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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, 1999
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
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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, 1999, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $15,934,014.
There were 5,566,669 shares of Common Stock of the registrant outstanding
as of June 30, 1999.
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 8, 1999, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 1999.
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 1999
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business............................. 1
Item 2. Properties........................... 15
Item 3. Legal Proceedings.................... 15
Item 4. Submission of Matters to a Vote of
Security Holders................... 15
PART II
Item 5. Market for Registrants' Common Equity
and Related Shareholder Matters.... 16
Item 6. Selected Consolidated Financial
Data............................... 17
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Item 8. Financial Statements and
Supplementary Data................. 31
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure............... 31
PART III
Item 10. Directors and Executive Officers..... 32
Item 11. Executive Compensation............... 32
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 32
Item 13. Certain Relationships and Related
Transactions....................... 32
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form
8-K................................ 32
PART I
ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a
specialized consumer finance company engaged in the purchase and retention of
receivables originated by franchised automobile dealers from the sale of new and
late-model used vehicles to consumers with substandard credit profiles. The
Company does not utilize off-balance sheet securitization to finance its
receivables held for investment. As of April 30, 1999, the Company had
receivables held for investment in the aggregate principal amount of
$179,807,957, having an effective yield of 16.2% and a net interest spread to
the Company of 9.7% (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 Auto Lenders
Acceptance Corporation ("ALAC") from Fortis, Inc. Headquartered in Atlanta,
Georgia, ALAC 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. sub-prime). The sub-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 April 30,
1999, 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
1
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 12% 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, 1999, 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, 1998 APRIL 30, 1999
BUSINESS DEALERS AT ------------------ ------------------
STATES COMMENCED APRIL 30, 1999 NUMBER % NUMBER %
- ------------------------------------- --------- -------------- ------ --------- ------ ---------
Texas................................ 2/89 336 5,348 42.7% 5,626 35.1%
Ohio................................. 9/94 606 2,104 16.8 3,047 19.0
Georgia.............................. 9/94 110 1,920 15.3 2,408 15.0
Oklahoma............................. 7/94 102 959 7.7 1,476 9.2
Missouri............................. 12/93 77 496 4.0 705 4.4
Michigan............................. 10/94 192 369 3.0 481 3.0
Kansas............................... 12/93 47 264 2.1 361 2.3
Virginia............................. 4/98 38 -- -- 351 2.2
North Carolina....................... 11/95 65 218 1.7 305 1.9
Tennessee............................ 11/95 40 202 1.6 199 1.2
Arizona.............................. 2/96 28 165 1.3 176 1.1
Utah................................. 10/92 63 164 1.3 156 1.0
Colorado............................. 8/94 66 156 1.3 182 1.1
All others(1)........................ -- 936 151 1.2 542 3.5
-------------- ------ --------- ------ ---------
2,706 12,516 100.0% 16,015 100.0%
============== ====== ========= ====== =========
- ------------
(1) Includes dealers located in California, Connecticut, Florida, Idaho, Iowa,
Illinois, Indiana, Kentucky, Nebraska, New Jersey, Pennsylvania, South
Carolina, and Washington. The aggregate receivables from the dealers in each
of these states represented less than 4% of total receivables during the
year ended April 30, 1999.
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.
In 1997, the Company established a telemarketing department to supplement
the efforts of its marketing representatives in the field. The telemarketing
staff (Dealer Service Representatives) are
2
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 "Dealer 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.
DEALER FINANCING PROGRAMS
The Company originates loans primarily from two sources: (i) dealer
indirect (the "core program") and (ii) alliance referrals. The core program
generates approximately 90% of the Company's current volume and consists of
loans purchased directly from dealerships in states not covered under the
alliance agreements. Alliance referrals represent approximately 10% of current
originations and consist of applications which are declined by one of the
Company's three alliance partners (National City Bank, Citibank and Bank of
America) and forwarded to the Company for consideration.
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, 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 dealership agreements with 2,706 dealers at April 30, 1999.
These are non-exclusive agreements terminable at any time by either party and
they require no specific volume levels. 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. 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. 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.
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 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. The Company has developed various financing
programs under
3
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 10 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 servicing is
as important as sound credit evaluation for purposes of assuring the integrity
of a receivable.
Since its inception in 1989, the Company has had a servicing relationship
with General Electric Capital Corporation ("GECC"), an affiliate of the
General Electric Corporation. The division of GECC which services 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.
A specific team of employees at GECC is dedicated primarily to servicing
the Company's receivables. These persons coordinate with the Company's personnel
on a daily basis and their familiarity with the Company's business and portfolio
enable them to perform in a timely, responsive and cost-effective manner. The
Company maintains data bases enabling it to monitor and confirm the accuracy of
the periodic reports and other information provided by GECC and to reconcile
discrepancies when they exist.
The following table sets forth certain information concerning the volumes
of receivables serviced for the Company by GECC as of the dates indicated:
AS OF APRIL 30,
----------------------------------
1998 1999
---------------- ----------------
Number of Receivables................ 12,516 16,015
Aggregate Principal Amount of
Receivables........................ $ 136,445,808 $ 179,807,957
Under its servicing agreements with the Company, GECC is responsible for
three primary functions: (i) receipt, review and verification of all collateral
and documentation requirements, (ii) establishment and administration of payment
and collection schedules, and (iii) repossession of vehicles securing defaulted
receivables. The Company currently handles all of the disposition of repossessed
vehicles.
Servicing fees paid by the Company represent a variable cost that increases
in proportion to the volume of receivables carried. During its two fiscal years
ended April 30, 1999, the Company incurred servicing and related fees in the
amount of $1,838,002 and $2,350,741, respectively, which represented 1.5% of the
average principal amount of receivables outstanding in each of the respective
periods.
The Company's current relationship with GECC is governed by a servicing
agreement entered into in October 1992, although the Company has done business
with GECC under prior agreements since its inception in 1989. The present
agreement terminates on October 31, 2000, subject to earlier termination
depending on the outcome of annual pricing renegotiations. In the event the GECC
arrangement were to terminate, GECC would remain obligated to continue to
service the existing receivables through their maturity. The Company, however,
reserves the right to cancel the servicing agreement at any time without
penalty.
4
While the Company considers its relationship with GECC to be satisfactory,
the Company believes that an internal servicing platform provides certain
strategic and economic benefits. A desire to ultimately transition from an
external to an internal servicing platform was one of the key considerations in
the ALAC acquisition. ALAC offered the Company the ability to purchase a fully-
functioning servicing platform in significantly less time than it would have
taken it to develop such an infrastructure on its own. ALAC performed all
aspects of servicing its loans including (i) billing, collecting, accounting for
and posting all payments received directly from obligors or through its lockbox
accounts, (ii) responding to customer inquiries, (iii) taking all action
necessary to obtain and maintain the security interest granted in the
collateral, (iv) investigating delinquencies, (v) communicating with obligors to
obtain timely payments, (vi) contracting for the repossession and resale of the
collateral when necessary, and (vii) monitoring loans and the related
collateral. ALAC's loan volume combined with the Company's own volume will allow
the Company to fully leverage the acquired ALAC servicing platform while
achieving significant operating economies and cost synergies.
Subsequent to fiscal year end, the Company completed the transition of its
portfolio of receivables held for investment from GECC to its internal servicing
and collection platform. This transition effectively terminates the servicing
agreement with GECC with the exception of certain daily functions, such as
collecting and posting payments on existing accounts, which is expected to
continue for a brief period following the transition and certain ongoing
responsibilities of GECC such as forwarding information, documents or other
notices it receives with respect to the accounts of the Company.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify vehicle purchasers 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
select receivables arising from sales 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
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,
--------------------
1998 1999
--------- ---------
Average monthly gross income......... $ 3,449 $ 4,020
Average ratio of consumer debt to
gross income....................... 34% 32%
Average years in current
employment......................... 5 5
Average years in current residence... 6 6
Residence owned...................... 40% 44%
Residence rented..................... 52% 52%
Other residence arrangements(1)...... 8% 4%
- ------------
(1) Includes military personnel and persons residing with relatives.
5
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,
----------------------
1998 1999
---------- ----------
New Vehicles:
Percentage of portfolio(1)...... 29% 25%
Number of receivables
outstanding.................... 3,665 3,968
Average amount at date of
acquisition.................... $ 16,386 $ 17,027
Average term (months) at date of
acquisition(2)................. 60 60
Average remaining term
(months)(2).................... 37 37
Average monthly payment......... $415 $428
Average annual percentage
rate........................... 17.6% 17.3%
Used Vehicles:
Percentage of portfolio(1)...... 71% 75%
Number of receivables
outstanding.................... 8,851 12,047
Average age of vehicle at date
of acquisition (years)......... 2.0 2.1
Average amount at date of
acquisition.................... $ 13,474 $ 13,977
Average term (months) at date of
acquisition(2)................. 54 55
Average remaining term
(months)(2).................... 39 40
Average monthly payment......... $368 $373
Average annual percentage
rate........................... 17.9% 17.7%
- ------------
(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 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, the Company also 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 to a wholly-owned special-purpose financing
subsidiary, First Investors Auto Receivables Corporation ("FIARC"). Together,
these three facilities provide $225 million in financing capacity to fund the
purchase and long-term financing of receivables.
FIRC CREDIT FACILITY. As designated receivables are purchased from dealers
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
6
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 escrow
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 October 15, 1999,
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 eight occasions since its inception
in October, 1992. Management considers its relationship with its warehouse
lenders to be satisfactory and has no reason to believe that this credit
facility will not be renewed.
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 warehouse credit facility by the amount
of the receivables transferred, 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. At April 30, 1999,
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 in March
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 presently intends to seek an
extension of this arrangement prior to its expiration.
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
7
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,
1999, 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, 1999. 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.
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 ALAC. Contemporaneously with
the Company's purchase of ALAC, ALAC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by ALAC as of the
acquisition date, (ii) ALAC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by ALAC, and (iii) certain other financial
assets, including charged-off accounts owned by ALAC 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 October 31, 1999. 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 ALAC 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 ALAC 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, or certificates to be held by the Company
and First Union, 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 in conjunction with VFCC providing the permanent financing, VFCC will
obtain a beneficial interest in certain portion of the 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 an agreement
with 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 $10 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
period facility fees, as well as an annual agency fee. The initial expiration of
the facility was July 1998 and has been subsequently
8
extended on two occasions to October 15, 1999. If the lender elected not to
renew, any outstanding borrowings would be amortized over a one-year period. The
Company presently intends to seek an extension of this arrangement prior to its
expiration.
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 embracing 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. Since interest paid on the Company's borrowings
varies with indexed rates in the case of the FIRC credit facility and working
capital facility and varies with commercial paper rates under the two commercial
paper facilities, the Company's cost of funds will fluctuate with interest rates
generally. In order to achieve some degree of protection from the potential
impact of rising interest rates on its results of operations, the Company has
utilized conventional interest rate management contracts, including so-called
"caps" and "swaps". Under these swap agreements, the Company is obligated to
make net monthly payments to the counter party only in the event that the
prevailing 30-day LIBOR interest rate declines below the applicable ceiling
rates specified in the agreements. In the event that interest rates should
decline generally in that manner, the cost to the Company would be offset in
large part by a corresponding decline in the Company's cost of funds under its
variable rate credit facilities. Accordingly, the Company's maximum exposure
under these swap arrangements is reasonably quantifiable and management believes
that they entail substantially less risk than certain other types of interest
rate hedging products. Furthermore, the risk that the Company's interest rate
management becomes ineffective is generally limited to the extent that the swap
agreements may expire prior to the maturity of the receivables.
The Company is currently a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 7 in the Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of Bank of
America. The Company is currently evaluating additional interest rate management
products with a view to fixing or limiting its interest rate exposure with
respect to amounts that are substantially equivalent to its aggregate
outstanding borrowings under the FIRC credit facility and the commercial paper
facilities.
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 has a final
maturity of 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
9
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.
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, 1999, 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, 1999 were
$2,510,266, $2,860,491 and $3,537,416, respectively, and accounted for 3.8%,
3.8% and 3.2% 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, 1999, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $13,205,268 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$4,447,913. 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, 1999, the
Insurance Affiliate had capital and surplus of $484,679 and unencumbered cash
reserves of $1,370,296 in addition to the $1,250,000 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
10
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 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 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 March 2000. Termination of the surety bond
would result in a default under the commercial paper facility. The Company
presently intends to endeavor to extend this arrangement when the current term
expires.
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.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
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 accounts. The Company
is not exposed to credit losses on its entire receivables held for investment
portfolio due to prior business strategies that included third party insurers
and a dealer recourse program. An allowance for credit losses of $1,529,651 as a
percentage of the exposed core receivables of $179,100,018 is .9%.
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, 1999, the nonaccretable loss
reserve as a percentage of Receivables Acquired for Investment was 20.6%. The
nonaccretable portion represents, at acquisition, the excess of the loan's
scheduled contractual principal and contractual interest payments over its
expected cash flows.
11
The following table sets forth certain information regarding the Company's
delinquency and charge-off experience (based on the gross principal balance of
the Company's portfolio) over its last two fiscal years (dollars in thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
-------------------------------------------
1998 1999
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days............... 178 $ 2,371 359 $ 4,554
60 - 89 days............... 45 706 50 621
90 days or more............ 131 1,987 67 963
-------- --------- -------- ---------
Total delinquencies.................. 354 $ 5,064 476 $ 6,138
======== ========= ======== =========
Total delinquencies as a percentage
of outstanding receivables......... 2.7% 2.7% 2.8% 2.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... 3.2% 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.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed under such policies. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
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 Receivables Managed was 3.4% as of April
30, 1999.
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,
1999, approximately 25% of the receivables that had been acquired by the Company
related to new vehicles and approximately 75% 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
12
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 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 securitization transactions resulting in gains on sale of receivables.
However, in the event that securitization should appear appropriate in the
future as a means of reducing interest rate exposure, enhancing liquidity or for
other reasons, the Company believes that its operating history, as well as its
established servicing and credit enhancement insurance arrangements, would
enable it to securitize its receivables portfolio efficiently and expeditiously.
In connection with the acquisition of ALAC 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 148 employees as of April 30, 1999, including 64 located at
its headquarters in Houston, 74 located at its loan servicing center in Atlanta
and 10 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. The Company maintains a 401(k)
retirement plan for which it has no contribution obligations. The Company has no
collective bargaining agreements and considers its employee relations to be
satisfactory.
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
ALAC 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. In January, 1999,
the Company installed 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. Once the Company begins servicing its new originations
on the Atlanta-based platform, loans will be boarded electronically following
funding 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.
13
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 sub-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 sub-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) 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.
14
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 in February 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 in December 31, 2001, with an early
termination option by either party any time on or after June 30, 2000.
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.
15
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, 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
April 30, 1998....................... 8 1/8 6
January 31, 1998..................... 8 6
October 31, 1997..................... 8 1/2 7 1/4
July 31, 1997........................ 7 3/4 6 3/4
As of June 30, 1999, 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.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 1999, 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,
---------------------------------------------------------
1995 1996 1997 1998 1999(5)
--------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS:
Interest income(1)............... $ 8,977 $ 14,144 $ 18,151 $ 20,049 $ 31,076
Interest expense................. 3,502 5,245 6,706 7,834 12,782
--------- ---------- ---------- ---------- ----------
Net interest income......... 5,475 8,899 11,445 12,215 18,294
Provision for credit losses(2)... 597 704 2,520 3,901 4,661
--------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit
losses.................... 4,878 8,195 8,925 8,314 13,633
--------- ---------- ---------- ---------- ----------
Loss on receivables sold with
recourse(1)................... (138) -- -- -- --
Servicing........................ -- -- -- -- 1,200
Late fees and other.............. 207 587 693 617 1,594
--------- ---------- ---------- ---------- ----------
Total other income.......... 69 587 693 617 2,794
--------- ---------- ---------- ---------- ----------
Servicing fees................... 732 1,126 1,536 1,838 2,350
Salaries and benefits............ 1,149 1,900 2,351 2,639 6,030
Other............................ 1,330 2,002 2,356 2,526 4,894
--------- ---------- ---------- ---------- ----------
Total operating expenses.... 3,211 5,028 6,243 7,003 13,274
--------- ---------- ---------- ---------- ----------
Income before provision for
income taxes.................. 1,736 3,754 3,375 1,928 3,153
Provision for income taxes....... 627 1,295 1,232 704 1,151
--------- ---------- ---------- ---------- ----------
Net income....................... $ 1,109 $ 2,459 $ 2,143 $ 1,224 $ 2,002
--------- ---------- ---------- ---------- ----------
Preferred stock dividends(3)..... (107) (50) -- -- --
--------- ---------- ---------- ---------- ----------
Net income allocable to common
shareholders before redemption
of preferred stock............ 1,002 2,409 2,143 1,224 2,002
Premium paid upon redemption of
preferred stock............... -- (160) -- -- --
--------- ---------- ---------- ---------- ----------
Net income allocable to common
shareholders after redemption
of preferred stock............ $ 1,002 $ 2,249 $ 2,143 $ 1,224 $ 2,002
========= ========== ========== ========== ==========
Basic and Diluted net income per
common share before redemption
of preferred stock(4)......... $ 0.27 $ 0.51 $ 0.39 $ 0.22 $ 0.36
========= ========== ========== ========== ==========
Basic and Diluted net income per
common share after redemption
of preferred stock(4)......... $ 0.27 $ 0.47 $ 0.39 $ 0.22 $ 0.36
========= ========== ========== ========== ==========
AS OF APRIL 30,
---------------------------------------------------------
1995 1996 1997 1998 1999(5)
--------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Receivables held for investment,
net........................... $ 63,166 $ 96,263 $ 118,299 $ 139,599 $ 183,319
Receivables acquired for
investment, net............... -- -- -- -- 41,024
Investment in trust
certificates.................. -- -- -- -- 10,755
Other assets..................... 11,468 19,397 21,444 21,654 37,711
--------- ---------- ---------- ---------- ----------
Total assets................ $ 74,634 $ 115,660 $ 139,743 $ 161,253 $ 272,809
========= ========== ========== ========== ==========
Debt:
Secured credit facilities... $ 69,664 $ 91,049 $ 112,894 $ 130,813 $ 176,549
Acquisition term facility... -- -- -- -- 55,737
Other liabilities................ 3,093 2,818 2,913 5,280 13,361
Shareholders' equity............. 1,877 21,793 23,936 25,160 27,162
--------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity...... $ 74,634 $ 115,660 $ 139,743 $ 161,253 $ 272,809
========= ========== ========== ========== ==========
(FOOTNOTES ON FOLLOWING PAGE)
17
- ------------
(1) In November 1992, the Company changed its business strategy from the sale of
receivables to retaining receivables for investment. Since November 1992,
the primary source of the Company's revenues has been interest income from
receivables retained for investment. Prior to such date, the principal
source of income was gain from sale of receivables to investors. The loss on
receivables sold with recourse recognized in 1995 related to the revision of
the Company's estimated recourse obligations which arose in conjunction with
the Company's sale of certain receivables to third party investors. Such
receivables were acquired from the third party investors by certain
shareholders, then repurchased by the Company. The Company is not subject to
any further recourse obligations on receivables sold to investors.
(2) 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 warehouse credit facility. Receivables financed under the commercial
paper facility are either insured by third parties or 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.
(3) 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.
(4) 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.
(5) On October 2, 1998, the Company completed the acquisition of Auto Lenders
Acceptance Corporation (ALAC) from Fortis, Inc. ALAC 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.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Net income for the year ended April 30, 1999, was $2,001,842 or $0.36 per
common share. Net income for the year ended April 30, 1998, was $1,224,369 or
$0.22 per common share. This represents an increase of 64% in net income and
earnings per common share.
OVERVIEW
The Company is a specialized consumer finance company engaged in the
purchase and retention of receivables originated by franchised automobile
dealers from the sale of new and late-model used vehicles to consumers with
substandard credit profiles. At April 30, 1999, the Company had a network of
2,706 franchised dealers in 26 states from which it purchases the receivables at
the time of origination. While the Company intends to continue to geographically
diversify its receivables portfolio, approximately 35% of receivables held for
investment by principal balance at April 30, 1999 represent receivables acquired
from dealers 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 Auto Lenders Acceptance Corporation ("ALAC") from Fortis, Inc.
Headquartered in Atlanta, Georgia, ALAC 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 as 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. ALAC performs
servicing and collection functions on a $105.5 million portfolio of loans,
including loans serviced for others, originated in 18 states.
19
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,
------------------------
1998 1999
----------- -----------
Receivables Held for Investment:
Number.......................... 12,516 16,015
Principal balance............... $ 136,446 $ 179,808
Average principal balance of
receivables outstanding during
the twelve month period....... $ 124,436 $ 155,431
Average principal balance of
receivables outstanding during
the three month period........ $ 132,075 $ 172,287
Receivables Acquired for Investment:
Number.......................... -- 4,871
Principal balance............... -- $ 48,853
Receivables Managed:(1)
Number.......................... -- 6,461
Principal balance............... -- $ 56,614
- ------------
(1) Represents receivables previously owned by ALAC 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,
------------------------
1998 1999(2)
----------- -----------
Interest income(1)................... $ 20,049 $ 31,076
Interest expense..................... 7,834 12,782
----------- -----------
Net interest income............. $ 12,215 $ 18,294
=========== ===========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) The Receivables Acquired for Investment contributed $5,929 to interest
income, $2,975 to interest expense and $2,954 to net interest income for
fiscal 1999.
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 and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
YEARS ENDED
APRIL 30,
--------------------
1998 1999
--------- ---------
Receivables Held for Investment:
Effective yield on
receivables(1)................. 16.1% 16.2%
Average cost of debt(2)......... 6.5 6.5
--------- ---------
Net interest spread(3).......... 9.6% 9.7%
========= =========
Net interest margin(4).......... 9.8% 9.9%
========= =========
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
20
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, and by generating additional loan volume through alliances with major
banks. 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,
------------------------
1998 1999
----------- -----------
Receivables Held for Investment:
Principal balance, beginning of
period......................... $ 115,743 $ 136,446
Acquisitions.................... 75,249 111,060
Principal payments and
payoffs........................ (44,001) (55,509)
Defaults prior to liquidations
and recoveries (1)............. (10,545) (12,189)
----------- -----------
Principal balance, end of
period......................... $ 136,446 $ 179,808
=========== ===========
- ------------
(1) Represents gross principal balances.
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 $18.3 million
in 1999, an increase of 60% and 50% when compared to amounts reported in 1997
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.
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,
-------------------------------------------------------------------
1997 TO 1998 1998 TO 1999
-------------------------------- --------------------------------
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................. $ 3,185 $(1,288) $1,897 $ 4,994 $ 104 $5,098
Interest expense................ 1,214 (87) 1,127 1,989 (16) 1,973
--------- ------- ---------- --------- ------- ----------
Net interest income............. $ 1,971 $(1,201) $ 770 $ 3,005 $ 120 $3,125
========= ======= ========== ========= ======= ==========
21
RESULTS OF OPERATIONS
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 ALAC 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.
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 ALAC in connection with two asset securitization
transactions. Under these transactions, ALAC, 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 ALAC 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 ALAC. As of April 30, 1999,
the Company had 148 employees as compared to 66 as of April 30, 1998.
22
OTHER EXPENSES. Other expenses for 1999 increased 94% 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.
FISCAL YEAR ENDED APRIL 30, 1998, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1998 increased by $1,897, or 10%,
over 1997, primarily as a result of an increase in the average principal balance
of receivables held of 18% from 1997 to 1998 which offset a 1.0% decline in the
effective yield realized on the receivables.
INTEREST EXPENSE. Interest expense for 1998 increased by $1,127, or 17%,
over 1997. An increase in the weighted average borrowings outstanding of 18%
resulted in $1,214 of this difference. The weighted average cost of debt
remained flat and positively impacted interest expense by $87.
NET INTEREST INCOME. Net interest income increased to $12,215 in 1998, an
increase of 7% over 1997. The increase resulted primarily from the growth of the
receivables portfolio which offset a decline in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased by $1,381, or 55%, over 1997, as a result of an increase in net
charge-offs from $1,968 in fiscal year 1997 to $3,884 in fiscal year 1998. The
increase in charge-offs is attributable to the growth in the portfolio, 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. At April 30, 1998, the Company
increased its estimate of losses associated with certain assets held for sale to
adjust for lower than expected realized amounts of those assets. Accordingly, an
additional $250,000 incremental charge was taken in the fourth quarter to adjust
the carrying value of the repossessed inventory to better reflect the impact of
lower used car prices during the period. This resulted in a corresponding
increase in net charge-offs and provision for the period.
OTHER INCOME. For 1998, other income, which consists primarily of late
fees and interest income from short-term investments, decreased by $77, or 11%,
over 1997 primarily as a result of a decline in interest-earning investments.
SERVICING FEE EXPENSES. Servicing fee expenses increased $302, or 20%,
from 1997 to 1998. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the increase in the number
of receivables serviced, which increased by 1,973, or 19%, from 1997 to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $2,351
in 1997 to $2,639 in 1998, an increase of $288 or 12%. As a percentage of
interest income, salaries and benefits increased from 13.0% in 1997 to 13.2% in
1998. This dollar increase was primarily due to increases in base compensation
and is directly attributable to the growth in the receivables portfolio and the
Company's expansion into new markets.
OTHER EXPENSES. Other expenses for 1998 increased 7% from 1997 primarily
due to the overall expansion of the Company's operations. As a percentage of
interest income, other operating expenses declined from 13.0% in 1997 to 12.6%
in 1998.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased by $1,447, or 43%, from 1997 as a result of
the increase in provision for credit losses of $1,381 and other factors
discussed above.
23
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 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 from dealers. The Company paid $114.3 million for receivables
acquired to be held for investment for 1999 compared to $78.0 million in 1998.
The Company funds the purchase price of receivables through a combination
of two 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.
Substantially all of the Company's receivables are pledged to collateralize
these credit facilities.
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 $88.7 million in 1999 and $74.2 million in 1998.
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 1999 and 1998, the Company
required net cash flow, respectively, of $47.1 million and $23.6 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 October 15, 1999, at which time the outstanding principal balance will
be payable in full, although
24
there are provisions allowing the Company a period of six months to refinance
the facility in the event that it is not renewed.
The following table summarizes borrowings under the FIRC credit facility
(dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ 43,610 $ 65,000
Weighted average interest
rate(1)........................ 6.35% 5.84%
During period(2):
Maximum borrowings
outstanding.................... $ 53,270 $ 65,000
Weighted average balance
outstanding.................... 42,235 49,455
Weighted average interest
rate........................... 6.25% 6.37%
- ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
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 March 31, 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.
The following table summarizes borrowings under the FIARC commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ 87,203 $ 90,735
Weighted average interest
rate(1)........................ 6.17% 5.75%
During period(2):
Maximum borrowings
outstanding.................... $ 91,514 $ 98,273
Weighted average balance
outstanding.................... 78,754 88,187
Weighted average interest
rate........................... 6.57% 6.47%
- ------------
(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.
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
25
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.
The current term of the FIACC commercial paper facility expires on December
31, 1999. If the facility was terminated, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize.
The following table summarizes borrowings under the FIACC commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ -- $ 20,814
Weighted average interest
rate(1)........................ -- % 5.26 %
During period(2):
Maximum borrowings
outstanding.................... $ -- $ 23,716
Weighted average balance
outstanding.................... -- 14,063
Weighted average interest
rate........................... -- % 6.79 %
- ------------
(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 ALAC. Contemporaneously with the Company's purchase of
ALAC, ALAC transferred certain assets to FIFS Acquisition, consisting primarily
of (i) all receivables owned by ALAC as of the acquisition date, (ii) ALAC's
ownership interest in certain trust certificates and subordinated spread or cash
reserve accounts related to two asset securitizations previously conducted by
ALAC, and (iii) certain other financial assets, including charged-off accounts
owned by ALAC 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 ALAC 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 ALAC is
also utilized to reduce principal outstanding on the indebtedness. The bridge
facility expires on October 31, 1999. The Company is currently negotiating with
First Union to refinance the acquisition facility over an extended term
sufficient to amortize the
26
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,
or certificates to be held by the Company and First Union, 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 in conjunction with VFCC
providing the permanent financing, VFCC will obtain a beneficial interest in
certain portion of the 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 an agreement with 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 $10 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
period facility fees, as well as an annual agency fee. The expiration of the
facility is October 15, 1999. If the lender elected not to renew, any
outstanding borrowings would be amortized over a one-year period. The Company
presently intends to seek an extension of this arrangement prior to its
expiration. At April 30, 1999, there was $7.2 million outstanding under this
facility.
INTEREST RATE MANAGEMENT. The Company's operating revenues are derived
almost entirely from the collection of interest on the receivables that it
retains and its primary expense is the interest that it pays on borrowings
incurred to purchase and retain such receivables. The Company's capacity to
generate earnings is therefore largely a function of its ability to maintain a
sufficient net interest margin. Accordingly, significant increases in the
interest rates at which the Company borrows funds could promptly reduce the net
interest margin between portfolio yield and cost of funds and thereby adversely
affect the Company's results of operations. The Company endeavors to offset rate
fluctuation risk by using interest rate management products that convert all or
a substantial portion of its floating rate exposure to fixed rates. The Company
seeks to minimize its exposure to adverse interest rate movements by entering
into interest rate swap agreements with notional principal amounts which
approximate the balance of its debt outstanding under its warehouse and
commercial paper credit facilities. However, the Company will be exposed to
limited rate fluctuation risk to the extent it cannot perfectly match the timing
of net advances from its credit facilities and acquisitions of additional
interest rate swaps.
The Company's credit facilities bear interest at floating interest 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. To
manage the risk of fluctuation in the interest rate environment, the Company
enters into interest rate swaps and caps to lock in what management believes to
be an acceptable net interest spread. During the years ended April 30, 1999,
1998 and 1997 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.
The Company is currently a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 7 to Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of the counter
party. As a result, at April 30, 1999, the Company had converted a total of $120
million in floating rate debt
27
to a fixed rate and had outstanding floating rate debt of secured credit
facilities of $56,549,417. The Company is currently evaluating additional
interest rate management products with a view to fixing or limiting its interest
rate exposure with respect to amounts that are substantially equivalent to its
aggregate outstanding borrowings under the FIRC credit facility and the
commercial paper facilities.
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 20, 2002 while Swap B has a final
maturity of 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. The Company is not exposed to credit
losses on its entire receivables held for investment portfolio due to prior
business strategies that included third party insurers and a dealer recourse
program. An allowance for credit losses of $1,529,651 as a percentage of the
exposed core receivables of $179,100,018 is .9%.
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, 1999, the nonaccretable loss
reserve as a percentage of Receivables Acquired for Investment was 20.6%. The
nonaccretable portion represents, at acquisition, 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
28
and FIACC commercial paper facilities do not carry default insurance. Provisions
for credit losses of $4,661,000 and $3,900,966 have been recorded for the years
ended April 30, 1999 and 1998, 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 may become uncollectable. 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
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,
------------------------------------------------
1998 1999
---------------------- ----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- ---------- -------- ----------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days....................... 178 $2,371 359 $4,554
60 - 89 days....................... 45 706 50 621
90 days or more.................... 131 1,987 67 963
-------- ---------- -------- ----------
Total delinquencies.................. 354 $5,064 476 $6,138
======== ========== ======== ==========
Total delinquencies as a percentage
of outstanding receivables......... 2.7% 2.7% 2.8% 2.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... 3.2% 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.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed under such policies. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
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 Receivables Managed was 3.4% as of April
30, 1999.
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
29
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. Currently all of the Company's credit
facilities bear interest at floating rates tied to either a commercial paper
index or LIBOR. The Company manages this risk by converting a portion of its
floating rate debt to a fixed rate utilizing interest rate swaps which
effectively hedge the floating rate debt against an increase in market interest
rates.
As of April 30, 1999, the Company had $56.5 million of floating rate
secured debt outstanding which was not hedged by interest rate swaps. For every
1% increase in interest rates (e.g. commercial paper rates), annual after-tax
earnings would decrease by approximately $359,000, assuming the Company
maintains a level amount of floating rate debt and assuming an immediate
increase in rates.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs and microprocessors
using two digits rather than four to define the applicable year (the "Year 2000
Issue"). Such programs or microprocessors may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations leading to disruptions in the Company's activities and
operations. If the Company, or third parties with which it has a significant
relationship or upon which is relies for certain data utilized in its business
(the "Counterparties"), fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 Issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company believes its internal systems are compliant with
the Year 2000 Issue, the potential effects of the Year 2000 issue cannot be
quantified at this time because the Company cannot accurately estimate the
magnitude, duration, or nature of problems that noncompliance by the
Counterparties will have on its operations.
Although the risk is not presently quantifiable, the following disclosure
is intended to summarize the Company's actions to minimize the risk from the
Year 2000 Issue. Programs that will operate in the year 2000 unaffected by the
change in year from 1999 to 2000 are referred to herein as "year 2000
compliant".
STATE OF READINESS. The Company relies almost exclusively on third party
application software in its operations. All software applications are designed
to run on client server systems. The Company employees three major software
applications in its business: (i) a loan origination system which is utilized in
the receipt, approval and funding of receivables, (ii) a loan servicing and
collection system which is used by the Company's personnel to track and service
all active customer accounts as well as repossession and disposition activities,
and (iii) accounting systems which process all general ledger and financial
reporting activities. Each of the vendors that supply these software
applications has certified to the Company that their respective applications are
Year 2000 compliant. In addition, the Company has developed internal testing
procedures on each process and presently intends to conduct these tests prior to
August 31, 1999 to confirm the vendors' certification as to compliance.
The Company has also requested confirmation from all other Counterparties,
which an internal review indicated may be exposed to Year 2000 Issues. As of
June 23, 1999, the only material Counterparties which had not confirmed Year
2000 compliance were national banks, upon which the company relies for cash
management, lockbox and certain custodial services relating to its credit
facilities, and the credit reporting agencies upon which the Company relies in
obtaining credit histories on the loan applications it reviews for approval. All
Counterparties have assured the Company that they expect to be Year 2000
compliant prior to December 31, 1999.
30
COSTS. Since the Company does not rely on internally-developed
applications, it does not currently anticipate that compliance efforts to solve
the Year 2000 issue will require additional expenditures in any material amount.
To the extent that software upgrades must be purchased in order to insure
compliance, the cost of such software will be expensed.
RISKS. The Company believes that the most reasonably likely worst case
scenario is a compliance failure by a Counterparty upon which the Company
relies. Such a failure would likely have an effect on the Company's business,
financial condition and results of operations. The magnitude of that effect
however, cannot be quantified at this time because of variables such as the type
and importance of the third party, the possible effect on the Company's
operations and the Company's ability to respond. Thus, there can be no assurance
that there will not be a material adverse effect on the Company if such third
parties do not remediate their systems in a timely manner. In addition, it is
possible that the Company would experience a failure of a non-mission critical
system for a period of time, which could result in a minor disruption in some
internal operations.
CONTINGENCY PLANS. Contingency planning is an integral part of the
Company's year 2000 readiness project. The Company has and is continuing to
develop contingency plans, which document the processes necessary to maintain
critical business functions should a significant third party system or mission
critical internal system fail. These contingency plans generally include the
repair of existing systems and, in some instances, the use of alternative
systems or procedures.
The disclosure in this section contains information regarding Year 2000
readiness which constitutes "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act. Readers are cautioned that forward-looking
statements contained in the Year 2000 Update should be read in conjunction with
the Company's disclosures under the heading "Forward Looking Information".
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
31
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 1999 Annual Meeting of
Shareholders expected to be held September 8, 1999, 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 1999 Annual
Meeting of Shareholders expected to be held September 8, 1999, 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 1999 Annual Meeting of Shareholders expected to be held
September 8, 1999, 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 1999 Annual Meeting of
Shareholders expected to be held September 8, 1999, 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.
32
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.
33
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.
34
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 -- 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 -- 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 -- 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 -- Servicing Agreement dated March 31, 1999 among First Investors Auto Receivables
Corporation, Norwest Bank Minnesota, National Association and Auto Lenders Acceptance Corporation.
10.61 -- 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.
35
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.
(b) REPORTS ON FORM 8-K
None.
36
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 23, 1999 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/ FENTRESS BRACEWELL Chairman of the Board, Director
FENTRESS BRACEWELL
/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/ BRADLEY F. BRACEWELL Director
BRADLEY F. BRACEWELL
/s/ ROBERT L. CLARKE Director
ROBERT L. CLARKE
/s/ ROBERTO MARCHESINI Director
ROBERTO MARCHESINI
/s/ J. W. SMELLEY Director
J. W. SMELLEY
/s/ WALTER A. STOCKARD Director
WALTER A. STOCKARD
/s/ WALTER A. STOCKARD, JR. Director
WALTER A. STOCKARD, JR.
Date: July 23, 1999
37
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, 1998 and 1999............ F-3
Consolidated Statements of Operations
for the Years Ended April 30, 1997,
1998
and 1999........................... F-4
Consolidated Statements of
Shareholders' Equity for the Years
Ended April 30, 1997,
1998 and 1999...................... F-5
Consolidated Statements of Cash Flows
for the Years Ended April 30, 1997,
1998
and 1999........................... 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, 1998 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 1999. 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 generally accepted auditing
standards. 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, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1999
F-2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1998 AND 1999
1998 1999
---------------- ----------------
ASSETS
- -------------------------------------
Receivables Held for Investment,
net................................ $ 139,598,675 $ 183,318,532
Receivables Acquired for Investment,
net................................ -- 41,023,768
Investment in Trust Certificates..... -- 10,754,512
Cash and Short-Term Investments,
including restricted cash of
$3,215,540 and $7,487,636.......... 3,698,121 11,515,872
Other Receivables:
Due from servicer............... 10,229,975 14,065,957
Accrued interest................ 2,057,346 2,365,231
Assets Held for Sale................. 1,219,885 1,693,255
Other Assets:
Funds held under reinsurance
agreement..................... 2,016,682 2,620,296
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $846,250 and $1,702,088.... 1,638,947 4,898,045
Deferred income tax asset,
net........................... 298,235 553,781
Federal income tax receivable... 495,280 --
---------------- ----------------
Total assets............... $ 161,253,146 $ 272,809,249
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 130,813,078 $ 176,549,417
Unsecured credit facility....... 2,500,000 7,235,000
Acquisition term facility....... -- 55,737,371
Other Liabilities:
Due to dealers.................. 241,988 162,081
Accounts payable and accrued
liabilities................... 2,317,840 5,633,304
Current income taxes payable.... 219,770 329,764
---------------- ----------------
Total liabilities.......... 136,092,676 245,646,937
---------------- ----------------
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............... 6,689,985 8,691,827
---------------- ----------------
Total shareholders'
equity.................. 25,160,470 27,162,312
---------------- ----------------
Total liabilities and
shareholders' equity.... $ 161,253,146 $ 272,809,249
================ ================
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, 1997, 1998 AND 1999
1997 1998 1999
-------------- -------------- --------------
Interest Income...................... $ 18,151,669 $ 20,049,129 $ 31,076,003
Interest Expense..................... 6,706,341 7,833,677 12,781,725
-------------- -------------- --------------
Net interest income........ 11,445,328 12,215,452 18,294,278
Provision for Credit Losses.......... 2,520,253 3,900,966 4,661,000
-------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 8,925,075 8,314,486 13,633,278
-------------- -------------- --------------
Other Income:
Servicing....................... -- -- 1,199,628
Late fees and other............. 693,807 617,140 1,594,149
-------------- -------------- --------------
Total other income......... 693,807 617,140 2,793,777
-------------- -------------- --------------
Operating Expenses:
Servicing fees.................. 1,536,225 1,838,002 2,350,741
Salaries and benefits........... 2,350,986 2,639,080 6,030,007
Other........................... 2,356,316 2,526,404 4,893,800
-------------- -------------- --------------
Total operating expenses... 6,243,527 7,003,486 13,274,548
-------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 3,375,355 1,928,140 3,152,507
-------------- -------------- --------------
Provision (Benefit) for Income Taxes:
Current......................... 1,745,352 614,130 1,406,211
Deferred........................ (513,348) 89,641 (255,546)
-------------- -------------- --------------
Total provision for income
taxes................... 1,232,004 703,771 1,150,665
-------------- -------------- --------------
Net Income........................... $ 2,143,351 $ 1,224,369 $ 2,001,842
============== ============== ==============
Basic and Diluted Net Income Per
Common Share....................... $0.39 $0.22 $0.36
============== ============== ==============
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, 1997, 1998 AND 1999
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ----------- -------------- --------------
Balance, April 30, 1996.............. $5,567 $18,464,918 $ 3,322,265 $ 21,792,750
Net income...................... -- -- 2,143,351 2,143,351
------- ----------- -------------- --------------
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
======= =========== ============== ==============
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, 1997, 1998 AND 1999
1997 1998 1999
---------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net income...................... $ 2,143,351 $ 1,224,369 $ 2,001,842
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense.... 1,816,195 2,369,672 3,363,379
Provision for credit
losses.................. 2,520,253 3,900,966 4,661,000
Charge-offs, net of
recoveries.............. (1,968,383) (3,884,418) (4,329,894)
(Increase) decrease in:
Accrued interest
receivable.............. (309,407) (133,986) (307,885)
Restricted cash............ (502,243) 334,851 (145,253)
Deferred financing costs
and other............... (436,350) (664,036) (1,210,261)
Funds held under
reinsurance agreement... 267,235 546,772 (603,614)
Due from servicer.......... (3,161,034) (1,802,410) (3,835,982)
Deferred income tax asset,
net..................... (387,876) 89,641 (255,546)
Federal income tax
receivable.............. 295,523 (495,280) 495,280
Increase (decrease) in:
Due to dealers............. (463,937) (100,709) (79,907)
Accounts payable and
accrued liabilities..... 767,743 (142,845) 1,782,812
Current income taxes
payable................. (83,962) 110,298 109,994
Deferred income tax
liability, net.......... (125,472) -- --
---------------- ---------------- ----------------
Net cash provided by operating
activities................. 371,636 1,352,885 1,645,965
---------------- ---------------- ----------------
Cash Flows From Investing Activities:
Purchases of receivables held
for investment................ (68,854,056) (77,965,915) (114,309,752)
Principal payments from
receivables held for
investment.................... 45,535,622 54,397,892 67,224,322
Principal payments from
receivables acquired for
investment.................... -- -- 14,652,354
Principal payments from trust
certificates.................. -- -- 4,519,183
Acquisition of a business, net
of cash acquired.............. -- -- (76,052,178)
Purchase of furniture and
equipment..................... (82,999) (138,195) (342,949)
---------------- ---------------- ----------------
Net cash used in investing
activities.............. (23,401,433) (23,706,218) (104,309,020)
---------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 61,419,920 68,478,349 104,853,807
Unsecured debt............. -- 2,500,000 20,435,000
Acquisition debt........... -- -- 75,000,000
Principal payments made on --
Secured debt............... (39,574,425) (50,559,402) (59,117,468)
Unsecured debt............. -- -- (15,700,000)
Acquisition debt................ -- -- (19,262,629)
---------------- ---------------- ----------------
Net cash provided by
financing activities.... 21,845,495 20,418,947 106,208,710
---------------- ---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. (1,184,302) (1,934,386) 3,545,655
Cash and Short-Term Investments at
Beginning of Year.................. 3,601,269 2,416,967 482,581
---------------- ---------------- ----------------
Cash and Short-Term Investments at
End of Year........................ $ 2,416,967 $ 482,581 $ 4,028,236
================ ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for --
Interest................... $ 6,294,815 $ 7,748,529 $ 12,196,708
Income taxes............... 1,533,791 999,112 800,937
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, 1997, 1998 AND 1999
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) and Auto Lenders Acceptance Corporation (ALAC).
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
secured by new and used automobiles and light trucks (receivables) originated by
factory authorized franchised dealers. As of April 30, 1999, approximately 35
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 ALAC from
Fortis, Inc. and the operations of ALAC are included in the consolidated results
of the Company since the date of acquisition. See Note 15. Headquartered in
Atlanta, Georgia, ALAC 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 18
states on a Receivables Acquired for Investment and Receivables Managed
Portfolio of $105.5 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 generally accepted accounting principles 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 receivables from
dealers under two primary programs, one involving recourse to the dealer and the
other a non-recourse program (see Note 3). The basis in the receivables includes
the costs to acquire the receivables from the dealer, plus any fees paid 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
F-7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ALAC, 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 1999, the assumptions used were:
RANGE
------------
Prepayment........................... .9% ABS
Loss rate............................ 15% to 15.5%
Discount rate........................ 17% to 18%
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. If a dealer
participates in the receivable, the Company recognizes interest income net of
the dealer participation. When a receivable becomes two months past due, income
accrual is suspended until the payments become current. Other income relates
primarily to 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. In making this estimate, management
segregates the receivables acquired under its "core program" from receivables
acquired under a "dealer recourse program" (see Note 3). For receivables
acquired under the dealer recourse program, the Company recovers actual losses
from direct dealer reimbursements and from dealer reserves. Management analyzes
the core program 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.
Most of the automobile purchasers in the sub-prime market segment are
hourly wage-earners with 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.
F-9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERVICING AGREEMENT. The Company has entered into a servicing agreement
with General Electric Capital Corporation (GECC) which terminates on October 31,
2000, subject to earlier termination depending on the outcome of annual pricing
renegotiations. In the event the GECC agreement were to terminate, GECC would
remain obligated to continue to service existing receivables through their
maturities. The Company, however, reserves the right to cancel the servicing
agreement at any time without penalty. Under this agreement, GECC is responsible
for (i) receipt, review and verification of all collateral and documentation
requirements, (ii) establishment and administration of payment and collection
schedules, and (iii) repossession of vehicles securing defaulted receivables.
Servicing fees are paid to GECC monthly based on the number of receivables being
serviced during the period, and GECC is entitled to reimbursement for certain
expenses relating primarily to liquidation of collateral. Due from servicer
primarily represents unremitted principal and interest payments and proceeds
from sale of repossessed collateral.
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. GECC commences repossession procedures against the
underlying collateral when it and the Company determine 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 an 18 month period which
represents the committed term of such facility. Additionally, the Company
amortizes the costs related to the respective commercial paper facilities 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 ALAC in connection with two asset securitization
transactions. Under these transactions, ALAC, 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, interest expense on the Company's unsecured working capital
line of credit, service bureau fees, telephone, postage, and rent.
INCOME TAXES. The Company follows Statement of Financial Accounting
Standards (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
F-10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 manage the exposure of floating interest rates
under the terms of its credit facilities (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, LIBOR
rate indices and interest reset periods similar to its credit facilities. 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. The Company will adopt SFAS
No. 133 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 1997
and 1998 amounts to conform with the 1999 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 36 to 60 months and are
collateralized by the underlying vehicles. Net receivable balances consisted of
the following at April 30, 1998 and 1999:
1998 1999
---------------- ----------------
Receivables.......................... $ 136,445,808 $ 179,807,957
Unamortized premium and deferred
fees................................. 4,351,412 5,040,226
Allowance for credit losses.......... (1,198,545) (1,529,651)
---------------- ----------------
Net receivables................. $ 139,598,675 $ 183,318,532
================ ================
At April 30, 1999, the weighted average remaining term of the receivable
portfolio is 45 months and the weighted average contractual interest rate is
17.4 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-
2000....................... $ 45,696,371
2001....................... 45,561,028
2002....................... 42,167,044
2003....................... 32,892,835
2004....................... 13,490,679
----------------
$ 179,807,957
================
Under the core program, the Company has nonexclusive agreements with
dealerships which may be terminated at any time by either party. These
agreements, which contain customary representations and warranties concerning
title to the receivables sold, validity of the liens on the underlying vehicles
and compliance with applicable laws and other matters, do not guarantee
collectability solely because of payment default. At April 30, 1998 and 1999,
the Company had investments in receivables pursuant to the core program with
aggregate principal balances of $134,907,079 and $179,319,373, respectively.
Activity in the allowance for credit losses for the years ended April 30,
1998 and 1999, was as follows:
1998 1999
-------------- --------------
Balance, beginning of year........... $ 1,181,997 $ 1,198,545
Provision for credit losses..... 3,900,966 4,661,000
Charge-offs, net of
recoveries.................... (3,884,418) (4,329,894)
-------------- --------------
Balance, end of year................. $ 1,198,545 $ 1,529,651
============== ==============
At April 30, 1998 and 1999, the Company had investments in receivables
pursuant to the dealer recourse program with an aggregate principal balance of
$1,538,729 and $488,584; and dealer reserves of $238,000 and $161,052. The
Company instituted a dealer recourse program in November 1992, whereby the
participating dealers were obligated for an agreed period of time, usually 12 to
18 months, to reimburse the Company for losses upon the occurrence of default by
the borrower. The Company no longer utilizes this program.
F-12
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
Nonaccretable difference............. (14,314,526)
Accretable yield..................... (7,632,607)
----------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................ 41,023,768
================
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
================ ==============
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 --
2000............................... $ 19,368,917
2001............................... 19,368,917
2002............................... 15,137,878
2003............................... 9,095,189
--------------
$ 62,970,901
==============
5. RESTRICTED CASH
The components of restricted cash at April 30, 1998 and 1999, are as
follows:
1998 1999
------------- -------------
Dealer reserves (Note 3)............. $ 238,000 $ 161,052
Commercial paper facilities
compensating balances
(Note 7)........................... 1,145,912 2,794,117
Acquisition facility compensating
balance (Note 7)................... -- 3,126,843
Funds held in trust for receivable
fundings........................... 1,322,427 648,451
Warehouse credit facility account
(Note 7)........................... 251,511 437,734
Other................................ 257,690 319,439
------------- -------------
Total restricted cash........... $ 3,215,540 $ 7,487,636
============= =============
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,
1998 and 1999, are as follows:
1998 1999
------------- -------------
Deferred financing costs, net........ $ 642,044 $ 594,596
Furniture and equipment, net......... 206,380 2,193,544
Accounts receivable.................. 27,800 1,036,586
Other, net........................... 762,723 1,073,319
------------- -------------
Total........................... $ 1,638,947 $ 4,898,045
============= =============
7. DEBT
The Company finances the acquisition of its receivables portfolio through
three 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. Substantially all receivables
retained by the Company are pledged as collateral for the credit facilities.
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 $43,610,000 and $65,000,000
at April 30, 1998 and 1999, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.35 percent and 5.84 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 October 15,
1999. The Company presently intends to seek an extension of this arrangement
prior to its expiration.
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 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
F-14
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 31,
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, 1998 and 1999, the
Company had borrowings of $87,203,078 and $90,735,214, 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 6.17 percent and 5.75 percent, respectively. The Company
presently intends to seek an extension of this arrangement prior to its
expiration.
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 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, 1999, 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, 1999. 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, including the effects of program fees and
hedge instruments.
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 Variable Funding Capital Corporation (VFCC), an affiliate of First Union
National Bank, to finance the Company's acquisition of ALAC. Contemporaneously
with the Company's purchase of ALAC, ALAC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by ALAC as of the
acquisition date, (ii) ALAC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by ALAC, and (iii) certain other financial
assets, including charged-off accounts owned by ALAC as of the acquisition date.
These assets, along with a $1 million
F-15
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 October 31, 1999. 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 ALAC 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 ALAC 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, or certificates to be held by the Company and First Union, 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 in conjunction
with VFCC providing the permanent financing, VFCC will obtain a beneficial
interest in certain portion of the 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 an agreement with 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 $10 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) NationsBank'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 term of the
$10 million facility expires on October 15, 1999, and is renewable at the option
of the lender. If the lender elected not to renew, any outstanding borrowings
would be amortized over a one-year period. The Company presently intends to seek
an extension of this arrangement prior to its expiration. At April 30, 1998 and
1999, there was $2,500,000 and $7,235,000 outstanding under this facility.
LOAN COVENANTS. The documentation governing these credit facilities
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 the working
capital facility or the termination of the commercial paper facilities.
Management of the Company believes it was in compliance with all covenants at
April 30, 1999.
HEDGE INSTRUMENTS. The Company's earnings are directly dependent on its
ability to maintain a sufficient net interest spread between its fixed portfolio
yield and its floating cost of funds. Accordingly, increases in the interest
rates of the Company's borrowings could have an adverse impact on the Company's
earnings. The Company has entered into various interest rate swap and cap
agreements to minimize the adverse impact of increasing interest rates on its
earnings by converting the floating rate exposure of the debt to a fixed rate.
There can be no assurance, however, that this
F-16
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
strategy will consistently or completely offset adverse interest rate movements.
Furthermore, while the Company believes that this strategy will enable it to
achieve a sufficient net interest spread, it precludes the Company from
realizing higher earnings from decreases in the interest rates of its credit
facilities. During the years ended April 30, 1999, 1998 and 1997 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 cost of funds during such periods.
In September 1997, the Company elected to enter into three swap agreements
having an aggregate notional amount of $120 million and fixing the Company's
weighted average interest rate at 5.63 percent. Two of these swap agreements,
having a notional amount of $90 million, were scheduled to expire in September
1998; while the remaining swap agreement, covering a notional amount of $30
million was scheduled to expire in October 1998. Under each swap agreement, Bank
of America had the option of extending the maturity for an additional two years
from the initial expiration date.
On January 14, 1998, the Company elected to terminate the three swap
agreements having an aggregate notional amount of $120 million in connection
with its decision to enter into a swap agreement with Bank of America covering a
notional amount of $120 million for an initial term of two years, expiring
January 12, 2000. Under this agreement, the Company's interest rate is fixed at
5.565 percent on the $120 million notional amount. Bank of America has the
option of extending the maturity to January 14, 2002.
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 has a final maturity of 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.
F-17
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The temporary differences which give rise to net deferred tax assets are as
follows at April 30, 1998 and 1999, respectively:
1998 1999
------------ ------------
Deferred tax assets
Allowance for credit losses..... $ 500,660 $ 689,334
Receivables acquired for
investment, net............... -- 500,652
Accrued expenses................ 57,251 170,065
------------ ------------
557,911 1,360,051
------------ ------------
Deferred tax liabilities
Receivables held for investment,
net........................... (83,328) --
Investment in trust
certificates.................. -- (686,436)
Deferred costs, net............. (74,697) (56,634)
Internally developed software... (101,651) (63,200)
------------ ------------
(259,676) (806,270)
------------ ------------
Net deferred tax assets.............. $ 298,235 $ 553,781
============ ============
The provision (benefit) for income taxes for the years ended April 30,
1997, 1998 and 1999, consists of the following:
1997 1998 1999
------------- ----------- -------------
Current --
Federal..................... $ 1,541,900 $ 548,343 $ 1,347,472
State....................... 203,452 65,787 58,739
------------- ----------- -------------
$ 1,745,352 $ 614,130 $ 1,406,211
============= =========== =============
Deferred --
Federal..................... $ (409,156) $ 89,023 $ (255,546)
State....................... (104,192) 618 --
------------- ----------- -------------
$ (513,348) $ 89,641 $ (255,546)
============= =========== =============
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,
1997, 1998 and 1999.
1997 1998 1999
--------- --------- ---------
Income tax -- statutory rate......... 34.00% 34.00% 34.00%
State income tax, net of federal
benefit.............................. 2.50 2.50 2.10
Non-deductible expenses.............. .20 .50 .50
Tax free income...................... (.20) (1.10) (.40)
Other................................ -- .60 .30
--------- --------- ---------
Effective income tax rate....... 36.50% 36.50% 36.50%
========= ========= =========
9. CREDIT RISKS
Approximately 35 percent of the Company's receivables held for investment
by principal balance at April 30, 1999, 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
F-18
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and services, petrochemical operations, light and medium manufacturing
operations, 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.
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, 1998 APRIL 30, 1999
------------------------------- -------------------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------------- ------------ ----------------
Financial assets --
Receivables held for investment,
net of unamortized premium and
deferred fees................. $136,445,808 $ 145,829,396 $179,807,957 $ 192,432,874
Off-balance sheet instruments --
Swap agreements................. $120,000,000 $ (152,043) $171,668,397 $ (764,778)
Cap agreements.................. $ -- $ -- $ 19,458,941 $ 483,541
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
F-19
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
SWAP AGREEMENTS. The fair value approximates 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 approximates the payment the Company would
have to make to or receive from the cap counterparty to terminate the cap
agreements.
11. DEFINED CONTRIBUTION PLAN
Effective May 1, 1994, the Company adopted a participant-directed 401(k)
retirement plan (the 401(k)) for its employees. An employee becomes eligible to
participate on May 1 or November 1 immediately following the employee's
attaining age 21 and completing six months of service. The Company pays the
administrative expenses of the 401(k), and at the discretion of the Board of
Directors, may make contributions to the 401(k). The Company did not make any
contributions to the 401(k) during the fiscal years ended April 30, 1997, 1998
and 1999.
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, 1999, 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.
Effective June 20, 1996, the Compensation Committee granted an option
covering 10,000 shares of Common Stock to an officer of the Company. The
exercise price of this option is $11.00 per share
F-20
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(the fair market value of the Common Stock on the date of grant) and the option
is exercisable in cumulative annual increments of 20 percent beginning June 20,
1997.
Effective July 15, 1997, the Compensation Committee granted options
covering a total of 58,000 shares of Common Stock to key employees of the
Company. The exercise price of these options are $7.375 per share (the fair
market value of the Common Stock on the date of grant) and the options are
exercisable in cumulative annual increments of 20 percent beginning on July 15,
1998.
Effective March 19, 1998, the Compensation Committee granted an option
covering 10,000 shares of Common Stock to an officer of the Company. The
exercise price of this option is $6.75 per share (the fair market value of the
Common Stock on the date of grant) and the option is exercisable in cumulative
annual increments of 20 percent beginning on March 19, 1999.
A summary of the status of the Company's stock option plans for the years
ended April 30, 1997, 1998 and 1999 is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES UNDER PRICE PER
OPTION SHARE
------------ ---------
Outstanding at April 30, 1996........ 70,000 $ 11.00
Granted......................... 10,000 $ 11.00
------------
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......................... -- $ --
Forfeited....................... (1,000) $ 7.38
------------
Outstanding at April 30, 1999........ 137,000 $ 9.18
============
Options available for future grants
at April 30, 1999.................. 183,000
============
FISCAL
-------------------------------
1997 1998 1999
--------- --------- ---------
Options exercisable at end of year... 30,000 38,000 61,400
Weighted average exercise price of
options exercisable................ $ 11.00 $ 11.00 $ 10.19
Weighted average fair value of
options granted.................... $ 5.22 $ 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)
$6.75-$11.00 $ 8.87 117,000 41,400 6.37
----------- -----------
137,000 61,400
=========== ===========
- ------------
(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-21
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
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
Net Income........................... As Reported $ 2,143,351 $ 1,224,369 $ 2,001,842
Pro Forma $ 2,104,516 $ 1,194,946 $ 1,935,771
Basic and Diluted Net Income Per
Common Share....................... As Reported $0.39 $0.22 $0.36
Pro Forma $0.38 $0.21 $0.35
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
--------------------
1997 1998
--------- ---------
Risk free interest rate................. 6.43% 6.06%
Expected life of options in years....... 10 10
Expected stock price volatility......... 48% 37%
Expected dividend yield................. 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, 1999, the Company had unfunded
receivables in process of approximately $2.3 million.
EMPLOYMENT AGREEMENT. The Company has entered into employment agreements
with two key executives which expire in July 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, 1999, 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-22
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 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, 1997, 1998 and 1999, was $283,463, $289,257 and $871,851,
respectively. Required minimum lease payments for the remaining terms of the
above leases are:
Year ending April 30-
2000.......................... $ 1,025,367
2001.......................... 1,027,036
2002.......................... 813,462
2003.......................... 188,101
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
ALAC 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, 1999, the aggregate amount of annual principal maturities of
the capital lease obligation are as follows:
Year Ending April 30 --
2000.......................... $ 782,137
2001.......................... 782,137
2002.......................... 456,247
-------------
2,020,521
Less -- Amounts representing
interest...................... 219,295
-------------
$ 1,801,226
=============
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, 1997, 1998 and 1999 are
as follows:
FOR THE YEAR ENDED APRIL 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
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... 312 628 27
------------ ------------ ------------
Weighted average shares outstanding
for diluted earnings per
share........................... 5,566,981 5,567,297 5,566,696
============ ============ ============
F-23
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At April 30, 1999, the Company had 136,973 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
ALAC, a Delaware corporation and wholly-owned subsidiary of Fortis, Inc., for an
approximate purchase price of $74.1 million. ALAC'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 investments 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
================
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 ALAC, 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, 1999.
FOR THE THREE MONTHS ENDED,
-----------------------------------------------------------------------
JULY 31, 1998 OCTOBER 31, 1998 JANUARY 31, 1999 APRIL 30, 1999
------------- ---------------- ---------------- --------------
Interest Income......................... $ 5,658,594 $7,258,254 $9,688,287 $8,470,868
Interest Expense........................ 2,224,471 3,191,169 4,449,019 2,917,066
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-24