E-Z-GO 2008 Annual Report Download - page 49

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As of January 3, 2009, we have one significant off-balance sheet financing arrangement. The Distribution Finance revolving securitization trust is
a master trust that purchases inventory finance receivables from our Finance group and issues asset-backed notes to investors. These receivables
typically have short durations, which results in significant collections of previously purchased receivables and significant additional purchases of
replacement receivables from us on a monthly basis. This arrangement has provided net proceeds of $125 million in 2008, $549 million in 2007
and $50 million 2006, and net pre-tax gains of $36 million, $58 million and $42 million in 2008, 2007 and 2006, respectively. Proceeds from
securitizations include amounts received related to the issuance of additional asset-backed notes to investors and exclude amounts received
related to the ongoing replenishment of the outstanding sold balance of these short-duration receivables.
During 2008, $802 million of the outstanding notes issued by the Distribution Finance revolving securitization trust matured, and the trust issued
variable funding notes in the amount of $559 million (maturing in September 2009) and $419 million (maturing in May 2009). We retained
$103 million of these notes. Both notes have an interest rate equal to the commercial paper costs of the conduit purchasers. In addition, the trust
holds $1.2 billion of one-month LIBOR-based variable-rate notes with three-year terms. Approximately $642 million of these notes mature in
April 2009 and $588 million mature in March 2010. We retained $80 million of these notes. The amount of pre-tax gains recorded upon the
ongoing sale of receivables in this arrangement and the value of our subordinated interest are impacted by the pricing of the investor notes issued
by the trust. Therefore, an increase in the pricing of investor notes issued upon the maturity of the existing notes could have a negative impact on
the gains recognized by the Finance group related to future sales of receivables.
Critical Accounting Estimates
To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and
subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the
portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and
complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated
Financial Statements, which includes other significant accounting policies.
Allowance for Losses on Finance Receivables Held for Investment
We evaluate our allowance for losses on finance receivables held for investment based on a combination of factors. For homogeneous loan pools,
we examine current delinquencies, the characteristics of the existing accounts, historical loss experience, the value of the underlying collateral,
general economic conditions and trends, and the potential impact of the lack of liquidity available to our borrowers and their customers as a result
of our current decision to exit our non-captive finance businesses. We estimate losses will range from 0.75% to 10.0% of finance receivables
held for investment depending on the specific homogeneous loan pool. For larger balance commercial loans, we also consider borrower specific
information, industry trends and estimated discounted cash flows.
Provision for losses on finance receivables held for investment are charged to income, in amounts sufficient to maintain the allowance for losses
on finance receivables held for investment at a level considered adequate to cover losses inherent in the owned finance receivable held for
investment portfolio, based on management’s evaluation and analysis of this portfolio. While management believes that its consideration of the
factors and assumptions referred to above results in an accurate evaluation of existing losses in the portfolio based on prior trends and
experience, changes in the assumptions or trends within reasonable historical volatility may have a material impact on our allowance for losses
on finance receivables held for investment. The allowance for losses on finance receivables held for investment currently represents 2.76% of
total finance receivables held for investment. During the last five years, net charge-offs as a percentage of finance receivables held for investment
have ranged from 0.38% to 1.48%.
Finance Receivables Held for Sale
As a result of our exit plan, $1.7 billion of our finance receivable portfolio is classified as held for sale and is recorded at the lower of cost or fair
value, and the remaining $6.9 billion of receivables in our finance receivable portfolio is classified as held for investment. Upon the initial
reclassification of these receivables to held for sale, we estimated the fair value to be $293 million less than the carrying value, net of the $44
million allowance for loan losses attributable to these portfolios. This net adjustment was recorded in the fourth quarter of 2008.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations