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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
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 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
- --------------------------------------------------------------------------------------------------------------------
Common Stock - $.001 par value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [____]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 2000, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $16,546,884.
There were 5,566,669 shares of Common Stock of the registrant outstanding
as of June 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held September 7, 2000, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 2000.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 2000
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 14
Item 3. Legal Proceedings........................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders...................... 14
PART II
Item 5. Market for Registrants' Common Equity and Related Shareholder Matters.... 15
Item 6. Selected Consolidated Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 18
Item 8. Financial Statements and Supplementary Data.............................. 30
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................... 30
PART III
Item 10. Directors and Executive Officers......................................... 31
Item 11. Executive Compensation................................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 31
Item 13. Certain Relationships and Related Transactions........................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 31
PART I
ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a
consumer finance company engaged in both the purchase of receivables originated
by franchised automobile dealers and originating loans directly to consumers in
connection with the sale of new and late-model used vehicles. The Company
specializes in lending to consumers with impaired credit profiles. The Company
does not utilize off-balance sheet securitization to finance its Receivables
Held for Investment. As of April 30, 2000, the Company had Receivables Held for
Investment in the aggregate principal amount of $231,696,539, having an
effective yield of 16.0% and a net interest spread to the Company of 9.3% (net
of cost of funds and other carrying costs).
HISTORY
The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A.
Stockard to conduct an automobile finance business, with Mr. Moore providing the
operating expertise and Mr. Stockard and members of his family furnishing the
initial financial support. During the first three years of the Company's
existence, its operations consisted primarily of purchasing and pooling
receivables for resale to financial institutions and others. In March 1992, the
Company obtained additional capital from a group of private investors and
decided to expand its operations and reorient its business. Instead of acquiring
receivables for resale, the Company adopted a strategy of purchasing receivables
for retention.
On October 2, 1998, the Company completed the acquisition of First
Investors Servicing Corporation ("FISC") formally known as Auto Lenders
Acceptance Corporation from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC
was engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables
acquired for investment as well as on a portfolio of receivables acquired and
sold pursuant to two asset securitizations. As a result of the acquisition, the
Company increased the total dollar value on its balance sheet of receivables,
acquired an interest in certain trust certificates related to the asset
securitizations and acquired certain servicing rights along with furniture,
fixtures, equipment and technology to perform the servicing and collection
functions for the portfolio of receivables under management.
INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States. Most automobile financing is provided by captive
finance subsidiaries of major automobile manufacturers, banks, thrifts, credit
unions and independent finance companies such as the Company. The overall
industry is generally segmented according to the type of vehicle sold (new vs.
used), the nature of the dealership (franchised vs. independent) and the credit
characteristics of the borrower (prime vs. non-prime). The non-prime market is
comprised of individuals who are relatively high credit risks and who have
limited access to traditional financing sources, generally due to unfavorable
past credit experience, low income or limited financial resources and/or the
absence or limited extent of prior credit history.
ORIGINATING DEALER BASE
GENERAL. The Company primarily purchases receivables from the new and used
car departments of dealers operating under franchises from the major automobile
manufacturers. The Company does not generally do business with "independent"
dealers who operate used car lots with no manufacturer affiliation. No dealer or
group of dealers (who are affiliated with each other through common ownership)
accounted for more than 5% of the receivables owned by the Company at
1
April 30, 2000, and no dealer or group of related dealers originated more than
5% of the receivables held by the Company at that date. The volume and frequency
of receivable purchases from particular dealers vary widely with the size of the
dealerships as well as market and competitive factors in the various dealership
locations.
LOCATION OF DEALERS. Approximately 17% of the dealers with whom the
Company has agreements are located in Texas, where the Company has operated
since 1989. The Company commenced operations in Utah and Idaho in 1992 and has
since expanded its dealership base into 23 additional states.
The following table summarizes, with respect to each state in which the
Company operates, the date operations commenced, the number of dealers with whom
the Company had agreements in such state as of April 30, 2000, and the number of
receivables (and percentage of total receivables), outstanding as of these dates
which were originated by the Company from dealers in such state during the last
two fiscal years:
RECEIVABLES HELD FOR INVESTMENT
-----------------------------------------------
YEAR ENDED YEAR ENDED
DATE NUMBER OF APRIL 30, 1999 APRIL 30, 2000
BUSINESS DEALERS AT ---------------------- ----------------------
STATE COMMENCED APRIL 30, 2000 LOAN COUNT % LOAN COUNT %
- ------------------------------------- --------- -------------- ---------- --------- ---------- ---------
Texas................................ 2/89 336 5,626 35.1% 5,684 29.3%
Ohio................................. 9/94 381 3,047 19.0% 3,472 17.9%
Georgia.............................. 9/94 136 2,408 15.0% 2,998 15.4%
Oklahoma............................. 7/94 103 1,476 9.2% 2,195 11.4%
Missouri............................. 12/93 101 705 4.4% 960 5.0%
Michigan............................. 10/94 162 481 3.0% 665 3.4%
Virginia............................. 4/98 49 351 2.2% 557 2.9%
North Carolina....................... 11/95 77 305 1.9% 455 2.4%
Kansas............................... 12/93 58 361 2.3% 385 2.0%
Colorado............................. 8/94 91 182 1.1% 330 1.7%
Tennessee............................ 11/95 48 199 1.2% 291 1.5%
Arizona.............................. 2/96 37 176 1.1% 189 1.0%
Pennsylvania......................... 8/98 62 -- -- 156 0.8%
Washington........................... 10/98 35 -- -- 149 0.8%
Utah................................. 10/92 68 156 1.0% 138 0.7%
All others(1)........................ -- 263 542 3.5% 750 3.8%
-------------- ---------- --------- ---------- ---------
2,007 16,015 100.0% 19,374 100.0%
============== ========== ========= ========== =========
- ------------
(1) Includes dealers located in California, Connecticut, Florida, Iowa, Idaho,
Illinois, Indiana, Kentucky, Nebraska, New Jersey and South Carolina.
MARKETING REPRESENTATIVES. The Company utilizes a system of regional
marketing representatives to recruit, enroll and train new dealers as well as to
maintain relationships with the Company's existing dealers. The representatives
are full-time employees who reside in the region for which they are responsible.
In addition to soliciting and enrolling new dealers, the regional
representatives assist new dealers in assimilating the Company's system of
credit application submission, review, acceptance and funding, as well as
dealing with routine dealer relations on a daily basis. The role of the regional
representatives is generally limited to marketing the Company's core finance
programs and maintaining relationships with the Company's originating dealer
base. The representatives do not enter into or modify dealer agreements on
behalf of the Company, do not participate in credit evaluation or loan funding
decisions and do not handle funds belonging to the Company or its dealers. Each
representative reports to, and is supervised by, the Company's marketing manager
in Houston.
2
In 1997, the Company established a telemarketing department to supplement
the efforts of its marketing representatives in the field. The telemarketing
staff (Dealer Sales Representatives) are located in Houston and are primarily
responsible for (i) new loan volume in rural areas or states in which the
Company cannot justify a field marketing representative, (ii) customer service
support for marketing representatives who typically cover large geographic
areas, and (iii) customer support for the bank alliance partners (see
"Financing Programs").
It has been the policy of the Company to avoid the establishment of branch
offices because it believes that the expenses and administrative burden of such
offices are generally unjustified. Moreover, in view of the availability of
modern data transmission technology, the Company has concluded that the critical
functions of credit evaluation and loan origination are best performed and
controlled on a centralized basis from its Houston facility. Accordingly, as the
marketing representative system has operated satisfactorily, the Company does
not plan to create branch offices in the future.
FINANCING PROGRAMS
The Company originates loans from three sources: (i) dealer indirect (the
"core program"), (ii) alliance referrals and (iii) consumer direct utilizing
the Internet and direct marketing. The core program generates approximately 85%
of the Company's current volume and consists of loans purchased directly from
dealerships in states not covered under the alliance agreement. Alliance
referrals represent approximately 7% of current originations and consist of
indirect loan applications which are declined by the Company's alliance partner,
National City Bank, N.A. and forwarded to the Company for consideration.
Consumer direct originations involve applications for credit obtained through
either direct marketing efforts or through the Company's Internet initiative
from consumers who are seeking to acquire a vehicle or refinance an existing
automobile loan.
Credit applications generated by each of the above sources are forwarded to
the Company's centralized credit department in Houston with decisions made based
on the Company's standard underwriting guidelines and credit scoring model. The
internal credit decision and acceptance process is essentially the same
regardless of the origination source. Third party originators have no credit
approval authority and are subject to individual contracts which specify the
obligations of the parties. Essentially all of the Company's receivables are
acquired on a non-recourse basis.
In addition to purchasing receivables from dealers under the core program
as they are originated or making loans directly to consumers, the Company has
also acquired seasoned receivables in bulk portfolio acquisitions or from other
third party originators and may continue to do so from time to time.
The Company had active dealership agreements with 2,007 dealers at April
30, 2000. These are non-exclusive agreements terminable at any time by either
party and they require no specific volume levels. The agreements with the core
program dealers contain customary representations and warranties concerning
title to the receivables sold, validity of the liens on the underlying vehicles,
compliance with applicable laws and related matters. Although the dealers are
obligated to repurchase receivables which do not conform to these warranties,
under the core program the dealers do not guarantee collectability or obligate
themselves to repurchase receivables solely because of payment default. The
receivables are purchased at par or at prices that may reflect a discount or
premium depending on the annual percentage rates of particular receivables and
the Company's assessment of relative credit risk. The pricing and credit terms
upon which the Company agrees to acquire receivables is governed by the
Company's credit policy and a credit score generated by the Company's
proprietary, empirical based scoring model.
CREDIT EVALUATION
GENERAL. In connection with the origination of a receivable for purchase
by the Company, the Company follows systematic procedures designed to eliminate
unacceptable risks. This involves a
3
three-step process whereby (i) the creditworthiness of the borrower and the
terms of the proposed transaction are evaluated and either approved, declined or
modified by the Company's credit verification department, (ii) the loan
documentation and collateralization is reviewed by the Company's funding
department, and (iii) additional collateral verification procedures and customer
interviews are conducted by the Company. During the course of this process, the
Company's credit verification and funding personnel coordinate closely with the
finance and insurance departments of the dealers tendering receivables or with
individuals to whom the Company lends directly. The Company has developed
various financing programs under which it approves loans that vary in pricing
and loan terms depending on the relative credit risk determined for each loan.
Credit or default risk is evaluated by the Company's loan officers in
conjunction with a proprietary, empirical based credit scoring model developed
based on the Company's 11 year database of non-prime lending results.
COLLATERAL VERIFICATION. As a condition to the purchase of each receivable
originated by the Company, the Company performs an individual audit evaluation
consisting of personal telephonic interviews with each vehicle purchaser to
verify the details of the credit application and to confirm that the material
terms of the sale conform to the purchaser's understanding of the transaction.
The Company will purchase a receivable under its core program only after receipt
and review of a satisfactory audit report.
SERVICING
The Company believes that competent, attentive and efficient loan servicing
is as important as sound credit evaluation for purposes of assuring the
integrity of a receivable.
Since its inception in 1989 until July, 1999, the Company had a servicing
relationship with General Electric Capital Corporation ("GECC") an affiliate
of General Electric Corporation. The division of GECC which serviced the
Company's receivables operates primarily as a servicer of automobile installment
loans and is one of the largest such servicers in the United States. The
Company's relationship with GECC was governed by a servicing agreement entered
into in October 1992 although the Company had done business with GECC under
previous agreements since 1989. Under the agreement, GECC was responsible for
all aspects of loan servicing and collections with the exception of the
disposition of repossessed vehicles, which was the responsibility of the
Company.
Servicing fees paid by the Company to GECC represented a variable cost that
increased in proportion to the volume of receivables carried. During its two
fiscal years ended April 30, 2000, the Company incurred servicing and related
fees in the amount of $2,350,741 and $434,572, respectively.
In July 1999, the Company elected to terminate the servicing agreement with
GECC in connection with the transfer of the servicing and collection activities
on the receivables to the Company's internal servicing and collection platform.
Under a separate agreement, GECC will continue to perform certain functions such
as forwarding to the Company any payments, information, documents and other
information received related to the Company's accounts.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify potential borrowers whom it regards as creditworthy
despite credit histories that limit their access to traditional sources of
consumer credit. In addition to personal credit qualifications, the Company
attempts to assure that the characteristics of the automobile sold and the terms
of the sale are likely to result in a consistently performing receivable. These
considerations include amount financed, monthly payments required, duration of
the loan, age of the automobile, mileage on the automobile and other factors.
CUSTOMER PROFILE. The Company's primary goal in credit evaluation is to
make loans to customers having stable personal situations, predictable incomes
and the ability and inclination to perform their obligations in a timely manner.
Many of the Company's customers are persons who
4
have experienced credit difficulties in the past by reason of illness, divorce,
job loss, reduction in pay or other adversities, but who appear to the Company
to have the capability and commitment to meet their obligations. Through its
credit evaluation process, the Company seeks to distinguish these persons from
those applicants who are chronically poor credit risks. Certain information
concerning the Company's obligors for the past two fiscal years (based on credit
information compiled at the time of the loan origination) is set forth in the
following table:
APRIL 30,
--------------------
1999 2000
--------- ---------
Average monthly gross income......... $ 4,020 $ 4,030
Average ratio of consumer debt to
gross income....................... 32% 33%
Average years in current
employment......................... 6 6
Average years in current residence... 5 5
Residence owned...................... 44% 42%
Residence rented..................... 52% 53%
Other residence arrangements(1)...... 4% 5%
- ------------
(1) Includes military personnel and persons residing with relatives.
PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the non prime market, the Company endeavors
to maintain a receivables portfolio having characteristics that, in its
judgment, reflect an optimal balance between achievable yield and acceptable
risk. The following table sets forth certain information concerning the
composition of the Company's portfolio as of the end of the past two fiscal
years:
APRIL 30,
----------------------
1999 2000
---------- ----------
New Vehicles:
Percentage of portfolio(1)...... 25% 23%
Number of receivables
outstanding.................... 3,968 4,052
Average amount at date of
acquisition.................... $ 17,027 $ 17,601
Average term (months) at date of
acquisition(2)................. 60 60
Average remaining term
(months)(2).................... 37 45
Average monthly payment......... $428 $471
Average annual percentage
rate........................... 17.3% 17.0%
Used Vehicles:
Percentage of portfolio(1)...... 75% 77%
Number of receivables
outstanding.................... 12,047 15,322
Average age of vehicle at date
of acquisition (years)......... 2.1 1.9
Average amount at date of
acquisition.................... $ 13,977 $ 14,665
Average term (months) at date of
acquisition(2)................. 55 57
Average remaining term
(months)(2).................... 40 46
Average monthly payment......... $373 $413
Average annual percentage
rate........................... 17.7% 17.6%
- ------------
(1) Calculated on the basis of number of receivables outstanding as of the date
indicated.
(2) Because the actual life of many receivables will differ from the stated term
by reason of prepayments and defaults, data reflecting the average stated
term of receivables included in a portfolio will not correspond with actual
average life.
FINANCING ARRANGEMENTS
GENERAL. At the time the Company acquires receivables, they are financed
by transferring them, at an amount equal to the outstanding principal balance,
to one of two wholly-owned special-purpose
5
financing subsidiaries, F.I.R.C, Inc. ("FIRC") or First Investors Auto Capital
Corporation ("FIACC"). FIRC maintains a $65 million revolving bank facility
with Bank of America, First Union National Bank and Wells Fargo Bank (Texas),
(the "FIRC credit facility"). FIACC maintains a $25 million commercial paper
warehouse facility with Variable Funding Capital Corporation ("VFCC"), a
commercial paper conduit administered by First Union National Bank (the "FIACC
commercial paper facility"). Together, these two facilities provide warehouse
financing for the initial purchase of receivables. The Company selects the
warehouse facility to be utilized for a specific funding based primarily upon
the remaining availability under the respective facilities. In addition, a
wholly-owned special-purpose financing subsidiary, First Investors Auto
Receivables Corporation ("FIARC") has a $135 million conduit finance facility
with Enterprise Funding Corporation ("Enterprise"), a commercial paper conduit
administered by Bank of America, (the "FIARC commercial paper facility") which
allows the Company to refinance borrowings under the FIRC credit facility in
order to maintain sufficient capacity to acquire new receivables. Together,
these warehouse credit facilities provide $225 million in financing capacity to
fund the purchase and long-term financing of receivables. When necessary, the
Company will transfer receivables from the warehouse credit facilities and issue
additional term notes.
FIRC CREDIT FACILITY. As designated receivables are originated by the
Company and transferred to FIRC, they are immediately pledged to a commercial
bank that serves as the collateral agent for the bank lenders. The FIRC credit
facility has a borrowing base that, subject to certain adjustments, permits FIRC
to draw advances up to the outstanding principal balance of qualified
receivables but not in excess of the present facility limit of $65 million.
Uninsured losses on receivables, or certain other events adversely affecting the
collectability of receivables, can result in their ineligibility for inclusion
in the borrowing base, and in the event that the Company's advances exceed the
borrowing base the Company must prepay the credit line until the imbalance is
corrected.
Under the FIRC credit facility the Company has three interest rate options:
(i) the Bank of America prime rate in effect from time to time, (ii) a rate
equal to .5% above the "LIBOR" rate (the average U.S. dollar deposit rate
prevailing from time to time in the London interbank market) for selected
advance terms, or (iii) any other short-term fixed interest rate agreed upon by
the Company and the lenders. The Company is also required to pay periodic
facility fees as well as an annual agency fee, and to maintain certain
collection reserves. This facility is secured by the pledge of all of the
receivables financed, as well as the related escrow accounts and all of the
capital stock of FIRC. Collections of principal and interest on the Company's
receivables are remitted directly to the collateral agent for application to the
payment of interest due on the credit facility and certain other charges, with
the balance of collections then being distributed to the Company.
The current term of the FIRC credit facility expires on September 30, 2000,
at which time the outstanding balance will be payable in full, subject to
certain notification provisions allowing the Company a period of six months in
order to endeavor to refinance the facility in the event of termination. The
term of this facility has been extended on ten occasions since its inception in
October, 1992. The Company is currently in discussions with its lenders
regarding the renewal and extension of this facility. Management considers its
relationship with the lenders under this facility to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the facility
was not renewed however, or if material changes were made to its terms and
conditions, it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. When a sufficient number of receivables
have been accumulated under the FIRC credit facility, they may be refinanced
under the FIARC commercial paper facility through a transfer of a group of
specified receivables from FIRC to FIARC. FIARC's purchase is funded through
borrowings under the commercial paper facility equal to 90% of the aggregate
principal balance of the receivables transferred. The remaining 10% of funds
required to repay borrowings under the FIARC credit facility are advanced by the
Company in the form of an equity contribution to FIARC. Enterprise funds the
advance to FIARC through the issuance, by an affiliate of Enterprise, of
commercial paper (indirectly secured by the receivables) to institutional or
public investors. The Company is not a guarantor of, or otherwise a party to,
such commercial paper.
6
At April 30, 2000, the maximum borrowings available under the commercial paper
facility was $135 million. The Company's interest cost is based on Enterprise's
commercial paper rates for specific maturities plus .30%. In addition, the
Company is required to pay periodic facility fees and other costs related to the
issuance of commercial paper.
As collections are received on the transferred receivables they are
remitted directly to a collection account maintained by the collateral agent for
the FIARC commercial paper facility. From that account, a portion of the
collected funds are distributed to Enterprise in an amount equal to the
principal reduction required to maintain the 90% advance rate and to pay
carrying costs and related expenses, with the balance released to the Company.
In addition to the 90% advance rate, FIARC must maintain a 1% cash reserve as
additional credit support for the facility.
In March 1999, the Company increased its commercial paper facility, with
Enterprise, which is credit enhanced by a surety bond issued by MBIA Insurance
Corporation from $105 million to $135 million. The new facility expires on
August 15, 2000. If the facility were terminated, no new receivables could be
transferred to FIARC from FIRC and the receivables financed under the commercial
paper facility would be allowed to amortize. The Company is currently in
discussions with its lenders regarding the renewal and extension of this
facility. Management considers its relationship with the lenders under this
facility to be satisfactory and has no reason to believe that this credit
facility will not be renewed. If the facility was not renewed however, or if
material changes were made to its terms and conditions, it could have a material
adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 2000, the maximum
borrowings available under the facility were $25 million. The Company's interest
cost is based on VFCC's commercial paper rates for specific maturities plus
.55%. In addition, the Company is required to pay periodic facility fees of .25%
on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
The current term of the facility expires on December 31, 2000. If the
facility was not extended, no new receivables could be transferred to FIACC and
the receivables pledged as collateral would be allowed to amortize. The Company
presently intends to seek an extension of this arrangement prior to its
expiration.
TERM NOTES. On January 24, 2000, the Company, through its indirect, wholly
owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174% asset-backed notes ("Notes").
The Notes are secured by a pool of automobile receivables totaling $174,968,641,
which were previously owned by FIRC, FIARC and FIACC. Proceeds from the
issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Note issuance and to fund a cash reserve account of 2% or
$3,499,373 which will serve as a portion of the credit enhancement for the
transaction. The Notes bear interest at 7.174% and require monthly principal
reductions sufficient to reduce the balance of the Notes to 96% of the
outstanding balance of the underlying receivables pool. The final maturity of
the Notes is February 15, 2006. As of April 30, 2000, the outstanding principal
balance on the Notes
7
was $151,104,279. A surety bond issued by MBIA Insurance Corporation provides
credit enhancement for the Note holders. Additional credit support is provided
by the cash reserve account, which equals 2% of the original balance of the
receivables pool and a 4% over-collateralization requirement. In the event that
certain asset quality covenants are not met, the reserve account target level
will increase to 6% of the then current principal balance of the receivables
pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC to finance the Company's acquisition of FISC. Contemporaneously with
the Company's purchase of FISC, FISC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by FISC as of the
acquisition date, (ii) FISC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by FISC, and (iii) certain other financial
assets, including charged-off accounts owned by FISC as of the acquisition date.
These assets, along with a $1 million cash reserve account funded at closing,
serve as the collateral for the bridge facility. The facility bears interest at
VFCC's commercial paper rate plus 2.35% and expires on July 31, 2000. Under the
terms of the facility, all cash collections from the acquired receivables or
cash distributions to the certificate holder under the securitizations are
applied to pay FISC a servicing fee in the amount of 3% on the outstanding
balance of all owned or managed receivables and then to pay interest on the
facility. Excess cash flow available after servicing fees and interest payments
are utilized to reduce the outstanding principal balance on the indebtedness. In
addition, one-third of the servicing fee paid to FISC is also utilized to reduce
principal outstanding on the indebtedness. The Company is currently negotiating
with First Union to refinance the acquisition facility over an extended term
sufficient to amortize the outstanding balance of the indebtedness through
collections of the underlying receivables and trust certificates. It is
anticipated that the permanent financing will consist of issuing various
tranches of notes, to be held by VFCC, which will contain distinct principal
amortization requirements and interest rates. The Company anticipates no
material change in the weighted average interest rate under the permanent
financing. It is anticipated, however, that a partnership will be created to
purchase FIFS, Acquisition assets and issue the notes. The partnership interests
will be held by the Company and First Union and will enable the partners to
share excess cash flow generated by the remaining assets. The amount of excess
cash to be received by First Union will vary depending upon the timing and
amount of such cash flows. To the extent that the facility is not finalized
prior to the expiration date, the Company intends to seek a short-term extension
to allow for the completion of the term financing. The Company has no reason to
believe that VFCC will not grant such an extension or that an agreement to
refinance the bridge loan will not be reached prior to the then final maturity
of the bridge facility. If the facility were not extended, the remaining
outstanding principal balance would be due at maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that is utilized for working capital and general corporate purposes.
Borrowings under this facility bear interest at the Company's option of (i) Bank
of America's prime lending rate, or (ii) a rate equal to 3.0% above the LIBOR
rate for the applicable interest period. In addition, the Company is also
required to pay periodic facility fees, as well as an annual agency fee. The
current expiration of the facility is September 30, 2000. If the lender elected
not to renew, any outstanding borrowings would be amortized over a one-year
period. The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under the
increased working capital facility.
8
LOAN COVENANTS. The documentation governing each of the Company's
financing arrangements contains numerous covenants relating to the Company's
business, the maintenance of credit enhancement insurance covering the
receivables (if applicable), the observance of certain financial covenants, the
avoidance of certain levels of delinquency experience, and other matters. The
breach of these covenants, if not cured within the time limits specified, could
precipitate events of default that might result in the acceleration of the FIRC
credit facility and working capital facility or the termination of the
commercial paper facilities. Through the operation of the collateral agency
arrangements described above, which are in the nature of a "lock-box" security
device covering the collection of principal and interest on almost all of the
Company's receivables, such a default could cause the immediate termination of
the Company's primary sources of liquidity. The Company is currently in
compliance with all covenants governing these financing arrangements.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is February 15, 2006.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81%; and, the second in the initial
notional amount of $24.9 million (Swap B) pursuant to which the Company's
interest rate is fixed at 5.50%. The notional amount outstanding under each swap
agreement amortizes based on an implied amortization of the hedged indebtedness.
Swap A has a final maturity of December 30, 2002 while Swap B matured on
February 20, 2000. The Company also purchased two interest rate caps which
protect the Company and the lender against any material increases in interest
rates which may adversely affect any outstanding indebtedness which is not fully
covered by the aggregate notional amount outstanding under the swaps. The first
cap agreement enables the Company to receive payments from the counterparty in
the event that the one-month commercial paper rate exceeds 4.81% on a notional
amount that increases initially and then amortizes based on the expected
difference between the outstanding notional amount under Swap A and the
underlying indebtedness. The interest rate cap expires December 20, 2002 and the
cost of the cap is amortized in interest expense for the period. The second cap
agreement enables the Company to receive payments from the counterparty in the
event that the one-month commercial paper rate exceeds 6% on a notional amount
that increases initially and then amortizes based on the expected difference
between the outstanding notional amount under Swap B and the underlying
indebtedness. The interest rate cap expires February 20, 2002 and the cost of
the cap is imbedded in the fixed rate applicable to Swap B.
9
CREDIT ENHANCEMENT -- FIRC CREDIT FACILITY. In order to obtain a lower
cost of funding, the Company has agreed under the FIRC credit facility to
maintain credit enhancement insurance covering all of its receivables pledged as
collateral under this facility. The facility lenders are named as additional
insureds under these policies. The coverages are obtained on each receivable at
the time it is purchased by the Company and the applicable premiums are prepaid
for the life of the receivable. Each receivable is covered by three separate
credit insurance policies, consisting of basic default insurance under a
standard auto loan protection policy (known as "ALPI" insurance) together with
certain supplemental coverages relating to physical damage and other risks.
These coverages are carried solely by the Company at its expense and neither the
vehicle purchasers nor the dealers are charged for the coverages and they are
usually unaware of their existence. The Company's ALPI insurance policy is
written by National Union Fire Insurance Company of Pittsburgh ("National
Union"), which is a wholly-owned subsidiary of American International Group. As
of April 30, 2000, National Union had been assigned a rating of A+ + by A.M.
Best Company, Inc.
The premiums that the Company paid during its past fiscal year for its
three credit enhancement insurance coverages, which consist primarily of the
basic ALPI insurance, represented approximately 3.9% of the principal amount of
the receivables acquired during the year. Aggregate premiums paid for ALPI
coverage alone during the three fiscal years ended April 30, 2000 were
$2,860,491, $3,537,416 and $5,344,975, respectively, and accounted for 3.8%,
3.2% and 3.8% of the aggregate principal balance of the receivables acquired
during such respective periods.
Prior to establishing its relationship with National Union in March 1994,
the Company's ALPI policy was provided by another third-party insurer. In April
1994 the Company organized First Investors Insurance Company (the "Insurance
Affiliate") under the captive insurance company laws of the State of Vermont.
The Insurance Affiliate is an indirect wholly-owned subsidiary of the Company
and is a party to a reinsurance agreement whereby the Insurance Affiliate
reinsures 100% of the risk under the Company's ALPI insurance policy. At the
time each receivable is insured by National Union, the risk is automatically
reinsured to its full extent and approximately 96% of the premium paid by the
Company to National Union with respect to such receivable is ceded to the
Insurance Affiliate. When a loss covered by the ALPI policy occurs, it is paid
by National Union after the claim is processed, and National Union is then
reimbursed in full by the Insurance Affiliate. As of April 30, 2000, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $18,550,243 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$5,501,351. In addition to the monthly premiums and liquidity reserves of the
Insurance Affiliate, a trust account is maintained by National Union to secure
the Insurance Affiliates obligations for losses it has reinsured.
The result of the foregoing reinsurance structure is that National Union,
as the "fronting" insurer under the captive arrangement, is unconditionally
obligated to the Company's credit facility lenders for all losses covered by the
ALPI policy and the Company, through its Insurance Affiliate, is obligated to
indemnify National Union for all such losses. As of April 30, 2000, the
Insurance Affiliate had capital and surplus of $851,656 and unencumbered cash
reserves of $2,738,198 in addition to the $1,386,328 trust account.
The ALPI coverage, as well as the Insurance Affiliates' liability under the
Reinsurance Agreement, remains in effect for each receivable that is pledged as
collateral under the warehouse credit facility. Once receivables are transferred
from FIRC to FIARC and financed under the commercial paper facility, ALPI
coverage and the Insurance Affiliate's liability under the Reinsurance Agreement
is cancelled with respect to the transferred receivables. Any unearned premium
associated with the transferred receivables is returned to the Company. The
Company believes the losses its Insurance Affiliate will be required to
indemnify will be less than the premiums ceded to it. However, there can be no
assurance that losses will not exceed the premiums ceded and the capital and
surplus of the Insurance Affiliate.
CREDIT ENHANCEMENT -- FIARC COMMERCIAL PAPER FACILITY. Prior to October
1996, the ALPI Policy, through the structure outlined above, served as credit
enhancement for both the bank warehouse credit facility and the commercial paper
facility. In October 1996, in connection with the
10
increase in the commercial paper facility to $105 million, the Company elected
to diversify its credit enhancement mechanisms, obtaining a surety bond from
MBIA Insurance Corporation to enhance the commercial paper facility and
retaining the ALPI Policy to enhance the FIRC warehouse facility. The surety
bond provides payment of principal and interest to Enterprise in the event of a
payment default by FIARC. MBIA is paid a surety premium equal to 0.35% per annum
on the average outstanding borrowings under the facility. The surety bond was
issued for an initial term of two years and has been extended to August 15,
2000. Termination of the surety bond would result in a default under the
commercial paper facility. The Company presently intends to seek an extension of
this arrangement in conjunction with the facility renewal.
CREDIT ENHANCEMENT -- FIACC COMMERCIAL PAPER FACILITY. Under the structure
of the FIACC commercial paper facility, no third-party credit insurance or
surety bond is required. Credit enhancement is provided in the form of the 88%
advance rate and 2% cash reserve requirement.
CREDIT ENHANCEMENT -- TERM NOTES. The Term Notes issued in January 2000
are enhanced by a surety bond issued by MBIA Insurance Corporation. The surety
bond provides payment of principal and interest to the noteholders in the event
of payment default by the 2000-A Trust. MBIA is paid a surety premium equal to
0.35% per annum on the outstanding balance of the Term Notes. The surety bond
was issued for the term of the underlying notes, which mature on February 15,
2006.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. The allowance for credit losses of
$2,133,994 as of April 30, 2000 and $1,529,651 as of April 30, 1999 as a
percentage of Receivables Held for Investment of $231,696,539 as of April 30,
2000 and $179,807,957 as of April 30, 1999 was .9% at April 30, 2000 and April
30, 1999.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of April 30, 2000 and 1999, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 17.3% and 20.6%, respectively. The nonaccretable portion
represents the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows.
The following table sets forth certain information regarding the Company's
delinquency and charge-off experience over its last two fiscal years (dollars in
thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
----------------------------------------
1999 2000
-------------------- -----------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT
-------- --------- -------- ------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days............... 359 $ 4,554 469 $5,308
60 - 89 days............... 50 621 157 1,778
90 days or more............ 67 963 162 1,799
-------- --------- -------- ------
Total delinquencies.................. 476 $ 6,138 788 $8,885
======== ========= ======== ======
Total delinquencies as a percentage
of outstanding receivables......... 2.8% 2.4% 4.1% 3.8%
Net charge-offs as a percentage of
average receivables outstanding
during the period.................. 2.8% 2.8%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage of outstanding receivables for the 1999 period are based on gross
receivables balances, which include principal outstanding plus unearned
interest income.
11
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Securitized Receivables was 8.7% and
3.4% as of April 30, 2000, and 1999, respectively.
The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Company personnel (described above under "Credit
Evaluation") and attentive servicing of receivables. In addition, based on its
experience, the Company believes that delinquency risk can be reduced to some
degree by more conservative loan structures which limit loan terms and
loan-to-value ratios and by managing the composition of its portfolio to include
a relatively large proportion of receivables arising from the sale of new or
late-model used cars. These vehicles are less likely to experience mechanical
problems during the initial 24 months of the loan (which is the period of
highest delinquency risk) and the purchasers of such vehicles appear to have a
relatively higher commitment to loan performance than the purchasers of older
used automobiles. Therefore, the Company (unlike many of its competitors in the
sub-prime market) concentrates on financing new and late-model used cars to the
extent practicable. In view of the popularity in recent years of new automobile
leasing programs sponsored by manufacturers and franchised dealers, the Company
believes that large numbers of late-model used automobiles will be available for
sale over the near term as these vehicles come "off lease". As of April 30,
2000, approximately 23% of the receivables that had been acquired by the Company
related to new vehicles and approximately 77% of the receivables arose from the
sale of used vehicles. Of the Company's Receivables Held for Investment at that
date, approximately 77% originated from the sale of vehicles that were either
new or no more than two model years old at the time of sale.
SECURITIZATION
Many finance companies similar to the Company engage in "securitization"
transactions whereby receivables are pooled and conveyed to a trust or other
special purpose entity, with interests in the entity being sold to investors. As
the pooled receivables amortize, finance charge collections are passed through
to the investors at a specified rate for the life of the pool and an interest in
collections exceeding the specified rate is retained by the sponsoring finance
company. For accounting purposes, the sponsor often recognizes as revenue the
discounted present value of this excess interest as estimated over the life of
the pool. This revenue, or "gain on sale", is recognized for the period in
which the transaction occurs.
The Company does not use off-balance sheet financing structures for
receivables originated by the Company and therefore, recognizes interest income
on the accrual method over the life of the receivables rather than recording
gains when those receivables are sold. The Company does not currently intend to
engage in off-balance sheet securitization transactions resulting in gains on
sale of receivables.
In connection with the acquisition of FISC in October 1998, the Company
obtained interests in two securitizations of automobile receivables (as further
described in Note 2 in the Notes to Consolidated Financial Statements).
EMPLOYEES
The Company had 177 employees as of April 30, 2000, including 61 located at
its headquarters in Houston, 107 located at its loan servicing center in Atlanta
and 9 regional marketing representatives. The Company's employees are covered by
group health insurance, but the Company has no pension, profit-sharing or bonus
plans or other material benefit programs. Effective May 1, 1994, the Company
adopted a participant-directed 401(k) retirement plan for its employees. An
employee becomes eligible to participate in the plan immediately upon
employment. The Company pays the administrative expenses of the 401(k) plan. The
Company also matches a percentage of each participant's voluntary contributions
up to a maximum voluntary contribution of 3% of the participant's compensation.
In fiscal year 2000, the Company made matching contributions to the 401(k) plan
of $31,954. Prior to fiscal year 2000, no matching contributions were made. The
Company has no collective bargaining agreements and considers its employee
relations to be satisfactory.
12
INFORMATION SYSTEMS
The Company utilizes advanced information management systems including a
fully integrated software program designed to expedite each element in the
receivables acquisition process, including the entry and verification of credit
application data, credit analysis and the communication of credit decisions to
originating dealers. The Company also utilizes a number of analytical tools in
managing credit risk including an empirical scoring model, trend and
discriminant analysis and pricing models which are designed to optimize yield
given an expected default rate.
The servicing and collection platform, acquired by the Company through the
FISC acquisition, is provided by a software package and the system is designed
to provide support for all collections and servicing activities including
billing, collection process management, account activity history, repossession
management, loan accounting information and payment posting. The Company also
utilizes an auto dialer software which interfaces with the system and serves as
an efficiency tool in the collection process.
Both the front-end and back-end platforms are highly compatible from an
integration standpoint with all loans boarded electronically following funding
from the origination system to the collection system.
In addition to its two primary operating systems, the Company also utilizes
third-party software in its accounting, human resources, and data management
functions, all of which are products well known in the marketplace.
The Company's information technology group is headquartered in Atlanta with
additional personnel located in Houston. Primary responsibilities include
network administration, hardware and software maintenance and reporting. The
Company believes that its data processing and information management capacity is
sufficient to accommodate significantly increased volumes of receivables without
material additional capital expenditures for this purpose. See Management's
Discussion and Analysis -- Year 2000 Issue.
COMPETITION
The business of direct and indirect lending for the purchase of new and
used automobiles is intensely competitive in the United States. Such financing
is provided by commercial banks, thrifts, credit unions, the large captive
finance companies affiliated with automobile manufacturers, and many independent
finance companies such as the Company. Many of these competitors and potential
competitors have significantly greater financial resources than the Company and,
particularly in the case of the captive finance companies, enjoy ready access to
large numbers of dealers. The Company believes that a number of factors
including historical market orientations, traditional risk-aversion preferences
and in some cases regulatory constraints, have discouraged many of these
entities from entering the non-prime sector of the market where the Company
operates. However, as competition intensifies, these well-capitalized concerns
could enter the market, and the Company could find itself at a competitive
disadvantage.
The non-prime market in which the Company operates also consists of a
number of both large and mid-sized independent finance companies doing business
on a local, regional or national basis including some which are affiliated with
captive finance companies or large insurance groups. Reliable data regarding the
number of such companies and their market shares is unavailable; however, the
market is highly fragmented and intensely competitive.
REGULATION
The operations of the Company are subject to regulation, supervision and
licensing under various federal and state laws and regulations. State consumer
protection laws, motor vehicle installment sales acts and usury laws impose
ceilings on permissible finance charges, require licensing of finance companies
as consumer lenders, and prescribe many of the substantive provisions of the
retail installment sales contracts that the Company purchases. Federal consumer
credit statutes and regulations primarily require disclosure of credit terms in
consumer finance transactions, although rules adopted by the Federal Trade
Commission (including the so-called holder-in-due-course rule)
13
also affect the substantive rights and remedies of finance companies purchasing
automobile installment sales contracts.
The Company's business requires it to hold consumer lending licenses issued
by individual states, under which the Company is subject to periodic
examinations. State consumer credit regulatory authorities generally enjoy broad
discretion in the revocation and renewal of such licenses and the loss of one or
more of these could adversely affect the Company's operations.
In addition to specific licensing and consumer regulations applicable to
the Company's business, the Company's ability to enforce and collect its
receivables is limited by several laws of general application including the Fair
Debt Collection Practices Act, Federal bankruptcy laws and the Uniform
Commercial Codes of the various states. These and similar statutes govern the
procedures, and in many instances limit the rights of creditors, in connection
with asserting defaults, repossessing and selling collateral, realizing on the
proceeds thereof, and enforcing deficiencies.
The Company's insurance subsidiary is subject to regulation by the
Department of Banking, Insurance and Securities of the State of Vermont. The
plan of operation of the subsidiary, described above under "Financing
Arrangements" and "Credit Enhancement", was approved by the Department and
any material changes in those operations would likewise require the Department's
approval. The subsidiary is subject to minimum capital and surplus requirements,
restrictions on dividend payments, annual reporting, and periodic examination
requirements.
The Company believes that its operations comply in all material respects
with the requirements of laws and regulations applicable to its business. These
requirements, and the interpretations thereof, change from time to time and are
not uniform among the states in which the Company operates. The Company retains
a specialized consumer credit legal counsel that engages and supervises local
legal counsel in each state where the Company does business, to monitor
compliance on an ongoing basis and to respond to changes in applicable
requirements as they occur.
ITEM 2. PROPERTIES
The Company's principal physical properties are its data processing and
communications equipment and furniture and fixtures, all of which the Company
believes to be adequate for its intended use.
The Company's offices in suburban Houston consist of approximately 11,752
square feet on the first and seventh floor of an eight-story office building.
This space is held under a lease requiring average annual rentals of
approximately $165,000 and expiring on February 28, 2003, with an option to
renew for five years at the market rate then prevailing.
The Company's offices in suburban Atlanta consist of approximately 30,747
square feet on the sixth and seventh floor of an eight-story office building.
This space is held under a lease requiring average annual rentals of
approximately $575,000 and expiring on December 31, 2001, with an early
termination option by either party any time on or after June 30, 2000. The
Company did exercise this early termination option and entered into a new lease
of approximately 27,467 square feet on the third and fourth floor of a
four-story office building. The space is held under a lease requiring average
annual rentals of approximately $557,000 and expiring on June 30, 2007, with an
option to renew for two consecutive five-year periods at the market rate then
prevailing.
The Company owns no real property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is currently not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders
during the fourth quarter of the past fiscal year.
14
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on the Nasdaq National Market
System, under the symbol FIFS since the completion of the Company's initial
public offering on October 4, 1995. High and low bid prices of the common stock
are set forth below for the periods indicated.
THREE MONTHS ENDED HIGH LOW
------------------ ------ -------
April 30, 2000....................... 5 1/2 4 1/2
January 31, 2000..................... 6 1/32 4 3/4
October 31, 1999..................... 6 7/16 5
July 31, 1999........................ 6 1/2 5 26/128
April 30, 1999....................... 6 9/16 5 3/8
January 31, 1999..................... 5 3/4 4 3/4
October 31, 1998..................... 6 3/8 3 3/4
July 31, 1998........................ 7 13/16 5 7/8
As of June 30, 2000, there were approximately 40 shareholders of record of
the Company's common stock. The number of beneficial owners is unknown to the
Company at this time.
The Company has not declared or paid any cash dividends on its common stock
since its inception. The payment of cash dividends in the future will depend on
the Company's earnings, financial condition and capital needs and on other
factors deemed pertinent by the Company's Board of Directors. It is currently
the policy of the Board of Directors to retain earnings to finance the operation
and expansion of the Company's business and the Company has no plans to pay any
cash dividends on the common stock in the foreseeable future.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 2000, has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with such statements (dollars in thousands, except share data).
YEARS ENDED APRIL 30,
-----------------------------------------------------
1996 1997 1998 1999(4) 2000
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS:
Interest income.................. $ 14,144 $ 18,151 $ 20,049 $ 31,076 $ 40,276
Interest expense................. 5,245 6,706 7,834 12,782 16,510
--------- --------- --------- --------- ---------
Net interest income......... 8,899 11,445 12,215 18,294 23,766
Provision for credit losses(1)... 704 2,520 3,901 4,661 6,414
--------- --------- --------- --------- ---------
Net interest income after
provision for credit
losses.................... 8,195 8,925 8,314 13,633 17,352
--------- --------- --------- --------- ---------
Servicing........................ -- -- -- 1,200 1,293
Late fees and other.............. 587 693 617 1,594 2,728
--------- --------- --------- --------- ---------
Total other income.......... 587 693 617 2,794 4,021
--------- --------- --------- --------- ---------
Servicing fees................... 1,126 1,536 1,838 2,350 435
Salaries and benefits............ 1,900 2,351 2,639 6,030 9,413
Other interest expense........... -- -- 111 540 1,153
Other............................ 2,002 2,356 2,415 4,354 5,705
--------- --------- --------- --------- ---------
Total operating expenses.... 5,028 6,243 7,003 13,274 16,706
--------- --------- --------- --------- ---------
Income before provision for
income taxes.................. 3,754 3,375 1,928 3,153 4,667
Provision for income taxes....... 1,295 1,232 704 1,151 1,703
--------- --------- --------- --------- ---------
Net income....................... $ 2,459 $ 2,143 $ 1,224 $ 2,002 $ 2,964
--------- --------- --------- --------- ---------
Preferred stock dividends(2)..... (50) -- -- -- --
--------- --------- --------- --------- ---------
Net income allocable to common
shareholders before redemption
of preferred stock............ 2,409 2,143 1,224 2,002 2,964
Premium paid upon redemption of
preferred stock............... (160) -- -- -- --
--------- --------- --------- --------- ---------
Net income allocable to common
shareholders after redemption
of preferred stock............ $ 2,249 $ 2,143 $ 1,224 $ 2,002 $ 2,964
========= ========= ========= ========= =========
Basic and Diluted net income per
common share before redemption
of preferred stock(3)......... $ 0.51 $ 0.39 $ 0.22 $ 0.36 $ 0.53
========= ========= ========= ========= =========
Basic and Diluted net income per
common share after redemption
of preferred stock(3)......... $ 0.47 $ 0.39 $ 0.22 $ 0.36 $ 0.53
========= ========= ========= ========= =========
AS OF APRIL 30,
----------------------------------------------------------
1996 1997 1998 1999(4) 2000
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Receivables Held for Investment,
net........................... $ 96,263 $ 118,299 $ 139,599 $ 183,319 $ 235,955
Receivables Acquired for
Investment, net............... -- -- -- 41,024 21,888
Investment in Trust
Certificates.................. -- -- -- 10,755 5,849
Other assets..................... 19,397 21,444 21,654 37,711 39,567
---------- ---------- ---------- ---------- ----------
Total assets................ $ 115,660 $ 139,743 $ 161,253 $ 272,809 $ 303,259
========== ========== ========== ========== ==========
Debt:
Term Notes.................. $ -- $ -- $ -- $ -- $ 151,104
Acquisition term facility... -- -- -- 55,737 26,212
Warehouse credit
facilities................ 91,049 112,894 130,813 176,549 77,545
Working capital facility.... -- -- 2,500 7,235 13,300
Other liabilities................ 2,818 2,913 2,780 6,126 4,972
Shareholders' equity............. 21,793 23,936 25,160 27,162 30,126
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity...... $ 115,660 $ 139,743 $ 161,253 $ 272,809 $ 303,259
========== ========== ========== ========== ==========
(FOOTNOTES ON FOLLOWING PAGE)
16
- ------------
(1) The Company purchases credit enhancement insurance from third-party insurers
which covers the risk of loss upon default and certain other risks. Until
March 1994, such insurance and dealer reserves absorbed substantially all
credit losses. In May 1994, the Company established a captive insurance
subsidiary to reinsure certain risks under the credit enhancement insurance
coverage for all receivables acquired in March 1994 and thereafter.
Beginning in October 1996, the Company limited the extent of the receivables
covered by credit enhancement insurance to those receivables financed under
the FIRC credit facility. Receivables financed under the other credit
facilities are uninsured. Accordingly, the Company is exposed to credit
losses on receivables which are either uninsured or reinsured by its captive
insurance subsidiary and must provide an allowance for such losses.
(2) The nonvoting cumulative preferred stock had a par value of $1.00 per share
and was entitled to receive cumulative cash dividends of $.07 per share on
May 31, 1995, and on the last day of each succeeding November and May
thereafter. The nonvoting cumulative preferred stock was redeemable at the
option of the Company, either in whole or in part, upon receiving written
consent of the holders of at least 65 % of the shares. In May 1995, the
Board of Directors approved the redemption of the nonvoting cumulative
preferred stock for $960,000 plus dividends accruing through the date of
redemption. The premium of $160,000 over the stated redemption price was
consideration for the holders' consent for the redemption and was recorded
as a reduction of retained earnings. Proceeds from the offering of Common
Stock were used to redeem all of the outstanding nonvoting cumulative
preferred stock.
(3) Basic and Diluted net income per common share amounts are calculated based
on net income available to common shareholders after preferred dividends, if
any, and in the case of the year ended April 30, 1996, the premium paid to
the holders of the 1993 preferred stock upon its redemption divided by the
weighted average number of shares outstanding, adjusted for the 3-for-1
stock split.
(4) On October 2, 1998, the Company completed the acquisition of FISC. FISC was
engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables
for investment as well as on a portfolio of receivables acquired and sold
pursuant to two asset securitizations. The transaction was treated as a
purchase for accounting purposes and results of operations are included in
the Company's consolidated financial statements beginning on October 2,
1998.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Net income for the year ended April 30, 2000, was $2,963,535 or $0.53 per
common share. Net income for the year ended April 30, 1999, was $2,001,842 or
$0.36 per common share. This represents an increase of 48% in net income and 47%
in earnings per common share.
OVERVIEW
The Company is a consumer finance company engaged in both the purchase of
receivables originated by franchised automobile dealers and originating loans
directly to consumers in connection with the sale of new and late-model used
vehicles. The Company specializes in lending to consumers with impaired credit
profiles. At April 30, 2000, the Company had a network of 2,007 franchised
dealers in 26 states from which it regularly purchases receivables at the time
of origination. The Company also maintained alliance partnerships with a large
regional bank and an Internet market firm from which it receives referral
applications for credit consideration. While the Company intends to continue to
geographically diversify its receivables portfolio, approximately 29% of
Receivables Held for Investment at April 30, 2000 represent receivables acquired
from dealers or originated to consumers located in Texas.
From its inception in 1989 through October 1992, the business strategy of
the Company was to purchase, pool and sell receivables to third-party investors
and to recognize gains associated with those sales on a current basis. In
November 1992, the Company decided that it could achieve a more stable and
predictable income stream through acquiring and retaining receivables for net
interest income recognized over the life of the receivables. The primary element
in this strategy is access to institutional financing in sufficient magnitudes
and at rates enabling the Company to purchase significant volumes of receivables
and retain them at a funding cost allowing an adequate net interest margin
between portfolio yield and cost of funds. Through the utilization of flexible
secured credit facilities and comprehensive credit insurance, the Company has
been able to access financing on terms permitting it to implement this strategy
and to pursue it successfully through the present time. Management believes that
continued pursuit of this strategy will enable the Company to sustain its growth
and maintain a stable earnings stream on a relatively conservative basis.
Therefore, since November 1992, the primary source of the Company's
revenues has been interest income from receivables retained as investments,
while its primary cost has been interest expense arising from the financing of
the Company's investment in such receivables. The profitability of the Company
during this period has been determined by the growth of the receivables
portfolio and effective management of net interest income and fixed operating
expenses. In addition, on October 2, 1998, the Company completed the acquisition
of First Investors Financial Servicing Corporation ("FISC") formally known as
Auto Lenders Acceptance Corporation from Fortis, Inc. Headquartered in Atlanta,
Georgia, FISC was engaged in essentially the same business as the Company and
additionally performs servicing and collection activities on a portfolio of
receivables acquired for investment as well as on a portfolio of receivables
acquired and sold pursuant to two asset securitizations. As a result of the
acquisition, the Company increased the total dollar value on its balance sheet
of receivables, acquired an interest in certain trust certificates and interest
strips related to the asset securitizations and acquired certain servicing
rights along with furniture, fixtures, equipment and technology to perform the
servicing and collection functions for the portfolio of receivables under
management. FISC performs servicing and collection functions on a $289.1 million
portfolio of loans, including loans serviced for others, originated in 31
states.
18
The following table summarizes the Company's growth in receivables and net
interest income for the last two fiscal years (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED APRIL 30,
------------------------
1999 2000
----------- -----------
Receivables Held for Investment:
Number.......................... 16,015 19,374
Principal balance............... $ 179,808 $ 231,697
Average principal balance of
receivables outstanding during
the twelve-month period....... $ 155,431 $ 208,160
Average principal balance of
receivables outstanding during
the three-month period........ $ 172,287 $ 224,286
Receivables Acquired for Investment:
Number.......................... 4,871 3,375
Principal balance............... $ 48,853 $ 28,097
Securitized Receivables(1):
Number.......................... 6,461 4,281
Principal balance............... $ 56,614 $ 29,337
Total Managed Receivables Portfolio:
Number.......................... 27,347 27,030
Principal Balance............... $ 285,275 $ 289,131
- ------------
(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables.
YEARS ENDED APRIL 30,
------------------------
1999 2000
----------- -----------
Interest income(1):
Receivables Held for
Investment.................... $ 25,147 $ 33,333
Receivables Acquired for
Investment and Investment in
Trust Certificates............ 5,929 6,943
----------- -----------
31,076 40,276
Interest expense:
Receivables Held for
Investment(2)................. 9,807 13,573
Receivables Acquired for
Investment and Investment in
Trust Certificates............ 2,975 2,937
----------- -----------
12,782 16,510
----------- -----------
Net interest income............. $ 18,294 $ 23,766
=========== ===========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Includes facility fees and fees on the unused portion of the credit
facilities.
19
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
Receivables Held for Investment and the Company's average cost of debt utilized
to fund these receivables, and its net interest margin (averages based on
month-end balances):
YEARS ENDED
APRIL 30,
--------------------
1999 2000
--------- ---------
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1)......... 16.2% 16.0%
Average cost of debt(2)......... 6.5 6.7
--------- ---------
Net interest spread(3).......... 9.7% 9.3%
========= =========
Net interest margin(4).......... 9.9% 9.5%
========= =========
- ------------
(1) Represents interest income as a percentage of average Receivables Held for
Investment outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on Receivables Held for Investment less average cost of
debt.
(4) Represents net interest income as a percentage of average Receivables Held
for Investment outstanding.
The Company intends to increase its acquisition of receivables by expanding
its dealer base in existing states served, by expanding its dealer base into new
states, by generating additional loan volume through alliances with major banks
and by increasing direct to consumer lending. To the extent that the Company's
receivables acquisitions exceed the extinguishment of receivables through
principal payments, payoffs or defaults, its receivables portfolio and interest
income will continue to increase. The following table summarizes the activity in
the Company's receivables portfolio (dollars in thousands):
YEARS ENDED
APRIL 30,
------------------------
1999 2000
----------- -----------
Receivables Held for Investment:
Principal balance, beginning of
period......................... $ 136,446 $ 179,808
Acquisitions.................... 111,060 137,204
Principal payments and
payoffs........................ (55,509) (73,500)
Defaults prior to liquidations
and recoveries (1)............. (12,189) (11,815)
----------- -----------
Principal balance, end of
period......................... $ 179,808 $ 231,697
=========== ===========
- ------------
(1) Represents gross receivable balances for fiscal 1999, which include
principal outstanding plus unearned interest income.
Receivables may be paid earlier than their contractual term, primarily due
to prepayments and liquidation of collateral after defaults. See "Delinquency
and Credit Loss Experience".
ANALYSIS OF NET INTEREST INCOME
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased to $23.8 million
in 2000, an increase of 30% and 95% when compared to amounts reported in 1999
and 1998. The increase resulted primarily from the growth of the receivables
held for investment and contributions to interest income from the receivables
acquired for investment and trust certificates.
20
The amount of net interest income is the result of the relationship between
the average principal amount of receivables held and average rate earned thereon
and the average principal amount of debt incurred to finance such receivables
and the average rates paid thereon. Changes in the principal amount and rate
components associated with the receivables and debt can be segregated to analyze
the periodic changes in net interest income. The following table analyzes the
changes attributable to the principal amount and rate components of net interest
income (dollars in thousands):
YEARS ENDED APRIL 30,
-------------------------------------------------------------------
1998 TO 1999 1999 TO 2000
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------- -------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- ---------- --------- ------- ----------
Receivables Held for Investment:
Interest income................. $ 4,994 $ 104 $5,098 $ 8,531 $ (345) $8,186
Interest expense................ 1,989 (16) 1,973 3,278 488 3,766
--------- ------- ---------- --------- ------- ----------
Net interest income............. $ 3,005 $ 120 $3,125 $ 5,253 $ (833) $4,420
========= ======= ========== ========= ======= ==========
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 2000, COMPARED TO FISCAL YEAR ENDED APRIL 30,
1999 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 2000 increased by $9,200, or 30% over
1999, primarily as a result of an increase in the average principal balance of
Receivables Held for Investment of 34% from 1999 to 2000 and the increase in
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates of 17%. The increase in interest income on Receivables Acquired for
Investment and Investment in Trust Certificates is attributable to a full
twelve-month period for fiscal 2000 as compared to a seven-month period for
fiscal 1999 from the FISC acquisition in October 1998. This is offset by a 41%
decline in the average principal balances of the Receivables Acquired for
Investment and Investment in Trust Certificates for 2000 as compared to 1999.
INTEREST EXPENSE. Interest expense for 2000 increased by $3,728, or 29%,
over 1999. An increase in the weighted average borrowings outstandings under
credit and term facilities of 33% resulted in $3,766 of this difference. The
remaining difference is primarily due to a 33% decrease in the average
outstanding borrowing for the FISC acquisition facility. This decrease is offset
by a full twelve-month period for the acquisition facility in fiscal 2000
compared to seven months for fiscal 1999. Lastly, the weighted average cost of
debt to fund Receivables Held for Investment increased to 6.7% for the year
ended April 30, 2000 compared to 6.5% for the year ended April 30, 1999.
NET INTEREST INCOME. Net interest income increased by $5,472 in 2000, an
increase of 30% over 1999. The increase resulted primarily from the growth in
Receivables Held for Investment and the contributions to interest income from
the Receivables Acquired for Investment and Investment in Trust Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2000
increased by $1,753, or 38%, over 1999, as a result in the growth of Receivables
Held for Investment and the maintenance of an allowance for credit losses of .9%
of outstanding receivables. Net charge-offs increased from $4,330 in fiscal 1999
to $5,810 in fiscal 2000, also as a result of the increase in Receivables Held
for Investment.
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding principal balance of the securitized
receivables plus reimbursement for certain costs and expenses incurred as a
result of its collection
21
activities. Servicing income increased 8% for fiscal 2000 as compared to fiscal
1999. This increase results from a full twelve months activity for 2000 compared
to the seven months from the acquisition date of October 1998 to April 1999 for
fiscal 1999. This increase is offset by a 46% decline in the average outstanding
principal balance of the securitized loans during 2000 as compared to 1999.
LATE FEES AND OTHER INCOME. Late fees and other income primarily
represents late fees collected from customers on past due accounts, collections
on certain FISC assets which had previously been charged off by the Company, and
interest income earned on short-term marketable securities and money market
instruments. Late fees and other income increased to $2,728 in 2000 from $1,594
in 1999 mainly attributable to the growth in Receivables Held for Investment and
an increased emphasis on collection of late fees since the Company began
servicing its own loans in July 1999.
SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the Company
to General Electric Credit Corporation with which the Company had a servicing
relationship on its Receivables Held for Investment. Effective July 6, 1999, the
Company began servicing its portfolio in-house and terminated the General
Electric arrangement. Thus, beginning in July 1999, the Company incurred no
third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $6,030
in 1999 to $9,413 in 2000, an increase of $3,383 or 56%. The increase is a
result of increasing staff levels to support an increase in the Company's
receivables portfolio, an expansion of its geographic territory and an increase
in staffing levels as a result of the acquisition of FISC and the resulting
assumption of loan servicing activities. Contributing to the increase is the
inclusion of a full twelve-month period for FISC in fiscal 2000 as compared to
only seven months for fiscal 1999. As of April 30, 2000, the Company had 177
employees compared to 148 as of April 30, 1999.
OTHER INTEREST EXPENSE. Other interest expense increased $613, or 114%,
for the year ended April 30, 2000 over the year ended April 30, 1999. The
increase is related to an increase in the average borrowings outstanding under
the working capital facility of 130% and an increase in the average borrowing
rate.
OTHER EXPENSES. Other expenses increased 31% in fiscal 2000. The increase
is primarily due to including a full twelve-month period for FISC in fiscal 2000
compared to only seven months in 1999.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 2000, income before
provision for income taxes increased by $1,514, or 48% from 1999 as a result of
the positive factors discussed above.
FISCAL YEAR ENDED APRIL 30, 1999, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1998
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1999 increased by $11,027, or 55%,
over 1998, primarily as a result of an increase in the average principal balance
of Receivables Held for Investment of 25% from 1998 to 1999 and the contribution
to interest income made by the Receivables Acquired for Investment and the Trust
Certificates acquired pursuant to the FISC acquisition. In addition, the
interest income was positively influenced for the year ended April 30, 1999, by
a .1% increase in effective yield. Management attributes the increase in yield
to increases in the interest rates charged on its financing programs in the
fourth quarter and to a decrease in the percentage of Receivables Held for
Investment on which rate participation is paid to dealers as incentive to
utilize the Company's financing programs.
INTEREST EXPENSE. Interest expense for 1999 increased by $4,948, or 63%,
over 1998. An increase in the weighted average borrowings outstanding under
secured credit facilities of 25% resulted in $1,989 of this difference. Interest
expense associated with the $75 million acquisition facility also contributed to
the increase. Weighted average cost of debt for secured credit facilities
remained flat.
22
NET INTEREST INCOME. Net interest income increased by $6,079 in 1999, an
increase of 50% over 1998. The increase resulted primarily from the growth in
Receivables Held for Investment and contributions to interest income from the
Receivables Acquired for Investment and Trust Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1999
increased by $760, or 19%, over 1998, as a result of an increase in net
charge-offs from $3,884 in fiscal year 1998 to $4,330 in fiscal year 1999. The
increase in charge-offs is attributable to the growth in the Receivables Held
for Investment, an increase in the number of loans that are seasoned nine to 24
months, which is generally where the highest percentage of repossessions occur
and lower recovery amounts on the sale of the vehicle collateral.
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding balance of the principal balance of
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Under the terms of the
securitizations, the servicer may be removed upon breach of its obligations
under the servicing agreements, the deterioration of the underlying receivables
portfolios in violation of certain performance triggers or the deteriorating
financial condition of the servicer. Servicing income was $1,200 for the year
1999.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $1,594
in 1999 from $617 in 1998 which primarily represents late fees collected from
customers on past due accounts, collections on certain FISC assets which had
previously been charged-off by the Company and interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased $513, or 28%,
from 1998 to 1999. Servicing fees consist primarily of fees paid by the Company
to General Electric Credit Corporation with which the Company has a servicing
relationship on its Receivables Held for Investment. Since these costs vary with
the volume of receivables serviced, this increase was primarily attributable to
the increase in the number of receivables serviced in the Receivables Held for
Investment, which increased by 3,499, or 28%, from 1998 to 1999.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $2,639
in 1998 to $6,030 in 1999, an increase of $3,391 or 128%. The increase is a
result of expansion of the Company's operation as a result of an increase in its
receivables portfolio, expansion of its geographic territory and an increase in
staffing levels as a result of the acquisition of FISC. As of April 30, 1999,
the Company had 148 employees as compared to 66 as of April 30, 1998.
OTHER INTEREST EXPENSE. Other interest expense increased $429 for the year
ended April 30, 1999 over the year ended April 30, 1998. The increase was
primarily due to an increase in the average borrowings outstanding under the
working capital facility of $375,000 in fiscal 1998 to $4,681,667 in fiscal
1999.
OTHER EXPENSES. Other expenses for 1999 increased 80% from 1998. The
increase is a result of an expansion of the Company's asset base and an increase
in the volume of applications for credit processed by the Company in the 1999
period versus the comparable period and operating costs associated with the
acquired company which were not applicable to the prior year period.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1999, income before
provision for income taxes increased by $1,224, or 63%, from 1998 as a result of
the positive factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from dealers
and fund required reserve accounts, (ii) amounts necessary to fund premiums for
credit enhancement insurance or other credit enhancement required by the
Company's financing programs, and (iii) amounts necessary to fund costs to
retain receivables, primarily interest
23
expense and servicing fees. The Company also requires a significant amount of
cash flow for working capital to fund fixed operating expenses, primarily
salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables. The Company paid $141.3 million for receivables acquired to be held
for investment for 2000 compared to $114.3 million in 1999.
The Company funds the purchase price of receivables through a combination
of three warehouse facilities. The FIRC credit facility generally permits the
Company to borrow up to the outstanding principal balance of qualified
receivables, but not to exceed $65 million. The FIACC commercial paper facility
generally allows the Company to borrow up to 88% of the outstanding principal
balance of the receivables, but not to exceed $25 million. Receivables that have
accumulated in the FIRC credit facility may be transferred to the FIARC
commercial paper facility at the option of the Company. The FIARC commercial
paper facility provides an additional financing source up to $135 million.
Additionally, the Company has transferred receivables from the warehouse credit
facilities and issued Term Notes. Substantially all of the Company's receivables
are pledged to collateralize these credit facilities and Term Notes.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolios. The Company received
such payments in the amount of $118.2 million in 2000 and $88.7 million in 1999.
Such cash flow funds repayment of amounts borrowed under the FIRC credit and
commercial paper facilities and other holding costs, primarily interest expense
and servicing and custodial fees. During fiscal years 2000 and 1999, the Company
required net cash flow, respectively, of $55.5 million and $47.1 million (cash
required to acquire receivables held for investment net of principal payments on
receivables) to fund the growth of its receivables portfolio. The Company has
relied on borrowed funds to provide the source of cash flow to fund such growth.
CAPITALIZATION. Since the change in business strategy to retaining
receivables in November 1992, the Company has financed its acquisition of such
receivables primarily through two related credit facilities. The Company's
equity was not a significant factor in its capitalization until the completion
of the Company's initial public offering of common stock in October 1995,
resulting in net proceeds of $18.5 million. However, the Company expects to
continue to rely primarily on its credit facilities to acquire and retain
receivables. The Company believes its existing credit facilities have adequate
capacity to fund the increase of the receivables portfolio expected in the
foreseeable future. While the Company has no reason to believe that these
facilities will not continue to be available, their termination could have a
material adverse effect on the Company's operations if substitute financing on
comparable terms was not obtained.
FIRC CREDIT FACILITY. The primary source of acquisition financing for
Receivables Held for Investment has been through a syndicated warehouse credit
facility agented by Bank of America. The FIRC credit facility currently provides
for maximum borrowings, subject to certain adjustments, up to the outstanding
principal balance of qualified receivables, but not to exceed the current
facility limit of $65 million. Borrowings under the FIRC credit facility bear
interest pursuant to certain indexed variable rate options at the election of
the Company or any other short-term fixed interest rate agreed upon by the
Company and the lenders. The Company bases its selection of the interest rate
option primarily on its expectations of market interest rate fluctuations, the
timing and the amount of the required funding and the period of time it
anticipates requiring the funding prior to transfer to the FIARC commercial
paper facility. The FIRC credit facility provides for a term of one year,
matures September 30, 2000, at which time the outstanding principal balance will
be payable in full, although there are provisions allowing the Company a period
of six months to refinance the facility in the event that it is not renewed.
Borrowings under the FIRC credit facility were $65,000,000 and $59,540,000 at
April 30, 1999 and 2000, respectively.
24
The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a $135 million commercial paper conduit facility
with Enterprise Funding Corporation ("Enterprise"), a commercial paper conduit
managed by Bank of America. Receivables that have accumulated in the FIRC credit
facility may be transferred to the FIARC commercial paper facility by
transferring a specific group of receivables to a discrete special purpose
financing subsidiary and pledging those receivables as collateral. Receivables
are generally transferred from the FIRC credit facility to the FIARC commercial
paper facility to refinance them on a longer term basis at interest rates based
on commercial paper rates and to provide additional borrowing capacity under the
FIRC credit facility. Borrowings under this commercial paper facility bear
interest at the commercial paper rate plus .30%. The current term of the FIARC
commercial paper facility expires on August 15, 2000. If the FIARC commercial
paper facility were terminated, no new receivables could be transferred from the
FIRC credit facility to Enterprise; however, the then outstanding receivables
would continue to be financed until fully amortized. At April 30, 1999 and 2000,
the Company had borrowings of $90,735,214 and $18,004,889, respectively,
outstanding under the commercial paper facility.
The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. The maximum borrowings available
under the facility are $25 million. The Company's interest cost is based on
VFCC's commercial paper rates for specific maturities plus 0.55%. In addition,
the Company is required to pay periodic facility fees of 0.25% on the unused
portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
There were no outstanding borrowings at April 30, 2000. At April 30, 1999,
borrowings were $20,814,203 under the FIACC commercial paper facility.
The current term of the FIACC commercial paper facility expires on December
31, 2000. If the facility was terminated, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize.
TERM NOTES. On January 24, 2000, the Company, through its indirect, wholly
owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174% asset-backed notes ("Notes").
The Notes are secured by a pool of automobile receivables
25
totaling $174,968,641, which were previously owned by FIRC, FIARC and FIACC.
Proceeds from the issuance, which totaled $167,967,690 were used to repay all
outstanding borrowings under the FIARC and FIACC commercial paper facilities, to
reduce the outstanding borrowings under the FIRC credit facility, to pay
transaction fees related to the Note issuance and to fund a cash reserve account
of 2% or $3,499,373 which will serve as a portion of the credit enhancement for
the transaction. The Notes bear interest at 7.174% and require monthly principal
reductions sufficient to reduce the balance of the Notes to 96% of the
outstanding balance of the underlying receivables pool. The final maturity of
the Notes is February 15, 2006. As of April 30, 2000, the outstanding principal
balance on the Notes was $151,104,279. A surety bond issued by MBIA Insurance
Corporation provides credit enhancement for the Note holders. Additional credit
support is provided by the cash reserve account, which equals 2% of the original
balance of the receivables pool and a 4% over-collateralization requirement. In
the event that certain asset quality covenants are not met, the reserve account
target level will increase to 6% of the then current principal balance of the
receivables pool.
The following table summarizes borrowings under the warehouse credit
facility, the FIARC and FIACC commercial paper facilities and the Term Notes
(dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
------------------------
1999 2000
----------- -----------
At period-end:
Balance outstanding............. $ 176,549 $ 228,649
Weighted average interest
rate(1)........................ 5.63% 6.91%
During period(2):
Maximum borrowings
outstanding.................... $ 176,549 $ 228,649
Weighted average balance
outstanding.................... 151,705 202,405
Weighted average interest
rate........................... 6.5% 6.7%
- ------------
(1) Based on interest rates, facility fees, surety bond fees and hedge
instruments applied to borrowings outstanding at period-end.
(2) Based on month-end balances.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC ("FIFS
Acquisition"), entered into a $75 million non-recourse bridge financing
facility with VFCC, an affiliate of First Union National Bank, to finance the
Company's acquisition of FISC. Contemporaneously with the Company's purchase of
FISC, FISC transferred certain assets to FIFS Acquisition, consisting primarily
of (i) all receivables owned by FISC as of the acquisition date, (ii) FISC's
ownership interest in certain trust certificates and subordinated spread or cash
reserve accounts related to two asset securitizations previously conducted by
FISC, and (iii) certain other financial assets, including charged-off accounts
owned by FISC as of the acquisition date. These assets, along with a $1 million
cash reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus
2.35%. Under the terms of the facility, all cash collections from the
receivables or cash distributions to the certificate holder under the
securitizations are first applied to pay FISC a servicing fee in the amount of
3% on the outstanding balance of all owned or managed receivables and then to
pay interest on the facility. Excess cash flow available after servicing fees
and interest payments are utilized to reduce the outstanding principal balance
on the indebtedness. In addition, one-third of the servicing fee paid to FISC is
also utilized to reduce principal outstanding on the indebtedness. The bridge
facility expires on July 31, 2000. The Company is currently negotiating with
First Union to refinance the acquisition facility over an extended term
sufficient to amortize the outstanding balance of the indebtedness through
collections of the underlying receivables and trust certificates. It is
anticipated that the permanent financing will consist of issuing various
tranches of notes, to be held by VFCC, which will contain distinct principal
amortization requirements and interest rates. The Company anticipates no
material change in the weighted average interest rate under the permanent
26
financing. It is anticipated, however, that a partnership will be created to
purchase FIFS, Acquisition assets and issue the notes. The partnership interests
will be held by the Company and First Union and will enable the partners to
share excess cash flow generated from the remaining assets. The amount of excess
cash to be received by First Union will vary depending upon the timing and
amount of such cash flows. To the extent that the facility is not finalized
prior to the expiration date, the Company intends to seek a short-term extension
to allow for the completion of the term financing. The Company has no reason to
believe that VFCC will not grant such an extension or that an agreement to
refinance the bridge loan will not be reached prior to the then final maturity
of the bridge facility. If the facility were not extended, the remaining
outstanding principal balance would be due at maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that is utilized for working capital and general corporate purposes. This
facility was increased to $13.5 million in December 1999. Borrowings under this
facility bear interest at the Company's option of (i) Bank of America's prime
lending rate, or (ii) a rate equal to 3.0% above the LIBOR rate for the
applicable interest period. In addition, the Company is also required to pay
period facility fees, as well as an annual agency fee. The expiration of the
facility is September 30, 2000. If the lender elected not to renew, any
outstanding borrowings would be amortized over a one-year period. At April 30,
1999 and 2000, there was $7,235,000 and $13,300,000 outstanding under this
facility.
The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
INTEREST RATE MANAGEMENT. The Company's secured credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is February 15, 2006.
During the years ended April 30, 2000, 1999 and 1998 amounts paid pursuant to
the Company's interest rate management products were not material in relation to
interest expense in the aggregate nor did they have a material impact on the
Company's weighted average costs of funds during such periods.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81%; and, the second in the initial
notional amount of $24.9 million (Swap B) pursuant to which the
27
Company's interest rate is fixed at 5.50%. The notional amount outstanding under
each swap agreement amortizes based on an implied amortization of the hedged
indebtedness. Swap A has a final maturity of December 20, 2002 while Swap B
matured on February 20, 2000. The Company also purchased two interest rate caps
which protect the Company and the lender against any material increases in
interest rates which may adversely affect any outstanding indebtedness which is
not fully covered by the aggregate notional amount outstanding under the swaps.
The first cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 4.81%
on a notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Swap A and the
underlying indebtedness. The interest rate cap expires December 20, 2002 and the
cost of the cap is amortized in interest expense for the period. The second cap
agreement enables the Company to receive payments from the counterparty in the
event that the one-month commercial paper rate exceeds 6% on a notional amount
that increases initially and then amortizes based on the expected difference
between the outstanding notional amount under Swap B and the underlying
indebtedness. The interest rate cap expires February 20, 2002 and the cost of
the cap is imbedded in the fixed rate applicable to Swap B.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. An allowance for credit losses of
$2,133,994 as of April 30, 2000 and $1,529,651 as of April 30, 1999 as a
percentage of the Receivables Held for Investment of $231,696,539 as of April
30, 2000 and $179,807,957 as of April 30, 1999 was .9% at April 30, 2000 and
April 30, 1999.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of April 30, 2000 and 1999, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 17.3% and 20.6%, respectively. The nonaccretable portion
represents the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 60 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
Under its financing programs, the Company retains the credit risk
associated with the receivables acquired. Historically, the Company has
purchased credit enhancement insurance from third party insurers which covers
the risk of loss upon default and certain other risks. Until March 1994, such
insurance absorbed substantially all credit losses. In April 1994, the Company
established a captive insurance subsidiary to reinsure certain risks under the
credit enhancement insurance coverage for all receivables acquired in March 1994
and thereafter. In addition, receivables financed under the FIARC and FIACC
commercial paper facilities and receivables financed under the FIAIC Term Notes
do not carry default insurance. Provisions for credit losses of $6,414,572 and
$4,661,000 have been recorded for the years ended April 30, 2000 and 1999,
respectively for losses on receivables which are either uninsured or which are
reinsured by the Company's captive insurance subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. In making this estimate, management
analyzes portfolio characteristics in the light of its underwriting criteria,
delinquency and repossession statistics, historical loss experience, and size,
quality and concentration of the receivables, as well as external factors such
as future economic outlooks. The allowance for credit losses is based on
estimates and qualitative evaluations and ultimate losses will vary from current
estimates. These estimates are reviewed periodically and as
28
adjustments, either positive or negative, become necessary, are reported in
earnings in the period they become known.
The following table summarizes the status and collection experience of all
receivables acquired by the Company (dollars in thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
------------------------------------------------
1999 2000
---------------------- ----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT
-------- ---------- -------- ----------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days....................... 359 $4,554 469 $5,308
60 - 89 days....................... 50 621 157 1,778
90 days or more.................... 67 963 162 1,799
-------- ---------- -------- ----------
Total delinquencies.................. 476 $6,138 788 $8,885
======== ========== ======== ==========
Total delinquencies as a percentage
of outstanding receivables......... 2.87% 2.4% 4.1% 3.8%
Net charge-offs as a percentage of
average receivables outstanding
during the period.................. 2.8% 2.8%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage of outstanding receivables are based on gross receivables
balances, which include principal outstanding plus unearned interest income.
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Managed Receivables was 8.7% and 3.4% as
of April 30, 2000 and 1999, respectively.
MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's credit facilities bear interest at floating rates
which are reset on a short-term basis, whereas its receivables bear interest at
fixed rates which do not generally vary with changes in interest rates. The
Company is therefore exposed primarily to market risks associated with movements
in interest rates on its credit facilities. The Company believes that it takes
the necessary steps to appropriately reduce the potential impact of interest
rate increases on the Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.
As of April 30, 2000, the Company had $192.3 million of floating rate
secured debt outstanding considering the effect of swap and cap agreements. For
every 1% increase in commercial paper rates or LIBOR, annual after-tax earnings
would decrease by approximately $1,250,000, assuming the Company maintains a
level amount of floating rate debt and assuming an immediate increase in rates.
29
YEAR 2000 ISSUE
The transition to the year 2000 date change was made without significant
problems or interruption of business activity. The Company had implemented
programs to assess the impact of the year 2000 date change on software and
related technologies. Testing and modifications of the Company's critical
information systems were completed prior to December 31, 1999. The Company did
not incur any significant costs relating to year 2000 issues.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in this Form
10-K are listed under Item 14(a). The Company is not required to file any
supplementary financial data under this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information responsive to this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders expected to be held September 7, 2000, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this item appears under the caption "Summary
Compensation Table" in the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders expected to be held September 7, 2000, which is to be
filed with the Securities and Exchange Commission, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this item appears under the caption "Security
Ownership of Management and Certain Beneficial Owners" in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders expected to be held
September 7, 2000, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item appears under the caption "Certain
Transactions" in the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders expected to be held September 7, 2000, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page F-1.
(3) EXHIBITS
2.1(j) -- Stock Purchase Agreement, dated as of September 9, 1998, between First Investors Financial
Services Group, Inc. and Fortis, Inc. to purchase Auto Lenders Acceptance Corporation, a
wholly-owned subsidiary of Fortis, Inc.
3.1(a) -- Articles of Incorporation, as amended
3.2(a) -- Bylaws, as amended
4.1(a) -- Excerpts from the Articles of Incorporation, as amended (included in
Exhibit 3.1).
4.3(a) -- Specimen Stock Certificate
10.5(a) -- Credit Agreement dated as of October 16, 1992 among F.I.R.C., Inc. ("FIRC") and
NationsBank of Texas, N.A., individually and as agent for the banks party thereto, as
amended by First Amendment to Credit Agreement and Loan Documents dated as of November 5,
1993, Second Amendment to Credit Agreement and Loan Documents dated as of March 3, 1994,
Third Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995 and
Fourth Amendment to Credit Agreement and Loan Documents dated as of July 7, 1995.
10.6(a) -- Collateral Security Agreement dated as of October 16, 1992 between FIRC and Texas Commerce
Bank National Association as collateral agent for the ratable benefit of NationsBank of
Texas, N.A., as agent, and the banks party to the Credit Agreement filed as Exhibit 10.5.
31
10.7(a) -- Escrow Agreement dated as of October 16, 1992 among FIRC, NationsBank of Texas, N.A. as
agent for the banks party to the Credit Agreement filed as Exhibit 10.5, and Texas
Commerce Bank National Association as Escrow Agent.
10.8(a) -- Transfer and Administration Agreement dated as of March 3, 1994 among FIRC, Enterprise
Funding Corporation, Texas Commerce Bank National Association and NationsBank N.A.
(Carolinas) (formerly NationsBank of North Carolina, N.A.), as amended by Amendment Number
1 dated August 1, 1994, Amendment Number 2 dated February 28, 1995 and Amendment No. 3
dated March 21, 1995.
10.9(a) -- Servicing Agreement dated as of October 16, 1992 between FIRC and General Electric Capital
Corporation, as amended by First Amendment to Servicing Agreement dated as of November 4,
1993, Second Amendment to Servicing Agreement dated as of March 1, 1994 and Third
Amendment to Servicing Agreement dated as of June 1, 1995.
10.10(a) -- Purchase Agreement between FIRC and First Investors Financial Services, Inc. ("First
Investors") dated October 16, 1992, as amended by First Amendment to Purchase Agreement
dated as of November 5, 1993 and Second Amendment to Purchase Agreement dated as of March
3, 1994.
10.11(a) -- Auto Loan Protection Insurance Policy dated October 13, 1992 issued by Agricultural Excess
& Surplus Insurance Company to FIRC as insured.
10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994 issued by National Union Fire
Insurance Company of Pittsburgh to FIRC as insured.
10.13(a) -- Facultative Reinsurance Agreement between National Fire Insurance Company of Pittsburgh
and First Investors Insurance Company, as reinsurer, dated as of May 26, 1995.
10.14(a) -- Blanket Collateral Protection Insurance Policy dated October 5, 1992 issued by
Agricultural Excess & Surplus Insurance Company to FIRC as insured.
10.15(a) -- ISDA Master Agreement dated August 12, 1994 between FIRC and NationsBank of Texas, N.A.
together with Confirmation of U.S. Dollar Rate Swap Transaction dated June 14, 1995 and
Confirmation for U.S. Dollar Rate Swap Transaction dated May 16, 1995.
10.16(a) -- Employment Agreement dated as of March 20, 1992 between the Registrant and Tommy A. Moore,
Jr., as amended by First Amendment dated as of March 15, 1995 and Second Amendment dated
as of July 1, 1995.
10.17(a) -- Lease Agreement between A.I.G. Realty, Inc. and First Investors dated as of June 1, 1992,
as amended by Amendment One dated October 29, 1993 and Amendment Two dated October 26,
1994.
10.18(a) -- Redemption Agreement dated as of June 8, 1995 among the Registrant and all holders of its
class of 1993 Preferred Stock.
10.21(a) -- 1995 Employee Stock Option Plan of the Registrant.
10.22(a) -- Form of Stock Option Agreement between the Registrant and Robert L. Clarke dated August
25, 1995.
10.23(b) -- Amendment No. 4 dated November 20, 1995 to the Transfer and Administration Agreement dated
as of March 3, 1994, filed as Exhibit 10.8.
10.24(b) -- Employment Agreement dated as of May 1, 1996 between the Registrant and Bennie H. Duck.
10.25(b) -- Amendment Three dated October 10, 1995 to the Lease Agreement between A.I.G. Realty, Inc.
and the Registrant, filed as Exhibit 10.17.
10.26(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated November 16, 1995.
10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise Funding Corporation and FIRC,
Inc.
10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated August 7, 1996.
32
10.29(d) -- Security Agreement dated as of October 22, 1996 among First Investors Auto Receivables
Corporation, Enterprise Funding Corporation, Texas Commerce Bank National Association,
MBIA Insurance Corporation, NationsBank N.A., and First Investors Financial Services, Inc.
10.30(d) -- Note Purchase Agreement dated as of October 22, 1996 between First Investors Auto
Receivables Corporation and Enterprise Funding Corporation.
10.31(d) -- Purchase Agreement dated as of October 22, 1996 between First Investors Financial
Services, Inc. and First Investors Auto Receivables Corporation.
10.32(d) -- Insurance Agreement dated as of October 1, 1996 among First Investors Auto Receivables
Corporation, MBIA Insurance Corporation, First Investors Financial Services, Inc., Texas
Commerce Bank National Association, and NationsBank N.A.
10.33(d) -- Servicing Agreement dated as of October 22, 1996 between First Investors Auto Receivables
Corporation and General Electric Capital Corporation.
10.34(d) -- Amended and Restated Credit Agreement dated as of October 30, 1996 among F.I.R.C., Inc.
and NationsBank of Texas, N.A., individually and as Agent for the financial institutions
party thereto.
10.35(d) -- Amended and Restated Collateral Security Agreement dated as of October 30, 1996 between
F.I.R.C., Inc. and Texas Commerce Bank National Association as collateral agent for the
ratable benefit of NationsBank of Texas, N.A. individually and as agent for the financial
institutions party to the Amended and Restated Credit Agreement filed as Exhibit 10.34.
10.36(d) -- Amended and Restated Purchase Agreement dated as of October 30, 1996 between First
Investors Financial Services, Inc. and F.I.R.C., Inc.
10.37(d) -- Amended and Restated Servicing Agreement between F.I.R.C., Inc. and General Electric
Capital Corporation.
10.38(e) -- Third Amendment dated January 20, 1997 to the Employment Agreement dated as of March 20,
1992 between the Registrant and Tommy A. Moore, Jr.
10.39(f) -- First Amendment to the Amended and Restated Credit Agreement dated January 31, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.40(f) -- Second Amendment to the Amended and Restated Credit Agreement dated May 15, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.41(f) -- Employment Agreement dated July 16, 1997 between First Investors Financial Services, Inc.
and Tommy A. Moore, Jr.
10.42(f) -- Credit Agreement dated as of July 18, 1997 between First Investors Financial Services,
Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party
thereto.
10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997 by and among First Investors
(Vermont) Holdings, Inc. and NationsBank of Texas, N.A., as agent for the banks party
thereto.
10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among First Investors Financial
Services, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto.
10.45(g) -- Security Agreement dated as of January 1, 1998 among First Investors Auto Capital
Corporation, First Union Capital Markets Corp., and First Investors Financial Services,
Inc.
10.46(g) -- Note Purchase Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation, First Union Capital Markets Corp., the Investors, First Union National Bank,
and Variable Funding Capital Corporation.
10.47(g) -- Purchase Agreement dated as of January 1, 1998 between First Investors Financial Services,
Inc. and First Investors Auto Capital Corporation.
10.48(g) -- Servicing Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation and General Electric Capital Corporation.
33
10.49(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Bennie H. Duck.
10.50(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Joseph A. Pisano.
10.51(i) -- Loan and Security Agreement dated as of October 2, 1998 between Variable Funding Capital
Corporation, Auto Lenders Acceptance Corporation, ALAC Receivables Corp. and FIFS
Acquisition Funding Company, L.L.C.
10.52(i) -- Custodial Agreement dated as of October 2, 1998 among Variable Funding Capital
Corporation, Norwest Bank Minnesota, NA, and Auto Lenders Acceptance Corporation.
10.53(i) -- Contract Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders
Acceptance Corporation and FIFS Acquisition Funding Company, L.L.C.
10.54(i) -- NIM Collateral Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders
Acceptance Corporation, ALAC Receivables Corporation and FIFS Acquisition Funding Company,
L.L.C.
10.55(k) -- Third Amendment to the Amended and Restated Credit Agreement dated January 25, 1999 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.56(k) -- Second Amendment to the Credit Agreement dated January 25, 1999 between First Investors
Financial Services, Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.57(l) -- Amendment Number 2 to Security Agreement dated March 31, 1999 among First Investors Auto
Receivables Corporation, Enterprise Funding Corporation, Chase Bank of Texas, National
Association, Norwest Bank Minnesota, National Association, MBIA Insurance Corporation,
NationsBank N.A., and First Investors Financial Services, Inc.
10.58(l) -- Amendment Number 1 to Note Purchase Agreement dated as of March 31, 1999 among First
Investors Auto Receivables Corporation and Enterprise Funding Corporation.
10.59(l) -- Amendment Number 1 to Insurance Agreement dated March 31, 1999 among First Investors Auto
Receivables Corporation, MBIA Insurance Corporation, First Investors Financial Services,
Inc., Auto Lenders Acceptance Corporation, Norwest Bank Minnesota, National Association
and NationsBank, N.A.
10.60(l) -- Servicing Agreement dated March 31, 1999 among First Investors Auto Receivables
Corporation, Norwest Bank Minnesota, National Association and Auto Lenders Acceptance
Corporation.
10.61(l) -- Guaranty dated March 31, 1999 by First Investors Financial Services, Inc., First Investors
Auto Receivables Corporation, Auto Lenders Acceptance Corporation and Norwest Bank
Minnesota, National Association.
10.62(m) -- Sale and Allocation Agreement dated January 1, 2000 among First Investors Financial
Services, Inc., First Investors Servicing Corporation, First Investors Auto Investment
Corp., Norwest Bank Minnesota, National Association and First Investors Auto Owner Trust
2000-A.
10.63(m) -- Indenture dated as of January 1, 2000 $167,969,000 7.174% Asset-Backed Notes among First
Investors Auto Owner Trust 2000-A, First Investors Financial Services, Inc. and Norwest
Bank Minnesota, National Association.
10.64(m) -- Amended and Restated Trust Agreement dated as of January 24, 2000 among First Investors
Auto Investment Corp. and Bankers Trust (Delaware).
10.65(m) -- Servicing Agreement dated as of January 1, 2000 by and among First Investors Auto Owner
Trust 2000-A, Norwest Bank Minnesota, National Association, First Investors Auto
Investment Corp. and First Investors Servicing Corporation.
34
10.66(m) -- Insurance Agreement dated as of January 1, 2000 among MBIA Insurance Corporation, First
Investors Servicing Corporation, First Investors Financial Services, Inc., First Investors
Auto Investment Corp., First Investors Auto Owner Trust 2000-A, Bankers Trust (Delaware)
and Norwest Bank Minnesota, National Association.
10.67(m) -- Indemnification Agreement dated as of January 12, 2000 among MBIA Insurance Corporation,
First Investors Financial Services, Inc. and Banc of America Securities LLC.
21.1(j) -- Subsidiaries of the Registrant.
- ------------
(a) -- Exhibit previously filed with the Company's Registration Statement on Form S-1,
Registration No. 33-94336 and incorporated herein by reference.
(b) -- Exhibit previously filed on 1996 Form 10-K and incorporated herein by reference.
(c) -- Exhibit previously filed on July 31, 1996 First Quarter Form 10-Q and incorporated
herein by reference.
(d) -- Exhibit previously filed on October 31, 1996 Second Quarter Form 10-Q and incorporated
herein by reference.
(e) -- Exhibit previously filed on January 31, 1997 Third Quarter Form 10-Q and incorporated
herein by reference.
(f) -- Exhibit previously filed on July 31, 1997 First Quarter Form 10-Q and incorporated
herein by reference.
(g) -- Exhibit previously filed on January 31, 1998 Third Quarter Form 10-Q and incorporated
herein by reference.
(h) -- Exhibit previously filed on 1998 Form 10-K and incorporated herein by reference.
(i) -- Exhibit previously filed on October 31, 1998 Second Quarter Form 10-Q and incorporated
herein by reference.
(j) -- Exhibit previously filed on October 2, 1998 Form 8-K and incorporated herein by
reference.
(k) -- Exhibit previously filed on January 31, 1999 Third Quarter Form 10-Q and incorporated
herein by reference.
(l) -- Exhibit previously filed on 1999 Form 10-K and incorporated herein by reference.
(m) -- Exhibit previously filed on March 21, 2000 Third Quarter Form 10-Q/A and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
None.
35
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: July 21, 2000 By: /s/Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of First
Investors Financial Services Group, Inc. and in the capacities and on the date
indicated.
SIGNATURE TITLE
- ------------------------------------- -------------------------------------------------------
/s/Tommy A. Moore, Jr. President and Chief Executive Officer, Director
TOMMY A. MOORE, JR. (Principal Executive Officer)
/s/Bennie H. Duck Vice President and Chief Financial Officer
BENNIE H. DUCK (Principal Financial and Accounting Officer)
/s/Robert L. Clarke Director
ROBERT L. CLARKE
/s/Roberto Marchesini Director
ROBERTO MARCHESINI
/s/Walter A. Stockard Director
WALTER A. STOCKARD
/s/Walter A. Stockard, Jr. Director
WALTER A. STOCKARD, JR.
Date: July 21, 2000
36
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of April 30, 1999 and 2000................ F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1998, 1999 and 2000.......................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
April 30, 1998, 1999 and 2000.......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended April 30, 1998,
1999 and 2000.......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:
We have audited the accompanying consolidated balance sheets of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 1999 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 1999 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
June 29, 2000
F-2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1999 AND 2000
1999 2000
---------------- ----------------
ASSETS
------
Receivables Held for Investment,
net................................ $ 183,318,532 $ 235,954,788
Receivables Acquired for Investment,
net................................ 41,023,768 21,888,454
Investment in Trust Certificates..... 10,754,512 5,848,688
Cash and Short-Term Investments,
including restricted cash of
$10,804,461 and $23,411,293........ 11,515,872 25,520,158
Other Receivables:
Due from servicer............... 14,065,957 --
Accrued interest................ 2,365,231 3,313,630
Assets Held for Sale................. 1,693,255 1,007,256
Other Assets:
Funds held under reinsurance
agreement..................... 2,620,296 3,842,641
Deferred financing costs and
other assets, net of
accumulated
amortization and depreciation
of $1,702,088 and
$3,133,823.................... 4,898,045 5,818,338
Deferred income taxes
receivable, net............... 553,781 64,875
---------------- ----------------
Total assets............... $ 272,809,249 $ 303,258,828
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Debt:
Term Notes...................... $ -- $ 151,104,279
Acquisition term facility....... 55,737,371 26,211,787
Warehouse credit facilities..... 176,549,417 77,544,889
Working capital facility........ 7,235,000 13,300,000
Other Liabilities:
Accounts payable and accrued
liabilities................... 5,795,385 4,444,984
Current income taxes payable.... 329,764 527,042
---------------- ----------------
Total liabilities.......... 245,646,937 273,132,981
---------------- ----------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares
authorized, 5,566,669 and
5,566,669 issued
and outstanding............... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 8,691,827 11,655,362
---------------- ----------------
Total shareholders'
equity.................. 27,162,312 30,125,847
---------------- ----------------
Total liabilities and
shareholders' equity.... $ 272,809,249 $ 303,258,828
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1998, 1999 AND 2000
1998 1999 2000
-------------- -------------- --------------
Interest Income...................... $ 20,049,129 $ 31,076,003 $ 40,276,227
Interest Expense..................... 7,833,677 12,781,725 16,509,757
-------------- -------------- --------------
Net interest income........ 12,215,452 18,294,278 23,766,470
Provision for Credit Losses.......... 3,900,966 4,661,000 6,414,572
-------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses................. 8,314,486 13,633,278 17,351,898
-------------- -------------- --------------
Other Income:
Servicing....................... -- 1,199,628 1,293,502
Late fees and other............. 617,140 1,594,149 2,727,848
-------------- -------------- --------------
Total other income......... 617,140 2,793,777 4,021,350
-------------- -------------- --------------
Operating Expenses:
Servicing fees.................. 1,838,002 2,350,741 434,572
Salaries and benefits........... 2,639,080 6,030,007 9,413,424
Other interest expense.......... 111,398 539,927 1,153,326
Other........................... 2,415,006 4,353,873 5,704,942
-------------- -------------- --------------
Total operating expenses... 7,003,486 13,274,548 16,706,264
-------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 1,928,140 3,152,507 4,666,984
-------------- -------------- --------------
Provision (Benefit) for Income Taxes:
Current......................... 614,130 1,406,211 1,214,543
Deferred........................ 89,641 (255,546) 488,906
-------------- -------------- --------------
Total provision for income
taxes................... 703,771 1,150,665 1,703,449
-------------- -------------- --------------
Net Income........................... $ 1,224,369 $ 2,001,842 $ 2,963,535
============== ============== ==============
Basic and Diluted Net Income Per
Common Share....................... $0.22 $0.36 $0.53
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1998, 1999 AND 2000
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ----------- -------------- --------------
Balance, April 30, 1997.............. $5,567 $18,464,918 $ 5,465,616 $ 23,936,101
Net income...................... -- -- 1,224,369 1,224,369
------- ----------- -------------- --------------
Balance, April 30, 1998.............. 5,567 18,464,918 6,689,985 25,160,470
Net income...................... -- -- 2,001,842 2,001,842
------- ----------- -------------- --------------
Balance, April 30, 1999.............. 5,567 18,464,918 8,691,827 27,162,312
Net income...................... -- -- 2,963,535 2,963,535
------- ----------- -------------- --------------
Balance, April 30, 2000.............. $5,567 $18,464,918 $ 11,655,362 $ 30,125,847
======= =========== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1998, 1999 AND 2000
1998 1999 2000
---------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net income...................... $ 1,224,369 $ 2,001,842 $ 2,963,535
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense.... 2,369,672 3,363,379 4,455,762
Provision for credit
losses.................. 3,900,966 4,661,000 6,414,572
Charge-offs, net of
recoveries.............. (3,884,418) (4,329,894) (5,810,229)
(Increase) decrease in:
Accrued interest
receivable.............. (133,986) (307,885) (948,399)
Restricted cash............ 334,851 (145,253) (15,923,657)
Deferred financing costs
and other assets........ (664,036) (1,210,261) (2,317,067)
Funds held under
reinsurance agreement... 546,772 (603,614) (1,222,345)
Due from servicer.......... (1,802,410) (3,835,982) 14,065,957
Deferred income taxes
receivable, net......... 89,641 (255,546) 488,906
Current income taxes
receivable.............. (495,280) 495,280 --
Increase (decrease) in:
Accounts payable and
accrued liabilities..... (243,554) 1,702,905 (1,350,401)
Current income taxes
payable................. 110,298 109,994 197,278
---------------- ---------------- ----------------
Net cash provided by operating
activities................. 1,352,885 1,645,965 1,013,912
---------------- ---------------- ----------------
Cash Flows From Investing Activities:
Purchases of Receivables Held
for Investment................ (77,965,915) (114,309,752) (141,305,830)
Principal payments from
Receivables Held for
Investment.................... 54,397,892 67,224,322 85,794,530
Principal payments from
Receivables Acquired for
Investment.................... -- 14,652,354 19,135,314
Principal payments from Trust
Certificates.................. -- 4,519,183 4,905,824
Acquisition of a business, net
of cash acquired.............. -- (76,052,178) --
Purchase of furniture and
equipment..................... (138,195) (342,949) (102,288)
---------------- ---------------- ----------------
Net cash used in investing
activities.............. (23,706,218) (104,309,020) (31,572,450)
---------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Term Notes................. -- -- 167,969,000
Warehouse credit
facilities.............. 68,478,349 104,853,807 125,652,886
Working capital facility... 2,500,000 20,435,000 14,865,000
Acquisition term
facility................ -- 75,000,000 --
Principal payments made on --
Term Notes................. -- -- (16,864,721)
Warehouse credit
facilities.............. (50,559,402) (59,117,468) (224,657,414)
Work capital facility...... -- (15,700,000) (8,800,000)
Acquisition term
facility................ -- (19,262,629) (29,525,584)
---------------- ---------------- ----------------
Net cash provided by
financing activities.... 20,418,947 106,208,710 28,639,167
---------------- ---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. (1,934,386) 3,545,655 (1,919,371)
Cash and Short-Term Investments at
Beginning of Year.................. 2,416,967 482,581 4,028,236
---------------- ---------------- ----------------
Cash and Short-Term Investments at
End of Year........................ $ 482,581 $ 4,028,236 $ 2,108,865
================ ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for --
Interest................... $ 7,748,529 $ 12,196,708 $ 15,815,121
Income taxes............... 999,112 800,937 1,017,265
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1999 AND 2000
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors or the Company) was established to serve as a holding company for
First Investors Financial Services, Inc. (FIFS) and FIFS's wholly owned
subsidiaries, First Investors Insurance Company (FIIC), First Investors Auto
Receivables Corporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors Auto
Capital Corporation (FIACC), First Investors Servicing Corporation (FISC)
formerly known as, Auto Lenders Acceptance Corporation (ALAC), First Investors
Auto Investment Corp. and FIFS Acquisition Funding Corp. LLC. First Investors,
together with its subsidiaries, is hereinafter referred to as the Company.
FIFS began operations in May 1989 and is principally involved in the
business of acquiring and holding for investment retail installment contracts
and promissory notes secured by new and used automobiles and light trucks
(receivables) originated by factory authorized franchised dealers. As of April
30, 2000, approximately 29 percent of receivables held for investment had been
originated in Texas. The Company currently operates in 26 states.
FIIC was organized under the captive insurance company laws of the state of
Vermont for the purpose of reinsuring certain credit enhancement insurance
policies which have been written by unrelated third party insurance companies.
On October 2, 1998, the Company completed the acquisition of FISC and the
operations of FISC are included in the consolidated results of the Company since
the date of acquisition. See Note 15. Headquartered in Atlanta, Georgia, FISC
was engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables
acquired for investment as well as on a portfolio of receivables acquired and
sold pursuant to two asset securitizations. As a result of the acquisition, the
Company increased the total dollar value on its balance sheet of receivables,
acquired an interest in certain trust certificates related to the asset
securitizations and acquired certain servicing rights along with furniture,
fixtures, equipment and technology to perform the servicing and collection
functions for the portfolio of receivables under management. The Company
performs servicing and collection functions on loans originated from 31 states
on a Managed Receivables Portfolio of $289.1 million.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of First Investors and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates used by the
Company relate to the allowance for credit losses and nonaccretable difference.
See Notes 3 and 4. Actual results could differ from those estimates.
RECEIVABLES HELD FOR INVESTMENT. The Company acquires automobile loans
from dealers and originates loans directly to consumers. Fees and expenses of
originating the loan are capitalized and amortized in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases". The basis in the receivables includes the
costs to acquire the
F-7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivables from the dealer, plus or minus any fees paid or received related to
the purchase of the receivables.
Receivables are generally acquired from dealers at a premium or discount
from the principal amounts financed by the borrower. This premium or discount is
negotiated by the Company and the dealers. Included in the carrying amount of
receivables is the insurance premium paid to third-party insurers, net of any
premiums ceded to FIIC for reinsurance. The Company amortizes the difference
between the principal balance of the receivables and its carrying amount over
the expected remaining life of the receivables using the interest method.
RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were
acquired in a portfolio purchase, the Company estimates the amount and timing of
undiscounted expected future principal and interest cash flows. For certain
purchased loans, the amount paid for a loan reflects the Company's determination
that it is probable the Company will be unable to collect all amounts due
according to the loan's contractual terms. Accordingly, at acquisition, the
Company recognizes the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows as an amount that
should not be accreted. The remaining amount, representing the excess of the
loan's expected cash flows over the amount paid, is accreted into interest
income over the remaining life of the loan. Additionally, accretion of yield
expected to be paid to others is recorded as a reduction of interest income.
Over the life of the loan, the Company continues to estimate expected cash
flows. The Company evaluates whether the present value of any decrease in the
loan's actual or expected cash flows should be recorded as a loss provision for
the loan. For any material increases in estimated cash flows, the Company
adjusts the amount of accretable yield by reclassification from nonaccretable
difference. The Company then adjusts the amount of periodic accretion over the
loan's remaining life. See Note 4.
INVESTMENT IN TRUST CERTIFICATES. Through the acquisition of FISC, the
Company obtained interests in two securitizations of automobile receivables.
Automobile receivables were transferred to a trust (ALAC Automobile Receivables
Trust), which issued notes and certificates representing undivided ownership
interests in the trusts. The Company owns trust certificates and interest-only
residuals from each of these trusts which are classified as Investment in Trust
Certificates. Additionally, the Company owns spread accounts held by the trustee
for the benefit of the trust's noteholders. Such amounts are classified as
Restricted Cash.
Trust certificates are interests in the securitized receivables which are
subordinated to the noteholders interests. These certificates represent a credit
enhancement in order for the securitization to achieve a specific rating from
the credit rating agencies.
Interest-only residuals result from excess cash flows of the
securitizations. Interest-only residuals are computed as the differential
between the weighted average interest rate earned on the automobile receivables
securitized and the rate paid to the noteholders and certificate-holders, net of
contractual servicing fees to be paid to the Company. The resulting differential
represents an asset in the period in which the automobile receivables are
securitized equal to the present value of estimated future excess interest cash
flows adjusted for anticipated prepayments and losses.
Trust certificates and interest-only residuals are valued at the present
value of expected future cash flows using discount rates that the Company
expects to yield. These discount rates are the result of the purchase price of
the interests and the expected future cash flows. Interests are recorded at
amortized cost. If actual cash flows are less than expected cash flows, the
Company will write down the value of the interests. If actual cash flows exceed
expected cash flows, additional yield will be recognized on a prospective basis.
The Company utilized prepayment speeds, loss rate and discount
F-8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate assumptions to determine the fair value of the trust certificates and
interest-only residuals. During 2000 and 1999, the assumptions used were:
FISCAL 1999 FISCAL 2000
-------------------- --------------------
RANGE RANGE
-------------------- --------------------
Prepayment........................... .9% ABS .9% ABS
Loss rate............................ 15% to 15.5% 14.5% to 15.5%
Discount rate........................ 17% to 18% 17% to 47%
INCOME RECOGNITION. The Company accrues interest income monthly based upon
contractual terms using the effective interest method. Interest income also
includes additional amounts received upon early payoffs of certain receivables
attributable to the difference between the principal balance of the receivables
calculated using the Rule of 78's method and the principal balance of the
receivables calculated using the effective interest method. When a receivable
becomes two months past due, income accrual is suspended until the payments
become current. Other income includes late charge fees and is recognized as
collected.
ALLOWANCE FOR CREDIT LOSSES. For receivables financed under the FIRC
credit facility, the Company purchases credit enhancement insurance from
third-party insurers which covers the risk of loss upon default and certain
other risks. Until March 1994, such insurance and dealer reserves absorbed
substantially all credit losses. In April 1994, the Company established a
captive insurance subsidiary to reinsure the credit enhancement insurance
coverage. The credit enhancement insurance coverage for all receivables acquired
in March 1994 and thereafter has been reinsured by FIIC. Beginning in October
1996, all receivables recorded by the Company were covered by credit enhancement
insurance while pledged as collateral for the FIRC credit facility. Once
receivables are transferred to the FIARC commercial paper facility, credit
enhancement insurance is cancelled. In addition, no default insurance is
purchased for core receivables originated and financed under the FIACC
commercial paper facility. Accordingly, the Company is exposed to credit losses
for all receivables either reinsured by FIIC or uninsured and provides an
allowance for such losses.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. Management analyzes the receivable
portfolio characteristics as compared to its underwriting criteria, delinquency
and repossession statistics, historical loss experience, size, quality and
concentration characteristics of the receivable portfolio, as well as external
factors such as future economic outlooks.
The automobile purchasers in the non-prime market segment are individuals
with impaired credit profiles who often have little or no personal savings. In
most cases such purchasers' ability to remit payments as required by the terms
of the receivables is entirely dependent on their continued employment and
stability of household and medical expenses. Job losses or events which cause a
significant increase in household or medical expenses could result in defaults
on their consumer debts. A prolonged economic recession resulting in widespread
unemployment in this wage-earning sector could cause a significant rise in
delinquencies and charge-offs, which would adversely affect the Company.
Although the Company considers its allowance to be adequate, there can be no
assurance that it would suffice in the event of a sustained period of economic
distress. The allowance for credit losses is based on estimates and qualitative
evaluations, and ultimate losses will vary from current estimates. These
estimates are reviewed periodically and, as adjustments, either positive or
negative, become necessary, they are reported in earnings in the period they
become known.
SERVICING AGREEMENT. From its inception until July 1999, the Company was a
party to a servicing agreement with General Electric Capital Corporation (GECC)
under which GECC performed certain loan servicing and collection activities with
respect to the Company's portfolio of Receivables
F-9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Held for Investment. Servicing fees were paid monthly to GECC based on the
number of receivables being serviced during the period plus certain reimbursable
expenses including legal and third party recovery costs. Due from servicer
primarily represents unremitted principal and interest payments and proceeds
from the sale of repossessed collateral. In July 1999, the Company elected to
terminate the servicing agreement with GECC in connection with the transfer of
the servicing and collection activities on the receivables to the Company's
internal servicing and collection platform.
FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial
assurance for the third party insurance company it reinsures by maintaining
premiums ceded to it in a restricted trust account for the benefit of the third
party insurance company. The reinsurance agreement provides, among other things,
that the funds held can be withdrawn by the third party insurance company due to
an insolvency of the Company or to reimburse the third party insurance company
for the Company's share of losses paid by the third party insurance company
pursuant to the reinsurance agreement.
ASSETS HELD FOR SALE. The Company commences repossession procedures
against the underlying collateral when the Company determines that collection
efforts are likely to be unsuccessful. Upon repossession, the receivable is
written down to the estimated fair value of the collateral, less the cost of
disposition and plus the expected recoveries from third-party insurers, through
a charge to the allowance for credit losses. Additionally, the repossessed
collateral is reclassified to assets held for sale.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the FIRC credit facility over a 45 month period which
represents the committed term of such facility. Additionally, the Company
amortizes the costs related to the respective commercial paper facilities and
Term Notes over the estimated average life of the receivables financed as the
provisions of such facility provide that receivables assigned to such facility
would be allowed to amortize should the facilities not be extended.
SERVICING INCOME. Servicing income is recognized on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding principal balance of securitized
receivables plus reimbursement for certain costs and expenses incurred as a
result of its collection activities. Under the terms of the securitizations, the
servicer may be removed upon breach of its obligations under the servicing
agreements, the deterioration of the underlying receivables portfolios in
violation of certain performance triggers or the deteriorating financial
condition of the servicer.
OTHER OPERATING EXPENSES. Other operating expenses include primarily
professional fees, service bureau fees, telephone, postage, and rent.
INCOME TAXES. The Company follows SFAS No. 109, which prescribes that
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest
rate swap and cap agreements to maximize net interest income while managing the
exposure of floating interest rates under the terms of its credit facilities or
Term Notes (see Note 7). The Company endeavors to maintain the effectiveness of
the interest rate swap or cap agreements by selecting products with dollar
denominated notional principal amounts, interest rate indices and interest reset
periods similar
F-10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to its credit facilities or Term Notes. The differentials paid or received on
interest rate agreements are accrued and recognized currently as adjustments to
interest expense. Premiums paid or received on these agreements, if any, are
amortized to interest expense over the term of the related agreement. Gains and
losses on early terminations of interest rate swap and cap agreements are
included in the carrying amount of the related debt and amortized as yield
adjustments over the estimated remaining term of the swap.
EMPLOYEE STOCK OPTIONS. The Company accounts for its stock-based
compensation under Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees." Under this accounting method, no compensation
expense is recognized in the consolidated statements of operations if no
intrinsic value of the option exists at the date of grant. The Company has made
annual pro forma disclosures of net income and earnings per share as if the
stock based compensation awards were based on the fair value of the awards at
the date of grant. See Note 12.
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133." The Company will
adopt SFAS No. 133 concurrently with SFAS No. 138 effective for its fiscal year
beginning May 1, 2001. Management has not yet quantified the impact of adopting
SFAS No. 133 on the consolidated financial statements. However, the Statement
could increase volatility in earnings.
INTERNAL USE SOFTWARE COSTS. In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-1,
"Accounting For The Costs Of Computer Software Developed Or Obtained For
Internal Use". This SOP specifies certain costs of computer software developed
or obtained for internal use that should be capitalized. The Company capitalizes
external direct costs of materials and services consumed in developing
internal-use computer software and payroll costs for employees who devote time
to developing internal-use computer software, in accordance with SOP 98-1.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of shares of common stock outstanding (see Note 12 and Note 14).
FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciable assets are amortized using the
straight-line method over the estimated useful lives (two to five years) of the
respective assets.
CASH AND SHORT-TERM INVESTMENTS. The Company considers all investments
with a maturity of three months or less when purchased to be short-term
investments and treated as cash equivalents. See Note 5 for components of
restricted cash.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1998
and 1999 amounts to conform with the 2000 presentation.
F-11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. RECEIVABLES HELD FOR INVESTMENT
The receivables generally have terms of 60 months and are collateralized by
the underlying vehicles. Net receivable balances consisted of the following at
April 30, 1999 and 2000:
1999 2000
---------------- ----------------
Receivables.......................... $ 179,807,957 $ 231,696,539
Unamortized premium and deferred
fees................................. 5,040,226 6,392,243
Allowance for credit losses.......... (1,529,651) (2,133,994)
---------------- ----------------
Net receivables................. $ 183,318,532 $ 235,954,788
================ ================
At April 30, 2000, the weighted average remaining term of the receivable
portfolio is 46 months and the weighted average contractual interest rate is
17.5 percent. Principal payments expected to be received on the receivable
portfolio, assuming no defaults and that payments are received in accordance
with contractual terms, are summarized in the following table. Receivables may
pay off prior to contractual due dates, primarily due to defaults and early
payoffs.
Year ending April 30-
2001....................... $ 56,050,041
2002....................... 58,925,927
2003....................... 57,847,399
2004....................... 37,007,419
2005....................... 21,865,753
----------------
$ 231,696,539
================
Activity in the allowance for credit losses for the years ended April 30,
1999 and 2000, was as follows:
1999 2000
-------------- --------------
Balance, beginning of year........... $ 1,198,545 $ 1,529,651
Provision for credit losses..... 4,661,000 6,414,572
Charge-offs, net of
recoveries.................... (4,329,894) (5,810,229)
-------------- --------------
Balance, end of year................. $ 1,529,651 $ 2,133,994
============== ==============
4. RECEIVABLES ACQUIRED FOR INVESTMENT
Loans purchased at a discount relating to credit quality were included in
the balance sheet amounts of Receivables Acquired for Investment as follows as
of April 30, 1999 and 2000:
1999 2000
---------------- ----------------
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality net of excess cash
flows to be sold................... $ 62,970,901 $ 31,198,093
Nonaccretable difference............. (14,314,526) (5,387,268)
Accretable yield..................... (7,632,607) (3,922,371)
---------------- ----------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................ $ 41,023,768 $ 21,888,454
================ ================
F-12
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount of Receivables Acquired for Investment are net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
estimated that it would be unable to collect.
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
---------------- --------------
Balance at April 30, 1998............ $ -- $ --
Additions....................... 24,603,781 12,225,259
Accretion....................... -- (4,592,652)
Eliminations.................... (10,289,255) --
---------------- --------------
Balance at April 30, 1999............ $ 14,314,526 $ 7,632,607
Eliminations.................... (7,673,937) --
Accretion....................... -- (4,963,557)
Reclassifications............... (1,253,321) 1,253,321
---------------- --------------
Balance at April 30, 2000............ $ 5,387,268 $ 3,922,371
================ ==============
Nonaccretable difference eliminations represent contractual principal and
interest payments that the Company has determined that it would be unable to
collect. The increase in accretable yield in 2000 includes a reclassification
from nonaccretable difference for cash flows expected to be collected in excess
of those previously expected.
Principal payments expected to be received on the receivable portfolio,
assuming no defaults and that payments are received in accordance with
contractual terms, are summarized in the following table. Receivables may pay
off prior to contractual due dates, primarily due to defaults and early payoffs.
Year ending April 30 --
2001............................... $ 11,747,433
2002............................... 11,631,211
2003............................... 7,819,449
--------------
$ 31,198,093
==============
5. RESTRICTED CASH
The components of restricted cash at April 30, 1999 and 2000, are as
follows:
1999 2000
-------------- --------------
Dealer reserves...................... $ 161,052 $ 28,604
Acquisition facility compensating
balance (Note 7)................... 3,126,843 3,574,751
Funds held in trust for receivable
fundings........................... 648,451 1,898,650
Warehouse credit facility account
(Note 7)........................... 3,231,851 5,206,261
Collection and lockbox balances...... 3,316,825 12,453,027
Other................................ 319,439 250,000
-------------- --------------
Total restricted cash........... $ 10,804,461 $ 23,411,293
============== ==============
F-13
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets at April 30,
1999 and 2000, are as follows:
1999 2000
------------- -------------
Deferred financing costs, net........ $ 594,596 $ 1,527,354
Furniture and equipment, net......... 2,193,544 1,436,788
Software, net........................ 214,845 678,124
Accounts receivable.................. 1,036,586 792,762
Other, net........................... 858,474 1,383,310
------------- -------------
Total........................... $ 4,898,045 $ 5,818,338
============= =============
7. DEBT
The Company finances the acquisition of its receivables portfolio through
three warehouse credit facilities. The Company's credit facilities provide for
one year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. In January
2000, the Company issued $168 million in asset-backed notes secured by a pool of
receivables. Proceeds from the note issuance were used to repay outstanding
borrowings under the various revolving credit facilities. Substantially all
receivables retained by the Company are pledged as collateral for the credit
facilities and the Term Notes.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been primarily provided through a syndicated warehouse
credit facility agented by Bank of America. The borrowing base is defined as the
sum of the principal balance of the receivables pledged and the amount on
deposit in an escrow account. The Company is required to maintain a reserve
account equal to the greater of one percent of the principal amount of
receivables financed or $250,000. During fiscal year 1999, the FIRC credit
facility was increased to $65 million from $55 million. Borrowings under the
FIRC credit facility bear interest at a rate selected by the Company at the time
of the advance of either the base rate, defined as the higher of the prime rate
or the federal funds rate plus .5 percent, the LIBOR rate plus .5 percent, or a
rate agreed to by the Company and the banks. The facility also provides for the
payment of a fee of .25 percent per annum based on the total committed amount.
Borrowings under the FIRC credit facility were $65,000,000 and $59,540,000
at April 30, 1999 and 2000, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 5.84 percent and 6.21 percent as of such dates. The FIRC credit
facility provides for a term of one year at which time the outstanding principal
balance will be payable in full, although there are provisions allowing the
Company a period of six months to refinance the facility in the event that it is
not renewed. The current term of the FIRC credit facility expires on September
30, 2000. The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility through
Enterprise Funding Corporation (Enterprise), a commercial paper conduit
administered by Bank of America. Receivables are transferred
F-14
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periodically from the FIRC credit facility to Enterprise through the assignment
of an undivided interest in a specified group of receivables. Enterprise issues
commercial paper (indirectly secured by the receivables), the proceeds of which
are used to repay the FIRC credit facility.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise which remained in effect until this
facility was increased in March 1999 to $135 million. The financing is provided
to a special-purpose, wholly-owned subsidiary of the Company, FIARC. Credit
enhancement for the $135 million facility is provided to the commercial paper
investors by a surety bond issued by MBIA Insurance Corporation. Borrowings
under the commercial paper facility bear interest at the commercial paper rate
plus a borrowing spread equal to .30 percent per annum. Additionally, the
agreement provides for additional fees based on the unused amount of the
facility and dealer fees associated with the issuance of the commercial paper. A
surety bond premium equal to .35 percent per annum is assessed based on the
outstanding borrowings under the facility. A one percent cash reserve must be
maintained as additional credit support for the facility. The current term of
the FIARC commercial paper facility expires on August 15, 2000. If the facility
was not extended, receivables pledged as collateral would be allowed to
amortize; however, no new receivables would be allowed to be transferred from
the FIRC credit facility. At April 30, 1999 and 2000, the Company had borrowings
of $90,735,214 and $18,004,889, respectively, outstanding under the commercial
paper facility at weighted average interest rates, including the effect of
program fees, dealer fees and hedge instruments, as applicable, of 5.75 percent
and 7.33 percent, respectively. The Company is currently in discussions with its
lenders regarding the renewal and extension of this facility. Management
considers its relationship with the lenders under this facility to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility was not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on the
Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with Variable Funding Capital
Corporation ("VFCC"), a commercial paper conduit administered by First Union
National Bank, to fund the acquisition of additional receivables generated under
certain of the Company's financing programs. FIACC acquired receivables from the
Company and may borrow up to 88% of the face amount of receivables, which are
pledged as collateral for the commercial paper borrowings. VFCC funds the
advance to FIACC through the issuance of commercial paper (indirectly secured by
the receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. At April 30, 2000,
the maximum borrowings available under the facility were $25 million. The
Company's interest cost is based on VFCC's commercial paper rates for specific
maturities plus .55 percent. In addition, the Company is required to pay
periodic facility fees of .25 percent on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88 percent advance rate and to pay carrying costs and
related expenses, with the balance released to the Company. In addition to the
88 percent advance rate, FIACC must maintain a 2 percent cash reserve as
additional credit support for the facility.
The current term of the FIACC commercial paper facility expires on December
31, 2000. If the facility was not extended, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1999, borrowings were
$20,814,203 under the FIACC commercial paper facility, and had a weighted
average interest rate of 5.26 percent,
F-15
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including the effects of program fees and hedge instruments. There were no
outstanding borrowings at April 30, 2000.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174% asset-backed notes ("Notes").
The Notes are secured by a pool of automobile receivables totaling $174,968,641,
which were previously owned by FIRC, FIARC and FIACC. Proceeds from the
issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Note issuance and to fund a cash reserve account of 2% or
$3,499,373 which will serve as a portion of the credit enhancement for the
transaction. The Notes bear interest at 7.174% and require monthly principal
reductions sufficient to reduce the balance of the Notes to 96% of the
outstanding balance of the underlying receivables pool. The final maturity of
the Notes is February 15, 2006. As of April 30, 2000, the outstanding principal
balance on the Notes was $151,104,279. A surety bond issued by MBIA Insurance
Corporation provides credit enhancement for the Note holders. Additional credit
support is provided by the cash reserve account, which equals 2% of the original
balance of the receivables pool and a 4% over-collateralization requirement. In
the event that certain asset quality covenants are not met, the reserve account
target level will increase to 6% of the then current principal balance of the
receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC, an affiliate of First Union National Bank, to finance the Company's
acquisition of FISC. Contemporaneously with the Company's purchase of FISC, FISC
transferred certain assets to FIFS Acquisition, consisting primarily of (i) all
receivables owned by FISC as of the acquisition date, (ii) FISC's ownership
interest in certain trust certificates and subordinated spread or cash reserve
accounts related to two asset securitizations previously conducted by FISC, and
(iii) certain other financial assets, including charged-off accounts owned by
FISC as of the acquisition date. These assets, along with a $1 million cash
reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus 2.35
percent and expires on July 31, 2000. Under the terms of the facility, all cash
collections from the receivables or cash distributions to the certificate holder
under the securitizations are first applied to pay FISC a servicing fee in the
amount of 3 percent on the outstanding balance of all owned or managed
receivables and then to pay interest on the facility. Excess cash flow available
after servicing fees and interest payments are utilized to reduce the
outstanding principal balance on the indebtedness. In addition, one-third of the
servicing fee paid to FISC is also utilized to reduce principal outstanding on
the indebtedness. The Company is currently negotiating with First Union to
refinance the acquisition facility over an extended term sufficient to amortize
the outstanding balance of the indebtedness through collections of the
underlying receivables and trust certificates. It is anticipated that the
permanent financing will consist of issuing various tranches of notes, to be
held by VFCC, which will contain distinct principal amortization requirements
and interest rates. The Company anticipates no material change in the weighted
average interest rate under the permanent financing. It is anticipated, however,
that a partnership will be created to purchase FIFS, Acquisition assets and
issue the notes. The partnership interests will be held by the Company and First
Union and will enable the partners to share excess cash flow generated from the
remaining assets. The amount of excess cash to be received by First Union will
vary depending upon the timing and amount of such cash flows. To the extent that
the facility is not finalized prior to the expiration date, the Company intends
to seek a short-term extension to allow for the completion of the term
financing. The Company has no reason to believe that VFCC will not grant such an
extension or that an agreement to refinance the
F-16
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bridge loan will not be reached prior to the then final maturity of the bridge
facility. If the facility were not extended, the remaining outstanding principal
balance would be due at maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that is utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December, 1999.
Borrowings under this facility bear interest at the Company's option of (i) Bank
of America's prime lending rate, or (ii) a rate equal to 3.0 percent above the
LIBOR rate for the applicable interest period. In addition, the Company is also
required to pay period facility fees, as well as an annual agency fee. The
current expiration of the facility is September 30, 2000. If the lender elected
not to renew, any outstanding borrowings would be amortized over a one-year
period. The Company is currently in discussions with its lenders regarding the
renewal and extension of this facility. Management considers its relationship
with the lenders under this facility to be satisfactory and has no reason to
believe that this credit facility will not be renewed. If the facility was not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company. At April 30, 1999 and
2000, there was $7,235,000 and $13,300,000 outstanding under this facility.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under
increased working capital facility.
LOAN COVENANTS. The documentation governing these credit facilities and
Term Notes contains numerous covenants relating to the Company's business, the
maintenance of credit enhancement insurance covering the receivables (if
applicable), the observance of certain financial covenants, the avoidance of
certain levels of delinquency experience and other matters. The breach of these
covenants, if not cured within the time limits specified, could precipitate
events of default that might result in the acceleration of the FIRC credit
facility, the Term Notes and the working capital facility or the termination of
the commercial paper facilities. The Company was in compliance with all
covenants at April 30, 2000.
INTEREST RATE MANAGEMENT. The Company's secured credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is February 15, 2006.
F-17
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81 percent; and, the second in the
initial notional amount of $24.9 million (Swap B) pursuant to which the
Company's interest rate is fixed at 5.50 percent. The notional amount
outstanding under each swap agreement amortizes based on an implied amortization
of the hedged indebtedness. Swap A has a final maturity of December 30, 2002
while Swap B matured on February 20, 2000. The Company also purchased two
interest rate caps which protect the Company and the lender against any material
increases in interest rates which may adversely affect any outstanding
indebtedness which is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement enables the Company to
receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 4.81 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap A and the underlying indebtedness. The
interest rate cap expires December 20, 2002 and the cost of the cap is amortized
in interest expense for the period. The second cap agreement enables the Company
to receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 6 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap B and the underlying indebtedness. The
interest rate cap expires February 20, 2002 and the cost of the cap is imbedded
in the fixed rate applicable to Swap B.
8. INCOME TAXES
The temporary differences which give rise to net deferred tax assets are as
follows at April 30, 1999 and 2000, respectively:
1999 2000
------------- -------------
Deferred tax assets
Allowance for credit losses..... $ 689,334 $ 1,235,853
Accrued expenses................ 170,065 320,778
------------- -------------
859,399 1,556,631
------------- -------------
Deferred tax liabilities
Receivables held for investment,
net........................... -- (284,342)
Receivables Acquired for
Investment, net and Investment
in Trust Certificates......... (185,784) (1,139,889)
Deferred costs, net............. (56,634) (47,555)
Internally developed software... (63,200) (19,970)
------------- -------------
(305,618) (1,491,756)
------------- -------------
Net deferred tax assets.............. $ 553,781 $ 64,875
============= =============
F-18
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes for the years ended April 30,
1998, 1999 and 2000, consists of the following:
1998 1999 2000
----------- ------------- -------------
Current --
Federal......................... $ 548,343 $ 1,347,472 $ 925,003
State........................... 65,787 58,739 289,540
----------- ------------- -------------
$ 614,130 $ 1,406,211 $ 1,214,543
=========== ============= =============
Deferred --
Federal......................... $ 89,023 $ (255,546) $ 584,694
State........................... 618 -- (95,788)
----------- ------------- -------------
$ 89,641 $ (255,546) $ 488,906
=========== ============= =============
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the years ended April 30,
1998, 1999 and 2000.
1998 1999 2000
--------- --------- ---------
Income tax -- statutory rate......... 34.0% 34.0% 34.0%
State income tax, net of federal
benefit.............................. 2.5 2.1 2.5
Non-deductible expenses.............. .5 .5 .1
Tax free income...................... (1.1) (.4) (.1)
Other................................ .6 .3 --
--------- --------- ---------
Effective income tax rate....... 36.5% 36.5% 36.5%
========= ========= =========
9. CREDIT RISKS
Approximately 29 percent of the Company's receivables held for investment
by principal balance at April 30, 2000, represent receivables acquired from
dealers located in Texas. The economy of Texas is primarily dependent on
petroleum and natural gas production and sales of related supplies and services,
petrochemical operations, light and medium manufacturing operations, computer
and computer service businesses, agribusiness and tourism. Job losses in any or
all of these primary economic segments of the Texas economy may result in a
significant increase in delinquencies or defaults in the Company's receivable
portfolio. While the receivables are secured by vehicles, the Company has
recourse to reserve accounts and dealers for losses on certain receivables and
the Company has third-party default insurance for receivables originated prior
to April 1994, there can be no assurance that such remedies would mitigate
additional credit losses.
The Company is also exposed to credit loss in the event that the
counterparties to the swap agreements described in Note 7 do not perform their
obligations. The terms of the Company's interest rate agreements provide for
settlement on a monthly basis and accordingly, any credit loss due to non-
performance of the counterparty would be limited to the amount due from the
counterparty for the month non-performance occurred. The Company would be
exposed to adverse interest rate fluctuations following any such
non-performance. While management believes that it could enter into interest
rate swap agreements with other counterparties to effectively manage such rate
exposure, there is no assurance that it would be able to enter interest rate
agreements on comparable terms as those of its present agreements.
F-19
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and estimated fair
values of the Company's financial instruments for those financial instruments
whose carrying amounts differ from their estimated fair values. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
shown in the table are included in the balance sheet under the indicated
captions.
APRIL 30, 1999 APRIL 30, 2000
------------------------------- -------------------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------------- ------------ ----------------
Financial assets --
Receivables Held for
Investment.................... $179,807,957 $ 192,432,874 $231,696,539 $ 238,670,780
Financial liabilities --
Term Notes...................... -- -- $151,104,279 $ 150,490,418
Off-balance sheet instruments --
Swap agreements................. $171,668,397 $ (764,778) $171,296,496 $ (482,924)
Cap agreements.................. $ 19,458,941 $ 483,541 $ 41,729,094 $ 1,037,576
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:
CASH AND SHORT-TERM INVESTMENTS, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES. The carrying amounts approximate fair value because of the
short maturity and market interest rates of those instruments.
RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by
discounting expected cash flows at a risk-adjusted rate of return deemed to be
appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
RECEIVABLES ACQUIRED FOR INVESTMENT. The carrying value approximates fair
value. The fair values were estimated by discounting expected cash flows at a
risk-adjusted rate of return deemed to be appropriate for investors in such
receivables. Expected cash flows take into consideration management's estimates
of prepayments, defaults and recoveries.
INVESTMENT IN TRUST CERTIFICATES. The carrying value approximates fair
value. The fair values were determined by utilizing prepayment speeds, loss rate
assumptions and discount rate assumptions.
TERM NOTES. The fair value was estimated by discounting cash payments
using current rates and comparative maturities. Expected cash payments take into
consideration prepayments, defaults and recoveries on the underlying collateral.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
SWAP AGREEMENTS. The fair value was estimated based on the payment the
Company would have to make to or receive from the swap counterparty to terminate
the swap agreements.
CAP AGREEMENTS. The fair value was estimated based on the payment the
Company would receive from the cap counterparty to terminate the cap agreements.
F-20
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEFINED CONTRIBUTION PLAN
Effective May 1, 1994, the Company adopted a participant-directed 401(k)
retirement plan for its employees. An employee becomes eligible to participate
in the plan immediately upon employment. The Company pays the administrative
expenses of the 401(k) plan. The Company also matches a percentage of each
participant's voluntary contributions up to a maximum voluntary contribution of
3% of the participant's compensation. In fiscal year 2000, the Company made
matching contributions to the 401(k) plan in the amount of $31,954. Prior to
fiscal year 2000, no matching contributions were made.
12. SHAREHOLDERS' EQUITY
PREFERRED STOCK. In June 1995, the shareholders approved a new series of
preferred stock (New Preferred Stock) with a $1.00 par value, and authorized
1,000,000 shares. As of April 30, 2000, no shares have been issued.
STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the
Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered
by the Compensation Committee of the Board of Directors and provides that
options may be granted to officers and other key employees for the purchase of
up to 300,000 shares of Common Stock, subject to adjustment in the event of
certain changes in capitalization. Options may be granted either as incentive
stock options (which are intended to qualify for certain favorable tax
treatment) or as non-qualified stock options.
The Compensation Committee selects the persons to receive options and
determines the exercise price, the duration, any conditions on exercise and
other terms of the options. In the case of options intended to be incentive
stock options, the exercise price may not be less than 100 percent of the fair
market value per share of Common Stock on the date of grant. With respect to
non-qualified stock options, the exercise price may be fixed as low as 50
percent of the fair market value per share at the time of grant. In no event may
the duration of an option exceed 10 years and no option may be granted after the
expiration of 10 years from the adoption of the Plan.
The exercise price of the option is payable in full upon exercise and
payment may be in cash, by delivery of shares of Common Stock (valued at their
fair market value at the time of exercise), or by a combination of cash and
shares. At the discretion of the Compensation Committee, options may be issued
in tandem with stock appreciation rights entitling the option holder to receive
an amount in cash or in shares of Common Stock, or a combination thereof, equal
in value to any increase since the date of grant in the fair market value of the
Common Stock covered by the option.
F-21
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans for the years
ended April 30, 1998, 1999 and 2000 is presented below:
WEIGHTED
AVERAGE
SHARES UNDER EXERCISE
OPTION PRICE
------------ ---------
Outstanding at April 30, 1997........ 80,000 $ 11.00
Granted......................... 68,000 $ 7.29
Forfeited....................... (10,000) $ 11.00
------------
Outstanding at April 30, 1998........ 138,000 $ 9.17
Granted......................... 10,000 $ 4.92
Forfeited....................... (1,000) $ 7.38
------------
Outstanding at April 30, 1999........ 147,000 $ 8.93
Granted......................... 2,500 $ 5.25
Forfeited....................... (12,500) $ 8.30
------------
Outstanding at April 30, 2000........ 137,000 $ 8.91
============
Options available for future grants
at April 30, 2000.................. 183,000
============
FISCAL
-------------------------------
1998 1999 2000
--------- --------- ---------
Options exercisable at end of year... 38,000 61,400 80,300
Weighted average exercise price of
options exercisable................ $ 11.00 $ 10.19 $ 9.75
Weighted average fair value of
options granted.................... $ 4.27 $ -- $ --
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE AVERAGE OPTIONS OPTIONS CONTRACTUAL
PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
-------- -------------- ----------- ----------- -------------
$11.00 $11.00 20,000 20,000 (1)
$4.75-$11.00 $ 9.24 117,000 60,300 6.29
----------- -----------
137,000 80,300
=========== ===========
- ------------
(1) The option will terminate one year after the Director ceases to be a member
of the Board of Directors, except that in the event of the Director's death
while serving as a Director the option would be exercisable by his heirs or
representatives of his estate for a period of two years after date of death.
F-22
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for these plans under APB Opinion No. 25 under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
FISCAL
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
Net Income........................... As Reported $ 1,224,369 $ 2,001,842 $ 2,963,535
Pro Forma $ 1,182,126 $ 1,939,023 $ 2,920,289
Basic and Diluted Net Income Per
Common Share....................... As Reported $0.22 $0.36 $0.53
Pro Forma $0.21 $0.35 $0.52
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.
The following weighted-average assumptions were used:
FISCAL
-------------------------------
1998 1999 2000
--------- --------- ---------
Risk free interest rate................. 6.06% 5.41% 6.45%
Expected life of options in years....... 10 10 10
Expected stock price volatility......... 37% 38% 37%
Expected dividend yield................. 0% 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO FUND. As of April 30, 2000, the Company had unfunded
receivables in process of approximately $1.8 million.
EMPLOYMENT AGREEMENT. The Company has entered into employment agreements
with two key executives which expire July 31, 2000. Each agreement provides for
an annual salary plus the potential to earn an annual cash bonus to be
determined by the Compensation Committee of the Board of Directors based on the
financial results for the fiscal year then ended. In the event the executive is
terminated for any reason other than death, disability, mutual agreement or
conduct of a material illegal act, he is entitled to a sum equal to the annual
salary for the remaining term of the agreement.
LITIGATION. The Company from time to time becomes involved in various
routine legal proceedings which are incidental to the business. Management of
the Company vigorously defends such matters. As of April 30, 2000, management
believes there are no such legal proceedings that would have a material adverse
impact on the Company's financial position or results of operations.
F-23
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES. The Company is a party to a lease agreement for office space in
Houston that expires on February 28, 2003. The Company is party to a lease
agreement for office space in Atlanta which expires on December 31, 2001, with
an early termination option by either party anytime on or after June 30, 2000.
The Company did exercise this early termination option and entered into a new
lease agreement expiring on June 30, 2007. The Company also holds equipment
under operating leases which expire in fiscal year 2003. Rent expense for office
space and other operating leases for the years ended April 30, 1998, 1999 and
2000, was $289,257, $871,851, $1,149,646, respectively. Required minimum lease
payments for the remaining terms of the above leases are:
Year ending April 30-
2001.......................... $ 1,095,025
2002.......................... 1,047,454
2003.......................... 774,872
2004.......................... 578,472
2005.......................... 571,618
Thereafter.................... 1,160,298
CAPITAL LEASES. During the year ended April 30, 1999, the Company entered
into a sale-and-leaseback transaction for certain of its computer equipment at
FISC for approximately $2.1 million. Gain on sale of this transaction was not
significant and is being amortized through the term of the lease. For accounting
purposes, the Company has treated this transaction as a capital lease in
accordance with SFAS No. 13 "Accounting for Leases" and recorded this
obligation in Accounts Payable and Accrued Liabilities. Payments are due in
monthly installments of $65,178 through 2002 with an implicit interest rate of
8.8 percent. Depreciation on the equipment has been reflected in accordance with
the Company's accounting policies.
At April 30, 2000, the aggregate amount of annual principal maturities of
the capital lease obligation are as follows:
Year Ending April 30 --
2001.......................... $ 782,137
2002.......................... 456,247
-------------
1,238,384
Less -- Amounts representing
interest...................... 86,421
-------------
$ 1,151,963
=============
F-24
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the years ended April 30, 1998, 1999 and 2000 are
as follows:
FOR THE YEAR ENDED APRIL 30,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share.... 5,566,669 5,566,669 5,566,669
Effect of dilutive stock options... 628 27 484
------------ ------------ ------------
Weighted average shares outstanding
for diluted earnings per
share........................... 5,567,297 5,566,696 5,567,153
============ ============ ============
At April 30, 2000, the Company had 136,516 employee stock options which
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the period presented.
15. BUSINESS COMBINATIONS
On October 2, 1998, the Company acquired all of the outstanding stock of
FISC, a Delaware corporation and wholly-owned subsidiary of Fortis, Inc., for an
approximate purchase price of $74.1 million. FISC's principal business activity
is the servicing of retail automobile sales contracts. The transaction was
treated as a purchase for accounting purposes and results of operations are
included in the Company's consolidated financial statements beginning on October
2, 1998. The net book value of the net assets acquired exceeded the purchase
price by $8.5 million. Receivables acquired for investment have been recorded
net of amounts estimated to be uncollectible over the life of the receivables.
In conjunction with the acquisition, liabilities were assumed as follows:
Receivables acquired for
investment........................... $ 55,676,122
Investment in trust certificates..... 15,273,695
Fixed assets and other............... 6,635,013
Cash paid, net of cash acquired...... (76,052,178)
----------------
Liabilities assumed.................. $ 1,532,652
================
F-25
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary presents information as if the
acquisition had occurred at the beginning of each fiscal year. The pro forma
information is provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined business. In preparing the pro forma data, adjustments have been made
to (i) increase the yield on Receivables Acquired for Investment based on the
discounted purchase price, (ii) increase interest expense for the financing of
the acquisition, (iii) eliminate intercompany costs, (iv) eliminate costs
incurred in preparation of the sale of FISC, and (v) adjust the federal and
state income tax provisions based on the combined operations.
FOR THE YEAR ENDED
APRIL 30,
------------------------------
1998 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
Interest Income...................... $ 46,039,536 $ 43,076,429
Net Income (Loss).................... $ (2,022,170) $ 424,193
Basic and Diluted Net Income (Loss)
per common share..................... $ (0.36) $ 0.08
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 2000.
FOR THE THREE MONTHS ENDED,
-----------------------------------------------------------------------
JULY 31, 1999 OCTOBER 31, 1999 JANUARY 31, 2000 APRIL 30, 2000
------------- ---------------- ---------------- --------------
Interest Income......................... $ 9,609,333 $ 10,063,124 $ 10,584,724 $ 10,019,046
Interest Expense........................ 3,879,688 3,984,995 4,142,041 4,503,033
Net Income.............................. 702,416 775,412 807,870 677,837
Basic and Diluted Net Income per Common
Share................................. $ 0.13 $ 0.14 $ 0.15 $ 0.12
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 1999.
FOR THE THREE MONTHS ENDED,
-----------------------------------------------------------------------
JULY 31, 1998 OCTOBER 31, 1998 JANUARY 31, 1999 APRIL 30, 1999
------------- ---------------- ---------------- --------------
Interest Income......................... $ 5,658,594 $ 6,953,343 $ 9,202,081 $ 9,261,985
Interest Expense........................ 2,224,471 2,886,258 3,962,813 3,708,184
Net Income.............................. 314,983 388,878 584,718 713,263
Basic and Diluted Net Income per Common
Share................................. $ 0.06 $ 0.07 $ 0.11 $ 0.12
F-26