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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS MARCH 1, 2000
---------------------------- --------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JANUARY 31, 2000
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1999 and
January 31, 2000..................... 3
Consolidated Statements of Operations
for the Three Months
and Nine Months Ended January 31,
1999 and 2000........................ 4
Consolidated Statement of
Shareholders' Equity for the Nine
Months Ended January 31, 2000........ 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
January 31, 1999 and 2000............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risk........ 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 21
SIGNATURES................................... 21
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1999 AND JANUARY 31, 2000
APRIL 30, JANUARY 31,
1999 2000
--------------- ------------
(AUDITED) (UNAUDITED)
ASSETS
- -------------------------------------
Receivables Held for Investment,
net................................ $ 183,318,532 $219,990,577
Receivables Acquired for Investment,
net................................ 41,023,768 26,220,708
Investment in Trust Certificates..... 10,754,512 6,919,989
Cash and Short-Term Investments,
including restricted cash of
$7,487,636 and $22,596,460......... 11,515,872 24,673,323
Other Receivables:
Due from servicer............... 14,065,957 --
Accrued interest................ 2,365,231 3,174,849
Assets Held for Sale................. 1,693,255 1,489,189
Other Assets:
Funds held under reinsurance
agreement..................... 2,620,296 2,703,183
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $1,702,088 and
$2,677,961.................... 4,898,045 6,738,842
Deferred income taxes
receivable, net............... 553,781 --
Current income taxes
receivable.................... -- 107,581
--------------- ------------
Total assets............... $ 272,809,249 $292,018,241
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured Term Notes.............. $ -- $167,969,000
Secured credit facilities....... 176,549,417 45,140,000
Acquisition term facility....... 55,737,371 33,653,821
Unsecured credit facilities..... 7,235,000 13,300,000
Other Liabilities:
Accounts payable and accrued
liabilities................... 5,795,385 2,173,311
Current income taxes payable.... 329,764 --
Deferred income taxes payable,
net........................... -- 334,099
--------------- ------------
Total liabilities.......... 245,646,937 262,570,231
--------------- ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669,
shares issued and
outstanding................... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 8,691,827 10,977,525
--------------- ------------
Total shareholders'
equity..................... 27,162,312 29,448,010
--------------- ------------
Total liabilities and
shareholders' equity....... $ 272,809,249 $292,018,241
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1999 AND 2000
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
---------------------------- ------------------------------
1999 2000 1999 2000
------------ -------------- -------------- --------------
Interest Income...................... $ 9,202,081 $ 10,584,724 $ 21,814,018 $ 30,257,181
Interest Expense..................... 3,962,813 4,142,041 9,073,541 12,006,724
------------ -------------- -------------- --------------
Net interest income........ 5,239,268 6,442,683 12,740,477 18,250,457
Provision for Credit Losses.......... 1,115,000 1,542,800 3,265,000 4,611,372
------------ -------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 4,124,268 4,899,883 9,475,477 13,639,085
------------ -------------- -------------- --------------
Other Income:
Servicing....................... 474,918 293,365 720,922 1,043,387
Late fees and other............. 241,764 544,162 604,690 1,816,333
------------ -------------- -------------- --------------
Total other income......... 716,682 837,527 1,325,612 2,859,720
Operating Expenses:
Servicing fees.................. 602,165 -- 1,681,927 434,572
Salaries and benefits........... 1,908,905 2,543,712 3,893,930 7,240,637
Other........................... 1,409,064 1,921,462 3,195,974 5,224,072
------------ -------------- -------------- --------------
Total operating expenses... 3,920,134 4.465,174 8,771,831 12,899,281
------------ -------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 920,816 1,272,236 2,029,258 3,599,524
------------ -------------- -------------- --------------
Provision for Income Taxes:
Current......................... 548,012 (1,229,398) 1,106,496 425,946
Deferred........................ (211,914) 1,693,764 (365,817) 887,880
------------ -------------- -------------- --------------
Total provision for income
taxes.................... 336,098 464,366 740,679 1,313,826
------------ -------------- -------------- --------------
Net Income........................... $ 584,718 $ 807,870 $ 1,288,579 $ 2,285,698
============ ============== ============== ==============
Basic and Diluted Net Income per
Common Share....................... $0.11 $0.15 $0.23 $0.41
============ ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2000
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- -------------- --------------
Balance, April 30, 1999.............. $5,567 $ 18,464,918 $ 8,691,827 $ 27,162,312
Net income...................... -- -- 2,285,698 2,285,698
------- -------------- -------------- --------------
Balance, January 31, 2000............ $5,567 $ 18,464,918 $ 10,977,525 $ 29,448,010
======= ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 AND 2000
(UNAUDITED)
1999 2000
---------------- ----------------
Cash Flows From Operating Activities:
Net income...................... $ 1,288,579 $ 2,285,698
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 2,387,142 3,138,934
Provision for credit
losses................... 3,265,000 4,611,372
Charge-offs, net of
recoveries............... (3,048,492) (4,134,205)
(Increase) decrease in:
Accrued interest
receivable............... (707,487) (809,618)
Restricted cash............ (1,913,057) (15,108,824)
Deferred financing costs
and other................ (1,168,219) (2,754,579)
Funds held under
reinsurance agreement.... (517,108) (82,887)
Due from servicer.......... (1,650,338) 14,065,957
Deferred income taxes
receivable, net.......... (365,817) 553,781
Current income taxes
receivable............... 495,280 (107,581)
Increase (decrease) in:
Accounts payable and
accrued liabilities...... 2,135,676 (3,622,074)
Current income taxes
payable.................. 214,773 (329,764)
Deferred income taxes
payable, net............. -- 334,099
---------------- ----------------
Net cash provided by
(used in) operating
activities.......... 415,932 (1,959,691)
---------------- ----------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for
Investment.................... (80,651,221) (101,390,576)
Principal payments from
Receivables Held for
Investment.................... 47,309,013 62,268,679
Principal payments from
Receivables Acquired for
Investment.................... 7,166,517 14,803,060
Principal payments from Trust
Certificates.................. 3,236,211 3,834,523
Acquisition of business, net of
cash acquired................. (76,887,410) --
Purchase of furniture and
equipment..................... (206,554) (48,401)
---------------- ----------------
Net cash used in
investing
activities.......... (100,033,444) (20,532,715)
---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured Term Notes......... -- 167,969,000
Secured debt............... 74,144,320 88,960,602
Unsecured debt............. 14,535,000 14,865,000
Acquisition debt........... 75,000,000 --
Principal payments made on --
Secured debt............... (39,933,611) (220,370,019)
Unsecured debt............. (11,450,000) (8,800,000)
Acquisition debt........... (9,550,669) (22,083,550)
---------------- ----------------
Net cash provided by
financing
activities.......... 102,745,040 20,541,033
---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. 3,127,528 (1,951,373)
Cash and Short-Term Investments at
Beginning of Period................ 482,581 4,028,236
---------------- ----------------
Cash and Short-Term Investments at
End of Period...................... $ 3,610,109 $ 2,076,863
================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 8,509,052 $ 11,873,836
Income taxes............... 396,443 863,291
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 AND 2000
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) 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 January 31, 2000, approximately 31 percent of
Receivables Held for Investment were located in Texas. The Company currently
originates loans from dealerships located in 26 states.
On October 2, 1998, the Company completed the acquisition of First
Investors Servicing Corporation (FISC) formerly known as Auto Lenders Acceptance
Corporation from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC was
engaged in essentially the same business as the Company and additionally
performs servicing and collection activities. As a result of the acquisition,
the Company increased receivables, acquired an interest in certain Trust
Certificates related to two asset securitizations and acquired certain servicing
rights along with furniture, fixtures, equipment and technology. As of January
31, 2000, FISC performs servicing and collection functions on a Managed
Receivables Portfolio of $286.1 million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of January 31, 2000, and the results of its
operations for the three months and nine months ended January 31, 1999 and 2000,
and its cash flows for the nine months ended January 31, 1999 and 2000.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading. These financial statements should be read
in conjunction with the audited consolidated financial statements included in
the Company's 1999 Annual Report on Form 10-K filed July 23, 1999.
INVESTMENT IN TRUST CERTIFICATES. The Company utilized prepayment speeds
and loss rate assumptions to determine the fair value of the Trust Certificates
and interest-only residuals. The resulting discount rate is used to accrue
income. During 2000, the assumptions used were:
RANGE
---------------
Prepayment........................... .9% ABS
Loss rate............................ 14.5% to 15.5%
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of common shares outstanding. See Note 6.
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS. Certain reclassifications have been made to the 1999
amounts to conform with the 2000 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JANUARY 31,
1999 2000
--------------- ---------------
Receivables.......................... $ 179,807,957 $ 217,924,975
Unamortized premium and deferred
fees............................... 5,040,226 4,072,420
Allowance for credit losses.......... (1,529,651) (2,006,818)
--------------- ---------------
Net receivables................. $ 183,318,532 $ 219,990,577
=============== ===============
Activity in the allowance for credit losses was as follows:
FOR THE NINE MONTHS
ENDED JANUARY 31,
--------------------------------
1999 2000
--------------- ---------------
Balance, beginning of period......... $ 1,198,545 $ 1,529,651
Provision for credit losses.......... 3,265,000 4,611,372
Charge-offs, net of recoveries....... (3,048,492) (4,134,205)
--------------- ---------------
Balance, end of period............... $ 1,415,053 $ 2,006,818
=============== ===============
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 January 31, 2000:
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net of excess cash
flows to be sold...................... $ 35,275,090
Nonaccretable difference................ (4,699,844)
Accretable yield........................ (4,354,538)
---------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................... $ 26,220,708
===============
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
determined that it would be unable to collect.
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
------------- -----------
Balance at April 30, 1999............... $14,314,526 $ 7,632,607
Accretion.......................... -- (3,951,991)
Eliminations....................... (8,940,760) --
Reclassifications.................. (673,922) 673,922
------------- -----------
Balance at January 31, 2000............. $ 4,699,844 $ 4,354,538
============= ===========
Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period ended January 31, 2000.
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT
GENERAL. Borrowings under the F.I.R.C., Inc. (FIRC) credit facility and
the First Investors Auto Owner Trust 2000-A (Auto Trust) (see Secured Term Notes
below) were $45,140,000 and $167,969,000, respectively, at January 31, 2000 and
had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees and hedge instruments, as applicable, of 6.39% and
6.67%, respectively. The effects of the hedge instrument on the weighted average
interest rate lowered the effective interest rate on the Auto Trust borrowings
by approximately 0.86%. The current term of the FIRC credit facility expires on
June 15, 2000. There were no borrowings outstanding at January 31, 2000 under
the First Investors Auto Receivables Corporation (FIARC) commercial paper
facility or the First Investors Auto Capital Corporation (FIACC) commercial
paper facility. The current term of the FIARC commercial paper facility expires
on March 31, 2000. The current term of the FIACC commercial paper facility
expires on December 31, 2000.
SECURED TERM NOTES. On January 24, 2000, the Company, through its
indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2000-A (Auto
Trust) completed the issuance of $167,969,000 of 7.174% asset-backed notes
(Notes). The Notes are secured by a pool of automobile receivables totaling
$174,968,641 which were previously owned by FIRC, FIARC and FIACC. Proceeds from
the issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Note issuance and to fund a cash reserve account of 2% or
$3,499,373 which will serve as a portion of the credit enhancement for the
transaction. The Notes bear interest at 7.174% and require monthly principal
reductions sufficient to reduce the balance of the Notes to 96% of the
outstanding balance of the underlying receivables pool. The final maturity of
the Notes is February 15, 2006. Credit enhancement for the Note holders is
provided by a surety bond issued by MBIA Insurance Corporation. Additional
credit support is provided by a cash reserve account which is equal to 2% of the
original balance of the receivables pool and a 4% over-collateralization
requirement amount. In the event that certain asset quality covenants are not
met, the reserve account target level will increase to 6% of the then current
principal balance of the receivables pool.
The Company, through its wholly-owned subsidiary, FIFS Acquisition Funding
Company, has outstanding non-recourse borrowings of $33,653,821 as of January
31, 2000 which are related to the acquisition of FISC. This facility expires on
April 15, 2000.
The Company, through its wholly-owned subsidiary, First Investors Financial
Services, Inc. (FIFS), also maintains a working capital facility with Bank of
America and First Union National Bank. At January 31, 2000, there was
$13,300,000 in prime rate borrowings outstanding under this facility. This
facility expires on April 15, 2000.
The Company's secured credit facilities bear interest at floating interest
rates which are reset on a short-term basis while the secured term Notes bear
interest at a fixed rate of interest. The Company's receivables bear interest at
fixed rates which do not generally vary with the change in interest rates. Since
a primary contributor to the Company's profitability is its ability to manage
its net interest spread, the Company seeks to maximize the net interest spread
while minimizing exposure to changes in interest rates. In connection with
managing the net interest spread, the Company may periodically enter into
interest rate swaps or caps to minimize the effects of fluctuations in market
interest rates on the net interest spread. To the extent that the Company has
outstanding floating rate borrowings or has elected to convert a portion of its
borrowings from fixed rates to floating rates, the Company will be exposed to
fluctuations in short-term interest rates.
9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is February 15, 2006.
6. 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 three months and nine months ended January
31, 1999 and 2000, are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
------------------------ ------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share....... 5,566,669 5,566,669 5,566,669 5,566,669
Effect of dilutive stock options...... -- 383 36 567
----------- ----------- ----------- -----------
Weighted average shares outstanding
for diluted earnings per share..... 5,566,669 5,567,052 5,566,705 5,567,236
=========== =========== =========== ===========
For the three months and nine months ended January 31, 1999 and 2000, the
Company had 134,117 and 133,933, respectively, of 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.
7. SERVICING
Effective July 6, 1999, the Company terminated its servicing contract with
General Electric Capital Corporation (GECC), an affiliate of the General
Electric Corporation, and completed the transition of its portfolio of
Receivables Held for Investment from GECC to FISC. Under a separate agreement,
GECC will perform 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 such as forwarding
information, documents or other notices it receives with respect to the account
of the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended January 31, 2000 was $807,870, an
increase of 38% from that reported for the comparable period in the preceding
year of $584,718. Net income for the nine months ended January 31, 2000 was
$2,285,698, an increase of 77% from that reported for the comparable period in
the preceding year of $1,288,579. Earnings per common share were $0.15 for the
three months ended January 31, 2000, compared to $0.11 per common share for the
prior year period. Earnings per common share were $0.41 for the nine months
ended January 31, 2000, compared to $0.23 per common share for the prior year
period.
NET INTEREST INCOME
The continued profitability of the Company during this period has been
achieved by the growth of the Receivables Held for Investment, income from
servicing activities and effective management of net interest income. The
following table summarizes the Company's growth in receivables and net interest
income (dollars in thousands):
AS OF OR FOR THE
NINE MONTHS ENDED
JANUARY 31,
----------------------
1999 2000
---------- ----------
Receivables Held for Investment:
Number.......................... 14,990 18,540
Principal balance............... $ 166,769 $ 217,925
Average principal balance of
receivables outstanding during
the nine-month period......... 149,827 202,711
Average principal balance of
receivables outstanding during
the three-month period........ 161,438 214,921
Receivables Acquired for Investment:
Number.......................... 5,418 3,716
Principal balance............... $ 56,697 $ 32,724
Securitized Receivables(1):
Number.......................... 7,119 4,807
Principal balance............... $ 67,481 $ 35,408
Total Managed Receivables Portfolio:
Number.......................... 27,527 27,063
Principal balance............... $ 290,947 $ 286,057
- ------------
(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables.
11
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------ ------------------
1999(2) 2000 1999(2) 2000
------- ------- ------- -------
Interest income(1):
Receivables Held for
Investment ................. $ 6,579 $ 8,820 $18,323 $24,762
Receivables Acquired for
Investment and Investment in
Trust Certificates ......... 2,623 1,765 3,491 5,495
------- ------- ------- -------
9,202 10,585 21,814 30,257
Interest expense:
Receivables Held for
Investment ................. 2,608 3,472 7,226 9,593
Receivables Acquired for
Investment and Investment in
Trust Certificates ......... 1,355 670 1,848 2,414
------- ------- ------- -------
3,963 4,142 9,074 12,007
------- ------- ------- -------
Net interest income ..... $ 5,239 $ 6,443 $12,740 $18,250
======= ======= ======= =======
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown reflect a reduction of $486 and $791 for the three- and
nine-month periods, respectively, in both interest income and interest
expense for receivables acquired for investment with no impact on net
interest income. This reclassification was made to conform with the 2000
presentation.
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
Receivables Held for Investment and the Company's average cost of debt utilized
to fund these receivables, and its net interest margin (averages based on
month-end balances):
THREE MONTHS NINE MONTHS
ENDED ENDED
JANUARY 31, JANUARY 31,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1) ..... 16.3% 16.4% 16.3% 16.3%
Average cost of debt(2) ...... 6.5 6.7 6.6 6.5
---- ---- ---- ----
Net interest spread(3) ....... 9.8% 9.7% 9.7% 9.8%
==== ==== ==== ====
Net interest margin(4) ....... 9.8% 10.0% 9.9% 10.0%
==== ==== ==== ====
- ------------
(1) Represents interest income as a percentage of average Receivables Held for
Investment outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on Receivables Held for Investment less average cost of
debt.
(4) Represents net interest income as a percentage of average Receivables Held
for Investment outstanding.
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 for the three
months and nine months ended January 31, 2000 to $6.4 million and $18.3 million
from $5.2 million and $12.7 million for the comparable periods in the preceding
year. Net interest income in 2000 represents increases of 23% and 43% from the
same periods in 1999.
12
Changes in the principal amount and rate components associated with the
Receivables Held for Investment and debt can be segregated to analyze the
periodic changes in net interest income on such receivables. The following table
analyzes the changes attributable to the principal amount and rate components of
net interest income (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1999 TO 2000 JANUARY 31, 1999 TO 2000
--------------------------------- ---------------------------------
INCREASE DUE TO INCREASE DUE TO
CHANGE IN CHANGE IN
-------------------- --------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
Receivables Held for Investment:
Interest income................. $ 2,181 $ 60 $ 2,241 $ 6,467 $ (28 ) $ 6,439
Interest expense................ 774 90 864 2,479 (112 ) 2,367
--------- ------- --------- --------- ------- ---------
Net interest income............. $ 1,407 $ (30) $ 1,377 $ 3,988 $ 84 $ 4,072
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 2000 AND 1999 (DOLLARS IN
THOUSANDS)
INTEREST INCOME Interest income for the 2000 periods increased to $10,585
and $30,257 compared with $9,202 and $21,814 for the comparable periods in 1999.
Interest income on Receivables Held for Investment increased 34% and 35% for the
three-month and nine-month periods. This is due to an increase in the average
principal balance of Receivables Held for Investment of 33% and 35% from the
1999 comparable periods. Interest income on Receivables Acquired for Investment
and Investment in Trust Certificates decreased by 33% for the comparable
three-month periods and increased 57% for the nine-month periods. The quarterly
decrease is attributable to a 46% reduction in the average principal balances of
the Receivables Acquired for Investment and Investment in Trust Certificates.
The increase in interest income for the comparable nine-month periods is
attributable to a full nine months of income for fiscal 2000 as compared to the
four-month period in fiscal 1999 from the FISC acquisition in October 1998 to
January 1999.
INTEREST EXPENSE. Interest expense in 2000 increased for both the three
and nine month periods to $4,142 and $12,007 as compared to $3,963 and $9,074 in
1999. Interest expense on Receivables Held for Investment increased 33% for both
the three-month and nine-month periods. This is due to an increase of 30% and
34% in the weighted average borrowings outstanding under secured credit
facilities. Interest expense on Receivables Acquired for Investment and
Investment in Trust Certificates decreased by 51% for the comparable three-month
periods and increased 31% for the nine-month periods. The quarterly decrease is
attributable to a 47% reduction in the weighted average borrowings under the
unsecured acquisition facility. The increase in interest expense for the
comparable nine-month periods is attributable to a full nine months of expense
for fiscal 2000 as compared to the four-month period in fiscal 1999 from the
FISC acquisition in October 1998 to January 1999.
NET INTEREST INCOME. Net interest income increased to $6,443 and $18,250,
an increase of 23% and 43%. 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 2000
increased to $1,543 and $4,611 as compared to $1,115 and $3,265 in 1999. The
increase was the result of the growth of the Company's Receivables Held for
Investment portfolio and the related increase in net charge-offs.
13
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding principal balance of 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. During the three- and nine-month periods, servicing
income was $293 and $1,043, respectively, compared to $475 and $721 for the same
periods in 1999. Servicing income continues to decrease as the principal balance
outstanding on the securitizations declines.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $544
and $1,816 in 2000 from $242 and $605 in 1999 which primarily represents late
fees collected from customers on past due accounts, collections on certain FISC
assets which had previously been charged-off by the Company, and interest income
earned on short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fees consist primarily of fees paid by
the Company to General Electric Credit Corporation with which the Company had a
servicing relationship on its Receivables Held for Investment. Effective July 6,
1999, the Company began servicing its portfolio in-house and terminated the
General Electric arrangement. Thus, beginning in July 1999 and for the entire
second and third quarters, the Company incurred no third party servicing
expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs increased to
$2,544 and $7,241 in 2000 from $1,909 and $3,894 in 1999. The increase is a
result of increasing staff levels to support an increase in the Company's
receivables portfolio, an expansion of its geographic territory and an increase
in staffing levels as a result of the acquisition of FISC and the resulting
assumption of loan servicing activities.
OTHER EXPENSES. Other expenses increased to $1,921 and $5,224 in 2000 from
$1,409 and $3,196 in 1999. The increase is a result of an expansion of the
Company's asset base, an increase in the volume of applications for credit
processed by the Company in the 2000 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 2000, income before
provision for income taxes increased to $1,272 and $3,600 or 38% and 77% from
the comparable periods in 1999. This change was a result of the increase in net
interest income after provision for credit losses of $776 and $4,164 and an
increase in late fees and other income of $302 and $1,212, offset by an increase
in operating expenses of $512 and $2,028.
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, and (iii) amounts necessary to fund costs to
retain receivables, primarily interest expense. The Company also requires a
significant amount of cash flow for working capital to fund operating expenses,
primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company paid $30.0 million and $101.4 million for
receivables acquired for the three months and nine months ended January 31, 2000
compared to $28.2 million and $80.7 million paid in the comparable 1999 periods.
14
The Company funds the purchase price of the receivables through the use of
a $65 million warehouse credit facility provided to F.I.R.C., Inc. ("FIRC") a
wholly-owned special purpose financing subsidiary of the Company. The current
FIRC credit facility generally permits the Company to draw advances up to the
outstanding principal balance of qualified receivables. Receivables that have
accumulated in the FIRC credit facility may be transferred to a commercial paper
conduit facility at the option of the Company. The commercial paper facility
provides additional liquidity of up to $135 million to fund the Company's
investment in the receivables portfolio. Credit enhancement for the warehouse
lenders is provided by an Auto Loan Protection Insurance ("ALPI") policy
issued by National Union Fire Insurance Company of Pittsburgh and reinsured by
the Company's captive insurance subsidiary.
The Company utilizes a $135 million commercial paper conduit financing
through Enterprise Funding Corporation, a commercial paper conduit administered
by Bank of America as an additional source of warehouse financing for
Receivables Held for Investment. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). Credit enhancement for the $135 million
facility is provided to the commercial paper investors by a surety bond issued
by MBIA Insurance Corporation.
Receivables originally purchased by the Company are financed with
borrowings under the FIRC credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the FIARC commercial paper facility used to repay
borrowings under the FIRC credit facility. Once receivables are transferred to
the FIARC subsidiary and pledged as collateral for commercial paper borrowings,
the ALPI policy with respect to the transferred receivables is cancelled with
any unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the FIARC commercial paper facility
must be maintained in a reserve account for the benefit of the creditors and
surety bond provider.
The current term of the FIRC credit facility expires on June 15, 2000, at
which time the outstanding balance will be payable in full, subject to certain
notification provisions allowing the Company a period of six months in order to
endeavor to refinance the facility in the event of termination. The term of the
facility has been extended on nine occasions since its inception in October
1992. The FIARC commercial paper facility was provided for a term of one year
and has been extended to March 31, 2000. If the facility was terminated,
receivables pledged as collateral would be allowed to amortize; however, no new
receivables would be allowed to be transferred from the FIRC credit facility.
The Company also maintains a $25 million commercial paper conduit financing
through Variable Funding Capital Corporation ("VFCC"), a commercial paper
conduit administered by First Union National Bank. The financing was provided to
a special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Capital Corporation ("FIACC") 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. In addition, a cash reserve equal to 2% of the outstanding
borrowings under the FIACC commercial paper facility must be maintained in a
reserve account for the benefit of the creditors.
The current term of the FIACC commercial paper facility expires on December
31, 2000. If the facility was terminated, receivables pledged as collateral
would be allowed to amortize; however, no new receivables could be transferred
to the facility.
In addition to the $225 million in currently available debt facilities
utilized to fund the acquisition of new receivables, the Company also maintains
a $13.5 million working capital
15
facility to be used for working capital and general corporate purposes. The
working capital facility expires on April 15, 2000. If the lenders elect not to
renew, any outstandings will be amortized over a one year period. There was
$13.3 million outstanding under this facility at January 31, 2000.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under the
working capital facility.
On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A (Auto Trust) completed the
issuance of $167,969,000 of 7.174% asset-backed notes (Notes). The Notes are
secured by a pool of automobile receivables totaling $174,968,641 which were
previously owned by FIRC, FIARC and FIACC. Proceeds from the issuance, which
totaled $167,967,690 were used to repay all outstanding borrowings under the
FIARC and FIACC commercial paper facilities, to reduce the outstanding
borrowings under the FIRC credit facility, to pay transaction fees related to
the Note issuance and to fund a cash reserve account of 2% or $3,499,373 which
will serve as a portion of the credit enhancement for the transaction. The Notes
bear interest at 7.174% and require monthly principal reductions sufficient to
reduce the balance of the Notes to 96% of the outstanding balance of the
underlying receivables pool. The final maturity of the Notes is February 15,
2006. Credit enhancement for the Note holders is provided by a surety bond
issued by MBIA Insurance Corporation. Additional credit support is provided by a
cash reserve account which is equal to 2% of the original balance of the
receivables pool and a 4% over-collateralization requirement amount. In the
event that certain asset quality covenants are not met, the reserve account
target level will increase to 6% of the then current principal balance of the
receivables pool.
On October 2, 1998, the Company, through its indirect, wholly-owned
subsidiary, FIFS Acquisition Funding Company LLC ("FIFS Acquisition"), entered
into a $75 million non-recourse bridge financing facility with VFCC, an
affiliate of First Union National Bank, to finance the Company's acquisition of
FISC. Contemporaneously with the Company's purchase of FISC, FISC transferred
certain assets to FIFS Acquisition, consisting primarily of (i) all receivables
owned by FISC as of the acquisition date, (ii) FISC's ownership interest in
certain Trust Certificates and subordinated spread or cash reserve accounts
related to two asset securitizations previously conducted by FISC, and (iii)
certain other financial assets, including charged-off accounts owned by FISC as
of the acquisition date. These assets, along with a $1 million cash reserve
account funded at closing serve as the collateral for the bridge facility. The
facility bears interest at VFCC's commercial paper rate plus 2.35%. Under the
terms of the facility, all cash collections from the receivables or cash
distributions to the certificate holder under the securitizations are first
applied to pay FISC a servicing fee in the amount of 3% on the outstanding
balance of all owned or managed receivables and then to pay interest on the
facility. Excess cash flow available after servicing fees and interest payments
are utilized to reduce the outstanding principal balance on the indebtedness. In
addition, one-third of the servicing fee paid to FISC is also utilized to reduce
principal outstanding on the indebtedness. The bridge facility expires on April
15, 2000. The Company is currently negotiating with First Union to refinance the
acquisition facility over an extended term sufficient to amortize the
outstanding balance of the indebtedness through collections of the underlying
receivables and Trust Certificates. It is anticipated that the permanent
financing will consist of issuing various tranches of notes, to be held by VFCC,
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
16
flows. To the extent that the facility is not finalized prior to the expiration
date, the Company intends to seek a short-term extension to allow for the
completion of the term financing. The Company has no reason to believe that VFCC
will not grant such an extension or that an agreement to refinance the bridge
loan will not be reached prior to the then final maturity of the bridge
facility. If the facility were not extended, the remaining outstanding principal
balance would be due at maturity.
Substantially all of the Company's receivables are pledged to collateralize
the credit facilities. Management considers its relationship with all of the
Company's lenders and the Noteholders to be satisfactory and has no reason to
believe that the credit facilities will not be renewed.
The Company's most significant source of cash flow is the principal and
interest payments from the receivables portfolio. The Company received such
payments in the amount of $86.2 million and $63.7 million for the nine months
ended January 31, 2000 and 1999, respectively. Such cash flow funds repayment of
amounts borrowed under the FIRC credit and commercial paper facilities and other
holding costs, primarily interest expense and custodial fees. During the nine
months ended, the Company required net cash flow of $39.1 million in 2000 and
$33.3 million in 1999 (cash required to acquire Receivables Held for Investment
net of principal payments on receivables) to fund the growth of its receivables
portfolio.
INTEREST RATE MANAGEMENT. The Company's secured credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates which do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565% on a notional
amount of $120 million. The swap agreement expired on January 12, 2000. In
connection with the issuance of the Notes, the Company entered into a swap
agreement with Bank of America pursuant to which the Company pays a floating
rate equal to the prevailing one month LIBOR rate plus 0.505% and receives a
fixed rate of 7.174% from the counterparty. The initial notional amount of the
swap was $167,969,000 which amortizes in accordance with the expected
amortization of the Notes. Final maturity of the swap is February 15, 2006.
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
17
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 allowance for credit losses of
$2,007 as a percentage of Receivables Held for Investment is .9% at January 31,
2000.
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 January 31, 2000 and April 30, 1999,
the nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 13.3% and 20.6%, respectively. The decrease is related to several
factors; actual portfolio losses have been less than originally anticipated, the
seasoning of the portfolio and the amount of loan prepayments have been larger
than initially expected. The nonaccretable portion represents the excess of the
loan's scheduled contractual principal and 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.
The Company retains the credit risk associated with the receivables
acquired. 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 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 Auto Trust, FIARC and FIACC commercial paper facilities do
not carry default insurance. A provision for credit losses of $1,543 and $4,611
has been recorded for the three months ended and nine months ended January 31,
2000, 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.
18
The following table summarizes the status and collection experience of
receivables by the Company (dollars in thousands):
AS OF OR FOR THE NINE MONTHS ENDED JANUARY 31,
----------------------------------------------------
1999 2000
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................... 390 $ 5,030 428 $ 4,842
60 - 89 days.................... 104 1,346 116 1,331
90 days or more................. 98 1,482 111 1,161
--- --------- --- ---------
Total delinquencies.................. 592 $ 7,858 655 $ 7,334
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 3.6% 3.3% 3.5% 3.4%
Net charge-offs as a percentage of
average receivables outstanding
during the
period(2)(3)....................... 2.7% 2.7%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables for the 1999 period are based on gross
receivables balances, which include principal outstanding plus unearned
interest income and on the outstanding principal balance of receivables for
the 2000 period. The change in calculation methodology is a result of the
transfer of servicing from GE Capital. GE Capital provided the Company with
gross receivable balance information only, therefore, comparable data cannot
be obtained. While the dollar amount of delinquent receivables are not
comparable period over period, management does not believe that the change
in methodology would result in materially different delinquency percentages.
(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 by third-party insurers. 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.
(3) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Securitized Receivables was 6.4% and
3.4% as of January 31, 2000 and April 30, 1999, respectively.
YEAR 2000 ISSUE
The transition to the year 2000 date change was made without significant
problems or interruption of business activity. The Company had implemented
programs to assess the impact of the year 2000 date change on software and
related technologies. Testing and modifications of the Company's critical
information systems were completed prior to December 31, 1999. The Company did
not incur any significant costs relating to year 2000 issues.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market
19
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the Company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's secured 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. Additionally, in connection with the issuance of the Notes, the Company
entered into a swap agreement with Bank of America to swap the fixed term note
interest rate to a one month floating rate. The Company is therefore exposed
primarily to market risks associated with movements in interest rates on the
outstanding credit and term facilities.
As of January 31, 2000 and considering the term note swap, the Company had
$213 million of floating rate secured debt. For every 1% increase in interest
rates (e.g., commercial paper rates), annual after-tax earnings would decrease
by approximately $1.35 million assuming the Company maintains a level amount of
floating rate debt and assuming an immediate increase in rates.
20
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit
Number Description
- -------------------------------------------------------------
10.62 -- Sale and Allocation Agreement dated
January 1, 2000 among First Investors
Financial Services, Inc., First
Investors Servicing Corporation,
First Investors Auto Investment
Corp., Norwest Bank Minnesota,
National Association and First
Investors Auto Owner Trust 2000-A.
10.63 -- Indenture dated as of January 1, 2000
$167,969,000 7.174% Asset-Backed
Notes among First Investors Auto
Owner Trust 2000-A, First Investors
Financial Services, Inc. and Norwest
Bank Minnesota, National Association.
10.64 -- Amended and Restated Trust Agreement
dated as of January 24, 2000 among
First Investors Auto Investment Corp.
and Bankers Trust (Delaware).
10.65 -- Servicing Agreement dated as of
January 1, 2000 by and among First
Investors Auto Owner Trust 2000-A,
Norwest Bank Minnesota, National
Association, First Investors Auto
Investment Corp. and First Investors
Servicing Corporation.
10.66 -- Insurance Agreement dated as of
January 1, 2000 among MBIA Insurance
Corporation, First Investors
Servicing Corporation, First
Investors Financial Services, Inc.,
First Investors Auto Investment
Corp., First Investors Auto Owner
Trust 2000-A, Bankers Trust
(Delaware) and Norwest Bank Min-
nesota, National Association.
10.67 -- Indemnification Agreement dated as of
January 12, 2000 among MBIA Insur-
ance Corporation, First Investors
Financial Services, Inc. and Banc of
America Securities LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: March 14, 2000 By: /s/ TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 2000 By: /s/ BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND
CHIEF FINANCIAL OFFICER
21