assets is written down through an other-than-temporary impairment charge to earnings to the extent the write-down exceeds any previously recorded unrealized gain.
The following tables present certain data related to the receivables portfolio (dollars in thousands):
The allowance for loan losses and nonaccretable acquisition fees increased to $541.2 million, or 6.1% of finance receivables, at June 30, 2005, from $418.4 million, or 6.2% of finance receivables, at June 30, 2004. The increase in the amount of allowance for loan losses and nonaccretable acquisition fees resulted from increased finance receivables outstanding.
Delinquency
The following is a summary of managed finance receivables that are (i) more than 30 days delinquent, but not yet in repossession, and (ii) in repossession, but not yet charged off (dollars in thousands):
An account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually due. Delinquencies in 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 high rate of account movement between current and delinquent status in the portfolio.
The Company has experienced improved credit performance on loans originated since February 2003. A greater percentage of total managed finance receivables at June 30, 2005, as compared to that same percentage at June 30, 2004, were originated since February 2003. Accordingly, total managed finance receivables 31 to 60 days and greater-than-60 days delinquent were lower at June 30, 2005, as compared to June 30, 2004. Delinquencies in finance receivables are lower than delinquencies in gain on sale receivables due to improved credit performance on loans originated since the implementation of a revised operating plan in February 2003 as well as the relative lower overall seasoning of such finance receivables. Delinquencies in finance receivables were higher at June 30, 2005, as compared to June 30, 2004, as a result of seasoning of the finance receivables.
Deferrals
In accordance with its policies and guidelines, the Company, at times, offers payment deferrals to consumers, whereby the consumer is allowed to move up to two delinquent payments to the end of the loan generally by paying a fee (approximately the interest portion of the payment deferred, except where state law provides for a lesser amount). The Company’s policies and guidelines, as well as certain contractual restrictions in the Company’s warehouse credit facilities and securitization transactions, limit the number and frequency of deferments that may be granted. The Company’s policies and guidelines generally limit the granting of deferments on new accounts until a requisite number of payments have been received. Due to the nature of the Company’s customer base and policies and guidelines of the deferral program, approximately 50% of accounts currently comprising the managed portfolio will receive a deferral at some point in the life of the account.
An account for which all delinquent payments are deferred is classified as current at the time the deferment is granted and therefore is not included as a delinquent account. Thereafter, such account is aged based on the timely payment of future installments in the same manner as any other account.
Contracts receiving a payment deferral as an average quarterly percentage of average managed receivables outstanding were as follows:
The following is a summary of total deferrals as a percentage of managed receivables outstanding:
The percentage of loans deferred is greater for the Company’s gain on sale receivables as compared to its finance receivables as a result of seasoning of the gain on sale receivables as well as overall improved credit performance on loans originated since the implementation of the Company’s revised operating plan in February 2003.
The Company evaluates the results of its deferment strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, 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.
Changes in deferment levels do not have a direct impact on the ultimate amount of finance receivables charged off by the Company. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios and loss confirmation periods used in the determination of the
adequacy of the Company’s allowance for loan losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the loan portfolio and therefore increase the allowance for loan losses and related provision for loan losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan losses and related provision for loan losses.
Charge-offs
The following table presents charge-off data with respect to the Company’s managed finance receivables portfolio (dollars in thousands):
(a)
Mandatory charge-offs represent accounts 120 days delinquent that are charged off in full with no recovery amounts realized at time of charge-off and the change during the period in the aggregate write-down of finance receivables in repossession to the net realizable value of the repossessed vehicle when the repossessed vehicle is legally available for sale.
Net charge-offs as a 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. The decrease in net charge-offs for fiscal 2005, as compared to fiscal 2004, resulted primarily from improved credit performance on loans originated since the implementation of the Company’s revised operating plan in February 2003 and a declining managed portfolio balance, combined with an overall improvement in recovery rates. The increase in net charge-offs for fiscal 2004, as compared to fiscal 2003, resulted primarily from the Company’s change in repossession charge-off policy during fiscal 2004 and weakness in the economy during the first half of fiscal 2004. Prior to December 31, 2003, receivables were charged off when the Company repossessed and disposed of the automobile or the account was otherwise deemed uncollectible. In implementing the new repossession charge-off policy, the Company incurred additional charge-offs of $49.6 million in fiscal 2004 related to the acceleration of charge-off timing for certain accounts already repossessed.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company’s primary sources of cash are finance charge income, servicing fees, distributions from securitization Trusts, issuances of senior notes and equity, borrowings under warehouse credit facilities, transfers of finance receivables to Trusts in securitization transactions and collections and recoveries on finance receivables. The Company’s primary uses of cash have been purchases of finance receivables, repayment of warehouse credit facilities, securitization notes payable and senior notes, funding credit enhancement requirements for securitization transactions, operating expenses, income taxes and stock repurchases.
The Company used cash of $5,447.4 million, $3,859.7 million and $6,559.6 million for the purchase of finance receivables during fiscal 2005, 2004 and 2003, respectively. These purchases were funded initially utilizing cash and warehouse credit facilities and subsequently the long-term financing of finance receivables in securitization transactions as well as, in fiscal 2003, through the sale of receivables under a whole loan purchase facility.
Warehouse Credit Facilities
In the normal course of business, in addition to using its available cash, the Company pledges receivables and borrows under its warehouse credit facilities to fund its operations and repays these borrowings as appropriate under its cash management strategy.
As of June 30, 2005, warehouse credit facilities consisted of the following (in millions):
(a)
At the maturity date, the outstanding debt balance can either be repaid in full or over time based on the amortization of receivables pledged.
(b)
$150.0 million of this facility matures in November 2005, and the remaining $1,800.0 million matures in November 2007.
(c)
This facility is a revolving facility through the date stated above. During the revolving period, the Company has the ability to substitute receivables for cash, or vice versa.
In August 2004, the Company entered into the $400.0 million repurchase facility pursuant to which the Company can finance the repurchase of finance receivables from securitization Trusts upon exercise of the cleanup call option. Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $500.0 million and extended its maturity to August 2006.
In October 2004, the Company terminated a $500.0 million medium term note facility and entered into the $650.0 million medium term note facility.
In November 2004, the Company renewed its $1,950.0 million commercial paper facility, extending the $150.0 million one-year maturity to November 2005 and the $1,800.0 million three year maturity to November 2007.
In January 2005, the Company entered into the $150.0 million near prime facility to fund higher credit quality receivables. Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $400.0 million and extended its maturity to July 2006.
The Company’s warehouse credit facilities contain various covenants requiring certain minimum financial ratios, asset quality and portfolio performance ratios (cumulative net loss, delinquency and repossession ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or restrict the Company’s ability to obtain additional borrowings under these agreements. As of June 30, 2005, the Company’s warehouse credit facilities were in compliance with all covenants.
Whole Loan Purchase Facility
In March 2003, the Company entered into a whole loan purchase facility with an original term of approximately four years under which the Company transferred $1.0 billion of finance receivables to a special purpose finance subsidiary of the Company and received an advance of $875.0 million from the purchaser. Additionally, the Company issued a $30.0 million note to the purchaser representing debt issuance costs in the form of a residual interest in the finance receivables transferred. In September 2003, the Company terminated the whole loan purchase facility.
Convertible Senior Notes
In November 2003, the Company issued $200.0 million of contingently convertible senior notes that are due in November 2023. Interest on the notes is payable semiannually at a rate of 1.75% per annum. The notes, which are uncollateralized, are convertible prior to maturity into shares of the Company’s common stock at $18.68 per share. Additionally, the Company may exercise its option to repurchase the notes, or holders of the convertible senior notes may require the Company to repurchase the notes, on November 15, 2008, at a price equal to 100.25% of the principal amount of the notes redeemed, or after November 15, 2008 at par.
In conjunction with the issuance of the convertible senior notes, the Company purchased a call option that entitles it to purchase shares of the Company’s stock in an amount equal to the number of shares convertible at $18.68 per share. This call option allows the Company to offset the dilution of its shares if the conversion feature of the senior convertible notes is exercised. The Company also issued warrants to purchase 10,705,205 shares of the Company’s common stock. Each warrant entitles the holder, at its option, and subject to certain provisions within the warrant agreement, to purchase shares of common stock from the Company at $28.20 per share, at any time prior to its expiration on October 15, 2008.
Contractual Obligations
The following table summarizes the expected scheduled principal and interest payments, where applicable, under the Company’s contractual obligations (in thousands):
Securitizations
The Company has completed 49 securitization transactions through June 30, 2005. The proceeds from the transactions were primarily used to repay borrowings outstanding under the Company’s warehouse credit facilities.
A summary of the active transactions through June 30, 2005, is as follows (in millions):
(a)
Transactions originally totaling $14,929.5 million have been paid off as of June 30, 2005.
(b)
Balances at June 30, 2005, reflect fluctuations in foreign currency translation rates and principal pay downs.
(c)
Amounts do not include $24.4 million of asset-backed securities issued and retained by the Company.
(d)
Amounts do not include $25.8 million of asset-backed securities retained by the Company.
Prior to October 1, 2002, the Company structured its securitization transactions to meet the accounting criteria for sales of finance receivables under generally accepted accounting principles in the United States of America. The Company changed the structure of securitization transactions completed subsequent to September 30, 2002, to no longer meet the accounting criteria for sale of finance receivables. Accordingly, following a securitization, the finance receivables are transferred to a securitization Trust, which is a special purpose finance subsidiary of AmeriCredit Corp. The related securitization notes payable issued by these Trusts remain on the Company’s consolidated balance sheets. While these Trusts are included in the Company’s consolidated financial statements, these Trusts are separate legal entities; thus the finance receivables and other assets held by these Trusts are legally owned by these Trusts, are available to satisfy the related securitization notes payable and are
not available to creditors of AmeriCredit Corp. or its other subsidiaries. This change in securitization structure does not change the Company’s requirement 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 transfers finance receivables in excess of the amount of asset-backed securities issued to create initial overcollateralization. The Company 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, thereby creating additional credit enhancement through overcollateralization in the Trusts. When the credit enhancement levels reach specified percentages of the Trust’s pool of receivables, excess cash flows are distributed to the Company.
The Company employs two types of securitization structures to meet its credit enhancement requirements. The structure the Company has utilized most frequently involves the purchase of a financial guaranty policy issued by an insurer to cover the asset-backed securities and may include the use of reinsurance or other alternative credit enhancement products to reduce the required initial deposit to the restricted cash account and initial overcollateralization. However, the Company currently has no outstanding commitments to obtain reinsurance or other alternative credit enhancement products and will likely provide initial credit enhancement deposits in future securitization transactions from its existing capital resources.
The Company’s second type of securitization structure involves the sale of subordinated asset-backed securities in order to provide credit enhancement for the senior asset-backed securities. The subordinated asset-backed securities replace a portion of the Company’s credit enhancement required in a securitization transaction in a manner similar to the utilization of insurance or other alternative credit enhancements described in the preceding paragraph.
The Company’s most recent securitization transaction completed in August 2005 covered by a financial guaranty insurance policy required an initial cash deposit and overcollateralization level of 9.5% of the original receivable pool balance; and target credit enhancement levels must reach 15.5% of the receivable pool balance before cash is distributed to the Company. Under this structure, the Company typically expects to begin to receive cash distributions approximately five to eight months after receivables are securitized. Securitization transactions covered by financial guaranty insurance policies completed in calendar year 2003, calendar year 2004 and until the most recent transaction had initial cash deposits and overcollateralization levels between 9.5% and 12.0% and contained target credit enhancement levels of 17.0% to 18.5%. Increases or decreases to the credit enhancement level on future securitization transactions will depend on the net interest margin, credit performance trends of the Company’s finance receivables, the Company’s financial condition and the economic environment. The Company believes that additional securitizations to be completed in fiscal 2006 will require initial cash and overcollateralization levels and target credit enhancement levels similar to levels in its most recent securitization transaction.
Cash flows related to securitization transactions were as follows (in millions):
With respect to the Company’s securitization transactions covered by a financial guaranty insurance policy, agreements with the insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss triggers) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.
Prior to October 2002, the financial guaranty insurance policies for all of the Company’s insured securitization transactions were provided by FSA. The restricted cash account for each securitization Trust insured as part of the FSA Program was cross-collateralized to the restricted cash accounts established in connection with the Company’s other securitization Trusts in the FSA Program, such that excess cash flows from an FSA Program securitization that had already met its own credit enhancement requirement could be used to fund target credit enhancement requirements with respect to FSA Program securitizations in which specified portfolio performance ratios had been exceeded, rather than being distributed to the Company.
The Company’s securitization transactions insured by financial guaranty insurance providers, including FSA, since October 2002 are cross-collateralized to a more limited extent. In the event of a shortfall in the original target credit enhancement requirement for any of these securitization Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount. In one of the Company’s securitization transactions, if a secured party receives a notice of a rating agency review for downgrade or if there is a downgrade of any class of notes (without taking into consideration the presence of the financial guaranty insurance policy) excess cash flows from other securitization transactions insured by the same insurance provider would be utilized to satisfy any increased target credit enhancement requirements.
As of June 30, 2005, the Company had exceeded its targeted cumulative net loss triggers in six of the seven remaining FSA Program securitizations. Accordingly, cash of approximately $120.3 million generated by FSA Program securitizations otherwise distributable to the Company was used to fund increased credit enhancement levels for the securitizations that breached their cumulative net loss triggers. The higher targeted credit enhancement levels have been reached and maintained in each of these six FSA Program securitizations. The remaining FSA Program securitization breached its cumulative net loss trigger as of June 30, 2005, and FSA granted a waiver. Additionally, the Company received a waiver for July and August 2005, however, the Company cannot guarantee that FSA will continue to grant a waiver; if a waiver is not granted, the credit enhancement level for such securitization would have increased by $21.2 million as of August 31, 2005. The impact of any delay in the amount of cash to be released to the Company during fiscal 2006 is not expected to be material to the Company’s liquidity position.
The agreements that the Company enters into with its financial guaranty insurance providers in connection with securitization transactions contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss triggers) that are higher than the limits referred to above. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the financial guaranty insurance providers to terminate the Company’s servicing rights to the receivables sold to that Trust. In addition, the servicing agreements on certain insured securitization Trusts are cross-defaulted so that a default under one servicing agreement would allow the financial guaranty insurance provider to terminate the Company’s servicing rights under all servicing agreements for securitization Trusts in which they issued a financial guaranty insurance policy. Additionally, if these higher targeted portfolio performance levels were exceeded, the financial guaranty insurance providers may elect to retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement. This, in turn, could result in defaults under the Company’s other securitizations and other material indebtedness. Although the Company has never exceeded these additional targeted portfolio performance ratios, and does not anticipate violating any event of default triggers for its securitizations, there can be no assurance that the Company’s servicing rights with respect to the automobile receivables in such Trusts or any other Trusts will not be terminated if (i) such targeted portfolio performance ratios are breached, (ii) the Company breaches its obligations under the servicing agreements, (iii) the financial guaranty insurance providers are required to make payments under a policy, or (iv) certain bankruptcy or insolvency events were to occur. As of June 30, 2005, no such termination events have occurred with respect to any of the Trusts formed by the Company.
Stock Repurchases
During fiscal 2005, the Company repurchased 16,507,529 shares of its common stock, at an average cost of $21.96 per share, under stock repurchase plans approved by the Board of Directors since April 2004. As of June 30, 2005, the existing stock repurchase plan authorizes the Company to repurchase another $305.3 million of its common stock. During July and August 2005, the Company repurchased an additional 4,372,472 shares of its common stock, at an average cost of $25.69 per share. As of August 31, 2005, the remaining stock repurchase plan authorizes the Company to repurchase another $192.9 million of its common stock.
Operating Plan
The Company believes that it has sufficient liquidity to achieve its growth strategies in fiscal 2006. As of June 30, 2005, the Company had unrestricted cash balances of $663.5 million. Assuming that origination volume ranges from $5.8 billion to $6.2 billion in fiscal 2006 and the initial credit enhancement requirement for the Company’s securitization transactions remains at 9.5% (the level for the most recent securitization completed in August 2005), the Company would require $551.0 million to $589.0 million in cash or liquidity to fund initial credit enhancement in fiscal 2006. The Company expects that cash distributions from its securitization transactions will exceed the funding requirement for initial credit enhancement deposits for fiscal 2006. The Company will continue to require the execution of additional securitization transactions in fiscal 2006. There can be no assurance that funding will be available to the Company through the execution of securitization transactions or, if available, that the funding will be on acceptable terms. If the Company is unable to execute securitization transactions on a regular basis, and was otherwise unable to issue any other debt or equity, it would not have sufficient funds to finance new loan originations and, in such event, the Company would be required to revise the scale of its business, including possible discontinuation of loan origination activities, which would have a material adverse effect on the Company’s ability to achieve its business and financial objectives.
OFF-BALANCE SHEET ARRANGEMENTS
Prior to October 1, 2002, the Company structured its securitization transactions to meet the accounting criteria for sales of finance receivables. Under this structure, notes issued by the Company’s unconsolidated qualified special purpose finance subsidiaries are not recorded as liabilities on the Company’s consolidated balance sheets. See Liquidity and Capital Resources-Securitization for a detailed discussion of the Company’s securitization transactions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Fluctuations in market interest rates impact the Company’s warehouse credit facilities and securitization transactions. The Company’s gross interest rate spread, which is the difference between interest earned on its finance receivables and interest paid, is affected by changes in interest rates as a result of the Company’s dependence upon the issuance of variable rate securities and the incurrence of variable rate debt to fund its purchases of finance receivables.
Warehouse Credit Facilities
Finance receivables purchased by the Company and pledged to secure borrowings under its warehouse credit facilities bear fixed interest rates. Amounts borrowed under the Company’s warehouse credit facilities bear interest at variable rates that are subject to frequent adjustments to reflect prevailing market interest rates. To protect the interest rate spread within each warehouse credit facility, the Company’s special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements in connection with borrowings under the Company’s 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 purchaser of the interest rate cap agreement bears no obligation or liability if interest rates fall below the “cap” rate. As part of the Company’s interest rate risk
management strategy and when economically feasible, the Company may simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid by its special purpose finance subsidiary to purchase the interest rate cap agreement and thus retain the interest rate risk. The fair value of the interest rate cap agreement purchased by the special purpose finance subsidiary is included in other assets and the fair value of the interest rate cap agreement sold by the Company is included in derivative financial instruments on the Company’s consolidated balance sheets.
In January 2005, the Company entered into interest rate swap agreements to hedge the variability in interest payments on its medium term notes facility caused by fluctuations in the benchmark interest rate. These interest rate swap agreements are designated and qualify as cash flow hedges. The fair values of the interest rate swap agreements are included in other assets on the consolidated balance sheets.
Securitizations
The interest rate demanded by investors in the Company’s securitization transactions depends on prevailing market interest rates for comparable transactions and the general interest rate environment. The Company utilizes several strategies to minimize the impact of interest rate fluctuations on its gross interest rate margin, including the use of derivative financial instruments, the regular sale or pledging of auto receivables to securitization Trusts and pre-funding of securitization transactions.
In its securitization transactions, the Company transfers fixed rate finance receivables to Trusts that, in turn, sell either fixed rate or floating rate securities to investors. The fixed rates on securities issued by the Trusts are indexed to market interest rate swap spreads for transactions of similar duration or various London Interbank Offered Rates (“LIBOR”) and do not fluctuate during the term of the securitization. The floating rates on securities issued by the Trusts are indexed to LIBOR and fluctuate periodically based on movements in LIBOR. Derivative financial instruments, such as interest rate swap and cap agreements, are used to manage the gross interest rate spread on these transactions. The Company uses interest rate swap agreements to convert the variable rate exposures on securities issued by its securitization Trusts to a fixed rate, thereby locking in the gross interest rate spread to be earned by the Company over the life of a securitization accounted for as a secured financing that would have been affected by changes in interest rates. Interest rate swap agreements purchased by the Company do not impact the amount of cash flows to be received by holders of the asset-backed securities issued by the Trusts. The interest rate swap agreements serve to offset the impact of increased or decreased interest paid by the Trusts on floating rate asset-backed securities on the cash flows to be received by the Company from the Trusts. The Company utilizes such arrangements to modify its net interest sensitivity to levels deemed appropriate based on the Company’s risk tolerance. In circumstances where the interest rate risk is deemed to be tolerable, usually if the risk is less than one year in term at inception, the Company may choose not to hedge potential fluctuations in cash flows due to changes in interest rates. The Company’s special purpose finance subsidiaries are contractually required to provide additional credit enhancement on their floating rate securities even if the Company chooses not to hedge its future cash flows. To comply with this requirement, the special purpose finance subsidiary purchases an interest rate cap agreement. Although the interest rate cap agreements are purchased by the Trusts, cash outflows from the Trusts ultimately impact the Company’s retained interests in the securitization transactions as cash expended by the securitization Trusts will decrease the ultimate amount of cash to be received by the Company. Therefore, when economically feasible, the Company may simultaneously sell a corresponding interest rate cap agreement to offset the premium paid by the Trust to purchase the interest rate cap agreement. The fair value of the interest rate cap agreements purchased by the special purpose finance subsidiaries in connection with securitization transactions structured as secured financings are included in other assets and the fair value of the interest rate cap agreements sold by the Company are included in derivative financial instruments on the Company’s consolidated balance sheets. Changes in the fair value of the interest rate cap agreements sold by the Company are reflected in interest expense on the Company’s consolidated statements of income.
Pre-funding securitizations is the practice of issuing more asset-backed securities than needed to cover finance receivables initially sold or pledged to the Trust. The proceeds from the pre-funded portion are held in an
escrow account until additional receivables are delivered to the Trust in amounts up to the pre-funded balance held in the escrow account. The use of pre-funded securitizations allows the Company to lock in borrowing costs with respect to the finance receivables subsequently delivered to the Trust. However, the Company incurs an expense in pre-funded securitizations during the period between the initial securitization and the subsequent delivery of finance receivables equal to the difference between the interest earned on the proceeds held in the escrow account and the interest rate paid on the asset-backed securities outstanding.
The following table provides information about the Company’s interest rate-sensitive financial instruments by expected maturity date as of June 30, 2005 (dollars in thousands):
The following table provides information about the Company’s interest rate-sensitive financial instruments by expected maturity date as of June 30, 2004 (dollars in thousands):
Finance receivables and 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, securitization notes payable, senior notes and convertible senior notes principal amounts have been classified based on expected payoff.
The notional amounts of interest rate swap and cap agreements, 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.
Management monitors the Company’s hedging activities to ensure that the value of derivative financial instruments, their correlation to the contracts being hedged and the amounts being hedged continue to provide effective protection against interest rate risk. However, there can be no assurance that 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. All transactions are entered into for purposes other than trading.
Current Accounting Pronouncements
Statement of Financial Accounting Standards No. 123 (revised 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS 123R to revise FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123R”). SFAS 123R, which is effective for the Company beginning on July 1, 2005, requires that the cost resulting from all share-based payment transactions be measured at fair-value and recognized in the financial statements. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide its view on the valuation of
share-based payment arrangements for public companies. The Company anticipates that the adoption of SFAS 123R and SAB 107 will result in an estimated $4.5 million additional expense for the fiscal year ending June 30, 2006. The estimated additional expense is based on unamortized expense relating to outstanding options granted prior to the Company’s implementation of SFAS 123 on July 1, 2003, that are expected to vest subsequent to June 30, 2005.
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 that use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “will,” “likely,” “should,” “estimate,” “continue,” “future” 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 assumptions, 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 this Annual Report on Form 10-K for the year ended June 30, 2005. It is advisable not to place undue reliance on the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
AmeriCredit Corp.
We have completed an integrated audit of AmeriCredit Corp.’s 2005 consolidated financial statements and of its internal control over financial reporting as of June 30, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(1), present fairly, in all material respects, the financial position of AmeriCredit Corp. and its subsidiaries at June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company changed the accounting for dealer acquisition fees on loans purchased subsequent to June 30, 2004.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of June 30, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Houston, Texas
September 9, 2005
MANAGEMENT’S REPORTS
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company’s evaluation under the “Internal Control-Integrated Framework,” management concluded that its internal control over financial reporting was effective as of June 30, 2005. Management’s assessment of the effectiveness of its internal control over financial reporting as of June 30, 2005, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
NEW YORK STOCK EXCHANGE REQUIRED DISCLOSURES
On September 12, 2005, our Chief Executive Officer certified that he was not aware of any violation by the Company of the New York Stock Exchange’s Corporate Governance listing standards, other than has been notified to the Exchange pursuant to Section 303A 12(b), of which there was none.
The Company has filed with the Securities and Exchange Commission, as exhibits to our Annual Report on Form 10-K for the year ended June 30, 2005, our Chief Executive Officer’s and Chief Financial Officer’s certifications required by Section 302 of the Sarbanes-Oxley Act of 2002.
AMERICREDIT CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
AMERICREDIT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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 89 branch offices in 34 states as of June 30, 2005.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, including certain special purpose financing trusts utilized in securitization transactions (“Trusts”) which are considered variable interest entities. 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.
The preparation of financial statements in conformity with accounting principles generally accepted 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 finance receivables held on the Company’s consolidated balance sheets.
Cash Equivalents
Investments in highly liquid securities with original maturities of 90 days or less are included in cash and cash equivalents.
Finance Receivables
The Company’s securitization transactions have been structured as secured financings since September 30, 2002. Accordingly, finance receivables are carried at amortized cost at June 30, 2005 and 2004. Prior to October 1, 2002, finance receivables were classified as held for sale.
Allowance for Loan Losses
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 inherent in the Company’s finance receivables.
The allowance for loan losses is established systematically based on the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. The Company reviews charge-off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends, such as unemployment rates, and other information in order to make the necessary judgments as to probable credit losses. The Company also uses historical charge-off experience to determine a loss confirmation period, which is defined as the time between when an event, such as delinquency status, giving
rise to a probable credit loss occurs with respect to a specific account and when such account is charged off. This loss confirmation period is applied to the forecasted probable credit losses to determine the amount of losses inherent in finance receivables at the reporting date. Assumptions regarding probable credit losses and loss confirmation periods are reviewed periodically and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above.
Charge-off Policy
The Company’s policy is to charge-off an account in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. During the year ended June 30, 2004, the Company changed its repossession charge-off policy to charge off accounts in repossession when the automobile is repossessed and legally available for disposition. Previously, the Company charged off accounts in repossession at the time the repossessed automobile was disposed of at auction. A charge-off represents the difference between the estimated net sales proceeds and the amount of the delinquent contract, including accrued interest. Accounts in repossession that have been charged off have been removed from finance receivables and the related repossessed automobiles, aggregating $18.5 million and $15.0 million at June 30, 2005 and 2004, respectively, are included in other assets on the consolidated balance sheets pending sale.
Credit Enhancement Assets
The Company periodically transfers receivables to Trusts, and the Trusts, in turn, issue asset-backed securities to investors in securitization transactions.
Prior to October 1, 2002, the Company structured its securitization transactions to meet the accounting criteria for sales of finance receivables. For securitization transactions structured as sales of receivables, the Company removes the net book value of the receivables sold from its consolidated balance sheets upon the transfer of receivables to the Trusts 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 Company retained an interest in the receivables in the form of a residual or interest-only receivables from Trusts and also retained other subordinated interests in the receivables transferred to the Trusts. The allocated basis of the interests retained is classified as either interest-only receivables from Trusts, investments in Trust receivables or restricted cash-gain on sale Trusts in the Company’s consolidated balance sheets depending upon the form of interest retained. These interests are collectively referred to as credit enhancement assets.
Since finance 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. At each reporting date, the fair value of credit enhancement assets is estimated by calculating the present value of their expected cash distribution to the Company using discount rates commensurate with the risks involved. Interest-only receivables from Trusts represents the present value of estimated 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. Investments in Trust receivables represents the present value of the excess of finance receivables held in the Trusts over outstanding debt balance of the Trusts. Restricted cash-gain on sale Trusts represents the present value of cash held in restricted accounts used to provide credit enhancement for specific Trusts.
Unrealized gains or unrealized 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 discount used to estimate the present value of the credit enhancement assets is accreted into income using the interest method over the expected life of the securitization and is recorded as part of servicing income.
Subsequent to September 30, 2002, the Company structured its securitization transactions to no longer meet the accounting criteria for sales of finance receivables and, accordingly, such securitization transactions have been accounted for as secured financings. Therefore, following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance sheets. The Company recognizes finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction, and records a provision for loan losses to recognize probable loan losses inherent in the finance receivables. Credit enhancements for securitizations accounted for as secured financings are not characterized as interest-only receivables from Trusts, investments in Trust receivables and restricted cash-gain on sale Trusts on the Company’s consolidated balance sheets. Cash pledged to support the securitization transaction is deposited to a restricted account and recorded on the Company’s consolidated balance sheets as restricted cash-securitization notes payable. Additionally, investments in Trust receivables, or overcollateralization, is calculated as the difference between finance receivables securitized and securitization notes payable. Under the secured financing securitization structure, interest-only receivables from Trusts are not reflected as an asset upon transfer of finance receivables but instead will be recognized in the income statement when earned in future periods.
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 and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized.
Derivative Financial Instruments
The Company recognizes all of its derivative financial instruments as either assets or liabilities on its consolidated balance sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as an accounting hedge, as well as the type of hedging relationship identified.
Interest Rate Swap Agreements
The Company utilizes interest rate swap agreements to convert floating rate exposures on securities issued by securitization Trusts accounted for as secured financings and its medium term note facility to fixed rates, thereby hedging the variability in interest expense paid. These interest rate swap agreements are designated as cash flow hedges and are highly effective in hedging the Company’s exposure to interest rate risk from both an accounting and economic perspective.
The Company also uses interest rate swap agreements to convert floating rate exposures on securities issued by gain on sale securitization Trusts to fixed rates, thereby 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. Historically, these interest rate swap agreements were designated and qualified as cash flow hedges. The Company dedesignated these swaps as cash flow hedges and discontinued hedge accounting during the year ended June 30, 2004.
For interest rate swap agreements designated as hedges, the Company formally documents all relationships between the interest rate swap agreement and the underlying asset, liability or cash flows 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. In addition, the Company also assesses the continued probability that the hedged cash flows will be realized.
The Company uses regression analysis to assess hedge effectiveness of its cash flow hedges on a prospective and retrospective basis. A derivative financial instrument is deemed to be effective if the X-coefficient from the regression analysis is between a range of 0.80 and 1.25. At June 30, 2005, all of the Company’s interest rate swap agreements designated as cash flow hedges fall within this range and are deemed to be effective hedges for accounting purposes. The Company uses the hypothetical derivative method to measure the amount of ineffectiveness of its cash flow hedges to be recorded in earnings.
The effective portion of the changes in the fair value of the interest rate swaps qualifying as cash flow hedges are deferred and included in shareholders’ equity as a component of accumulated other comprehensive income as an unrealized gain or loss on cash flow hedges. These unrealized gains or losses are recognized as adjustments to income over the same period in which cash flows from the related hedged item affect earnings. However, if the Company expects the continued reporting of a loss in accumulated other comprehensive income would lead to recognizing a net loss on the combination of the interest rate swap agreements and the hedged item, the loss is reclassified to earnings for the amount that is not expected to be recovered. Additionally, to the extent that any of these 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 interest expense on the Company’s consolidated statements of income. The Company discontinues hedge accounting prospectively when it is determined that an interest rate swap agreement has ceased to be effective as an accounting hedge or if the underlying hedged cash flow is no longer probable of occurring.
Interest Rate Cap Agreements
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. As part of the Company’s interest rate risk management strategy and when economically feasible, the Company may simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid to purchase the interest rate cap agreement and thus retain the interest rate risk. The fair value of the Company’s interest rate cap agreements purchased by its special purpose finance subsidiaries are included in other assets on the consolidated balance sheets. The fair value of the Company’s interest rate cap agreements sold by the Company is included in derivative financial instruments on the consolidated balance sheets. Because the interest rate cap agreements entered into by the Company or its special purpose finance subsidiaries do not qualify for hedge accounting, changes in the fair value of interest rate cap agreements purchased by the special purpose finance subsidiaries and interest rate cap agreements sold by the Company are recorded in interest expense on the Company’s consolidated statements of income. The intrinsic value of the interest rate cap agreements purchased by gain on sale Trusts is reflected in the valuation of the credit enhancement assets.
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 the 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, establishing risk limits and monitoring the credit ratings of the counterparties.
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.
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 tax credits and temporary differences between financial statement and income tax accounting. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be realized.
Revenue Recognition
Finance Charge Income
Finance charge income related to finance receivables 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 and direct costs of originating loans are deferred and amortized over the term of the related finance receivables using the interest method and are removed from the consolidated balance sheets when the related finance receivables are sold, charged off or paid in full.
Servicing Income
Servicing income consists of servicing fees earned from servicing domestic finance receivables sold to gain on sale Trusts, other-than-temporary impairment on the Company’s credit enhancement assets and accretion of present value discounts and unrealized gains related to credit enhancement assets. Servicing fees are recognized when earned. Other-than-temporary impairment is recognized when the fair value of the credit enhancement assets is less than the carrying amount. Accretion of present value discounts, representing the risk-adjusted time value of money of estimated cash flows expected to be received from the credit enhancement assets, is accreted into earnings using the interest method over the expected life of the securitization. Additionally, the unrealized gains on credit enhancement assets reflected in accumulated other comprehensive income are also accreted into earnings over the life of the credit enhancement assets using the effective interest method. The Company does not accrete the present value discounts in a period when such accretion would cause an other-than-temporary impairment in a securitization pool.
Diluted Earnings Per Share
In September 2004, the Emerging Issues Task Force reached a final consensus on EITF 04-8 to change the effect of contingently convertible debt within the dilutive earnings per share calculation. This change, which became effective for the three months ended December 31, 2004, resulted in the Company’s convertible senior notes being treated as convertible securities and included in dilutive earnings per share calculations using the if-converted method. EITF 04-8 required retroactive application beginning with the three months ended December 31, 2003, which was the first quarter the Company’s convertible senior notes were outstanding. Under EITF 04-8, diluted earnings per share decreased from $1.42 to $1.37 per share for the year ended June 30, 2004.
Accretion of Acquisition Fees
The Company adopted the Accounting Standards Executive Committee’s Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”), for loans acquired subsequent to June 30, 2004. Under SOP 03-3, dealer acquisition fees on loans purchased by the Company are no longer considered credit-related because there is no deterioration in credit quality between the time the loan is originated and when it is acquired. Accordingly, dealer acquisition fees reduce the carrying value of finance receivables and are accreted into earnings as an adjustment to yield over the life of the loans using the interest
method in accordance with Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Unamortized acquisition fees on loans charged off reduce the amount charged off to the allowance for loan losses and unamortized acquisition fees on loans paid off are recognized as an adjustment to yield in the period they are paid off.
Stock-based Compensation
On July 1, 2003, the Company adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), prospectively for all awards granted, modified or settled after June 30, 2003. The prospective method is one of the adoption methods provided for under Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the service period. This compensation cost is determined using option pricing models that are intended to estimate the fair value of awards at the grant date. The Company recognized compensation expense of $11.5 million ($7.2 million net of tax) and $3.1 million ($1.9 million net of tax) during the years ended June 30, 2005 and 2004, respectively, for options granted or modified subsequent to June 30, 2003.
The following table illustrates the effect on net income and earnings per share had compensation expense for all options granted under the Company’s plans been determined using the fair value-based method and amortized over the expected life of the options (in thousands, except per share data):
The fair value of each option granted or modified was estimated using an option-pricing model with the following weighted average assumptions:
Current Accounting Pronouncements
Statement of Financial Accounting Standards No. 123 (revised 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS 123R to revise FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123R”). SFAS 123R, which is effective for the
Company beginning on July 1, 2005, requires that the cost resulting from all share-based payment transactions be measured at fair-value and recognized in the financial statements. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) to provide its view on the valuation of share-based payment arrangements for public companies. The Company anticipates that the adoption of SFAS 123R and SAB 107 will result in an estimated $4.5 million additional expense for the year ending June 30, 2006. The estimated additional expense is based on unamortized expense relating to outstanding options granted prior to the Company’s implementation of SFAS 123 on July 1, 2003, that are expected to vest subsequent to June 30, 2005.
2. Finance Receivables
Finance receivables consist of the following (in thousands):
Finance receivables securitized represent receivables transferred to the Company’s special purpose finance subsidiaries in securitization transactions accounted for as secured financings. Finance receivables unsecuritized include $607.7 million and $337.9 million pledged under the Company’s warehouse credit facilities as of June 30, 2005 and 2004, respectively.
Finance 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 $378.3 million and $255.6 million of delinquent finance receivables as of June 30, 2005 and 2004, respectively.
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. Depending upon the contract structure and consumer credit attributes, the Company may charge dealers a non-refundable acquisition fee when purchasing individual finance contracts. The Company recorded acquisition fees on loans purchased prior to July 1, 2004, as nonaccretable fees available to cover losses inherent in the loan portfolio. Additionally, the Company records a discount on finance receivables repurchased upon the exercise of a cleanup call option from its gain on sale securitization transactions and accounts for such discounts as nonaccretable discounts available to cover losses inherent in the repurchased finance receivables.
A summary of the nonaccretable acquisition fees is as follows (in thousands):
A summary of the allowance for loan losses is as follows (in thousands):
3. Securitizations
A summary of the Company’s securitization activity and cash flows from special purpose entities used for securitizations is as follows (in thousands):
(a)
Servicing fees earned on securitizations accounted for as secured financings are included in finance charge income on the consolidated statements of income.
The Company retains an interest in the receivables sold in the form of credit enhancement assets and servicing responsibilities for receivables transferred to the Trusts. The Company earns a monthly base servicing fee of 2.25% per annum on the outstanding principal balance of its domestic securitized receivables and supplemental fees (such as late charges) for servicing the receivables. 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 nor a servicing liability. The Company recorded a servicing liability related to the servicing of its Canadian securitization pools because it does not receive a servicing fee for its servicing obligations. A servicing liability of $1.3 million and $3.9 million as of June 30, 2005 and 2004, respectively, is included in accrued taxes and expenses on the Company’s consolidated balance sheets.
As of June 30, 2005 and 2004, the Company was servicing $10,157.8 million and $11,471.8 million, respectively, of finance receivables that have been sold or transferred to securitization Trusts.
4. Credit Enhancement Assets
The investors in and insurers of the asset-backed securities sold by the Trusts have no recourse to the Company’s assets other than the credit enhancement assets. Credit enhancement assets represent the present value of the Company’s retained interests in securitizations accounted for as sales. The Company’s interest in credit enhancement assets are subordinate to the interests of the investors in and insurers of the Trusts, and the value of such assets is subject to the credit risks related to the receivables transferred to the Trusts. Credit
enhancement assets would be utilized to cover monthly principal and interest payments to the investors and administrative fees in the event that cash generated from the securitization Trusts was not sufficient to cover these payments.
Credit enhancement assets consist of the following (in thousands):
A summary of activity in the credit enhancement assets is as follows (in thousands):
At the time of securitization of finance 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 consist of cash deposited to a restricted account and additional receivables delivered to the Trust, which create overcollateralization. The securitization transactions require the percentage of assets pledged to support the transaction to increase until a specified level is attained. Excess cash flows generated by the Trusts are added to the restricted cash account or used to pay down outstanding debt in the Trusts, creating overcollateralization until the required percentage level of assets has been reached. Once the targeted percentage level of assets is reached and maintained, excess cash flows generated by the Trusts are released to 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 is reduced. Assets in excess of the required percentage are also released to the Company as distributions from Trusts.
With respect to the Company’s securitization transactions covered by a financial guaranty insurance policy, agreements with the insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss triggers) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.
Prior to October 2002, the financial guaranty insurance policies for all of the Company’s insured securitization transactions were provided by Financial Security Assurance, Inc. (“FSA”) and are referred to herein as the “FSA Program.” The restricted cash account for each securitization Trust insured as part of the FSA Program is cross-collateralized to the restricted cash accounts established in connection with the Company’s other securitization Trusts in the FSA Program, such that excess cash flows from an FSA Program securitization that has already met its own credit enhancement requirement may be used to fund increased target credit enhancement requirements with respect to FSA Program securitizations in which specified portfolio performance ratios have been exceeded rather than being distributed to the Company.
As of June 30, 2005, the Company had exceeded its targeted cumulative net loss triggers in six of the seven remaining FSA Program securitizations. Accordingly, cash of approximately $120.3 million generated by FSA Program securitizations otherwise distributable to the Company was used to fund increased credit enhancement levels for the securitizations that breached their cumulative net loss triggers. The higher targeted credit enhancement levels have been reached and maintained in each of these six FSA Program securitizations. The remaining FSA Program securitization breached its cumulative net loss trigger as of June 30, 2005, and FSA granted a waiver. Additionally, the Company received a waiver for July and August 2005, however, the Company cannot guarantee that FSA will continue to grant a waiver; if a waiver is not granted, the credit enhancement level for such securitization would have increased by $21.2 million as of August 31, 2005. The impact of any delay in the amount of cash to be released to the Company during fiscal 2006 is not expected to be material to the Company’s liquidity position.
Agreements with the Company’s financial guaranty insurance providers contain additional specified targeted portfolio performance ratios that are higher than the limits referred to in the preceding paragraphs. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the Company’s financial guaranty insurance providers to terminate the Company’s servicing rights to the receivables sold to that Trust.
Significant assumptions used in determining the gain on sale of receivables were as follows:
Significant assumptions used in measuring the estimated fair value of credit enhancement assets related to the gain on sale Trusts at the balance sheet dates are as follows:
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 gain on sale receivables portfolio typically has not fluctuated significantly with changes in market interest rates or other economic or market factors.
An immediate 10% and 20% adverse change in the assumptions used to measure the fair value of the credit enhancement assets would decrease the credit enhancement assets at June 30, 2005, as follows (in thousands):
The adverse changes to the key assumptions and estimates are hypothetical. The change in fair value based on the above 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 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 cumulative static pool credit losses on receivables that have been sold to the Trusts are shown below:
(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.
5. Warehouse Credit Facilities
Amounts outstanding under the Company’s warehouse credit facilities are as follows (in thousands):
Further detail regarding terms and availability of the warehouse credit facilities as of June 30, 2005, follows (in thousands):
(a)
At the maturity date, the outstanding debt balance can either be repaid in full or over time based on the amortization of receivables pledged.
(b)
$150.0 million of this facility matures in November 2005, and the remaining $1,800.0 million matures in November 2007.
(c)
This facility is a revolving facility through the date stated above. During the revolving period, the Company has the ability to substitute receivables for cash, or vice versa.
(d)
These amounts do not include cash collected on finance receivables pledged of $28.0 million which is also included in restricted cash-warehouse credit facilities on the consolidated balance sheets.
(e)
At the maturity date, the outstanding debt balance can either be repaid in full or over time based on the amortization of receivables pledged. The Company is not required to pay the advances outstanding at the maturity date.
(f)
Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $500.0 million and extend the maturity date to August 2006.
(g)
Subsequent to June 30, 2005, the Company amended the agreement to increase the facility limit to $400.0 million and extend the maturity date to July 2006.
The Company’s warehouse credit facilities are administered by agents on behalf of institutionally managed commercial paper or medium term note conduits. Under these funding agreements, the Company transfers finance receivables to special purpose finance subsidiaries of the Company. These subsidiaries, in turn, issue notes to the agents, collateralized by such finance receivables and cash. The agents provide funding under the notes to the subsidiaries pursuant to an advance formula, and the subsidiaries forward the funds to the Company in consideration for the transfer of finance receivables. While these subsidiaries are included in the Company’s consolidated financial statements, these subsidiaries are separate legal entities and the finance receivables and other assets held by these subsidiaries are legally owned by these subsidiaries and are not available to 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 Company is required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under the facilities. Additionally, certain funding agreements contain various covenants requiring minimum financial ratios, asset quality, and portfolio performance ratios (cumulative net loss, delinquency and repossession ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or restrict the Company’s ability to obtain additional borrowings under these agreements. As of June 30, 2005, the Company’s warehouse credit facilities were in compliance with all covenants.
Debt issuance costs are being amortized over the expected term of the warehouse credit facilities. Unamortized costs of $9.6 million and $8.3 million as of June 30, 2005 and June 30, 2004, respectively, are included in other assets on the consolidated balance sheets.
6. Whole Loan Purchase Facility
In March 2003, the Company entered into a whole loan purchase facility with an original term of approximately four years under which the Company transferred $1.0 billion of finance receivables to a special purpose finance subsidiary of the Company and received an advance of $875.0 million from the purchaser. Additionally, the Company issued a $30.0 million note to the purchaser representing debt issuance costs in the form of a residual interest in the finance receivables transferred. In September 2003, the Company terminated the whole loan purchase facility and recognized the remaining unamortized debt issuance costs of $26.9 million associated with the facility as a component of interest expense on the consolidated statements of income.
7. Securitization Notes Payable
Securitization notes payable represents debt issued by the Company in securitization transactions accounted for as secured financings. Debt issuance costs are being amortized over the expected term of the securitizations on an effective yield basis; unamortized costs of $23.3 million and $21.7 million as of June 30, 2005 and 2004, respectively, are included in other assets on the consolidated balance sheets.
Securitization notes payable consists of the following (dollars in thousands):
(a)
Note balances do not include $24.4 million and $22.4 million of asset-backed securities retained by the Company as of June 30, 2005 and 2004, respectively. The balances reflect fluctuations in foreign currency translation rates and principal paydowns.
(b)
Note balances do not include $25.8 million and $40.8 million of asset-backed securities retained by the Company as of June 30, 2005 and 2004, respectively.
(c)
Maturity date represents final legal maturity of securitization notes payable. Securitization notes payable are expected to be paid based on amortization of the finance receivables pledged to the Trusts. Expected principal payments are $3,062.7 million in fiscal 2006, $2,394.2 million in fiscal 2007, $1,001.8 million in fiscal 2008 and $707.8 million in fiscal 2009.
At the time of securitization of finance 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 consist of cash deposited to a restricted account and additional receivables delivered to the Trust, which create overcollateralization. The securitization transactions require the percentage of assets pledged to support the transaction to increase until a specified level is attained. Excess cash flows generated by the Trusts are added to the restricted cash account or used to pay down outstanding debt in the Trusts, creating overcollateralization until the required percentage level of assets has been reached. Once the targeted percentage level of assets is reached and maintained, excess cash flows generated by the Trusts are released to 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 is reduced. Assets in excess of the required percentage are also released to the Company as distributions from Trusts.
With respect to the Company’s securitization transactions covered by a financial guaranty insurance policy, agreements with the insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss triggers) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.
Agreements with the Company’s financial guaranty insurance providers contain additional specified targeted portfolio performance ratios. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the Company’s financial guaranty insurance providers to terminate the Company’s servicing rights to the receivables sold to that Trust.
8. Senior Notes
As of June 30, 2005 and 2004, the Company has outstanding $166.8 million and $166.4 million, respectively, of senior notes that are due May 2009. Interest on the notes is payable semi-annually at a rate of 9.25% per annum. The notes, which are uncollateralized, may be redeemed at the option of the Company after May 2006 at a premium declining to par in May 2008.
During the year ended June 30, 2004, the Company redeemed $7.3 million of its 9.25% Senior Notes due May 2009 and all of its 9 7/8% Senior Notes due 2006.
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; unamortized costs of $2.1 million and $2.9 million as of June 30, 2005 and 2004, respectively, are included in other assets in the consolidated balance sheets.
9. Convertible Senior Notes
In November 2003, the Company issued $200.0 million of contingently convertible senior notes that are due in November 2023. Interest on the notes is payable semiannually at a rate of 1.75% per annum. The notes, which are uncollateralized, are convertible prior to maturity into shares of the Company’s common stock at $18.68 per share. Additionally, the Company may exercise its option to repurchase the notes, or holders of the convertible senior notes may require the Company to repurchase the notes, on November 15, 2008, at a price equal to 100.25% of the principal amount of the notes redeemed, or after November 15, 2008 at par. Debt issuance costs are being amortized over the expected term of the notes; unamortized costs of $3.5 million and $4.5 million are included in other assets in the consolidated balance sheets as of June 30, 2005 and 2004, respectively.
In conjunction with the issuance of the convertible senior notes, the Company purchased a call option that entitles it to purchase shares of the Company’s stock in an amount equal to the number of shares convertible at $18.68 per share. This call option allows the Company to offset the dilution of its shares if the conversion feature of the senior convertible notes is exercised. The Company also issued warrants to purchase 10,705,205 shares of the Company’s common stock. Each warrant entitles the holder, at its option, and subject to certain provisions within the warrant agreement, to purchase shares of common stock from the Company at $28.20 per share, at any time prior to its expiration on October 15, 2008. The warrants may be settled in net shares or net cash, at the Company’s discretion if certain criteria are met. Both the cost of the call option and the proceeds of the warrants are reflected in additional paid in capital on the Company’s consolidated balance sheets.
10. Other Notes Payable
Other notes payable consists primarily of capital leases. Maturities of other notes payable for years ending June 30 are as follows (in thousands):
11. Derivative Financial Instruments and Hedging Activities
As of June 30, 2005 and 2004, the Company had interest rate swap agreements associated with its securitization Trusts and its medium term note facility with underlying notional amounts of $1,722.1 million and $1,469.6 million, respectively. The fair value of the Company’s interest rate swap agreements of $7.3 million as of June 30, 2005, is included in other assets on the consolidated balance sheets. The fair value of the Company’s
interest rate swap agreements of $6.8 million as of June 30, 2004, is included in derivative financial instruments under “liabilities” on the consolidated balance sheets. Interest rate swap agreements designated as hedges had unrealized gains included in accumulated other comprehensive income of approximately $6.3 million and $1.3 million as of June 30, 2005 and 2004, respectively. The ineffectiveness related to the interest rate swap agreements designated as hedges was not material for the years ended June 30, 2005, 2004 and 2003. The Company estimates approximately $4.6 million of unrealized gains included in other comprehensive income related to interest rate swap agreements will be reclassified into earnings within the next twelve months.
As of June 30, 2005 and June 30, 2004, the Company had interest rate cap agreements with underlying notional amounts of $1,219.0 million and $2,335.0 million, respectively. The fair value of the Company’s interest rate cap agreements purchased by its special purpose finance subsidiaries of $1.3 million and $5.9 million as of June 30, 2005 and 2004, respectively, are included in other assets on the consolidated balance sheets. The fair value of the Company’s interest rate cap agreements sold by the Company of $1.1 million and $5.6 million as of June 30, 2005 and 2004, respectively, are included in derivative financial instruments on the consolidated balance sheets.
Under the terms of its derivative financial instruments, the Company is required to pledge certain funds to be held in restricted cash accounts as collateral for the outstanding derivative transactions. As of June 30, 2005 and 2004, these restricted cash accounts totaled $6.7 million and $36.3 million, respectively, and are included in other assets on the consolidated balance sheets.
12. 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 $14.9 million, $28.1 million and $35.5 million for the years ended June 30, 2005, 2004 and 2003, respectively.
Operating lease commitments for years ending June 30 are as follows (in thousands):
Subsequent to June 30, 2005, the Company sold and leased back a building owned by the Company and utilized for servicing activities. The operating lease has a twelve-year term expiring in 2017 with renewal options. The lessor is an unrelated third party. The gain on the sale will be amortized into income in proportion to the related gross rental charged to expense over the lease term.
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 finance receivables, which include finance receivables held on the Company’s consolidated balance sheets and gain on sale 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 finance receivables represent contracts with consumers residing throughout the United States and, to a limited extent, in Canada, with borrowers located in Texas, California and Florida each accounting for 13%, 11% and 10%, respectively, of the managed auto receivables portfolio as of June 30, 2005. No other state accounted for more than 10% of managed finance receivables.
Guarantees of Indebtedness
The Company guaranteed the timely payment of principal and interest on the Class E asset-backed securities issued in one of its senior subordinate securitization transactions. The total outstanding balance of the subordinated asset-backed securities guaranteed by the Company was $6.1 million at June 30, 2004; this securitization transaction was called and the securities retired during the year ended June 30, 2005.
The payments of principal and interest on the Company’s senior notes and convertible senior notes are guaranteed by certain of the Company’s subsidiaries. As of June 30, 2005 and 2004, the carrying value of the senior notes and convertible senior notes were $366.8 million and $366.4 million, respectively. See guarantor consolidating financial statements in Note 24.
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, breach of contract and discriminatory treatment of credit applicants. 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 can include requests for compensatory, statutory and punitive damages. The Company believes that it has taken prudent steps to address and mitigate the litigation risks associated with its business activities.
In fiscal 2003, several complaints were filed by shareholders against the Company and certain of the Company’s officers and directors alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. These complaints have been consolidated into one action, styled Pierce v. AmeriCredit Corp., et al., pending in the United States District Court for the Northern District of Texas, Fort Worth Division; the plaintiff in Pierce seeks class action status. In Pierce, the plaintiff claims, among other allegations, that deferments were improperly granted by the Company to avoid delinquency triggers in securitization transactions and enhance cash flows and to incorrectly report charge-offs and delinquency percentages, thereby causing the Company to misrepresent its financial performance throughout the alleged class period. The Company believes that its granting of deferments, which is a common practice within the auto finance industry, complied with the covenants contained in its securitization and warehouse financing documents, and that its deferment activities were properly disclosed to all constituents, including shareholders, asset-backed investors, creditors and credit enhancement providers.
Additionally, a class action complaint, styled Lewis v. AmeriCredit Corp., was filed in the United States District Court for the Northern District of Texas, Fort Worth Division during the year ended June 30, 2003, against the Company and certain of its officers and directors alleging violations of Sections 11 and 15 of the Securities Act of 1933 in connection with the Company’s secondary public offering of common stock on October 1, 2002. In Lewis, the plaintiff alleges that the Company’s registration statement and prospectus for the offering contained untrue statements of material facts and omitted to state material facts necessary to make other statements in the registration statement not misleading.
In April 2004, two rulings were issued by the United States District Court for the Northern District of Texas, Fort Worth Division, affecting the Pierce and Lewis lawsuits. On April 1, 2004, the Court, in response to motions to dismiss filed by the Company and the other defendants, ruled that the plaintiff’s complaint in the Pierce lawsuit was deficient and ordered the plaintiff to cure such deficiencies or the case would be dismissed. On April 27, 2004, the Court issued an order consolidating the Lewis case into the Pierce case. In connection with the order consolidating the Lewis and Pierce cases, the Court granted the plaintiffs permission to file an amended, consolidated complaint, which they have done. The Company and the other defendants have filed motions to dismiss the amended complaint, and such motions are presently pending.
The Company believes that the claims alleged in the Pierce lawsuit, including the claims consolidated into Pierce from Lewis, are without merit and the Company intends to assert vigorous defenses to the litigation. Neither the likelihood of an unfavorable outcome nor the amount of ultimate liability, if any, with respect to this litigation can be determined at this time.
Two shareholder derivative actions have also been served on the Company. On February 27, 2003, the Company was served with a shareholder’s derivative action filed in the United States District Court for the Northern District of Texas, Fort Worth Division, entitled Mildred Rosenthal, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. A second shareholder derivative action was filed in the District Court of Tarrant County, Texas 48th Judicial District, on August 19, 2003, entitled David Harris, derivatively and on behalf of nominal defendant AmeriCredit Corp. v. Clifton H. Morris, Jr., et al. Both of these shareholder derivative actions allege, among other complaints, that certain officers and directors of the Company breached their respective fiduciary duties by causing the Company to make improper deferments, violate federal and state securities laws and issue misleading financial statements. The substantive allegations in both of the derivative actions are essentially the same as those in the above-referenced consolidated class action. A special litigation committee of the Board of Directors has been created to investigate the claims in the derivative actions. As a nominal defendant, the Company does not believe that it has any ultimate liability with respect to these derivative actions.
13. Common Stock
On October 1, 2002, the Company completed a secondary offering of 67,000,000 shares of common stock at a price of $7.50 per share. On November 13, 2002, an additional 1,500,000 shares were issued to cover over-allotments. The net proceeds of the secondary offering were approximately $481.0 million.
Since April 2004, the Company has announced three Board approved stock repurchase plans which authorize the Company to repurchase up to $700.0 million of its common stock in the open market or in privately negotiated transactions, based on market conditions.
During the years ended June 30, 2005 and 2004, the Company repurchased 16,507,529 and 1,832,100 shares, respectively, of its common stock, at an average cost of $21.96 and $17.56 per share, respectively, pursuant to these plans. During July and August 2005, the Company repurchased an additional 4,372,472 shares of its common stock, at an average cost of $25.69 per share. As of August 31, 2005, the Company has remaining authorization to repurchase another $192.9 million of its common stock.
14. Warrants
Agreements with Financial Security Assurance, Inc., an insurer of certain of the Company’s securitization transactions, provide for an increase in credit enhancement requirements if certain portfolio performance measures (delinquency, default or net loss ratios) are exceeded with respect to securitization transactions insured by FSA. In September 2002, the Company entered into an agreement with FSA to raise the specified delinquency levels through and including the March 2003 distribution date. In consideration for this agreement, the Company issued to FSA five-year warrants to purchase 1,287,691 shares of the Company’s common stock at $9.00 per share. The Company recorded non-cash interest expense of $6.6 million during the year ended June 30, 2003, related to this agreement.
In April 2005, 36,695 warrants were exercised, which resulted in a net settlement of 24,431 shares of the Company’s common stock.
15. Stock-Based Compensation
General
The Company has certain stock-based compensation plans for employees, non-employee directors and key executive officers.
A total of 28,200,000 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, 2005, 5,605,905 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 three to four years, although options with other vesting periods or options that vest upon the achievement of specified performance criteria may be authorized under certain employee plans. 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 now expired and no shares remain available for future grants. A total of 6,300,000 shares have been authorized for grants of options under the key executive officer plans, all of which have been previously awarded and become vested.
Employee Plans
A summary of stock option activity under the Company’s employee plans is as follows (shares in thousands):
A summary of options outstanding under the Company’s employee plans as of June 30, 2005, is as follows (shares in thousands):
Non-Employee Director Plans
A summary of stock option activity under the Company’s non-employee director plans is as follows (shares in thousands):
A summary of options outstanding under the Company’s non-employee director plans as of June 30, 2005, is as follows (shares in thousands):
Key Executive Officer Plans
A summary of stock option activity under the Company’s key executive officer plans is as follows (shares in thousands):
A summary of options outstanding under the Company’s key executive officer plans as of June 30, 2005, is as follows (shares in thousands):
Modifications to extend the option term by two years for 2,840,000 stock options, of which 2,272,000 received shareholder approval, were made during the year ended June 30, 2005. Compensation expense recognized over the service period on a straight-line basis was $5.4 million for the year ended June 30, 2005. As of June 30, 2005, there are no unamortized costs relating to the stock option modifications.
Restricted stock grants totaling 587,500 shares with an approximate aggregate market value of $14.1 million at the time of grant were also issued under the employee plans during the year ended June 30, 2005. The market value of these restricted shares at the date of grant is being amortized into expense over a period that approximates the service period of three years. The restricted stock granted is subject to a vesting schedule of 25% in March 2006, 25% in March 2007 and 50% in March 2008. Compensation expense recognized for restricted stock grants was $1.7 million, $0.8 million and $1.3 million for the years ended June 30, 2005, 2004 and 2003, respectively. As of June 30, 2005 and 2004, unamortized compensation expense, which is included in additional paid-in capital, related to the restricted stock awards was $12.6 million and $0.2 million, respectively.
Stock appreciation rights with respect to 680,600 shares with an approximate aggregate market value of $9.7 million at the time of grant were also issued under the employee plans during the year ended June 30, 2005. The market value of these rights at the date of grant is being amortized into expense over a period that approximates the service period of three years. Stock appreciation rights with respect to 640,000 shares are subject to vesting schedules of 25% in June 2005, 25% in March 2007 and 50% in March 2008. The remaining stock appreciation rights are subject to vesting schedules of 25% in March 2006, 25% in March 2007 and 50% in March 2008. Compensation expense recognized for stock appreciation rights was $1.0 million for the year ended June 30, 2005. As of June 30, 2005, unamortized compensation expense related to the rights was $8.7 million.
16. Employee Benefit Plans
The Company has a defined contribution retirement plan covering substantially all employees. The Company’s contributions in stock to the plan were $3.3 million and $2.8 million for the years ended June 30,
2005 and 2004, respectively. The Company recognized a net benefit of $0.6 million for the year ended June 30, 2004, as a result of the return of prior year unvested contributions being in excess of current year contributions to the plan.
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 market value at specified dates. A total of 5,000,000 shares have been reserved for issuance under the plan. As of June 30, 2005, 1,487,886 shares remain available for issuance under the plan. Shares issued under the plan were 549,046, 550,907 and 1,574,948 for the years ended June 30, 2005, 2004 and 2003, respectively. The Company recognized $2.6 million and $1.8 million in compensation expense for the years ended June 30, 2005 and 2004, respectively, as a result of the implementation of SFAS 123 on July 1, 2003.
17. Income Taxes
The income tax provision consists of the following (in thousands):
The Company’s effective income tax rate on income before income taxes differs from the U.S. statutory tax rate as follows:
The tax effects of temporary differences that give rise to deferred tax liabilities and assets are as follows (in thousands):
As of June 30, 2005, the Company has a net operating loss carryforward of approximately $27.8 million for Canadian income tax reporting purposes that expires between June 30, 2006 and June 30, 2015. The Company expects to generate sufficient income to utilize the net operating loss carryforward; accordingly, no tax valuation allowance has been recorded on the $9.8 million deferred tax asset.
18. Restructuring Charges
The Company recognized restructuring charges of $2.8 million during the year ended June 30, 2005, relating to a revision of assumed lease costs for office space and collection centers in connection with Company’s restructuring activities during the years ended June 30, 2004 and 2003.
The Company recognized restructuring charges of $15.9 million and $63.3 million for the years ended June 30, 2004 and 2003, respectively.
On April 1, 2004, the Company closed its Jacksonville collections center in an effort to continue to align the size of its infrastructure with its operational needs. The Company incurred severance expense of approximately $2.2 million for the closing of the collection center. In addition, the Company recognized approximately $12.0 million of contract termination and other associated charges resulting from the closing of the Jacksonville collections center and the abandonment and subsequent marketing of excess capacity at the Company’s Chandler collections center and corporate headquarters. The remainder of the restructuring charges recognized during the year ended June 30, 2004, related to adjustments to the accrued restructuring charges from the implementation of a revised operating plan in February 2003.
The restructuring charges recognized during the year ended June 30, 2003, included a $6.9 million charge for a reduction in workforce in November 2002 and a $56.4 million charge related to the implementation of the revised operating plan in February 2003. A restructuring charge of $53.1 million representing the costs associated with the revised operating plan was recorded in March 2003. Personnel-related costs consisted primarily of severance costs of identified workforce reductions related to the consolidation/closing of branch offices and the closing of the Company’s Canadian lending operations. Contract termination costs included expenses incurred to terminate facility and equipment leases prior to their termination date. Contract termination costs also included estimated costs that will continue to be incurred under facility and equipment contracts for their remaining terms without economic benefit to the Company. The Company estimated this cost by discounting the future cash to be paid under the contracts, net of any assumed proceeds on sublease rentals. As part of the revised operating plan, the Company discontinued the development of its customer relationship management system, which was designed to provide operational scalability and marketing benefits in a high-growth environment. The discontinuation of this project resulted in a charge of $20.8 million of previously capitalized costs, which was included in other associated costs. In June 2003, the Company recorded increases to its restructuring liability of $3.3 million due to changes in sublease rental income, increased costs incurred to terminate facility and equipment leases and reductions in the estimated realizable value of assets held for sale. Certain contractual payments associated with the revised operating plan will extend through the remaining terms of leases that have not been terminated.
As of June 30, 2005, total costs incurred to date in connection with the closing of the Jacksonville collections center and the abandonment of excess capacity at the Company’s Chandler collections center and corporate headquarters in fiscal 2004 includes $2.2 million in personnel-related costs and $13.6 million of contract termination and other associated costs. Total costs incurred to date in connection with the Company’s revised operating plan adopted in February 2003 include $18.8 million in personnel-related costs, $26.3 million of contract termination costs and $28.3 million in other associated costs. The accruals remain for contract term and other associated costs which are long term liabilities.
A summary of the liabilities, which are included in accrued taxes and expenses on the consolidated balance sheets, for the restructuring charges for the years ended June 30, 2003, 2004 and 2005, is as follows (in thousands):
19. Earnings Per Share
A reconciliation of weighted average shares used to compute basic and diluted earnings per share is as follows (dollars in thousands, except per share data):
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, adjusted for interest expense (net of related tax effects) related to the Company’s convertible senior notes, by the weighted average shares and assumed incremental shares. The treasury stock method was used to compute the assumed incremental shares related to the Company’s outstanding stock options and warrants. The average common stock market prices for the periods were used to determine the number of incremental shares. Options to purchase approximately 1.0 million, 5.2 million and 12.3 million shares of common stock for the years ended June 30, 2005, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares.
The if-converted method was used to calculate the impact of the Company’s convertible senior notes on assumed incremental shares. As required by EITF 04-8, assumed incremental shares for the years ended June 30, 2005 and 2004, were retroactively adjusted for the impact of the convertible senior notes.
20. Supplemental Cash Flow Information
Cash payments for interest costs and income taxes consist of the following (in thousands):
During the year ended June 30, 2004, the Company repurchased 62,900 restricted shares at an average price of $18.58 per share from employees and former employees in partial satisfaction of outstanding debt obligations.
During the year ended June 30, 2003, the Company entered into capital lease agreements for property and equipment of $13.0 million. The Company did not enter into any significant capital lease agreements for property and equipment during the years ended June 30, 2005 and 2004.
The Company received a tax refund for $70.0 million in July 2003.
In March 2003, in connection with its whole loan purchase facility, the Company issued a $30.0 million note to the purchaser as payment for costs associated with the structuring of the facility.
In September 2002, the Company issued warrants to FSA in consideration for increases in specific delinquency trigger levels on securitizations insured by FSA prior to September 30, 2002. The Company recorded non-cash interest expense of $6.6 million related to this agreement during the year ended June 30, 2003.
21. Supplemental Disclosure for Accumulated Other Comprehensive Income
A summary of changes in accumulated other comprehensive income is as follows (in thousands):
22. 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.
Estimated fair values, carrying values and various methods and assumptions used in valuing the Company’s financial instruments are set forth below (in thousands):
(a)
The carrying value of cash and cash equivalents, restricted cash-securitization notes payable, restricted cash-warehouse credit facilities and restricted cash-other 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)
The fair value of finance receivables is estimated by discounting future net cash flows expected to be collected using a current risk-adjusted rate.
(c)
The fair value of interest-only receivables from Trusts, investments in Trust receivables and restricted cash-gain on sale Trusts 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)
Warehouse credit facilities 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 interest rate cap and swap agreements, securitization notes payable, senior notes and convertible senior notes are based on quoted market prices, when available. If quoted market prices are not available, the market value is estimated by discounting future net cash flows expected to be settled using a current risk-adjusted rate.
(f)
The fair value of other notes payable is estimated based on rates currently available for debt with similar terms and remaining maturities.
23. Quarterly Financial Data (unaudited)
The following is a summary of quarterly financial results (dollars in thousands, except per share data):
(a)
Diluted earnings per share and weighted average shares and assumed incremental shares for all periods from the December 2003 quarter through the September 2004 quarter were revised to reflect the retroactive application of EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.”
24. Guarantor Consolidating Financial Statements
The payment of principal and interest on the Company’s senior notes and convertible senior notes are 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 and convertible senior notes. The Company believes that the 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.
The consolidating financial statement schedules present consolidating financial data for (i) AmeriCredit Corp. (on a parent only basis), (ii) the combined Subsidiary Guarantors, (iii) the combined Non-Guarantor Subsidiaries, (iv) an elimination column for adjustments to arrive at the information for the Company and its subsidiaries on a consolidated basis and (v) the Company and its subsidiaries on a consolidated basis as of June 30, 2005 and 2004 and for each of the three years in the period ended June 30, 2005.
Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Results of operations of subsidiaries are therefore reflected in the parent company’s investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING BALANCE SHEET
June 30, 2005
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING BALANCE SHEET
June 30, 2004
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF INCOME
Year Ended June 30, 2005
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF INCOME
Year Ended June 30, 2004
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF INCOME
Year Ended June 30, 2003
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended June 30, 2005
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended June 30, 2004
(in thousands)
AMERICREDIT CORP.
FINANCIAL STATEMENT SCHEDULE
CONSOLIDATING STATEMENT OF CASH FLOWS
Year Ended June 30, 2003
(in thousands)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters with its independent accountants to report under this Item 9.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Such controls include those designed to ensure that information for disclosure is communicated to management, including the Chief Executive Officer (the “CEO”), as appropriate to allow timely decisions regarding required disclosure.
The CEO and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2005. Based on their evaluation, they have concluded, to the best of their knowledge and belief, that the disclosure controls and procedures are effective. No changes were made in the Company’s internal controls over financial reporting during the quarter ended June 30, 2005, that have materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption “Election of Directors” in the Proxy Statement is incorporated herein by reference in response to this Item 10. See Item 1. “Business-Executive Officers” for information concerning executive officers.
The Company has adopted the AmeriCredit Code of Ethical Conduct for Senior Financial Officers (“code of ethics”), a code of ethics that applies to the Chief Executive Officer, Chief Financial Officer and Corporate Controller. The code of ethics is publicly available on the Company’s website at www.americredit.com (and a copy will be provided to any shareholder upon written request to the Company’s Secretary). Corporate governance guidelines applicable to the Board of Directors and charters for all Board committees are also available on the Company’s website. If any substantive amendments are made to the code of ethics or any waivers granted, including any implicit waiver, from a provision of the code to the Chief Executive Officer, Chief Financial Officer or Corporate Controller, the Company will disclose the nature of such amendment or waiver on that website or in a report on Form 8-K.
The information with respect to the Company’s audit committee financial expert contained under the caption “Board Committees and Meetings” in the Company’s proxy statement for the 2005 annual meeting of stockholders is incorporated herein by reference to such proxy statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions “Executive Compensation” and “Election of Directors” in the Proxy Statement is incorporated herein by reference in response to this Item 11.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption “Principal Shareholders and Stock Ownership of Management” in the Proxy Statement is incorporated herein by reference in response to this Item 12.
Equity Compensation Plans
The following table provides information about the Company’s equity compensation plans as of June 30, 2005:
The 1989 Stock Option Plan for AmeriCredit Corp., 1990 Stock Option Plan for Non-Employee Directors of AmeriCredit Corp., 1991 Key Employee Stock Option Plan of AmeriCredit Corp., 1995 Omnibus Stock and Incentive Plan for AmeriCredit Corp., AmeriCredit Corp. Employee Stock Purchase Plan, 1996 Limited Stock Option Plan for AmeriCredit Corp., 1998 Limited Stock Option Plan for AmeriCredit Corp. and Amended and Restated 2000 Limited Omnibus and Incentive Plan for AmeriCredit Corp. were approved by the Company’s shareholders.
The 1999 Employee Stock Option Plan of AmeriCredit Corp. (“1999 Plan”), FY 2000 Stock Option Plan of AmeriCredit Corp. (“FY 2000 Plan”), Management Stock Option Plan of AmeriCredit Corp. (“Management Plan”) and i4 Gold Stock Option Program (“i4 Plan”) have not been approved by the Company’s shareholders.
Description of Plans Not Approved by Shareholders
1999 Plan
Under the 1999 Plan, adopted by the Board of Directors in fiscal 1999, a total of 1,000,000 shares have been authorized for grants of options to employees other than directors and senior management officers (as defined by the plan) of which 77,935 shares were available for grants as of June 30, 2005. Each option must be granted at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, and no option may have a term in excess of ten years. In fiscal 2005, no shares were granted under the 1999 Plan. Each option is subject to vesting requirements established by the Board of Directors. The 1999 Plan provides for acceleration of vesting of awards in the event of a change in control. The 1999 Plan expires on February 4, 2009, except with respect to options then outstanding.
FY 2000 Plan
Under the FY 2000 Plan, adopted by the Board of Directors in fiscal 2000, a total of 2,000,000 shares have been authorized for grants of options to employees other than directors and senior management officers (as defined by the plan) of which 209,055 shares were available for grants as of June 30, 2005. Each option must be granted at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, and no option may have a term in excess of ten years. In fiscal 2005, no shares were granted under the FY 2000 Plan. Each option is subject to certain vesting requirements established by the Board of Directors. The FY 2000 Plan provides for acceleration of vesting of awards in the event of a change in control. The FY 2000 Plan expires on July 1, 2009, except with respect to options then outstanding.
Management Plan
Under the Management Plan, adopted by the Board of Directors in fiscal 2000, a total of 3,000,000 shares have been authorized for grants of options to employees other than directors and senior management officers (as defined by the plan) of which 567,245 shares were available for grants as of June 30, 2005. Each option must be granted at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, and no option may have a term in excess of ten years. In fiscal 2005, no shares were granted under the Management Plan. Each option is subject to certain vesting requirements established by the Board of Directors. The Management Plan provides for acceleration of vesting of awards in the event of a change in control. The Management Plan expires on February 3, 2010, except with respect to options then outstanding.
i4 Plan
Under the i4 Plan, adopted by the Board of Directors in fiscal 2002, a total of 1,200,000 shares have been authorized for grants of options to employees other than directors and senior management officers (as defined by the plan), of which 338,478 shares were available for grants as of June 30, 2005. Each option must be granted at a per share exercise price equal to the fair market value of a share of Common Stock on the date of grant, and no option may have a term in excess of ten years. In fiscal 2005, no shares were granted under the i4 Plan. Each option is subject to certain vesting requirements established by the Board of Directors. The i4 Plan provides for acceleration of vesting of awards in the event of a change in control. The i4 Plan expires on October 31, 2007, except with respect to options then outstanding.
For additional information on equity compensation plans, see Note 14 to the Consolidated Financial Statements.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption “Related Party Transactions” in the Proxy Statement is incorporated herein by reference in response to this Item 13.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption “Report of the Audit Committee” in the Proxy Statement is incorporated herein by reference in response to this Item 14.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1)
The following Consolidated Financial Statements of the Company and Report of Independent Accountants as set forth in Item 8 of this report are filed herein.
Report of Independent Registered Public Accounting Firm
Management’s Reports
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2005 and 2004.
Consolidated Statements of Income and Comprehensive Income for the years ended June 30, 2005, 2004 and 2003.
Consolidated Statements of Shareholders’ Equity for the years ended June 30, 2005, 2004 and 2003.
Consolidated Statements of Cash Flows for the years ended June 30, 2005, 2004 and 2003.
Notes to Consolidated Financial Statements
(2)
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are either not required under the related instructions, are inapplicable, or the required information is included elsewhere in the Consolidated Financial Statements and incorporated herein by reference.
(3)
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on September 12, 2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified by the numbers in parenthesis under the Exhibit Number column. Documents filed with this report are identified by the symbol “@” under the Exhibit Number column.
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
INDEX TO EXHIBITS
(Continued)
(1)
Incorporated by referenced to the exhibit shown in parenthesis included in Registration Statement No. 33-31220 on Form S-1 filed by the Company with the Securities and Exchange Commission.
(2)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 1990, filed by the Company with the Securities and Exchange Commission.
(3)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 1991, filed by the Company with the Securities and Exchange Commission.
(4)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 1993, filed by the Company with the Securities and Exchange Commission.
(5)
Incorporated by reference from the Company’s Proxy Statement for the year ended June 30, 1995, filed by the Company with the Securities and Exchange Commission.
(6)
Incorporated by reference from the Company’s Proxy Statement for the year ended June 30, 1996, filed by the Company with the Securities and Exchange Commission.
(7)
Incorporated by reference to exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 1997, filed by the Company with the Securities and Exchange Commission.
(8)
Incorporated by reference from the Company’s Proxy Statement for the year ended June 30, 1997, filed by the Company with the Securities and Exchange Commission.
(9)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Report on Form 8-K, dated August 28, 1997, filed by the Company with the Securities and Exchange Commission.
(10)
Incorporated by reference from the Company’s Proxy Statement for the year ended June 30, 1998, filed by the Company with the Securities and Exchange Commission.
(11)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Report on Form 8-K, dated September 7, 1999, filed by the Company with the Securities and Exchange Commission.
(12)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2000, filed by the Company with the Securities and Exchange Commission.
(13)
Incorporated by reference from the Company’s Proxy Statement for the year ended June 30, 2000, filed by the Company with the Securities and Exchange Commission.
(14)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2001, filed by the Company with the Securities and Exchange Commission.
(15)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002, filed by the Company with the Securities and Exchange Commission.
(16)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on October 29, 1999, by the Company with the Securities and Exchange Commission (Exhibit 4.4)
(17)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on July 31, 2001, by the Company with the Securities and Exchange Commission (Exhibit 4.4)
(18)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on February 23, 2000, by the Company with the Securities and Exchange Commission (Exhibit 4.4)
(19)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on November 16, 1994, by the Company with the Securities and Exchange Commission (Exhibit 4.3)
(20)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on March 1, 1999, by the Company with the Securities and Exchange Commission (Exhibit 4.4.1)
(21)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on November 7, 2001, by the Company with the Securities and Exchange Commission (Exhibit 4.4.2)
(22)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2002, filed by the Company with the Securities and Exchange Commission.
(23)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2002, filed by the Company with the Securities and Exchange Commission.
(24)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, filed by the Company with the Securities and Exchange Commission.
(25)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on December 12, 2002, by the Company with the Securities and Exchange Commission
(26)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on March 1, 1999, by the Company with the Securities and Exchange Commission (Exhibit 4.4)
(27)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003, filed by the Company with the Securities and Exchange Commission.
(28)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed by the Company with the Securities and Exchange Commission.
(29)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2003, filed by the Company with the Securities and Exchange Commission.
(30)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed by the Company with the Securities and Exchange Commission.
(31)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Registration Statement on Form S-8, filed on December 18, 2003, by the Company with the Securities and Exchange Commission (Exhibit 4.4.3)
(32)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2004, filed by the Company with the Securities and Exchange Commission.
(33)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed by the Company with the Securities and Exchange Commission.
(34)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed by the Company with the Securities and Exchange Commission.
(35)
Filed as an exhibit to the Current Report on Form 8-K, filed by the Company with the Securities and Exchange Commission on October 4, 2004.
(36)
Filed as an exhibit to the Proxy Statement, filed on Form DEF 14A with the Securities and Exchange Commission on September 28, 2004.
(37)
Filed as an exhibit to the report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2004.
(38)
Incorporated by reference to the exhibit shown in parenthesis included in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, filed by the Company with the Securities and Exchange Commission.
(@)
Filed herewith.