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 the Company's business in March 1987, and the business has been operated continuously since that time. As used herein, the term "Company" refers to the Company, 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, including AmeriCredit Financial Services, Inc. ("AFSI"), a Delaware corporation, have been operating in the automobile finance business since September 1992. Through its AFSI branch network, the Company purchases loans made by franchised and select independent dealers to consumers buying late model used and, to a lesser extent, new automobiles. 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 sale of loans in securitization transactions. The Company services its automobile lending portfolio at regional centers using automated loan servicing and collection systems.
In November 1996, the Company acquired Americredit Corporation of California, a California corporation. This subsidiary, which operates as AmeriCredit Mortgage Services ("AMS"), originates mortgage loans and sells the loans and related servicing rights in the wholesale markets.
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. Because the Company serves customers who are unable to meet the credit standards imposed by most traditional automobile financing sources, the Company generally charges interest at rates higher than those charged by traditional automobile financing sources. The Company also expects to sustain a higher level of credit losses than traditional automobile financing sources since the Company provides financing in a relatively high risk market.
Dealership Marketing. Since the Company is primarily 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 selects these dealers because they sell the type of used cars the Company prefers to finance, specifically later model, low mileage used cars. Of the contracts purchased by the Company during the fiscal year ended June 30, 1999, approximately 95% were originated by manufacturer franchised dealers with used car operations and 5% by select independent dealers. The Company purchased contracts from 12,590 dealers during the fiscal year ended June 30, 1999. No dealer 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 customer seeking to finance a vehicle purchase. Branch managers and other branch office personnel regularly telephone and visit dealers to solicit new business and to answer any questions dealers may have regarding the Company's financing programs and capabilities. These personnel explain the Company's underwriting philosophy, including the preference for non-prime quality
contracts secured by later model, lower mileage vehicles and the Company's practice of underwriting in the local branch office. To increase the effectiveness of these contacts, the branch managers and other branch office 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. To mitigate the Company's risk from potential credit losses, the Company typically charges dealers an acquisition fee when purchasing finance contracts. Such acquisition fees are negotiated with dealers on a contract-by-contract basis and are usually non- refundable. 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 such 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. The Company uses a branch office network to market its financing programs to selected dealers, develop relationships with these dealers and underwrite contracts submitted by dealerships. Branch office personnel are responsible for the solicitation, enrollment and education of dealers regarding the Company's financing programs. The Company believes a local presence enables the Company to more fully service dealers and 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, the regulatory environment and the availability of qualified personnel. Branch offices are typically situated in suburban office buildings which are accessible to local dealers.
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 one or more dealer and customer service representatives. Larger branch offices may also have additional assistant managers and/or dealer marketing representatives. The Company believes that the personal relationships its branch managers and other branch personnel 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 annual incentives based on overall branch performance including factors such as branch credit quality, loan pricing adequacy and loan volume objectives. The incentives are typically paid in cash and stock option grants. The branch managers report to regional vice presidents.
The Company's regional vice presidents monitor branch office compliance with the Company's underwriting guidelines. The Company's management information systems provide the regional vice presidents access to credit application information enabling them to consult with the branch managers on daily 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 branches, dollar volume of contracts purchased and number of producing dealerships for the periods set forth below.
- -------- (1) 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 has implemented a proprietary credit scoring system throughout its branch office network to support the branch level credit approval process. The credit scoring system was developed with the assistance of Fair, Isaac and Co., Inc. from 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 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 could compensate for this higher default risk through the structuring and pricing of the transaction. 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 adversely 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 risk is acceptable and the price the Company should charge for that risk. The Company's credit scorecards are validated on a monthly basis through the comparison of actual versus projected performance by score. The Company endeavors to refine its proprietary scorecards based on new information and identified correlations relating to receivables performance.
Through the use of the Company's proprietary credit scoring system, branch office personnel with credit authority are able to more efficiently review and prioritize loan applications. Applications which receive a high score can be processed rapidly and credit decisions can be quickly faxed back to the dealer. Applications receiving low scores can be quickly rejected without further processing and review by the Company. This ability to prioritize applications allows for a more effective allocation of resources to those applications requiring more review.
Decentralized Loan Approval Process. The Company purchases individual contracts through its branch offices based on a decentralized credit approval process tailored to local market conditions. Each branch manager has a specific credit authority based upon their experience and historical loan portfolio results as well as established credit scoring parameters. In certain markets where a branch office is not present, contracts are purchased through the Company's regional purchasing offices. Although the credit approval process is decentralized, all credit decisions must comply with the Company's credit scoring strategies and underwriting policies and procedures.
Loan application packages completed by prospective obligors are received via facsimile or electronic interface at the branch offices from dealers. Application data are entered into the Company's automated application processing system. A credit bureau report is automatically generated and a credit score is computed. Branch office 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. These personnel consider many factors in arriving at a credit decision, relying primarily on the applicant's credit score, but also taking into account the applicant's capacity to pay, stability, credit history, the contract terms and collateral value. The Company estimates that approximately 60% to 65% of applicants are denied credit by the Company typically because of their credit histories or other factors. Dealers are contacted regarding credit decisions by telefax, telephone or electronic interface. Declined and conditioned applicants are also provided with appropriate notification of the decision.
The Company's underwriting and collateral guidelines as well as credit scoring parameters form the basis for the branch level credit decision; however, the qualitative judgment of the branch office personnel with credit authority with respect to the credit quality of an applicant is a significant factor in the final credit decision. Exceptions to credit policies and authorities must be approved by a regional vice president or other designated credit officer.
The dealers send completed loan packages to the branch office. As part of the credit decision process, a customer service representative investigates the residence, employment and credit history of the applicant. Loan terms and insurance coverages are generally reverified with the customer by branch office personnel and the loan packages are forwarded to the Company's centralized loan services department. All loan documentation is scanned to create electronic images and key original documents are stored in a fire resistant vault. The loans are reviewed for proper documentation and regulatory compliance and are entered into the Company's loan accounting system. Once cleared for funding, the loan services department issues a check or electronically transfers funds to the dealer. 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, maintaining physical damage insurance coverage of the financed vehicle and repossessing and liquidating collateral when necessary. The Company utilizes various automated systems to support its servicing and collections activities. 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 20 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. All payment processing and customer account maintenance is performed centrally in Fort Worth, Texas by the loan services department. The Company receives servicing fees for servicing securitized receivables equal to 2.25% per annum of the outstanding principal balance of such receivables.
The Company's collections activities are performed at regional centers located in Fort Worth, Texas, Tempe, Arizona and Charlotte, North Carolina. 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 which dials phone numbers of 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. The system also tracks and notifies collections management of phone numbers that the system has been unable to reach within a specified number of days, thereby promptly identifying for management all customers who cannot be reached by telephone. By eliminating time wasted on attempting to reach customers, the system gives a single collector the ability to speak with a larger number of accounts daily.
Once an account becomes more than 30 days delinquent, the account moves to the Company's mid-range collection unit. The objective of these collectors is to prevent the account from becoming further delinquent. After a scheduled payment on an account becomes approximately 60 to 90 days past due, the Company typically initiates repossession of the financed vehicle. However, the Company may repossess a financed vehicle without regard to the length of payment delinquency 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.
Payment deferrals are at times offered to customers who have encountered temporary financial difficulty, hindering their ability to pay as contracted, and when other methods of assisting the customer in meeting the contract terms and conditions have been exhausted. A deferral allows the customer to move a delinquent payment to the end of the loan by paying a fee (approximately the interest portion of the payment deferred). The collector reviews the customer's past payment history and statistically based behavioral score and assesses the customer's desire and capacity to make future payments. Before agreeing to a deferral, the collector must also ensure that
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. The loan services department processes deferment transactions. As of June 30, 1999, approximately 14% of the Company's managed receivables had received a deferral.
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 and 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. The Company may pursue 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 even if the Company has not repossessed the related vehicle. On accounts less than 120 days delinquent, the Company charges-off the account when the vehicle securing the delinquent contract is repossessed and disposed of. The charge-off represents the difference between the actual net sales proceeds and the amount of the delinquent contract, including accrued interest. Accrual of finance charge income is suspended on accounts which are more than 60 days contractually delinquent.
Risk Management
Overview. The Company has developed procedures to evaluate and supervise the operations of each branch office on a centralized basis. The Company's risk management department is responsible for monitoring the contract purchase process and supporting the supervisory role of senior operations management. This department tracks via databases key variables, such as loan applicant data, credit bureau and credit score information, loan structures and terms and payment histories. The risk management department also regularly reviews the performance of the Company's credit scoring system and is involved with third-party vendors in the development and enhancement of credit scorecards for the Company.
The risk management department also 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 by the Company's management information systems. This information is used to monitor credit quality as well as to refine the structure and mix of new contract purchases. Portfolio returns can be reviewed 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 to nine 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.
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 as well as for reserve analysis models.
Compliance Audits. The Company's internal audit department conducts regular compliance audits of branch office operations, loan services, collections and other functional areas. The primary objective of the audits
is to measure compliance with the Company's written policies and procedures as well as regulatory matters. Branch office audits include a review of compliance with underwriting policies, completeness of loan documentation, collateral value assessment and extent of applicant data investigation. Written audit reports are distributed to local branch office personnel and the regional vice presidents for response and follow-up. Senior operations management reviews copies of these reports. Audit results and responses are also reviewed on a quarterly basis by an audit committee comprised of senior executive management.
Securitization of Loans
Since December 1994, the Company has pursued a strategy of securitizing its receivables to diversify its funding, improve liquidity and obtain a cost- effective source of funds for the purchase of additional automobile finance contracts. The Company applies the net proceeds from securitizations to pay down borrowings under its warehouse credit facilities, thereby increasing availability thereunder for further contract purchases. Through June 30, 1999, the Company had securitized approximately $5.8 billion of automobile receivables, including a $1.0 billion securitization completed in May 1999.
In its securitizations, the Company, through a wholly-owned subsidiary, transfers automobile receivables to newly-formed securitization trusts, which issue one or more classes of asset-backed securities. The asset-backed securities are in turn sold to investors, except for certain subordinated interests, which may be retained by the Company.
When receivables are transferred to securitization trusts, the Company recognizes a gain on sale of receivables and continues to service such receivables. The gain on sale of receivables primarily represents the present value of estimated excess cash flows the Company expects to receive from the pool of receivables sold. The estimated excess cash flows are the difference between the cash collected from obligors on securitized receivables and the sum of principal and interest paid to investors in the asset-backed securities, contractual servicing fees, defaults, net of recoveries and other expenses such as trustee fees and financial guarantee insurance premiums. Concurrently with recognizing such gain on sale of receivables, the Company records a corresponding asset, interest only receivables from trusts, which includes the present value of estimated excess cash flows as described above.
The calculation of interest-only receivables from trusts includes estimates of future losses and prepayment rates for the remaining term of the receivables sold since these factors impact the amount and timing of future cash collected on the receivables sold. The carrying value of interest-only receivables is reviewed quarterly by the Company for each separate securitization transaction. If future losses or prepayment rates exceed the Company's original estimates, the asset will be adjusted through a charge to operations. Favorable credit loss and prepayment experience compared to the Company's original estimates would result in additional income when realized.
In connection with the Company's securitization program, the Company arranges for a financial guaranty insurance policy to achieve a high grade credit rating on the asset-backed securities issued. The policies for each of the Company's securitizations have been provided by Financial Security Assurance Inc. ("FSA"), a monoline insurer, which insures the timely payment of principal and interest due on the asset-backed securities. The Company has limited reimbursement obligations to FSA; however, credit enhancement requirements, including FSA's encumbrance of certain restricted cash accounts and subordinated interests in trusts, provide a source of funds to cover shortfalls in collections and to reimburse FSA for any claims which may be made under the policies issued with respect to the Company's securitizations.
The credit enhancement requirements for any securitization include restricted cash accounts which are generally established with an initial deposit and subsequently funded through excess cash flows from securitized receivables. Funds would be withdrawn from the restricted cash accounts to cover any shortfalls in amounts payable on the asset-backed securities. Funds are also available to be withdrawn in an event of default to reimburse FSA for draws on its financial guaranty insurance policy. In addition, the restricted cash account for
each securitization trust is cross-collateralized to the restricted cash accounts established in connection with the Company's other securitization trusts, such that excess cash flow from a performing securitization trust insured by FSA may be used to support cash flow shortfalls from a non- performing securitization trust insured by FSA, thereby further restricting excess cash flow available to the Company. The Company is entitled to receive amounts from the restricted cash accounts to the extent the amounts deposited exceed predetermined required minimum levels.
FSA has taken a pledge of the stock of AFS Funding Corp., the wholly-owned subsidiary of the Company that owns the restricted cash accounts, interest- only receivables and any subordinated interests in the trusts, such that, if the pledge is foreclosed upon in the event of a payment by FSA under one of its insurance policies or certain material adverse changes in the business of the Company, FSA would control all of the restricted cash accounts, interest- only receivables and subordinated interests in the trusts. The terms of each securitization also provide that, under certain tests relating to delinquencies, defaults and losses, cash may be retained in the restricted cash account and not released to the Company until increased minimum levels of credit enhancement requirements have been reached and maintained.
Trade Names
The Company has obtained federal trademark protection for the "AmeriCredit" name and the logo that incorporates the "AmeriCredit" name.
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 agencies such as the Company. Such rules and regulations generally provide for licensing of sales finance agencies, 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's branch offices are 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 loan. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant 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.
The dealers who originate automobile loans 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 such 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 non-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. 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 and leasing, 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.
Mortgage Loan Operations
In November 1996, the Company acquired AMS. AMS originates and acquires mortgage loans through a network of mortgage brokers. AMS sells its mortgage loans and the related servicing rights in the wholesale markets. AMS does not currently represent a material portion of the Company's assets or revenues.
Risk Factors
Dependence on Warehouse Credit Facilities. The Company depends on warehouse credit facilities with financial institutions to finance its purchase of contracts pending securitization. At June 30, 1999, the Company has five warehouse credit facilities with various financial institutions providing for revolving credit borrowings of up to a total of $1,070 million and $20 million Cdn., subject to defined borrowing bases. The Company has a $505 million warehouse facility which expires in September 1999 and a $375 million warehouse facility which expires in March 2000. The Company's bank credit agreement, which provides for up to $115 million of revolving borrowings subject to a borrowing base, matures in March 2000 and the $20 million Cdn. bank facility to fund Canadian auto receivables expires in November 1999. In July 1999, the Company renewed the mortgage subsidiary credit agreement reducing the amount the Company can borrow from $75 million to $25 million, subject to a borrowing base, and extending the maturity date to July 2000. The Company cannot guarantee that any of these financing resources will continue to be available at reasonable terms or at all. The availability of these financing sources depends 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 any of these facilities and arrange new warehouse credit facilities, it will have to curtail contract purchasing activities, which would have a material adverse effect on the Company's financial position, liquidity and results of operation.
The Company's warehouse credit facilities contain extensive restrictions and covenants and require the Company to maintain specified financial ratios and satisfy specified financial tests, including maintenance of asset quality and portfolio performance tests. Failure to meet any of these convenants, financial ratios or financial tests 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 such agreements and restrict the Company's
ability to obtain additional borrowings under these agreements. The Company's ability to meet those financial ratios and tests can be affected by events beyond its control and the Company cannot guarantee that it will meet those financial ratios and tests.
Dependence on Securitization Program. Since December 1994, the Company has relied upon its ability to aggregate and sell receivables in the asset-backed securities market to generate cash proceeds for repayment of warehouse credit facilities and to purchase additional contracts from automobile dealers. Further, gains on sales generated by the Company's securitizations currently represent the single largest component of the Company's revenues. The Company endeavors to effect securitizations of its receivables on at least a quarterly basis. Accordingly, adverse changes in the Company's asset-backed securities program or in the asset-backed securities market for automobile receivables generally could materially adversely affect the Company's ability to purchase and resell loans on a timely basis and upon terms reasonably favorable to the Company. Any delay in the sale of receivables beyond a quarter-end would eliminate the gain on sale that quarter and adversely affect the Company's reported earnings for that quarter. Any of these adverse changes or delays would have a material adverse effect on the Company's financial position, liquidity and results of operations.
Dependence on Credit Enhancement. To date, all of the Company's securitizations have utilized credit enhancement in the form of financial guaranty insurance policies issued by Financial Security Assurance, Inc. ("FSA") in order to achieve AAA/Aaa ratings which reduces the costs of securitizations relative to alternative forms of financing available to the Company. FSA is not required to insure Company-sponsored securitizations and there can be no assurance that it will continue to do so or that future Company-sponsored securitizations will be similarly rated. Likewise, the Company is not required to utilize financial guaranty insurance policies issued by FSA or any other form of credit enhancement in connection with its securitizations. The Company recently began to utilize reinsurance and other credit enhancement alternatives to reduce the initial cash deposit related to securitization. A downgrading of FSA's credit rating or FSA's withdrawal of credit enhancement or the lack of availability of reinsurance or other alternative credit enhancements from the Company's securitization program could result in higher interest costs for future Company-sponsored securitizations and larger initial cash deposit requirements. 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 and to refinance its indebtedness and to fund 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 requires substantial amounts of cash to fund its contract purchase and securitization activities. Although the Company recognizes a gain on the sale of receivables upon the closing of a securitization, it typically receives the cash representing that gain over the actual life of the receivables securitized. The Company also incurs significant transaction costs in connection with a securitization. Accordingly, the Company's strategy of securitizing substantially all of its newly purchased receivables and increasing the number of contracts purchased will require substantial amounts of cash.
The Company expects to continue to require substantial amounts of cash as the volume of the Company's contract purchases increases and its securitization program grows. The Company's primary cash requirements include the funding of: (i) contract purchases pending their securitization and sale; (ii) credit enhancement requirements in connection with the securitization and sale of the receivables; (iii) interest and principal payments under warehouse credit facilities, the Company's senior notes and other indebtedness; (iv) fees and expenses incurred in connection with the securitization and servicing of receivables; (v) capital expenditures for technology; (vi) ongoing operating expenses; and (vii) income tax payments due on receipt of excess cash flows from securitization trusts.
The Company's primary sources of liquidity in the future are expected to be existing cash, financings under its warehouse credit facilities, sales of automobile receivables through securitizations, excess cash flow received from securitization trusts and further issuances of debt or equity securities, depending on capital market conditions.
Because the Company's principal credit facilities are initially 364 days in length, the Company must renew these facilities annually. In addition, because the Company expects to continue to require substantial amounts of cash for the foreseeable future, it anticipates that it will need to enter into debt or equity financings regularly, in addition to quarterly securitizations. The type, timing and terms of financing selected by the Company will be dependent upon the Company's cash needs, the availability of various financing sources and the prevailing conditions in the financial markets. There can be no assurance that any such sources will be available to the Company at any given time or as to whether the terms on which such sources may be available will be acceptable.
Leverage. The Company currently has substantial 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 and its ability to enter into additional securitizations and debt and/or 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 flow 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 such refinancing would 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.
The degree to which the Company is leveraged creates risks including: (i) the Company may be unable to satisfy its obligations under its outstanding senior notes; (ii) the Company may be more vulnerable to adverse general economic and industry conditions; (iii) the Company may find it more difficult to fund future working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; and (iv) the Company will have to dedicate a substantial portion of its cash resources to the payment of principal and interest on indebtedness outstanding thereby reducing the funds available for operations and future business opportunities. The Company's warehouse credit facilities and its indentures restrict 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 warehouse credit facilities and the indentures also require the Company to comply with certain financial ratios, covenants and 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.
If the Company cannot comply with the requirements in its warehouse credit facilities, then the lenders may require it to immediately repay all of the outstanding debt under its facilities. If its debt payments were accelerated, the Company's assets might not be sufficient to fully repay the debt. These lenders may also require the Company to use all of its available cash to repay its debt, they may foreclose upon their collateral or they may prevent the Company from making payments to other creditors on certain portions of the Company's outstanding debt.
The Company may not be able to obtain a waiver of these provisions or refinance its debt, if needed. In such a case, the Company's business, results of operations and financial condition 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 and held by the Company prior to their sale in a securitization transaction as well as the subsequent performance of receivables sold to securitization trusts. Obligors under loans acquired by the Company may default or prepay during the period prior to their sale in a securitization transaction or if they remain owned by the Company. The Company bears the full risk of losses resulting from payment defaults during such period. In the event of a payment 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 losses on loans held for sale by the Company, which reflects management's estimates of anticipated losses for such loans. If the allowance is inadequate, then the Company would recognize as an
expense the losses in excess of that allowance and results of operations could be adversely affected. In addition, under the terms of the warehouse credit facilities, the Company is not able to borrow against defaulted loans and loans greater than 30 days delinquent held by the Company.
The Company also retains a substantial portion of the default and prepayment risk associated with the receivables that it sells pursuant to Company- sponsored securitizations. A large component of the gain recognized on these sales and the corresponding assets recorded on the Company's balance sheet are credit enhancement assets which are based on the present value of estimated future excess cash flows from the securitized receivables which will be received by the Company. Accordingly, credit enhancement assets are calculated on the basis of management's assumptions concerning, among other things, defaults and prepayments. Actual defaults and prepayments may vary from management's assumptions, possibly to a material degree. As of June 30, 1999, credit enhancement assets totaled $494.9 million. Depending on the Company's growth, credit enhancement assets may become a larger share of the Company's overall assets.
The Company is required to deposit substantial amounts of the cash flows generated by its interests in Company sponsored securitizations ("restricted cash") into spread accounts which are pledged to FSA as security for the Company's obligation to reimburse FSA for any amounts which may be paid out on financial guarantee insurance policies.
The Company regularly measures its default, prepayment 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 and/or prepayments, or that any other material assumptions were inaccurate, the Company would be required to adjust the carrying value of its credit enhancement assets, which consist of restricted cash, investments in trust receivables and interest-only receivables, by recording a charge to income and writing down the carrying value of these assets on its balance sheet. Future cash flows from securitization trusts may also be less than expected and the Company's results of operations and liquidity would be adversely affected, possibly to a material degree. 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 fee income, further adversely affecting results of operations and cash flow. A material write-down of credit enhancement assets and the corresponding decreases in earnings and cash flow could limit the Company's ability to service debt and to enter into future securitizations and other financings. 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 or prepayment may differ from those assumed and other assumptions may be required to be revised upon future events.
Portfolio Performance; Negative Impact on Cash Flows; Right to Terminate Normal Servicing. Generally, the form of credit enhancement agreement the Company enters into in connection with securitization transactions contains specified limits on the delinquency, default and loss rates on the receivables included in each securitization trust. If, at any measurement date, the delinquency, default or loss rate 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. During the period in which the specified delinquency, default and loss rates were exceeded, excess cash flow, 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 flow. Further, the credit enhancement requirements for each securitization trust are cross-collateralized to the credit enhancement requirements established in connection with each of the Company's other securitization trusts, so that excess cash flow from a performing securitization trust insured by FSA may be used to support increased credit enhancement requirements for a non-performing securitization trust insured by FSA, which would further restrict excess cash flow available to the Company. The Company has on occasion exceeded these specified limits, however, FSA has either waived each of these occurrences or amended the agreements. The Company can give no assurance that FSA would waive any such future occurrence or amend the agreements. Any refusal of FSA to waive any such future occurrence or amend the agreements could have a material adverse effect on the Company's financial position, liquidity and results of operations.
The credit enhancement agreements entered into in connection with securitization transactions contain additional specified limits on the delinquency, default and loss rates on the receivables included in each trust which are higher than the limits referred to in the preceding paragraph. If, at any measurement date, the delinquency, default or loss rate with respect to any trust were to exceed these additional specified limits applicable to that trust, provisions of the credit enhancement agreements permit FSA to terminate the Company's servicing rights to the receivables sold to that trust. In addition, the servicing agreements are cross-defaulted so that a default under one servicing agreement would allow FSA to terminate the Company's servicing rights under all of its servicing agreements. Although the Company has never exceeded such delinquency, default or loss rates, there can be no assurance that the Company's servicing rights with respect to the automobile receivables in such trusts or any other trust which exceeds the specified limits in future periods will not be terminated. FSA has other rights to terminate the Company as servicer if (i) the Company were to breach its obligations under the servicing agreements, (ii) FSA was required to make payments under its policies or (iii) certain bankruptcy or insolvency events were to occur. As of June 30, 1999, no such termination events have occurred with respect to any of the trusts formed by the Company.
Reliance on Revenue Generated from the Sale of Loans to Trusts. The Company periodically sells auto receivables to certain special purpose financing trusts and these trusts in turn issue asset-backed securities to investors. The Company retains an interest in the receivables sold in the form of a residual or interest-only strip and may also retain other subordinated interests in the receivables sold to the trusts. The residual or interest-only strips represent the present value of future excess cash flows resulting from the difference between the finance charge income received from the obligors on the receivables and the interest paid to the investors in the asset-backed securities, net of credit losses, servicing fees and other expenses.
Upon the transfer of receivables to the trusts the Company removes the net book value of the receivables sold from its consolidated balance sheets and allocates the 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.
For the year ended June 30, 1999, the Company recognized a gain on sale of auto receivables of $162.4 million or approximately 48% of revenue during that period. If the Company is unable to originate new loans and sell them to the trusts, the Company could experience a significant change in the timing of revenue recognition and reported income. Further, there can be no assurance that the Company will recognize gains on future sales of receivables to the trusts consistent with the gains on previous sales.
Implementation of Business Strategy. The Company's financial position and results of operations depend on Company management's ability to execute its business strategy. Key factors involved in execution of such business strategy include continued expansion of automobile contract purchase volume, continued and successful use of proprietary scoring models for risk-based pricing, the use of sophisticated risk management techniques, continued investment in technology to support operating efficiency and growth and funding and liquidity through securitizations. 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.
The Company's business strategy also includes leveraging its expertise to broaden its lending to non-prime borrowers through the operations of AMS.
The Company plans to expand its indirect automobile finance business by adding additional branch offices and by increasing the dealer penetration of the Company's existing branch offices. The success of this strategy is dependent upon, among other factors, the Company's ability to hire and retain qualified branch managers and other personnel, to develop relationships with more dealers and to expand the Company's current relationships with existing dealer customers. The Company is faced with intense competition in attracting key personnel and establishing relationships with new dealers. Dealers often already have favorable non-prime financing sources, which may restrict the Company's ability to develop dealer relationships and delay the Company's growth. In addition, the competitive conditions in the Company's market may result in a reduction in the profitability of the
contracts that the Company purchases or a decrease in contract acquisition volume, which would adversely affect the Company's results of operations.
The growth of the Company's servicing portfolio has resulted in increased need for additional personnel and expansion of systems capacity. The Company's ability to support, manage and control growth is dependent upon, among other things, the Company's ability to hire, train, supervise and manage its growing workforce. There can be no assurance that the Company will have trained personnel and systems adequate to support the Company's growth strategy.
Credit-Impaired Borrowers. The Company specializes in purchasing, securitizing and servicing non-prime automobile receivables. Non-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. Delinquencies, defaults, repossessions and losses generally increase during periods of economic recession. 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. Because the Company focuses on non-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on these loans could be 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 slow down or recession, the Company's servicing costs may increase without a corresponding increase in its servicing fee income. While the Company believes that the underwriting criteria and collection methods it employs enable it to manage the higher risk inherent in loans made to non- prime borrowers, no assurance can be given that such criteria or methods will afford adequate protection against such risks. Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could also adversely affect the Company's ability to enter into future securitizations and correspondingly, its financial position, liquidity and results of operations.
Interest Rates. The Company's profitability may be directly affected by the level of and fluctuations in interest rates, which affect the Company's ability to earn a gross interest rate spread. As the level of interest rates increase, the Company's gross interest rate spread will generally decline since the rates charged on the contracts purchased from dealers are limited by statutory maximums, affording the Company little opportunity to pass on increased interest costs. Furthermore, the Company's future gains recognized upon the securitization of automobile receivables will also be affected by interest rates. The Company recognizes a gain in connection with its securitizations based upon the estimated present value of projected future excess cash flows from the securitization Trusts, which is largely dependent upon the gross interest rate spread. The Company believes that its profitability and liquidity would be adversely affected during any period of higher interest rates, possibly to a material degree. The Company monitors the interest rate environment and employs pre-funding or other hedging strategies designed to mitigate the impact of changes in interest rates. There can be no assurance, however, that pre-funding or other hedging strategies will mitigate the impact of changes in interest rates.
Labor Market Conditions. Low unemployment rates driven by economic growth and the continued expansion of consumer credit markets 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 and, ultimately, the Company's financial condition, results of operations and liquidity.
Competition. Reference should be made to Item 1. "Business--Automobile Finance Operations--Competition" for a discussion of competitive risk factors.
Regulation. Reference should be made to Item 1. "Business--Automobile Finance Operations--Regulation" for a discussion of regulatory risk factors.
Year 2000 Issue
The year 2000 issue is the result of computer programs and embedded hardware systems having been developed using two digits rather than four to define the applicable year. These computer programs or hardware that have date-sensitive software or embedded chips may use a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions or failure to the Company's operations including, among other things, a temporary inability to transact new business or communicate with its customers. The Company has substantially completed its year 2000 compliance review, which included obtaining certifications from third party software vendors regarding the year 2000 compliance of their software applications, testing the Company's core operating systems and identifying and repairing any problems. The Company believes that it is year 2000 compliant. However, the Company may experience degradation in the performance of its systems or complete system failure if its assessment is erroneous or if the Company encounters unforeseen difficulties. Any of these events, whether occurring in the Company's systems or the systems of others, could have a material adverse effect on the Company's business, financial condition and results of operations.
Employees
At June 30, 1999, the Company employed 2,241 persons in 41 states and two Canadian provinces. 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, 1999.
CLIFTON H. MORRIS, JR. has been Chairman of the Board and Chief Executive Officer of the Company since May 1988, and was also President of the Company from such date until April 1991 and from April 1992 to November 1996. Mr. Morris is also a director of Service Corporation International, a publicly held company which owns and operates funeral homes and related businesses, and Cash America International Inc., a publicly held pawn brokerage company.
MICHAEL R. BARRINGTON has been Vice Chairman, President and Chief Operating Officer of the Company since November 1996 and was Executive Vice President and Chief Operating Officer of the Company from November 1994 until November 1996. Mr. Barrington was a Vice President of the Company from May
1991 until November 1994. From its formation in July 1992 until November 1996, Mr. Barrington was also the President and Chief Operating Officer of AFSI.
DANIEL E. BERCE has been Vice Chairman and Chief Financial Officer of the Company since November 1996 and was Executive Vice President, Chief Financial Officer and Treasurer for the Company from November 1994 until November 1996. Mr. Berce was Vice President, Chief Financial Officer and Treasurer of the Company from May 1991 until November 1994. Mr. Berce is also a director of INSpire Insurance Solutions Inc., a publicly held company, which provides policy and claims administration services to the property and casualty insurance industry.
EDWARD H. ESSTMAN has been President and Chief Operating Officer of AFSI since November 1996. Mr. Esstman was Executive Vice President, Director of Consumer Finance Operations of AFSI from November 1994 until November 1996 and was Senior Vice President, Director of Consumer Finance of AFSI from AFSI's formation in July 1992 until November 1994. Mr. Esstman has also been Executive Vice President--Auto Finance Division for the Company since November 1996 and Senior Vice President and Chief Credit Officer for the Company from November 1994 until November 1996.
CHRIS A. CHOATE has been Senior Vice President, General Counsel and Secretary of the Company since November 1996 and was Vice President, General Counsel and Secretary of the Company from November 1994 until November 1996 and General Counsel and Secretary of the Company from January 1993 until November 1994. From July 1991 until January 1993, Mr. Choate was Assistant General Counsel.
JOSEPH E. McCLURE has been Executive Vice President, Chief Information Officer of the Company since April 1999 and was Senior Vice President, Chief Information Officer from October 1998 until April 1999. Prior to that, Mr. McClure was Executive Vice President, Division Information Officer of Associates First Capital Corp. and was in that position for more than five years.
CHERYL L. MILLER has been Executive Vice President, Director of Collections and Customer Service of AFSI since July 1998 and was Senior Vice President, Director of Collections and Customer Service of AFSI from March 1996 until July 1998 and Vice President, Director of Collections and Customer Service of AFSI from October 1994 until March 1996. From May 1994 until October 1994, Ms. Miller acted in other management capacities for AFSI. Prior to that, Ms. Miller was with Ford Motor Credit Company, most recently as customer service supervisor of the Dallas branch.
MICHAEL T. MILLER has been Executive Vice President and Chief Credit Officer since July 1998 and was Senior Vice President and Chief Credit Officer of the Company from November 1996 until July 1998. Mr. Miller was Senior Vice President, Risk Management, Credit Policy and Planning and Chief of Staff of AFSI from November 1994 until November 1996 and Vice President, Risk Management, Credit Policy and Planning of AFSI from AFSI's formation in July 1992 until November 1994. Michael T. Miller is the brother of Cheryl L. Miller.
PRESTON A. MILLER has been Executive Vice President and Treasurer of the Company since July 1998 and was Senior Vice President and Treasurer of the Company from November 1996 until July 1998. Mr. Miller was Vice President and Controller of the Company from November 1994 until November 1996 and was Controller of the Company from September 1989 until November 1994.
CINDE C. PERALES has been Executive Vice President, Director of Loan Services of AFSI since July 1998 and was Senior Vice President, Director of Loan Services of AFSI from March 1996 until July 1998 and Vice President, Director of Loan Services of AFSI from October 1992 until March 1996.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located at 801 Cherry Street, Suite 3900, Fort Worth, Texas, in a 113,000 square foot leased office space under a 12 year lease that commenced in July 1999. This building is
utilized by the Company for branch office support and administrative activities. The Company also leases 67,000 square feet of office space in Tempe, Arizona under a ten year agreement with renewal options, 56,000 square feet of office space in Charlotte, North Carolina under a ten year agreement with renewal options and 250,000 square feet of office space in Arlington, Texas under a five year agreement. These facilities are used primarily for loan servicing and collections activities.
The Company's executive offices were formerly located in a 43,000 square foot building purchased in 1994. The Company intends to sell this building.
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, fraud and discriminatory treatment of credit applicants, which could take the form of a plaintiffs' class action complaint. The Company, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages. One proceeding in which the Company is a defendant has been brought as a putative class action and is pending in the State of California. A class has yet to be certified in this case, in which the plaintiffs allege certain defects in post-repossession notice forms in the State of California and no court date has been set, nor are any hearings presently scheduled.
Management believes that the Company has taken prudent steps to address the litigation risks associated with the Company's business activities. However, there can be no assurance that the Company will be able to successfully defend against all such claims or that the determination of any such claim in a manner adverse to the Company would not have a material adverse effect on the Company's automobile finance business.
On April 8, 1999, a putative class action complaint was filed against the Company and certain of the Company's officers and directors alleging violations of Section 10(b) of the Securities Exchange Act of 1934 arising from the Company's use of the cash-in method of measuring and accounting for credit enhancement assets in the financial statements for the second, third and fourth quarters of fiscal year 1997, fiscal year 1998 and the first quarter of fiscal year 1999. The Company believes that its previous use of the cash-in method of measuring and accounting for credit enhancement assets was consistent with then current generally accepted accounting principles and accounting practices of other finance companies. As required by the Financial Accounting Standards Board's Special Report, "A Guide to Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, Second Edition," dated December 1998 and related statements made by the staff of the Commission, the Company retroactively changed the method of measuring and accounting for credit enhancement assets to the cash-out method and restated the Company's financial statements for the three months ended September 30, 1998 and the fiscal years ended June 30, 1998, 1997 and 1996. In the opinion of management, this litigation is without merit and the Company intends to vigorously defend against the complaint.
In the opinion of management, the resolution of the proceedings described in this section will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
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, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has never paid cash dividends on its common stock. The Company's warehouse credit facilities and the Indentures pursuant to which the 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 does not anticipate paying any cash dividends in the foreseeable future.
Information contained under the caption "Common Stock Data" in the Annual Report is incorporated herein by reference in further response to this Item 5.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information contained under the caption "Summary Financial and Operating Information" in the Annual Report is incorporated herein by reference in response to this Item 6.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information contained under the caption "Financial Review" in the Annual Report is incorporated herein by reference in response to this Item 7.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information contained under the caption "Financial Review--Interest Rate Risk" in the Annual Report is incorporated herein by reference in response to this Item 7A.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in the Annual Report and information contained under the caption "Quarterly Data" in the Annual Report are incorporated herein by reference in response to this Item 8.
The payment of principal, premium, if any, and interest on the Company's senior notes is guaranteed by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). The separate financial statements of the Subsidiary Guarantors are not included herein because the Subsidiary Guarantors are wholly-owned consolidated subsidiaries of the Company and are jointly, severally and unconditionally liable for the obligations represented by the senior notes. The Company believes that the condensed consolidating financial information for the Company, the combined Subsidiary Guarantors and the combined Non-Guarantor Subsidiaries provide information that is more meaningful in understanding the financial position of the Subsidiary Guarantors than separate financial statements of the Subsidiary Guarantors. Therefore, the separate financial statements of the Subsidiary Guarantors are not deemed material.
The following supplementary information presents consolidating financial data for (i) the Company (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, 1999 and 1998 and for each of the three years in the period ended June 30, 1999.
Investments in subsidiaries are accounted for by the parent company on the equity method for purposes of the presentation set forth below. Earnings of subsidiaries are therefore reflected in the parent company's investment accounts and earnings. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING BALANCE SHEET June 30, 1999 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING BALANCE SHEET June 30, 1998 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF INCOME Year Ended June 30, 1999 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF INCOME Year Ended June 30, 1998 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF INCOME Year Ended June 30, 1997 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended June 30, 1999 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended June 30, 1998 (Dollars in Thousands)
AMERICREDIT CORP. SUPPLEMENTARY INFORMATION CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended June 30, 1997 (Dollars in Thousands)
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTARY INFORMATION
Board of Directors and Shareholders AmeriCredit Corp.
Our report on the audits of the consolidated financial statements of AmeriCredit Corp. as of June 30, 1999 and 1998 and for the three years ended June 30, 1999, 1998 and 1997 has been incorporated by reference in this Form 10-K from page 38 of the 1999 Annual Report to Shareholders of AmeriCredit Corp. These audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The related financial statement schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such supplementary information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the financial statements taken as a whole.
PricewaterhouseCoopers LLP
Fort Worth, Texas August 4, 1999
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.
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.
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.
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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) The following Consolidated Financial Statements of the Company and Report of Independent Accountants are contained in the Annual Report and are incorporated herein by reference.
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and 1998.
Consolidated Statements of Income and Comprehensive Income for the years ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements
Report of Independent Accountants
(2) Consolidating financial information for AmeriCredit Corp. (on a parent only basis), the combined Subsidiary Guarantors and the combined Non- Guarantor Subsidiaries is included herein under Item 8.
(3) All 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.
(4) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Index to Exhibits.
(5) A report on Form 8-K dated April 12, 1999 was filed with the Commission to report under Item 5, the offering of $125 million aggregate principal amount of senior notes to certain qualified institutional buyers.
A report on Form 8-K dated April 21, 1999 was filed with the Commission to report under Item 5, the issuance of $200 million of 9.875% Senior Notes due 2006.
Certain subsidiaries and affiliates of the Company filed reports on Form 8- K during the quarterly period ended June 30, 1999 reporting monthly information related to securitization trusts.
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 21, 1999.
AmeriCredit Corp.
/s/ Clifton H. Morris, Jr. By: _________________________________ Clifton H. Morris, Jr. Chairman of the Board and Chief Executive Officer
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)
(1) Incorporated by reference 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 Registration Statement No. 33-41203 on Form S-8 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, 1990 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, 1991, filed by the Company with the Securities and Exchange Commission. (5) 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. (6) 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. (7) 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. (8) 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, 1997, filed by the Company with the Securities and Exchange Commission. (9) 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. (10) 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.
INDEX TO EXHIBITS (Continued)
(11) 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, 1997 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 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997 filed by the Company with the Securities and Exchange Commission. (13) Incorporated by reference to the exhibit shown in parenthesis included in the Company's Registration Statement on Form S-4, dated March 26, 1998, 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 as Form 10-K for the year ended June 30, 1998, filed by the Company with the Securities and Exchange Commission. (15) 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. (16) Incorporated by reference to the exhibit shown in parenthesis included in the Company's Registration Statement on Form S-4, dated June 15, 1999, filed by the Company with the Securities and Exchange Commission. (17) 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. (@) Filed herewith.