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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATIONS - General Motors Financial Company, Inc.dex321.htm
EX-10.2 - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - KYLE R. BIRCH - General Motors Financial Company, Inc.dex102.htm
EX-10.5 - AMENDED AND RESTATED EMPLOYMENT AGREEMENT - BRIAN S. MOCK - General Motors Financial Company, Inc.dex105.htm
EX-10.1 - SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT - DANIEL E. BERCE - General Motors Financial Company, Inc.dex101.htm
EX-31.1 - SECTION 302 CEO AND CFO CERTIFICATIONS - General Motors Financial Company, Inc.dex311.htm
EX-10.3 - SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT - STEVEN P. BOWMAN - General Motors Financial Company, Inc.dex103.htm
EX-10.4 - SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT - CHRIS A. CHOATE - General Motors Financial Company, Inc.dex104.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-10667

 

 

AmeriCredit Corp.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   75-2291093

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

801 Cherry Street, Suite 3500, Fort Worth, Texas 76102

(Address of principal executive offices, including Zip Code)

(817) 302-7000

(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 105 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

There were 134,560,825 shares of common stock, $0.01 par value outstanding as of April 30, 2010.

 

 

 


Table of Contents

AMERICREDIT CORP.

INDEX TO FORM 10-Q

 

             Page
Part I. FINANCIAL INFORMATION   
  Item 1.   CONDENSED FINANCIAL STATEMENTS (UNAUDITED)    3
    Consolidated Balance Sheets – March 31, 2010 and June 30, 2009    3
    Consolidated Statements of Operations and Comprehensive Operations – Three and Nine Months Ended
March 31, 2010 and 2009
   4
    Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2010 and 2009    5
    Notes to Consolidated Financial Statements    6
  Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    34
  Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    55
  Item 4.   CONTROLS AND PROCEDURES    56
Part II. OTHER INFORMATION   
  Item 1.   LEGAL PROCEEDINGS    56
  Item 1A.   RISK FACTORS    57
  Item 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    57
  Item 3.   DEFAULTS UPON SENIOR SECURITIES    57
  Item 4.   REMOVED AND RESERVED    57
  Item 5.   OTHER INFORMATION    57
  Item 6.   EXHIBITS    57
SIGNATURE    58

 

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Table of Contents

Part I.    FINANCIAL INFORMATION

 

Item 1. CONDENSED FINANCIAL STATEMENTS

AMERICREDIT CORP.

Consolidated Balance Sheets

(Unaudited, Dollars in Thousands)

 

     March 31, 2010     June 30, 2009  (a)
(Revised)
 

Assets

    

Cash and cash equivalents

   $ 497,329      $ 193,287   

Finance receivables, net

     8,187,125        10,037,329   

Restricted cash – securitization notes payable

     989,356        851,606   

Restricted cash – credit facilities

     153,244        195,079   

Property and equipment, net

     38,838        44,195   

Leased vehicles, net

     117,037        156,387   

Deferred income taxes

     83,249        75,782   

Other assets

     157,473        207,083   

Income tax receivable

       197,579   
                

Total assets

   $ 10,223,651      $ 11,958,327   
                

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Credit facilities

   $ 658,137      $ 1,630,133   

Securitization notes payable

     6,462,494        7,426,687   

Senior notes

     70,620        91,620   

Convertible senior notes

     408,539        392,514   

Accrued taxes and expenses

     226,642        157,640   

Interest rate swap agreements

     83,946        131,885   

Other liabilities

     11,840        20,540   
                

Total liabilities

     7,922,218        9,851,019   
                

Commitments and contingencies (Note 9)

    

Shareholders’ equity:

    

Preferred stock, $.01 par value per share, 20,000,000 shares authorized; none issued

    

Common stock, $.01 par value per share, 350,000,000 shares authorized; 136,424,160 and 134,977,812 shares issued

     1,364        1,350   

Additional paid-in capital

     317,660        284,961   

Accumulated other comprehensive income (loss)

     7,769        (21,099

Retained earnings

     2,013,455        1,878,459   
                
     2,340,248        2,143,671   

Treasury stock, at cost (1,911,636 and 1,806,446 shares)

     (38,815     (36,363
                

Total shareholders’ equity

     2,301,433        2,107,308   
                

Total liabilities and shareholders’ equity

   $ 10,223,651      $ 11,958,327   
                

 

(a) Revised for the Financial Accounting Standards Board (“FASB”) issuance of Accounting Standards Codification “ASC” 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

AMERICREDIT CORP.

Consolidated Statements of Operations and Comprehensive Operations

(Unaudited, Dollars in Thousands, Except Per Share Data)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009 (a)
(Revised)
    2010     2009 (a)
(Revised)
 

Revenue

        

Finance charge income

   $ 339,892      $ 452,186      $ 1,092,788      $ 1,483,719   

Other income

     20,930        29,191        68,073        90,893   

Gain on retirement of debt

     283        11,048        283        42,453   
                                
     361,105        492,425        1,161,144        1,617,065   
                                

Costs and expenses

        

Operating expenses

     75,215        76,278        220,487        244,877   

Leased vehicles expenses

     8,688        13,694        29,019        36,765   

Provision for loan losses

     74,583        234,816        338,732        797,703   

Interest expense

     106,584        148,237        358,492        573,666   

Restructuring charges, net

     220        7,810        134        10,465   
                                
     265,290        480,835        946,864        1,663,476   
                                

Income (loss) before income taxes

     95,815        11,590        214,280        (46,411

Income tax provision (benefit)

     32,609        13,996        79,284        (3,729
                                

Net income (loss)

     63,206        (2,406     134,996        (42,682
                                

Other comprehensive income (loss)

        

Unrealized gains (losses) on cash flow hedges

     9,744        24,080        34,242        (27,614

Foreign currency translation adjustment

     2,788        (2     11,056        (5,922

Income tax (provision) benefit

     (4,553     (9,034     (16,430     12,856   
                                

Other comprehensive income (loss)

     7,979        15,044        28,868        (20,680
                                

Comprehensive income (loss)

   $ 71,185      $ 12,638      $ 163,864      $ (63,362
                                

Earnings (loss) per share

        

Basic

   $ 0.47      $ (0.02   $ 1.01      $ (0.35
                                

Diluted

   $ 0.45      $ (0.02   $ 0.98      $ (0.35
                                

Weighted average shares

        

Basic

     134,053,846        131,914,885        133,588,587        122,697,685   
                                

Diluted

     139,231,152        131,914,885        137,645,064        122,697,685   
                                

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

The accompanying notes are an integral part of these consolidated financial statements.

 

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AMERICREDIT CORP.

Consolidated Statements of Cash Flows

(Unaudited, in Thousands)

 

     Nine Months Ended
March 31,
 
     2010     2009 (a)
(Revised)
 

Cash flows from operating activities

    

Net income (loss)

   $ 134,996      $ (42,682

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     61,997        82,855   

Accretion and amortization of loan fees

     4,729        15,903   

Provision for loan losses

     338,732        797,703   

Deferred income taxes

     (24,217     218,994   

Non-cash interest charges on convertible debt

     16,025        16,908   

Stock-based compensation expense

     11,510        11,238   

Amortization of warrant costs

     1,968        43,017   

Gain on retirement of debt

     (283     (43,208

Other

     (16,393     3,641   

Changes in assets and liabilities:

    

Income tax receivable

     197,402        (179,920

Other assets

     12,174        (15,998

Accrued taxes and expenses

     57,929        (45,988
                

Net cash provided by operating activities

     796,569        862,463   
                

Cash flows from investing activities:

    

Purchases of receivables

     (1,196,301     (1,112,143

Principal collections and recoveries on receivables

     2,733,164        3,312,854   

Purchases of property and equipment

     (1,023     (948

Investment in money market fund

       (115,821

Proceeds from money market fund

     10,047        99,114   

Change in restricted cash – securitization notes payable

     (137,750     83,565   

Change in restricted cash – credit facilities

     41,835        24,205   

Change in other assets

     25,712        25,216   
                

Net cash provided by investing activities

     1,475,684        2,316,042   
                

Cash flows from financing activities:

    

Net change in credit facilities

     (971,996     (1,125,534

Issuance of securitization notes payable

     1,752,493        1,000,000   

Payments on securitization notes payable

     (2,719,692     (3,111,096

Retirement of debt

     (20,425     (224,723

Debt issuance costs

     (20,898     (32,039

Proceeds from issuance of common stock

     12,708        1,271   

Other net changes

     227        (3,207
                

Net cash used by financing activities

     (1,967,583     (3,495,328
                

Net increase (decrease) in cash and cash equivalents

     304,670        (316,823

Effect of Canadian exchange rate changes on cash and cash equivalents

     (628     4,261   

Cash and cash equivalents at beginning of period

     193,287        433,493   
                

Cash and cash equivalents at end of period

   $ 497,329      $ 120,931   
                

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

The accompanying notes are an integral part of these consolidated financial statements.

 

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AMERICREDIT CORP.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including certain special purpose financing trusts utilized in securitization transactions (“Trusts”) which are considered variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation.

The consolidated financial statements as of March 31, 2010, and for the three and nine months ended March 31, 2010 and 2009, are unaudited, and in management’s opinion include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Certain prior year amounts have been reclassified to conform to the current year presentation. The results for interim periods are not necessarily indicative of results for a full year.

The interim period consolidated financial statements, including the notes thereto, are condensed and do not include all disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America. These interim period financial statements should be read in conjunction with our consolidated financial statements that are included in the Current Report on Form 8-K filed on November 16, 2009, which reflect the revision of prior-period annual financial information as discussed below for the adoption of ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion.

Adoption of New Accounting Standards

As of July 1, 2009, we adopted ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. ASC 470 20 65-1 specifies that when issuers of convertible debt instruments that may be settled in cash upon conversion recognize interest cost in subsequent periods, they should separately account for the liability and equity components of the instrument in a manner that will reflect the entity’s borrowing rate at the time of issuance for similar unsecured senior debt without an equity conversion feature. The transition provision requires that entities retrospectively apply ASC 470 20 65-1 for all periods presented. Our convertible senior notes due in September 2011 and September 2013 are affected by the adoption of this ASC. See Note 6 – “Senior Notes and Convertible Senior Notes” for further discussion.

 

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The following table presents consolidated statements of operations and comprehensive operations data for the three and nine months ended March 31, 2010, excluding the impact of the adoption of ASC 470 20 65-1 and as reported (dollars in thousands, except per share data):

 

     Three Months Ended
March 31, 2010
   Nine Months Ended
March 31, 2010
     Excluding
impact of  ASC
470 20 65-1
   As Reported    Excluding
impact of  ASC
470 20 65-1
   As Reported

Interest expense

   $ 101,150    $ 106,584    $ 342,467    $ 358,492

Income before income taxes

     101,249      95,815      230,305      214,280

Income tax provision

     34,365      32,609      85,213      79,284

Net income

     66,884      63,206      145,092      134,996

Earnings per share:

           

Basic

   $ 0.50    $ 0.47    $ 1.09    $ 1.01

Diluted

   $ 0.48    $ 0.45    $ 1.05    $ 0.98

The following table presents consolidated statements of operations and comprehensive operations data for the three and nine months ended March 31, 2009, as reported and as revised for the retrospective adoption of ASC 470 20 65-1 (dollars in thousands, except per share data):

 

     Three Months Ended
March 31, 2009
    Nine Months Ended
March 31, 2009
 
     As Reported    As Revised     As Reported     As Revised  

Gain on retirement of debt

   $ 14,442    $ 11,048      $ 53,309      $ 42,453   

Interest expense

     143,085      148,237        557,194        573,666   

Income (loss) before income taxes

     20,136      11,590        (19,083     (46,411

Income tax provision (benefit)

     10,303      13,996        (1,698     (3,729

Net income (loss)

     9,833      (2,406     (17,385     (42,682

Income (loss) per share:

         

Basic

   $ 0.07    $ (0.02   $ (0.14   $ (0.35

Diluted

   $ 0.07    $ (0.02   $ (0.14   $ (0.35

Recent Accounting Pronouncements and Accounting Changes

On January 21, 2010, the FASB issued ASU 2010-06 to add new requirements for fair value disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. This ASU became effective during the three months ended March 31, 2010 and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

On February 10, 2010, the FASB issued ASU 2010-09 to amend certain recognition and disclosure requirements regarding subsequent events. This ASU became effective on the issue date and it did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

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NOTE 2 – FINANCE RECEIVABLES

Finance receivables consist of the following (in thousands):

 

     March 31,
2010
    June 30,
2009
 

Finance receivables unsecuritized, net of fees

   $ 1,249,999      $ 2,534,158   

Finance receivables securitized, net of fees

     7,560,375        8,393,811   

Less nonaccretable acquisition fees

     (3,122     (12,100

Less allowance for loan losses

     (620,127     (878,540
                
   $ 8,187,125      $ 10,037,329   
                

Finance receivables securitized represent receivables transferred to our special purpose finance subsidiaries in securitization transactions accounted for as secured financings. Finance receivables unsecuritized include $712.2 million and $2,037.6 million pledged under our credit facilities as of March 31, 2010 and June 30, 2009, respectively.

Finance receivables are collateralized by vehicle titles and we have 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 $403.0 million and $667.3 million of delinquent finance receivables as of March 31, 2010 and June 30, 2009, respectively.

Finance contracts are generally purchased by us from auto dealers without recourse and, accordingly, the dealer usually has no liability to us if the consumer defaults on the contract. Depending upon the contract structure and consumer credit attributes, we may pay dealers a participation fee or we may charge dealers a non-refundable acquisition fee when purchasing individual finance contracts. We record the amortization of participation fees and the accretion of acquisition fees on loans purchased subsequent to June 30, 2004, to finance charge income using the effective interest method. We recorded acquisition fees on loans purchased prior to July 1, 2004, as nonaccretable fees available to cover losses inherent in the loan portfolio.

 

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A summary of the nonaccretable acquisition fees is as follows (in thousands):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

Balance at beginning of period

   $ 6,277      $ 28,359      $ 12,100      $ 42,802   

Net charge-offs

     (3,155     (5,363     (8,978     (19,806
                                

Balance at end of period

   $ 3,122      $ 22,996      $ 3,122      $ 22,996   
                                

A summary of the allowance for loan losses is as follows (in thousands):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010     2009     2010     2009  

Balance at beginning of period

   $ 710,782      $ 894,617      $ 878,540      $ 908,311   

Provision for loan losses

     74,583        234,816        338,732        797,703   

Net charge-offs

     (165,238     (234,437     (597,145     (811,018
                                

Balance at end of period

   $ 620,127      $ 894,996      $ 620,127      $ 894,996   
                                

NOTE 3 – SECURITIZATIONS

A summary of our securitization activity and cash flows from special purpose entities used for securitizations is as follows (in thousands):

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,
     2010    2009    2010    2009

Receivables securitized

   $ 927,758       $ 2,203,304    $ 1,289,082

Net proceeds from securitization

     800,000         1,752,493      1,000,000

Servicing fees (a)

     48,312    $ 59,966      150,443      184,751

Distributions

     112,697      58,822      242,332      343,134

 

(a) Servicing fees earned on securitizations are included in finance charge income on the consolidated statements of operations.

As of March 31, 2010 and June 30, 2009, respectively, we were servicing $7.6 billion and $8.4 billion of finance receivables that have been transferred to securitization Trusts.

 

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NOTE 4 – CREDIT FACILITIES

Amounts outstanding under our credit facilities are as follows (in thousands):

 

     March 31,
2010
   June 30,
2009
    

Medium term note facility

   $ 658,137    $ 750,000   

Master/Syndicated warehouse facility

        569,756   

Prime/Near prime facility

        250,377   

Lease warehouse facility

        60,000   
                
   $ 658,137    $ 1,630,133   
                

Further detail regarding terms and availability of the credit facilities as of March 31, 2010, follows (in thousands):

 

Facility Type

  

Maturity

   Facility
Amount
   Advances
Outstanding
   Finance
Receivables
Pledged
   Restricted
Cash
Pledged (a)
Master/Syndicated warehouse facility  (b)    February 2011    $ 1,300,000          $ 300
Medium term note facility (c)          $ 658,137    $ 712,157      121,818
                              
      $ 1,300,000    $ 658,137    $ 712,157    $ 122,118
                              

 

(a) These amounts do not include cash collected on finance receivables pledged of $31.1 million which is also included in restricted cash – credit facilities on the consolidated balance sheets.
(b) The revolving period under this facility ends in February 2011 and any outstanding balance will be repaid over time based on the amortization of the receivables pledged until February 2012 when any remaining amount outstanding will be due and payable.
(c) The revolving period under this facility ended in October 2009, and the outstanding debt balance will be repaid over time based on the amortization of the receivables pledged until October 2016 when any remaining amount outstanding will be due and payable.

Generally, our credit facilities are administered by agents on behalf of institutionally managed commercial paper or medium term note conduits. Under these funding agreements, we transfer finance receivables to our special purpose finance subsidiaries. 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 us in consideration for the transfer of finance receivables. While these subsidiaries are included in our 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 our creditors or our other subsidiaries. Advances under the funding agreements bear interest at commercial paper, London Interbank Offered Rates (“LIBOR”) or prime rates plus specified fees depending upon the source of funds provided by the agents.

We are required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under the facilities. Additionally, the funding agreements contain various covenants requiring minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and

 

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delinquency ratios, and pool level cumulative net loss 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, restrict our ability to obtain additional borrowings under these agreements, and/or remove us as servicer. As of March 31, 2010, we were in compliance with all covenants in our credit facilities.

The lease warehouse facility and the prime/near prime facility were repaid in full in October and November 2009, respectively.

On February 26, 2010, we increased and extended our master/syndicated warehouse facility. The borrowing capacity available under the facility increased to $1.3 billion from $1.0 billion and includes commitments from eight lenders.

Debt issuance costs are being amortized to interest expense over the expected term of the credit facilities. Unamortized costs of $11.1 million and $16.1 million as of March 31, 2010 and June 30, 2009, respectively, are included in other assets on the consolidated balance sheets.

NOTE 5 – SECURITIZATION NOTES PAYABLE

Securitization notes payable represents debt issued by us in securitization transactions. Debt issuance costs are being amortized over the expected term of the securitizations on an effective yield basis. Unamortized costs of $18.8 million and $13.9 million as of March 31, 2010 and June 30, 2009, respectively, are included in other assets on the consolidated balance sheets.

 

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Securitization notes payable as of March 31, 2010, consists of the following (dollars in thousands):

 

Transaction

  

Maturity

Date (b)

   Original
Note
Amount
   Original
Weighted

Average
Interest
Rate
    Receivables
Pledged
   Note
Balance

2005-1

   May 2011    $ 750,000    4.5   $ 35,579    $ 26,647

2005-B-M

   May 2012      1,350,000    4.1     91,717      82,787

2005-C-F

   June 2012      1,100,000    4.5     98,190      89,678

2005-D-A

   November 2012      1,400,000    4.9     160,586      146,562

2006-1

   May 2013      945,000    5.3     129,848      101,413

2006-R-M

   January 2014      1,200,000    5.4     329,537      298,095

2006-A-F

   September 2013      1,350,000    5.6     270,698      246,276

2006-B-G

   September 2013      1,200,000    5.2     287,445      263,246

2007-A-X

   October 2013      1,200,000    5.2     343,409      316,135

2007-B-F

   December 2013      1,500,000    5.2     506,575      468,021

2007-1 (APART)

   March 2016      1,000,000    5.4     298,606      304,215

2007-C-M

   April 2014      1,500,000    5.5     589,852      541,310

2007-D-F

   June 2014      1,000,000    5.5     425,298      390,797

2007-2-M (APART)

   March 2016      1,000,000    5.3     409,264      392,400

2008-A-F

   October 2014      750,000    6.0     479,024      384,085

2008-1

   January 2015      500,000    8.7     394,791      263,901

2008-2

   April 2015      500,000    10.5     419,153      274,336

2009-1

   January 2016      725,000    7.5     748,373      500,041

2009-1 (APART)

   July 2017      227,493    2.7     254,235      188,774

2010-1

   July 2017      600,000    3.7     648,686      581,148

2010-A

   July 2017      200,000    3.1     235,458      199,988

BV2005-LJ-1 (a)

   May 2012      232,100    5.1     13,896      14,725

BV2005-LJ-2 (a)(c)

   February 2014      185,596    4.6     15,043      14,404

BV2005-3 (a)

   June 2014      220,107    5.1     25,674      27,090

LB2004-C (a)

   July 2011      350,000    3.5     10,109      8,276

LB2005-A (a)

   April 2012      350,000    4.1     19,683      21,084

LB2005-B (a)

   June 2012      350,000    4.4     31,083      29,011

LB2006-A (a)

   May 2013      450,000    5.4     65,530      61,886

LB2006-B (a)

   September 2013      500,000    5.2     94,262      97,971

LB2007-A

   January 2014      486,000    5.0     128,771      128,192
                         
      $ 23,121,296      $ 7,560,375    $ 6,462,494
                         

 

(a) Transactions relate to securitization Trusts acquired by us.
(b) 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.
(c) Note balance does not include $1.4 million of asset-backed securities repurchased and retained by us as of March 31, 2010.

At the time of securitization of finance receivables, we are required to provide credit enhancement by pledging 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 additional overcollateralization until the targeted percentage level of assets has been reached. Once the targeted percentage level of assets is

 

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reached and maintained, excess cash flows generated by the Trusts are typically distributed to us. 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 typically distributed to us.

With respect to our 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) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.

The securitization transactions insured by some of our financial guaranty insurance providers 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 in the original target credit enhancement requirement.

As of March 31, 2010, we have exceeded certain portfolio performance ratios in several AmeriCredit Automobile Receivables Trust (“AMCAR”) and Long Beach Acceptance Corporation (“LB”) securitizations. Excess cash flows from these Trusts have been or are being used to build higher credit enhancement in each respective Trust instead of being distributed to us. We do not expect the trapping of excess cash flows from these Trusts to have a material adverse impact to our liquidity.

Agreements with our financial guaranty insurance providers contain additional specified targeted portfolio performance ratios that are higher than those previously described. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these higher levels, provisions of the agreements permit our financial guaranty insurance providers to terminate our servicing rights to the receivables transferred to that Trust.

On January 22, 2010, we entered into an agreement with Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance, Inc. to increase the levels of additional specified targeted portfolio performance ratios in the AMCAR 2007-D-F, AMCAR 2008-A-F, LB2006-B and LB2007-A securitizations. As part of this agreement, we deposited $38.0 million in the AMCAR 2007-D-F securitization restricted cash account and $57.0 million in the AMCAR 2008-A-F securitization restricted cash account. This cash is expected to be distributed to us over time as the securitization notes payable pay down.

 

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NOTE 6 – SENIOR NOTES AND CONVERTIBLE SENIOR NOTES

Senior notes and convertible senior notes consist of the following (in thousands):

 

     March 31,
2010
    June 30,
2009
(Revised)
 

8.5% Senior Notes (due July 2015)

   $ 70,620      $ 91,620   
                

0.75% Convertible Senior Notes (due in September 2011)

     247,000        247,000   

Debt discount

     (21,093     (31,088

2.125% Convertible Senior Notes (due in September 2013)

     215,017        215,017   

Debt discount

     (32,385     (38,415
                
   $ 408,539      $ 392,514   
                

As of July 1, 2009, we adopted ASC 470 20 65-1. ASC 470 20 65-1 specifies that when issuers of convertible debt instruments that may be settled in cash upon conversion recognize interest cost in subsequent periods, they should separately account for the liability and equity components of the instrument in a manner that will reflect the entity’s borrowing rate at the time of issuance for similar unsecured senior debt without an equity conversion feature. The transition provision requires that entities retrospectively apply ASC 470 20 65-1 for all periods presented.

As a result of adopting ASC 470 20 65-1 on July 1, 2009, as discussed in Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” to the consolidated financial statements, we have separately accounted for the liability and equity components of our convertible senior notes due in September 2011 and 2013, retrospectively, based on our determination that our borrowing rate at the time of issuance for unsecured senior debt without an equity conversion feature was approximately 7%. At issuance, the liability and equity components were $404.3 million and $145.7 million, respectively. The debt discount is being amortized to interest expense over the expected term of the notes based on the effective interest method. Debt issuance costs of approximately $3.5 million directly related to the issuance of the convertible senior notes due in September 2011 and 2013 have been allocated to the equity component in proportion to the allocation of proceeds.

 

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Interest expense related to the convertible senior notes consists of the following (in thousands):

 

     Three Months Ended
March 31,
   Nine Months Ended
March 31,
     2010    2009    2010    2009

Contractual interest

   $ 1,606    $ 1,763    $ 4,816    $ 5,660

Discount amortization

     5,434      5,291      16,025      16,908
                           

Total interest expense related to convertible senior notes

   $ 7,040    $ 7,054    $ 20,841    $ 22,568
                           

Debt issuance costs related to the senior notes and the convertible senior notes are being amortized to interest expense over the expected term of the notes; unamortized costs of $1.0 million and $1.4 million related to the senior notes and $3.2 million and $4.2 million related to the convertible senior notes are included in other assets on the consolidated balance sheets as of March 31, 2010 and June 30, 2009, respectively.

During the three months ended March 31, 2010, we repurchased on the open market $21.0 million of senior notes due in 2015 at an average price of 97.3% of the principal amount of the notes repurchased. In connection with this repurchase, we recorded a gain on retirement of debt of $0.3 million for the three and nine months ended March 31, 2010.

NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Interest rate caps, swaps and foreign currency contracts consist of the following (in thousands):

 

     March 31, 2010    June 30, 2009
     Notional    Fair Value    Notional    Fair Value

Assets

           

Interest rate swaps (a)

   $ 1,993,791    $ 27,315    $ 2,592,548    $ 24,267

Interest rate caps (a)

     930,832      5,879      1,914,886      15,858
                           

Total assets

   $ 2,924,623    $ 33,194    $ 4,507,434    $ 40,125
                           

Liabilities

           

Interest rate swaps

   $ 1,993,791    $ 83,946    $ 2,592,548    $ 131,885

Interest rate caps (b)

     724,471      6,061      1,721,044      16,644

Foreign currency contracts (b)(c)

     66,680      2,524      
                           

Total liabilities

   $ 2,784,942    $ 92,531    $ 4,313,592    $ 148,529
                           

 

(a) Included in other assets on the consolidated balance sheets.
(b) Included in other liabilities on the consolidated balance sheets.
(c) Notional has been translated from Canadian dollars to U.S. dollars at the quarter end rate.

Interest rate swap agreements designated as hedges had unrealized losses of approximately $40.7 million, net of tax, and $62.5 million, net of tax, included in accumulated other comprehensive income (loss) as of March 31,

 

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2010 and June 30, 2009, respectively. The ineffectiveness related to the interest rate swap agreements was immaterial for the three and nine months ended March 31, 2010 and 2009, respectively. We estimate approximately $52.9 million of unrealized losses included in accumulated other comprehensive income (loss) will be reclassified into earnings within the next twelve months.

Under the terms of our derivative financial instruments, we are required to pledge certain funds to be held in restricted cash accounts as collateral for the outstanding derivative transactions. As of March 31, 2010, and June 30, 2009, these restricted cash accounts totaled $30.7 million and $45.7 million, respectively, and are included in other assets on the consolidated balance sheets.

In July 2009, we entered into a series of foreign currency contracts in order to hedge our Canadian denominated cash flows as we convert them to U.S. dollars over time.

The following table presents information on the effect of derivative instruments on the consolidated statements of operations and comprehensive operations for the three and nine month periods ended March 31, 2010 (in thousands):

 

     Income (Losses)
Recognized
In Income
    Losses Recognized in
Accumulated Other
Comprehensive Income (Loss)
    Losses Reclassified
From Accumulated
Other Comprehensive
Income (Loss) into
Income (c)
 
     Three Months
Ended
   Nine Months
Ended
    Three Months
Ended
    Nine Months
Ended
    Three Months
Ended
    Nine Months
Ended
 
     March 31, 2010     March 31, 2010     March 31, 2010  

Non-Designated Hedges:

             

Interest rate contracts (a)

   $ 4,114    $ 10,565           

Foreign currency contracts (b)

     280      (2,524        
                       

Total

   $ 4,394    $ 8,041           
                       

Designated Hedges:

             

Interest rate contracts (a)

   $ 421    $ 591      $ (9,493   $ (29,629   $ (19,237   $ (63,871
                                               

Total

   $ 421    $ 591      $ (9,493   $ (29,629   $ (19,237   $ (63,871
                                               

 

(a) Income (losses) recognized in income are included in interest expense.
(b) Income (losses) recognized in income are included in operating expenses.
(c) Losses reclassified from accumulated other comprehensive income (loss) into income for effective and ineffective portions are included in interest expense.

NOTE 8 – FAIR VALUES OF ASSETS AND LIABILITIES

ASC 820 provides a framework for measuring fair value under GAAP. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most

 

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advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels.

There are three general valuation techniques that may be used to measure fair value, as described below:

 

A) Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

 

B) Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

 

C) Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

Assets and liabilities itemized below were measured at fair value on a recurring basis:

 

     March 31, 2010
(in thousands)
    
     Fair Value Measurements Using        
     Level 1    Level 2    Level 3        
     Quoted
Prices
In Active
Markets
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
   Assets/
Liabilities
At Fair
Value
  
              

Assets

              

Derivatives not designated as hedging instruments:

              

Interest rate caps (A)

      $ 5,879       $ 5,879   

Interest rate swaps (C)

         $ 27,315      27,315   
                              

Total assets

   $      $ 5,879    $ 27,315    $ 33,194   
                              

Liabilities

              

Derivatives designated as hedging instruments:

              

Interest rate swaps (C)

         $ 83,946    $ 83,946   

Derivatives not designated as hedging instruments:

              

Interest rate caps (A)

      $ 6,061         6,061   

Foreign currency contracts (A)

        2,524         2,524   
                                

Total liabilities

   $      $ 8,585    $ 83,946    $ 92,531   
                              

 

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     June 30, 2009
(in thousands)
     Fair Value Measurements Using     
     Level 1    Level 2    Level 3     
     Quoted
Prices
In Active
Markets
Identical
Assets
   Significant
Other
Observable
Inputs
   Significant
Unobservable
Inputs
   Assets/
Liabilities
At Fair
Value
           

Assets

           

Investment in money market fund (A)

         $ 8,027    $ 8,027

Derivatives not designated as hedging instruments:

           

Interest rate caps (A)

      $ 15,858         15,858

Interest rate swaps (C)

           24,267      24,267
                           

Total Assets

   $      $ 15,858    $ 32,294    $ 48,152
                           

Liabilities

           

Derivatives designated as hedging instruments:

           

Interest rate swaps (C)

         $ 131,885    $ 131,885

Derivatives not designated as hedging instruments:

           

Interest rate caps (A)

      $ 16,644         16,644
                           

Total Liabilities

   $      $ 16,644    $ 131,885    $ 148,529
                           

Financial instruments are considered Level 1 when quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Financial instruments are considered Level 2 when inputs other than quoted prices are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Financial instruments are considered Level 3 when their values are determined using price models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. A brief description of the valuation techniques used for our Level 3 assets and liabilities is provided below.

 

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The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 31, 2010 (in thousands):

 

     Assets     Liabilities  
     Interest Rate
Swap
Agreements
    Investment in
Money
Market Fund
    Interest Rate
Swap
Agreements
 

Balance at July 1, 2009

   $ 24,267      $ 8,027      $ (131,885

Total realized and unrealized gains

      

Included in earnings

     9,961        2,020        591   

Included in other comprehensive income

         (29,629

Settlements

     (6,913     (10,047     76,977   
                        

Balance at March 31, 2010

   $ 27,315      $        $ (83,946
                        

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 31, 2009 (in thousands):

 

     Assets     Liabilities  
     Interest Rate
Swap
Agreements
    Investment in
Money
Market Fund
    Interest Rate
Swap
Agreements
 

Balance at July 1, 2008

   $ 3,572        $ (76,269

Transfers into Level 3

     $ 115,821     

Total realized and unrealized gains

      

Included in earnings

     23,542        (3,475     (34,145

Included in other comprehensive income

         (85,469

Settlements

     (1,081     (99,114     60,081   
                        

Balance at March 31, 2009

   $ 26,033      $ 13,232      $ (135,802
                        

Derivatives

The fair values of our interest rate caps and foreign currency contracts are valued based on quoted market prices received from bank counterparties and are classified as Level 2.

Our interest rate swaps are not exchange traded but instead traded in over-the-counter markets where quoted market prices are not readily available. The fair value of derivatives is derived using models that use primarily market observable inputs, such as interest rate yield curves and credit curves. Any derivative fair value measurements using significant assumptions that are unobservable are classified as Level 3, which include interest rate swaps whose remaining terms extend beyond market observable interest rate yield curves. The impacts of the derivative liabilities for our and the counterparties’ non-performance risk to the derivative trades is considered when measuring the fair value of derivative liabilities.

Investment in Money Market Fund

We had an investment in the Reserve Primary Money Market Fund (“the Reserve Fund”), a money market fund which has subsequently liquidated its portfolio of

 

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investments. As of June 30, 2009, the investment was valued at the estimated net asset value of $0.97 per share as published by the Reserve Fund. In January 2010, we received a distribution from the Reserve Fund, which when combined with previous distributions, represents approximately $0.99 per share in total distributions. This distribution resulted in a $2.0 million gain.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Guarantees of Indebtedness

The payments of principal and interest on our senior notes and convertible senior notes are guaranteed by certain of our subsidiaries. The par value of the senior notes and convertible senior notes was $532.6 million and $553.6 million as of March 31, 2010 and June 30, 2009, respectively. See guarantor consolidating financial statements in Note 15.

Limited Corporate Guarantees of Indebtedness

We guaranteed the timely payment of interest and ultimate payment of principal on the Class B and Class C asset-backed securities issued in our AMCAR 2008-2 securitization transaction, up to a maximum of $50.0 million in the aggregate.

Legal Proceedings

As a consumer finance company, we are 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 us could take the form of class action complaints by consumers and/or shareholders. As the assignee of finance contracts originated by dealers, we 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. We believe that we have taken prudent steps to address and mitigate the litigation risks associated with our business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened litigation will not be material to our consolidated financial position, our results of operations, or our statement of cash flows.

NOTE 10 – INCOME TAXES

We had unrecognized tax benefits of $35.0 million at March 31, 2010 and June 30, 2009. The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $18.4 million and $18.0 million at March 31, 2010 and June 30, 2009, respectively, which includes the federal benefit of state taxes.

 

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At March 31, 2010, we believe that it is reasonably possible that the balance of the gross unrecognized tax benefits could decrease by $0.2 million to $9.3 million in the next twelve months due to ongoing activities with various taxing jurisdictions that we expect may give rise to settlements or the expiration of statutes of limitations.

We recognize accrued interest and penalties associated with uncertain tax positions as part of the income tax provision. As of July 1, 2009, accrued interest and penalties associated with uncertain tax positions were $10.3 million and $8.0 million, respectively. During the nine months ended March 31, 2010, we released $0.1 million in potential interest and accrued an additional $0.2 million in potential penalties associated with uncertain tax positions.

We continually evaluate expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings and recognize tax benefits and interest and penalties associated with uncertain tax positions as appropriate.

We file income tax returns in the U.S. and various state, local, and foreign jurisdictions. Our consolidated federal income tax returns for fiscal years 2006, 2007, 2008 and 2009 are under audit by the Internal Revenue Service (“IRS”). The IRS completed its examination of our fiscal years 2004 and 2005 consolidated federal income tax returns in the second quarter of fiscal year 2008. The returns for those years were subject to an appeals proceeding, which was concluded favorably to us in December 2009. The outcome of the appeals proceeding did not result in a material change to our financial position or results of operations. Our federal income tax returns prior to fiscal year 2004 are closed. Foreign and state jurisdictions have statutes of limitations that generally range from three to five years. Certain of our tax returns are currently under examination in various state tax jurisdictions.

Our effective income tax rate was 34.0% and 37.0% for the three and nine months ended March 31, 2010 and 120.8% and 8.0% for the three and nine months ended March 31, 2009. The effective tax rates were impacted by adjustments to prior year tax positions and adjustments to deferred tax balances.

Tax Accounting Change

During the year ended June 30, 2009, we filed an application for a change of accounting method for tax purposes under Internal Revenue Code (“IRC”) Section 475. We believe that, as a result of our business activities, certain assets must be marked-to-market for income tax purposes. Although this method change requires consent from the IRS, which is still pending, this change to a permissible method of accounting is generally considered to be perfunctory and management believes it should be granted. As a result of this change of accounting method, we received an income tax refund of approximately $198 million.

On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law which provides an election to carryback a loss to the

 

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third, fourth or fifth year that precedes the year of loss. Because of this change in tax law, we elected to extend our US federal fiscal year 2009 net operating loss (“NOL”) carryback period which resulted in an income tax refund of approximately $81 million. We have fully utilized our federal NOL and are making federal income tax payments for the year ended June 30, 2010.

NOTE 11 – RESTRUCTURING CHARGES

A summary of the liabilities, which are included in accrued taxes and expenses on the consolidated balance sheets, for restructuring charges for the nine

months ended March 31, 2010, is as follows (in thousands):

 

     Personnel-
Related
Costs
    Contract
Termination
Costs
    Total      

Balance at July 1, 2009

   $ 863      $ 4,771      $ 5,634     

Cash settlements

     (1,026     (3,642     (4,668  

Non-cash settlements

       2        2     

Additions and adjustments

     163        (29     134     
                          

Balance at March 31, 2010

   $        $ 1,102      $ 1,102     
                          

NOTE 12 – EARNINGS PER SHARE

A reconciliation of weighted average shares used to compute basic and diluted earnings per share is as follows (dollars in thousands, except per share data):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2010    2009 (a)
(Revised)
    2010    2009 (a)
(Revised)
 

Net income (loss)

   $ 63,206    $ (2,406   $ 134,996    $ (42,682
                              

Basic weighted average shares

     134,053,846      131,914,885        133,588,587      122,697,685   

Incremental shares resulting from assumed conversions: Stock-based compensation and warrants

     5,177,306        4,056,477   
                              

Diluted weighted average shares

     139,231,152      131,914,885        137,645,064      122,697,685   
                              

Earnings (loss) per share:

          

Basic

   $ 0.47    $ (0.02   $ 1.01    $ (0.35
                              

Diluted

   $ 0.45    $ (0.02   $ 0.98    $ (0.35
                              

 

  (a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

 

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Basic earnings (loss) per share have been computed by dividing net income (loss) by weighted average shares outstanding.

Diluted earnings per share, for the three and nine months ended March 31, 2010, has been computed by dividing net income, by the weighted average shares and assumed incremental shares. The treasury stock method was used to compute the assumed incremental shares related to our outstanding stock-based compensation and warrants and will be used to compute the assumed incremental shares related to our convertible senior notes issued in September 2006 once the average market price of the common shares exceeds the conversion price. The average market prices for the periods were used to determine the number of incremental shares. Options to purchase approximately 0.6 million and 0.7 million shares of common stock for the three and nine months ended March 31, 2010, 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. Warrants to purchase approximately 18.8 million shares of common stock for the three and nine months ended March 31, 2010, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares.

Diluted loss per share for the three and nine months ended March 31, 2009, has been computed by dividing net loss by weighted average shares outstanding assuming no incremental shares because all potentially dilutive common stock equivalents are anti-dilutive.

NOTE 13 – SUPPLEMENTAL CASH FLOW INFORMATION

Cash payments for interest costs and income taxes consist of the following (in thousands):

 

     Nine Months Ended
March 31,
     2010    2009

Interest costs (none capitalized)

   $ 356,675    $ 513,784

Income taxes

     117,394      2,216

We have received $279 million in income tax refunds in the nine months ended March 31, 2010.

NOTE 14 – FAIR VALUE OF FINANCIAL INSTRUMENTS

In April 2009, the FASB issued ASC 825 10 65-1, which requires interim disclosure of fair value information about financial instruments, whether recognized or not in our 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

 

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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. ASC 825 10 65-1 excludes certain financial instruments and all non-financial instruments from our disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of our Company.

Estimated fair values, carrying values and various methods and assumptions used in valuing our financial instruments are set forth below (in thousands):

 

           March 31, 2010    June 30, 2009
           Carrying
Value
   Estimated
Fair Value
   Carrying
Value  (f)
(Revised)
   Estimated
Fair Value

Financial assets:

             

Cash and cash equivalents

   (a   $ 497,329    $ 497,329    $ 193,287    $ 193,287

Finance receivables, net

   (b     8,187,125      8,056,522      10,037,329      9,717,655

Restricted cash – securitization notes payable

   (a     989,356      989,356      851,606      851,606

Restricted cash – credit facilities

   (a     153,244      153,244      195,079      195,079

Restricted cash – other

   (a     30,900      30,900      46,905      46,905

Interest rate swap agreements

   (d     27,315      27,315      24,267      24,267

Interest rate cap agreements purchased

   (d     5,879      5,879      15,858      15,858

Investment in money market fund

   (d           8,027      8,027

Financial liabilities:

             

Credit facilities

   (c     658,137      658,137      1,630,133      1,630,133

Securitization notes payable

   (d     6,462,494      6,577,261      7,426,687      6,879,245

Senior notes

   (d     70,620      68,501      91,620      85,207

Convertible senior notes

   (d     408,539      456,613      392,514      328,396

Other notes payable

   (e     240      240      600      600

Interest rate swap agreements

   (d     83,946      83,946      131,885      131,885

Interest rate cap agreements sold

   (d     6,061      6,061      16,644      16,644

Foreign currency hedge contracts

   (d     2,524      2,524      

 

(a) The carrying value of cash and cash equivalents, restricted cash – securitization notes payable, restricted cash – 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 cash flows expected to be collected using current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities.
(c) 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.
(d) The fair values of the interest rate cap and swap agreements, foreign currency contracts, investment in money market fund, 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.
(e) The fair value of other notes payable is estimated based on rates currently available for debt with similar terms and remaining maturities.
(f) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

 

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NOTE 15 – GUARANTOR CONSOLIDATING FINANCIAL STATEMENTS

The payment of principal and interest on our senior notes and convertible senior notes are guaranteed by certain of our subsidiaries (the “Subsidiary Guarantors”). The separate financial statements of the Subsidiary Guarantors are not included herein because the Subsidiary Guarantors are our wholly-owned consolidated subsidiaries and are jointly, severally, fully and unconditionally liable for the obligations represented by the senior notes and convertible senior notes. We believe that the consolidating financial information for AmeriCredit Corp., 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 statements 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 parent company and our subsidiaries on a consolidated basis and (v) the parent company and our subsidiaries on a consolidated basis.

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.

 

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AmeriCredit Corp.

Consolidating Balance Sheet

March 31, 2010

(Unaudited, in Thousands)

 

     AmeriCredit
Corp.
    Guarantors    Non-
Guarantors
    Eliminations     Consolidated  

ASSETS

           

Cash and cash equivalents

     $ 491,870    $ 5,459        $ 497,329   

Finance receivables, net

       498,797      7,688,328          8,187,125   

Restricted cash - securitization notes payable

          989,356          989,356   

Restricted cash - credit facilities

          153,244          153,244   

Property and equipment, net

   $ 5,277        33,561          38,838   

Leased vehicles, net

       3,925      113,112          117,037   

Deferred income taxes

     204,548        133,422      (254,721       83,249   

Other assets

     4,135        99,144      54,194          157,473   

Due from affiliates

     558,176           1,920,885      $ (2,479,061  

Investment in affiliates

     2,159,527        3,647,033      826,131        (6,632,691  
                                       

Total assets

   $ 2,931,663      $ 4,907,752    $ 11,495,988      $ (9,111,752   $ 10,223,651   
                                       

LIABILITIES AND SHAREHOLDERS' EQUITY

           

Liabilities:

           

Credit facilities

        $ 658,137        $ 658,137   

Securitization notes payable

          6,462,494          6,462,494   

Senior notes

   $ 70,620               70,620   

Convertible senior notes

     408,539               408,539   

Accrued taxes and expenses

     150,831      $ 30,500      45,311          226,642   

Interest rate swap agreements

          83,946          83,946   

Other liabilities

     240        11,600          11,840   

Due to affiliates

       2,479,061      $ (2,479,061  
                                       

Total liabilities

     630,230        2,521,161      7,249,888        (2,479,061     7,922,218   
                                       

Shareholders’ equity:

           

Common stock

     1,364        129,026        (129,026     1,364   

Additional paid-in capital

     317,660        75,887      1,271,689        (1,347,576     317,660   

Accumulated other comprehensive income (loss)

     7,769        51,595      (40,723     (10,872     7,769   

Retained earnings

     2,013,455        2,130,083      3,015,134        (5,145,217     2,013,455   
                                       
     2,340,248        2,386,591      4,246,100        (6,632,691     2,340,248   

Treasury stock

     (38,815            (38,815
                                       

Total shareholders’ equity

     2,301,433        2,386,591      4,246,100        (6,632,691     2,301,433   
                                       

Total liabilities and shareholders’ equity

   $ 2,931,663      $ 4,907,752    $ 11,495,988      $ (9,111,752   $ 10,223,651   
                                       

 

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AmeriCredit Corp.

Consolidating Balance Sheet

June 30, 2009

(in thousands)

(Revised)

 

     AmeriCredit
Corp. (a)
(Revised)
    Guarantors    Non-
Guarantors
    Eliminations     Consolidated (a)
(Revised)
 

ASSETS

           

Cash and cash equivalents

     $ 186,564    $ 6,723        $ 193,287   

Finance receivables, net

       580,420      9,456,909          10,037,329   

Restricted cash - securitization notes payable

          851,606          851,606   

Restricted cash - credit facilities

          195,079          195,079   

Property and equipment, net

   $ 5,527        38,668          44,195   

Leased vehicles, net

       5,319      151,068          156,387   

Deferred income taxes

     97,657        243,803      (265,678       75,782   

Other assets

     5,682        132,485      68,916          207,083   

Income tax receivable

     162,036        35,543          197,579   

Due from affiliates

     404,943           4,059,841      $ (4,464,784  

Investment in affiliates

     1,976,793        5,558,924      603,680        (8,139,397  
                                       

Total assets

   $ 2,652,638      $ 6,781,726    $ 15,128,144      $ (12,604,181   $ 11,958,327   
                                       

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Liabilities:

           

Credit facilities

        $ 1,630,133        $ 1,630,133   

Securitization notes payable

          7,426,687          7,426,687   

Senior notes

   $ 91,620               91,620   

Convertible senior notes

     392,514               392,514   

Accrued taxes and expenses

     60,596      $ 44,371      52,673          157,640   

Interest rate swap agreements

       525      131,360          131,885   

Other liabilities

     600        19,940          20,540   

Due to affiliates

       4,464,784      $ (4,464,784  
                                       

Total liabilities

     545,330        4,529,620      9,240,853        (4,464,784     9,851,019   
                                       

Shareholders’ equity:

           

Common stock

     1,350        172,368        (172,368     1,350   

Additional paid-in capital

     284,961        75,878      3,177,841        (3,253,719     284,961   

Accumulated other comprehensive (loss) income

     (21,099     26,009      (62,508     36,499        (21,099

Retained earnings

     1,878,459        1,977,851      2,771,958        (4,749,809     1,878,459   
                                       
     2,143,671        2,252,106      5,887,291        (8,139,397     2,143,671   

Treasury stock

     (36,363            (36,363
                                       

Total shareholders’ equity

     2,107,308        2,252,106      5,887,291        (8,139,397     2,107,308   
                                       

Total liabilities and shareholders' equity

   $ 2,652,638      $ 6,781,726    $ 15,128,144      $ (12,604,181   $ 11,958,327   
                                       

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

 

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AmeriCredit Corp.

Consolidating Statement of Operations

Three Months Ended March 31, 2010

(Unaudited, in Thousands)

 

     AmeriCredit
Corp.
    Guarantors     Non-
Guarantors
   Eliminations     Consolidated

Revenue

           

Finance charge income

     $ 30,092      $ 309,800      $ 339,892

Other income

   $ 7,511        110,687        208,017    $ (305,285     20,930

Gain on retirement of debt

     283               283

Equity in income of affiliates

     66,759        96,281           (163,040  
                                     
     74,553        237,060        517,817      (468,325     361,105
                                     

Costs and expenses

           

Operating expenses

     4,180        20,936        50,099        75,215

Leased vehicles expenses

       353        8,335        8,688

Provision for loan losses

       46,696        27,887        74,583

Interest expense

     10,487        123,791        277,591      (305,285     106,584

Restructuring charges, net

       220             220
                                     
     14,667        191,996        363,912      (305,285     265,290
                                     

Income before income taxes

     59,886        45,064        153,905      (163,040     95,815

Income tax (benefit) provision

     (3,320     (21,695     57,624        32,609
                                     

Net income

   $ 63,206      $ 66,759      $ 96,281    $ (163,040   $ 63,206
                                     

 

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AmeriCredit Corp.

Consolidating Statement of Operations

Three Months Ended March 31, 2009

(Unaudited, in Thousands)

(Revised)

 

     AmeriCredit
Corp. (a)
(Revised)
    Guarantors     Non-
Guarantors
   Eliminations     Consolidated  (a)
(Revised)
 

Revenue

           

Finance charge income

     $ 15,116      $ 437,070      $ 452,186   

Other income

   $ 9,055        98,424        182,796    $ (261,084     29,191   

Gain on retirement of debt

     11,048               11,048   

Equity in income of affiliates

     5,285        16,962           (22,247  
                                       
     25,388        130,502        619,866      (283,331     492,425   
                                       

Costs and expenses

           

Operating expenses

     7,214        2,397        66,667        76,278   

Leased vehicles expenses

       221        13,473        13,694   

Provision for loan losses

       22,398        212,418        234,816   

Interest expense

     14,174        93,481        301,666      (261,084     148,237   

Restructuring charges, net

       7,810             7,810   
                                       
     21,388        126,307        594,224      (261,084     480,835   
                                       

Income before income taxes

     4,000        4,195        25,642      (22,247     11,590   

Income tax provision (benefit)

     6,406        (1,090     8,680        13,996   
                                       

Net (loss) income

   $ (2,406   $ 5,285      $ 16,962    $ (22,247   $ (2,406
                                       

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 –“Senior Notes and Convertible Senior Notes” for additional information.

 

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AmeriCredit Corp.

Consolidating Statement of Operations

Nine Months Ended March 31, 2010

(Unaudited, in Thousands)

 

     AmeriCredit
Corp.
    Guarantors     Non-
Guarantors
   Eliminations     Consolidated

Revenue

           

Finance charge income

     $ 78,514      $ 1,014,274      $ 1,092,788

Other income

   $ 19,555        308,104        602,272    $ (861,858     68,073

Gain on retirement of debt

     283               283

Equity in income of affiliates

     152,232        243,176           (395,408  
                                     
     172,070        629,794        1,616,546      (1,257,266     1,161,144
                                     

Costs and expenses

           

Operating expenses

     11,550        54,614        154,323        220,487

Leased vehicles expenses

       1,230        27,789        29,019

Provision for loan losses

       117,337        221,395        338,732

Interest expense

     34,394        353,224        832,732      (861,858     358,492

Restructuring charges, net

       134             134
                                     
     45,944        526,539        1,236,239      (861,858     946,864
                                     

Income before income taxes

     126,126        103,255        380,307      (395,408     214,280

Income tax (benefit) provision

     (8,870     (48,977     137,131        79,284
                                     

Net income

   $ 134,996      $ 152,232      $ 243,176    $ (395,408   $ 134,996
                                     

 

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AmeriCredit Corp.

Consolidating Statement of Operations

Nine Months Ended March 31, 2009

(Unaudited, in Thousands)

(Revised)

 

     AmeriCredit
Corp. (a)
(Revised)
    Guarantors     Non-
Guarantors
   Eliminations     Consolidated  (a)
(Revised)
 

Revenue

           

Finance charge income

     $ 50,102      $ 1,433,617      $ 1,483,719   

Other income

   $ 28,744        753,541        1,489,645    $ (2,181,037     90,893   

Gain on retirement of debt

     42,453               42,453   

Equity in (loss) income of affiliates

     (8,495     111,728           (103,233  
                                       
     62,702        915,371        2,923,262      (2,284,270     1,617,065   
                                       

Costs and expenses

           

Operating expenses

     26,878        22,736        195,263        244,877   

Leased vehicles expenses

       4,562        32,203        36,765   

Provision for loan losses

       125,153        672,550        797,703   

Interest expense

     84,907        819,255        1,850,541      (2,181,037     573,666   

Restructuring charges, net

       10,465             10,465   
                                       
     111,785        982,171        2,750,557      (2,181,037     1,663,476   
                                       

(Loss) income before income taxes

     (49,083     (66,800     172,705      (103,233     (46,411

Income tax (benefit) provision

     (6,401     (58,305     60,977        (3,729
                                       

Net (loss) income

   $ (42,682   $ (8,495   $ 111,728    $ (103,233   $ (42,682
                                       

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

 

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AmeriCredit Corp.

Consolidating Statement of Cash Flows

Nine Months Ended March 31, 2010

(Unaudited, in Thousands)

 

     AmeriCredit
Corp.
    Guarantors     Non-
Guarantors
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income

   $ 134,996      $ 152,232      $ 243,176      $ (395,408   $ 134,996   

Adjustments to reconcile net income to net cash provided by operating activities:

          

Depreciation and amortization

     1,202        7,409        53,386          61,997   

Accretion and amortization of loan fees

       (943     5,672          4,729   

Provision for loan losses

       117,337        221,395          338,732   

Deferred income taxes

     (111,675     110,870        (23,412       (24,217

Non-cash interest charges on convertible debt

     16,025              16,025   

Stock-based compensation expense

     11,510              11,510   

Amortization of warrant costs

     1,968              1,968   

Gain on retirement of debt

     (283           (283

Other

       (3,082     (13,311       (16,393

Equity in income of affiliates

     (152,232     (243,176       395,408     

Changes in assets and liabilities:

          

Income tax receivable

     162,036        35,366            197,402   

Other assets

     1,579        (189     10,784          12,174   

Accrued taxes and expenses

     91,446        (28,894     (4,623       57,929   
                                        

Net cash provided by operating activities

     156,572        146,930        493,067          796,569   
                                        

Cash flows from investing activities:

          

Purchases of receivables

       (1,196,301     (1,098,781     1,098,781        (1,196,301

Principal collections and recoveries on receivables

       91,193        2,641,971          2,733,164   

Net proceeds from sale of receivables

       1,098,781          (1,098,781  

Purchases of property and equipment

       (1,023         (1,023

Proceeds from money market fund

       10,047            10,047   

Change in restricted cash — securitization notes payable

         (137,750       (137,750

Change in restricted cash — credit facilities

         41,835          41,835   

Change in other assets

       15,766        9,946          25,712   

Net change in investment in affiliates

     (8,715     2,169,762        (222,453     (1,938,594  
                                        

Net cash (used) provided by investing activities

     (8,715     2,188,225        1,234,768        (1,938,594     1,475,684   
                                        

Cash flows from financing activities:

          

Net change in credit facilities

         (971,996       (971,996

Issuance of securitization notes payable

         1,752,493          1,752,493   

Payments on securitization notes payable

         (2,719,692       (2,719,692

Retirement of debt

     (20,425           (20,425

Debt issuance costs

     1,810          (22,708       (20,898

Proceeds from issuance of common stock

     12,708        (43,333     (1,906,152     1,949,485        12,708   

Other net changes

     227              227   

Net change in due (to) from affiliates

     (153,233     (1,986,868     2,138,956        1,145     
                                        

Net cash used by financing activities

     (158,913     (2,030,201     (1,729,099     1,950,630        (1,967,583
                                        

Net (decrease) increase in cash and cash equivalents

     (11,056     304,954        (1,264     12,036        304,670   

Effect of Canadian exchange rate changes on cash and cash equivalents

     11,056        352          (12,036     (628

Cash and cash equivalents at beginning of period

       186,564        6,723          193,287   
                                        

Cash and cash equivalents at end of period

   $        $ 491,870      $ 5,459      $        $ 497,329   
                                        

 

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AmeriCredit Corp.

Consolidating Statement of Cash Flows

Nine Months Ended March 31, 2009

(Unaudited, in Thousands)

(Revised)

 

     AmeriCredit
Corp.(a)
(Revised)
    Guarantors     Non-
Guarantors
    Eliminations     Consolidated(a)
(Revised)
 

Cash flows from operating activities:

          

Net (loss) income

   $ (42,682   $ (8,495   $ 111,728      $ (103,233   $ (42,682

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

          

Depreciation and amortization

     2,129        30,427        50,299          82,855   

Accretion and amortization of loan fees

       (140     16,043          15,903   

Provision for loan losses

       125,153        672,550          797,703   

Deferred income taxes

     217,122        212        1,660          218,994   

Non-cash interest charges on convertible debt

     16,908              16,908   

Stock-based compensation expense

     11,238              11,238   

Amortization of warrant costs

     43,017              43,017   

Gain on retirement of debt

     (43,208           (43,208

Other

     (125     (19,628     23,394          3,641   

Equity in (loss) income of affiliates

     8,495        (111,728       103,233     

Changes in assets and liabilities:

          

Income tax receivable

     (178,325     (1,595         (179,920

Other assets

     (9,835     2,602        (8,765       (15,998

Accrued taxes and expenses

     (18,365     (15,536     (12,087       (45,988
                                        

Net cash provided by operating activities

     6,369        1,272        854,822          862,463   
                                        

Cash flows from investing activities:

          

Purchases of receivables

       (1,112,143     (477,296     477,296        (1,112,143

Principal collections and recoveries on receivables

       137,868        3,174,986          3,312,854   

Net proceeds from sale of receivables

       477,296          (477,296  

Purchases of property and equipment

       (948         (948

Investment in money market fund

       (115,821         (115,821

Proceeds from money market fund

       99,114            99,114   

Change in restricted cash — securitization notes payable

         83,565          83,565   

Change in restricted cash — credit facilities

         24,205          24,205   

Change in other assets

       116,979        (91,763       25,216   

Net change in investment in affiliates

     (852     503,119        (20,658     (481,609  
                                        

Net cash (used) provided by investing activities

     (852     105,464        2,693,039        (481,609     2,316,042   
                                        

Cash flows from financing activities:

          

Net change in credit facilities

         (1,125,534       (1,125,534

Issuance of securitization notes payable

         1,000,000          1,000,000   

Payments on securitization notes payable

         (3,111,096       (3,111,096

Retirement of debt

     (224,723           (224,723

Debt issuance costs

     (56     (2,164     (29,819       (32,039

Proceeds from issuance of common stock

     1,271        148,939        (599,916     450,977        1,271   

Other net changes

     (3,207           (3,207

Net change in due (to) from affiliates

     227,120        (501,463     255,295        19,048     
                                        

Net cash provided (used) by financing activities

     405        (354,688     (3,611,070     470,025        (3,495,328
                                        

Net increase (decrease) in cash and cash equivalents

     5,922        (247,952     (63,209     (11,584     (316,823

Effect of Canadian exchange rate changes on cash and cash equivalents

     (5,922     (1,466     65        11,584        4,261   

Cash and cash equivalents at beginning of period

       361,352        72,141          433,493   
                                        

Cash and cash equivalents at end of period

   $        $ 111,934      $ 8,997      $        $ 120,931   
                                        

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” for additional information.

 

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are a leading independent auto 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. We generate 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 us. To fund the acquisition of receivables prior to securitization, we use available cash and borrowings under our credit facility. We earn finance charge income on the finance receivables and pay interest expense on borrowings under our credit facilities and securitizations.

Through wholly-owned subsidiaries, we periodically transfer receivables to securitization trusts (“Trusts”) that issue asset-backed securities to investors. We retain an interest in these securitization transactions in the form of restricted cash accounts and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts, as well as the estimated future excess cash flows expected to be received by us 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 maintain specific credit ratings for the asset-backed securities issued by the Trusts. Once targeted credit enhancement requirements are reached and maintained, excess cash flows are typically distributed to us or, in a securitization utilizing a senior subordinated structure, may be used to accelerate the repayment of certain subordinated securities. In addition to excess cash flows, we receive monthly base servicing fees and we collect other fees, such as late charges, as servicer for securitization Trusts. For securitization transactions that involve the purchase of a financial guaranty insurance policy, credit enhancement requirements will increase if specified portfolio performance ratios are exceeded. Excess cash flows otherwise distributable to us from Trusts in which the portfolio performance ratios were exceeded and from other Trusts which may be subject to limited cross-collateralization provisions are accumulated in the Trusts until such higher levels of credit enhancement are reached and maintained. Our senior subordinated securitizations are not subject to portfolio performance ratios.

We structure our securitization transactions as secured financings. Accordingly, following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance sheets. We recognize finance charge and fee income on the receivables and

 

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interest expense on the securities issued in the securitization transaction and record a provision for loan losses to cover probable loan losses on the receivables.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2010 as compared to

Three Months Ended March 31, 2009

Changes in Finance Receivables:

A summary of changes in our finance receivables is as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Balance at beginning of period

   $ 9,304,976      $ 12,999,132   

Loans purchased

     623,855        210,064   

Liquidations and other

     (1,118,457     (1,307,873
                

Balance at end of period

   $ 8,810,374      $ 11,901,323   
                

Average finance receivables

   $ 9,042,982      $ 12,469,678   
                

The increase in loans purchased during the three months ended March 31, 2010, as compared to the three months ended March 31, 2009, was primarily due to our establishing higher loan production targets as a result of improved access to the securitization markets. Loan production goals were constrained during fiscal 2009 in order to preserve capital and liquidity. The decrease in liquidations and other resulted primarily from reduced average finance receivables.

The average new loan size was $17,912 and $16,997 for the three months ended March 31, 2010 and 2009, respectively. The average annual percentage rate for finance receivables purchased during the three months ended March 31, 2010, decreased to 17.1% from 17.3% during the three months ended March 31, 2009.

Net Margin:

Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.

 

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Our net margin as reflected on the consolidated statements of operations is as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009 (a)  
           (Revised)  

Finance charge income

   $ 339,892      $ 452,186   

Other income

     20,930        29,191   

Interest expense

     (106,584     (148,237
                

Net margin

   $ 254,238      $ 333,140   
                

 

(a) Revised for the Financial Accounting Standards Board (“FASB”) issuance of Accounting Standards Codification “ASC” 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” to the consolidated financial statements for additional information.

Net margin as a percentage of average finance receivables is as follows:

 

     Three Months Ended
March  31,
 
     2010     2009 (a)  
           (Revised)  

Finance charge income

   15.2   14.7

Other income

   0.9      0.9   

Interest expense

   (4.7   (4.8
            

Net margin as a percentage of average finance receivables

   11.4   10.8
            

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” to the consolidated financial statements for additional information.

The increase in net margin as a percentage of average finance receivables for the three months ended March 31, 2010, as compared to the three months ended March 31, 2009, was mainly due to higher annual percentage rates on finance receivables purchased since mid calendar year 2008.

Revenue:

Finance charge income decreased by 24.8% to $339.9 million for the three months ended March 31, 2010, from $452.2 million for the three months ended March 31, 2009, primarily due to the 27.5% decrease in average finance receivables. The effective yield on our finance receivables increased to 15.2% for the three months ended March 31, 2010, from 14.7% for the three months ended March 31, 2009. 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 our finance contracts due to finance receivables in nonaccrual status.

 

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Other income consists of the following (in thousands):

 

     Three Months Ended
March 31,
     2010    2009

Leasing income

   $ 11,026    $ 11,687

Investment income

     773      2,470

Late fees and other income

     9,131      15,034
             
   $ 20,930    $ 29,191
             

Investment income decreased as a result of lower investment interest rates and lower invested restricted cash balances.

Gain on retirement of debt for the three months ended March 31, 2010 was $0.3 million. We repurchased on the open market $21.0 million of senior notes due in 2015 at an average price of 97.3% of the principal amount of the notes repurchased. Gain on retirement of debt for the three months ended March 31, 2009 was $11.0 million. We repurchased on the open market $25.0 million of convertible senior notes due in 2011 at an average price of 41.0% of the principal amount of the notes repurchased.

Costs and Expenses:

Operating Expenses

Operating expenses decreased by 1.4% to $75.2 million for the three months ended March 31, 2010, from $76.3 million for the three months ended March 31, 2009. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 76.9% and 75.8% of total operating expenses for the three months ended March 31, 2010 and 2009, respectively.

Operating expenses as an annualized percentage of average finance receivables were 3.4% for the three months ended March 31, 2010 as compared to 2.5% for the three months ended March 31, 2009. The increase in operating expenses as a percentage of average finance receivables primarily resulted from the continued impact of a decreasing portfolio on our fixed cost base and an increase in origination personnel to support increased origination levels.

Provision for Loan losses

Provisions for loan losses are charged to operations to bring our 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 three months ended March 31, 2010 and 2009, reflects inherent losses on receivables originated during those quarters and changes in the amount of inherent losses on receivables

 

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originated in prior periods. The provision for loan losses decreased to $74.6 million for the three months ended March 31, 2010, from $234.8 million for the three months ended March 31, 2009, as a result of favorable credit performance of loans originated since early calendar year 2008, stabilization of economic conditions and improved recovery values on repossessed collateral. As an annualized percentage of average finance receivables, the provision for loan losses was 3.3% and 7.6% for the three months ended March 31, 2010 and 2009, respectively.

Interest Expense

Interest expense decreased to $106.6 million for the three months ended March 31, 2010, from $148.2 million for the three months ended March 31, 2009. Interest expense reflects the adoption of ASC 470 20 65-1, which was applied retrospectively. We have separately accounted for the liability and equity components of our convertible senior notes retrospectively, which results in recognizing interest expense based on a borrowing rate at the time of issuance for similar unsecured senior debt without an equity conversion feature. Average debt outstanding was $7.6 billion and $11.2 billion for the three months ended March 31, 2010 and 2009, respectively. Our effective rate of interest on our debt increased to 5.7% for the three months ended March 31, 2010, compared to 5.4% for the three months ended March 31, 2009.

Taxes

Our effective income tax rate was 34.0% and 120.8% for the three months ended March 31, 2010 and 2009, respectively. The effective tax rate for the three months ended March 2009 was impacted by adjustments to prior year tax positions.

Other Comprehensive Income:

Other comprehensive income consisted of the following (in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Unrealized gains on cash flow hedges

   $ 9,744      $ 24,080   

Canadian currency translation adjustment

     2,788        (2

Income tax provision

     (4,553     (9,034
                
   $ 7,979      $ 15,044   
                

 

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Cash Flow Hedges

Unrealized gains on cash flow hedges consisted of the following (in thousands):

 

     Three Months Ended
March 31,
     2010     2009

Unrealized (losses) gains related to changes in fair value

   $ (9,493   $ 1,715

Reclassification of net unrealized losses into earnings

     19,237        22,365
              
   $ 9,744      $ 24,080
              

Unrealized gains or losses related to changes in fair value for the three months ended March 31, 2010 and 2009, were 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 our 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 $2.8 million and losses of $2,000 for the three months ended March 31, 2010 and 2009, respectively, were included in other comprehensive income. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar conversion rates during the three months ended March 31, 2010 and 2009.

 

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Nine Months Ended March 31, 2010 as compared to

Nine Months Ended March 31, 2009

A summary of changes in our finance receivables is as follows (in thousands):

 

     Nine Months Ended
March 31,
 
     2010     2009  

Balance at beginning of period

   $ 10,927,969      $ 14,981,412   

Loans purchased

     1,231,523        1,110,184   

Liquidations and other

     (3,349,118     (4,190,273
                

Balance at end of period

   $ 8,810,374      $ 11,901,323   
                

Average finance receivables

   $ 9,727,552      $ 13,527,449   
                

The increase in loans purchased during the nine months ended March 31, 2010, as compared to the nine months ended March 31, 2009, was primarily due to our establishing higher loan production targets as a result of improved access to the securitization markets. Loan production goals during fiscal 2009 were constrained in order to preserve capital and liquidity. The decrease in liquidations and other resulted primarily from reduced average finance receivables.

The average new loan size was $17,856 and $17,576 for the nine months ended March 31, 2010 and 2009, respectively. The average annual percentage rate for finance receivables purchased during the nine months ended March 31, 2010, increased to 17.7% from 16.9% during the nine months ended March 31, 2009.

Net Margin:

Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.

 

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Our net margin as reflected on the consolidated statements of operations is as follows (in thousands):

 

     Nine Months Ended
March 31,
 
     2010     2009 (a)  
           (Revised)  

Finance charge income

   $ 1,092,788      $ 1,483,719   

Other income

     68,073        90,893   

Interest expense

     (358,492     (573,666
                

Net margin

   $ 802,369      $ 1,000,946   
                

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” to the consolidated financial statements for additional information.

Net margin as a percentage of average finance receivables is as follows:

 

     Nine Months Ended
March  31,
 
     2010     2009 (a)  
           (Revised)  

Finance charge income

   15.0   14.6

Other income

   0.9      0.9   

Interest expense

   (4.9   (5.6
            

Net margin as a percentage of average finance receivables

   11.0   9.9
            

 

(a) Revised for ASC 470 20 65-1, regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – “Summary of Significant Accounting Policies – Adoption of New Accounting Standards” and Note 6 – “Senior Notes and Convertible Senior Notes” to the consolidated financial statements for additional information.

The increase in net margin as a percentage of average finance receivables for the nine months ended March 31, 2010, as compared to the nine months ended March 31, 2009, was mainly due to higher annual percentage rates for finance receivables purchased since mid calendar year 2008 and the effect on interest expense in the nine months ended March 31, 2009 of the acceleration of unamortized warrant costs of $14.3 million and unamortized commitment fees of $5.8 million related to the early termination of a forward purchase agreement.

Revenue:

Finance charge income decreased by 26.3% to $1,092.8 million for the nine months ended March 31, 2010, from $1,483.7 million for the nine months ended March 31, 2009, primarily due to the 28.1% decrease in average finance receivables. The effective yield on our finance receivables increased to 15.0%

 

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for the nine months ended March 31, 2010, from 14.6% for the nine months ended March 31, 2009. The effective yield represents finance charges and fees taken into earnings during the period as a percentage of average finance receivables and may be lower than the contractual rates of our finance contracts due to finance receivables in nonaccrual status.

Other income consists of the following (in thousands):

 

     Nine Months Ended
March 31,
     2010    2009

Leasing income

   $ 33,797    $ 35,435

Investment income

     2,399      14,809

Late fees and other income

     31,877      40,649
             
   $ 68,073    $ 90,893
             

Investment income decreased as a result of lower investment interest rates and lower invested restricted cash balances.

During the nine months ended March 31, 2010, we repurchased on the open market $21.0 million of senior notes due in 2015 at an average price of 97.3% of the principal amount of the notes repurchased which generated a gain on retirement of debt of $0.3 million. During the nine months ended March 31, 2009, we repurchased on the open market, $38.9 million of convertible senior notes due in 2013 at an average price of 37.75% of the principal amount of the notes repurchased, $114.7 million of convertible senior notes due in 2023 at an average price of 98.9% of the principal amount of the notes repurchased and $25.0 million of convertible senior notes due in 2011 at an average price of 41.0% of the principal amount of the notes repurchased. We also issued 15,122,670 shares of our common stock to Fairholme Funds Inc. (“Fairholme”) in a non-cash transaction in exchange for $108.4 million of our Senior Notes due 2015 held by Fairholme, at a price of $840 per $1,000 principal amount of the Notes. We recorded a gain of $42.5 million in connection with these transactions.

Costs and Expenses:

Operating Expenses

Operating expenses decreased by 10.0% to $220.5 million for the nine months ended March 31, 2010, from $244.9 million for the nine months ended March 31, 2009. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 73.4% and 72.7% of total operating expenses for the nine months ended March 31, 2010 and 2009, respectively.

Operating expenses as an annualized percentage of average finance receivables were 3.0% for the nine months ended March 31, 2010, as compared to 2.4% for the nine months ended March 31, 2009. The increase in operating expenses as a percentage of average finance receivables primarily resulted from the continued impact of a decreasing portfolio on our fixed cost base and an increase in origination personnel to support increased origination levels.

 

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Provision for Loan losses

Provisions for loan losses are charged to operations to bring our 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 nine months ended March 31, 2010 and 2009 reflects inherent losses on receivables originated during those periods and changes in the amount of inherent losses on receivables originated in prior periods. The provision for loan losses decreased to $338.7 million for the nine months ended March 31, 2010, from $797.7 million for the nine months ended March 31, 2009, as a result of favorable credit performance of loans originated since early calendar year 2008, stabilization of economic conditions and improved recovery values on repossessed collateral. As an annualized percentage of average finance receivables, the provision for loan losses was 4.6% and 7.9% for the nine months ended March 31, 2010 and 2009, respectively.

Interest Expense

Interest expense decreased to $358.5 million for the nine months ended March 31, 2010, from $573.7 million for the nine months ended March 31, 2009. Interest expense reflects the adoption of ASC 470 20 65-1, which was applied retrospectively. We have separately accounted for the liability and equity components of our convertible senior notes retrospectively, which results in recognizing interest expense based on a borrowing rate at the time of issuance for similar unsecured senior debt without an equity conversion feature. Average debt outstanding was $8.3 billion and $12.4 billion for the nine months ended March 31, 2010 and 2009, respectively. Our effective rate of interest paid on our debt decreased to 5.7% for the nine months ended March 31, 2010, compared to 6.2% for the nine months ended March 31, 2009, due to the acceleration of unamortized warrant costs of $14.3 million and unamortized commitment fees of $5.8 million related to the early termination of a forward purchase agreement in the nine months ended March 31, 2009.

Taxes

Our effective income tax rate was 37.0% and 8.0% for the nine months ended March 31, 2010 and 2009, respectively. The rate for the nine months ended March 31, 2009, was impacted by adjustments to prior year tax positions and adjustments to deferred tax balances.

 

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Other Comprehensive Income (Loss):

Other comprehensive income (loss) consisted of the following (in thousands):

 

     Nine Months Ended
March 31,
 
     2010     2009  

Unrealized gains (losses) on cash flow hedges

   $ 34,242      $ (27,614

Canadian currency translation adjustment

     11,056        (5,922

Income tax (provision) benefit

     (16,430     12,856   
                
   $ 28,868      $ (20,680
                

Cash Flow Hedges

Unrealized gains (losses) on cash flow hedges consisted of the following (in thousands):

 

     Nine Months Ended
March 31,
 
     2010     2009  

Unrealized losses related to changes in fair value

   $ (29,629   $ (85,469

Reclassification of net unrealized losses into earnings

     63,871        57,855   
                
   $ 34,242      $ (27,614
                

Unrealized gains or losses related to changes in fair value for the nine months ended March 31, 2010 and 2009, were 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 fluctuates based upon changes in forward interest rate expectations.

Unrealized gains or losses on cash flow hedges of our 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 $11.1 million and losses of $5.9 million for the nine months ended March 31, 2010 and 2009, respectively, were included in other comprehensive income (loss). The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar conversion rates during the nine months ended March 31, 2010 and 2009.

 

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CREDIT QUALITY

Generally, we provide financing in relatively high-risk markets, and, therefore, anticipate a corresponding high level of delinquencies and charge-offs.

The following tables present certain data related to the receivables portfolio (dollars in thousands):

 

     March 31,
2010
    June 30,
2009
 

Principal amount of receivables, net of fees

   $ 8,810,374      $ 10,927,969   

Nonaccretable acquisition fees

     (3,122     (12,100

Allowance for loan losses

     (620,127     (878,540
                

Receivables, net

   $ 8,187,125      $ 10,037,329   
                

Number of outstanding contracts

     784,049        895,708   
                

Average carrying amount of outstanding contract (in dollars)

   $ 11,237      $ 12,200   
                

Allowance for loan losses and nonaccretable acquisition fees as a percentage of receivables

     7.1     8.2
                

The allowance for loan losses and nonaccretable acquisition fees as a percentage of receivables decreased to 7.1% as of March 31, 2010, from 8.2% as of June 30, 2009, as a result of the favorable credit performance of loans originated since early calendar year 2008, stabilization of economic conditions and improved recovery rates on repossessed collateral.

Delinquency

The following is a summary of 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):

 

     March 31, 2010     March 31, 2009  
     Amount    Percent     Amount    Percent  

Delinquent contracts:

          

31 to 60 days

   $ 472,206    5.3   $ 716,455    6.0

Greater-than-60 days

     190,911    2.2