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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, 2001
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, 2001
----- --------------
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, 2001
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2000 and
January 31, 2001 ....................................... 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended January 31, 2000 and 2001 . 4
Consolidated Statement of Shareholders' Equity for
the Nine Months Ended January 31, 2001 ................. 5
Consolidated Statements of Cash Flows for the Nine
Months Ended January 31, 2000 and 2001 ................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................ 24
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ....................... 26
SIGNATURES ...................................................... 27
2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2000 AND JANUARY 31, 2001
APRIL 30, JANUARY 31,
2000 2001
------------ ------------
(AUDITED) (UNAUDITED)
ASSETS
------
Receivables Held for Investment, net. $235,954,788 $255,983,902
Receivables Acquired for Investment,
net................................ 21,888,454 21,389,937
Investment in Trust Certificates..... 5,848,688 2,740,623
Cash and Short-Term Investments,
including restricted cash of
$23,411,293 and $27,189,557........ 25,520,158 28,573,997
Accrued Interest..................... 3,313,630 3,849,869
Assets Held for Sale................. 1,007,256 1,088,172
Other Assets:
Funds held under reinsurance
agreement..................... 3,842,641 3,572,107
Deferred financing costs and
other assets, net of
accumulated amortization and
depreciation of $3,133,823 and
$4,567,921.................... 5,818,338 6,544,602
Current income taxes receivable,
net........................... -- 80,235
Deferred income taxes
receivable, net............... 64,875 --
------------ ------------
Total assets............... $303,258,828 $323,823,444
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Debt:
Term Notes...................... $151,104,279 $101,041,698
Acquisition term facility....... 26,211,787 13,431,529
Warehouse credit facilities..... 77,544,889 156,182,742
Working capital facility........ 13,300,000 13,500,000
Other Liabilities:
Accounts payable and accrued
liabilities................... 4,444,984 4,944,528
Current income taxes payable,
net........................... 527,042 --
Deferred income taxes payable,
net........................... -- 232,763
------------ ------------
Total liabilities.......... 273,132,981 289,333,260
------------ ------------
Commitments and Contingencies
Minority Interest.................... -- 2,804,720
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 18,639,918
Retained earnings............... 11,655,362 13,039,979
------------ ------------
Total shareholders'
equity.................... 30,125,847 31,685,464
------------ ------------
Total liabilities and
shareholders' equity...... $303,258,828 $323,823,444
============ ============
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, 2000 AND 2001
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
------------------------- -------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Interest Income...................... $10,584,724 $11,407,967 $30,257,181 $33,999,021
Interest Expense..................... 4,142,041 5,092,333 12,006,724 15,263,071
----------- ----------- ----------- -----------
Net interest income........ 6,442,683 6,315,634 18,250,457 18,735,950
Provision for Credit Losses.......... 1,542,800 1,868,384 4,611,372 6,176,834
----------- ----------- ----------- -----------
Net Interest Income After Provision
for Credit Losses.................. 4,899,883 4,447,250 13,639,085 12,559,116
----------- ----------- ----------- -----------
Other Income:
Servicing....................... 293,365 85,772 1,043,387 432,616
Late fees and other............. 544,162 579,779 1,816,333 2,039,171
----------- ----------- ----------- -----------
Total other income......... 837,527 665,551 2,859,720 2,471,787
Operating Expenses:
Servicing fees.................. -- -- 434,572 --
Salaries and benefits........... 2,543,712 2,293,877 7,240,637 7,009,468
Other interest expense.......... 302,937 337,322 772,974 1,015,685
Other........................... 1,618,525 1,558,901 4,451,098 4,168,203
----------- ----------- ----------- -----------
Total operating expenses... 4,465,174 4,190,100 12,899,281 12,193,356
----------- ----------- ----------- -----------
Income Before Provision for Income
Taxes and Minority Interest........ 1,272,236 922,701 3,599,524 2,837,547
----------- ----------- ----------- -----------
Provision (Benefit) for Income Taxes:
Current......................... (1,229,398) 152,204 425,946 738,067
Deferred........................ 1,693,764 184,582 887,880 297,638
----------- ----------- ----------- -----------
Total provision for income
taxes.................... 464,366 336,786 1,313,826 1,035,705
Minority Interest.................... -- 200,858 -- 417,225
----------- ----------- ----------- -----------
Net Income........................... $ 807,870 $ 385,057 $ 2,285,698 $ 1,384,617
=========== =========== =========== ===========
Basic and Diluted Net Income per
Common Share....................... $0.15 $0.07 $0.41 $0.25
=========== =========== =========== ===========
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, 2001
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ----------- ----------- -----------
Balance, April 30, 2000.............. $5,567 $18,464,918 $11,655,362 $30,125,847
Net income...................... -- -- 1,384,617 1,384,617
Warrants issued................. -- 175,000 -- 175,000
------ ----------- ----------- -----------
Balance, January 31, 2001............ $5,567 $18,639,918 $13,039,979 $31,685,464
====== =========== =========== ===========
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, 2000 AND 2001
(UNAUDITED)
2000 2001
------------- ------------
Cash Flows From Operating Activities:
Net income...................... $ 2,285,698 $ 1,384,617
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 3,138,934 3,610,606
Provision for credit
losses................... 4,611,372 6,176,834
Charge-offs, net of
recoveries............... (4,134,205) (5,990,788)
Minority Interest.......... -- 417,225
(Increase) decrease in:
Accrued interest
receivable............... (809,618) (536,239)
Restricted cash............ (15,108,824) (3,778,264)
Deferred financing costs
and other assets......... (2,754,579) (1,587,003)
Funds held under
reinsurance agreement.... (82,887) 270,534
Due from servicer.......... 14,065,957 --
Deferred income taxes
receivable, net.......... 553,781 64,875
Current income taxes
receivable, net.......... (107,581) (80,235)
Increase (decrease) in:
Accounts payable and
accrued liabilities...... (3,622,074) 499,544
Current income taxes
payable.................. (329,764) (527,042)
Deferred income taxes
payable.................. 334,099 232,763
------------- ------------
Net cash provided by
(used in) operating
activities.......... (1,959,691) 157,427
------------- ------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for
Investment.................... (101,390,576) (93,647,134)
Purchase of Receivables Acquired
for Investment................ -- (8,110,849)
Principal payments from
Receivables Held for
Investment.................... 62,268,679 71,125,376
Principal payments from
Receivables Acquired for
Investment.................... 14,803,060 10,996,861
Principal payments from Trust
Certificates.................. 3,834,523 3,108,065
Purchase of furniture and
equipment..................... (48,401) (349,185)
------------- ------------
Net cash used in
investing
activities.......... (20,532,715) (16,876,866)
------------- ------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Term Notes................. 167,969,000 --
Warehouse credit
facilities............... 88,960,602 93,868,563
Working capital facility... 14,865,000 200,000
Principal payments made on --
Term Notes................. -- (50,062,581)
Warehouse credit
facilities............... (220,370,019) (15,230,710)
Working capital facility... (8,800,000) --
Acquisition term
facility................. (22,083,550) (12,780,258)
------------- ------------
Net cash provided by
financing
activities.......... 20,541,033 15,995,014
------------- ------------
Decrease in Cash and Short-Term
Investments........................ (1,951,373 (724,425)
Cash and Short-Term Investments at
Beginning of Period................ 4,028,236 2,108,865
------------- ------------
Cash and Short-Term Investments at
End of Period...................... $ 2,076,863 $ 1,384,440
============= ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 11,873,936 $ 14,947,238
Income taxes............... 863,291 1,105,522
Non-cash financing activities --
Exchange of 167,001
warrants for financing
fees..................... $ -- $ 175,000
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, 2000 AND 2001
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its wholly and majority owned subsidiaries
(collectively referred to as the Company) is principally involved in the
business of acquiring and holding for investment retail installment contracts
and promissory notes secured by new and used automobiles and light trucks
(receivables) originated by factory authorized franchised dealers. As of
January 31, 2001, approximately 27 percent of Receivables Held for Investment
had been originated in Texas. The Company currently operates 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. Headquartered in Atlanta, Georgia, FISC was engaged in essentially
the same business as the Company and additionally performs servicing and
collection activities on a portfolio of receivables acquired for investment as
well as on a portfolio of receivables acquired and sold pursuant to two asset
securitizations. As a result of the acquisition, the Company increased the total
dollar value on its balance sheet of receivables, acquired an interest in
certain Trust Certificates related to the asset securitizations and acquired
certain servicing rights along with furniture, fixtures, equipment and
technology to perform the servicing and collection functions for the portfolio
of receivables under management. The Company performs servicing and collection
functions on loans originated from 31 states on a managed receivables portfolio
of $284 million as of January 31, 2001.
On August 8, 2000, the Company entered into a partnership agreement whereby
a subsidiary of the Company is the general partner owning 70 percent of the
partnership assets and First Union Investors, Inc. serves as the limited partner
and owns 30 percent of the partnership assets (the "Partnership"). The
Partnership consists primarily of (i) a portfolio of loans previously owned by
FISC, (ii) 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.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its wholly and majority owned 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, 2001, and the results of its
operations for the three months and nine months ended January 31, 2000 and 2001,
and its cash flows for the nine months ended January 31, 2000 and 2001.
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 2000 Annual Report on Form 10-K filed July 21, 2000.
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133." The Company will adopt
SFAS No. 133 concurrently with SFAS No. 138 effective for its fiscal year
beginning May 1, 2001. Currently, the Company anticipates designating its
interest rate swaps and caps as cash flow hedges and will be required to
mark-to-market its hedging positions at the end of each period when the
implementation of SFAS No. 133 and 138 take effect. Changes in the fair value
of the Company's open hedging positions resulting from the mark-to-market
process will represent unrealized gains and losses. Such unrealized gains and
losses may change based on prevailing interest rates at each subsequent balance
sheet date. Such changes will be reflected as an increase or reduction in
stockholders' equity through other comprehensive income. In addition, the
Company will be required to measure the effectiveness of its hedging positions
periodically, any ineffectiveness in the hedging positions will be recorded
through net income. In general, SFAS No. 133 and 138 will result in material
fluctuations in other comprehensive income, net income and stockholder's equity
in periods of interest rate volatility.
RECLASSIFICATIONS. Certain reclassifications have been made to the fiscal
2000 amounts to conform with the fiscal 2001 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JANUARY 31,
2000 2001
------------ ------------
Receivables.......................... $231,696,539 $251,910,366
Unamortized premium and deferred
fees............................... 6,392,243 6,393,576
Allowance for credit losses.......... (2,133,994) (2,320,040)
------------ ------------
Net receivables................. $235,954,788 $255,983,902
============ ============
Activity in the allowance for credit losses was as follows:
FOR THE NINE MONTHS
ENDED JANUARY 31,
-------------------------------
2000 2001
------------ ------------
Balance, beginning of period......... $ 1,529,651 $ 2,133,994
Provision for credit losses.......... 4,611,372 6,176,834
Charge-offs, net of recoveries....... (4,134,205) (5,990,788)
------------ ------------
Balance, end of period............... $ 2,006,818 $ 2,320,040
============ ============
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, 2000 and January 31, 2001. The fiscal year 2000 contract payments
receivable was net of an estimate of future cash flows that were to be sold to
the limited partner. For January 31, 2001, the contract payments
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivable does not net estimated future cash flows payable to others and
instead such amounts are included as minority interest.
APRIL 30, JANUARY 31,
2000 2001
------------ ------------
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality........................ $ 31,198,093 $ 26,808,068
Nonaccretable difference................ (5,387,268) (2,245,186)
Accretable yield........................ (3,922,371) (3,172,945)
------------ ------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................... $ 21,888,454 $ 21,389,937
============ ============
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, 2000............... $ 5,387,268 $ 3,922,371
Additions.......................... 1,216,732 671,297
Accretion.......................... -- (2,737,381)
Eliminations....................... (4,186,666) --
Consolidation of partnership....... -- 1,144,510
Reclassifications.................. (172,148) 172,148
----------- -----------
Balance at January 31, 2001............. $ 2,245,186 $ 3,172,945
=========== ===========
Additions to accretable yield and nonaccretable difference relate to the
repurchase of ALAC Automobile Receivables Owner Trust 1997-1. See
Note 5 -- FIACC Commercial Paper Facility.
Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period ended January 31, 2001. The
increase in accretable yield includes a reclassification from nonaccretable
difference for cash flows expected to be collected in excess of those previously
expected. Accretable yield also increased due to the creation of the Partnership
on August 8, 2000 to share in the income from Receivables Acquired for
Investment. Partnership income accrues through accretable yield and the limited
partner's portion is accounted for as a minority interest. See
Note 5 -- Acquisition Facility.
5. DEBT
The Company finances the acquisition of its receivables portfolio through
various warehouse credit facilities. The Company's credit facilities provide for
one year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. In January
2000, the Company issued $168 million in asset-backed notes ("Term Notes")
secured by a pool of receivables. Proceeds from the note issuance were used to
repay outstanding borrowings under the various revolving credit facilities.
Substantially all receivables retained by the Company are pledged as collateral
for the credit facilities and the Term Notes.
FIRC CREDIT FACILITY. Borrowings under the FIRC credit facility were
$59,540,000 and $37,540,000 at April 30, 2000 and January 31, 2001,
respectively, and had weighted average interest rates, including the effect of
facility fees and hedge instruments, as applicable, of 6.21
9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
percent and 6.92 percent as of such dates. The current term of the FIRC credit
facility expires on November 14, 2001. This maturity date reflects a renewal of
the facility effective November 15, 2000. Under the terms of the renewal, the
maximum facility limit was reduced from $65 million to $50 million effective
December 31, 2000 to coincide with the increase in the FIARC commercial paper
facility. Further, under the renewal mechanics of the facility, should the
lenders elect not to renew the facility beyond November 14, 2001, the facility
would convert to a term loan facility which would mature six months thereafter
and amortize monthly in accordance with the borrowing base with any remaining
balance due at maturity. No other material changes were made to the existing
terms and conditions of the facility in connection with the renewal.
FIARC COMMERCIAL PAPER FACILITY. At April 30, 2000 and January 31, 2001,
the Company had borrowings of $18,004,889 and $113,755,597, respectively,
outstanding under this commercial paper facility at weighted average interest
rates, including the effect of program fees, dealer fees and hedge instruments,
as applicable, of 7.33 percent and 7.09 percent, respectively. The current term
of the FIARC commercial paper facility expires on November 28, 2001. This
maturity date reflects a renewal of the facility effective November 29, 2000.
Pursuant to this renewal, the maximum facility amount was increased from
$135 million to $150 million and the overcollateralization which serves as the
primary credit enhancement for the facility was reduced from 10 percent to 6
percent allowing the Company to now borrow up to 94 percent against the
receivables pledged as collateral for the FIARC commercial paper facility. No
other material changes were made to the terms and conditions of the facility in
connection with the renewal. If the facility was not extended beyond the
maturity date, receivables pledged as collateral would be allowed to amortize;
however, no new receivables would be allowed to be transferred from the FIRC
credit facility.
FIACC COMMERCIAL PAPER FACILITY. At January 31, 2001, borrowings were
$4,887,145 under the FIACC commercial paper facility, and had a weighted average
interest rate of 7.97 percent, including the effects of program fees and hedge
instruments. There were no outstanding borrowings at April 30, 2000. The current
term of the FIACC commercial paper facility expires on November 14, 2001.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1. Accordingly, the Company acquired $8,110,849 in
outstanding receivables from the trust and borrowed $6,408,150 under the FIACC
facility which, combined with amounts on deposit in the collection account and
the outstanding balance in a cash reserve account, was utilized to repay
$7,874,689 in senior notes and redeem $1,033,456 of the trust certificates. The
receivables purchased were used as collateral to secure the FIACC borrowing with
any residual cash flows generated by the receivables pledged to the Partnership.
As a result of utilizing FIACC to fund the repurchase of the ALAC
securitization, the Company has elected to utilize the FIACC commercial paper
facility solely as the financing source for this repurchase and does not expect
to utilize the facility to finance Receivables Held for Investment.
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 percent 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 percent or
$3,499,373 which will serve as a portion of
10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the credit enhancement for the transaction. The Notes bear interest at 7.174
percent and require monthly principal reductions sufficient to reduce the
balance of the Notes to 96 percent of the outstanding balance of the underlying
receivables pool. The final maturity of the Notes is February 15, 2006. As of
April 30, 2000 and January 31, 2001, the outstanding principal balance on the
Notes was $151,104,279 and $101,041,698, respectively and had weighted average
interest rates, including the effect of surety bond fees and hedge instruments,
as applicable, of 6.99 percent and 7.52 percent, respectively. A surety bond
issued by MBIA Insurance Corporation provides credit enhancement for the Note
holders. Additional credit support is provided by the cash reserve account,
which equals 2 percent of the original balance of the receivables pool and a 4
percent over-collateralization requirement. In the event that certain asset
quality covenants are not met, the reserve account target level will increase to
6 percent of the then current principal balance of the receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with Variable Funding Capital Corporation ("VFCC"), an affiliate of First Union
National Bank, to finance the Company's acquisition of FISC. Contemporaneously
with the Company's purchase of FISC, FISC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by FISC as of the
acquisition date, (ii) FISC's ownership interest in certain Trust Certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by FISC, and (iii) certain other financial
assets, including charged-off accounts owned by FISC as of the acquisition date.
These assets, along with a $1 million cash reserve account funded at closing
serve as the collateral for the bridge facility. The facility bears interest at
VFCC's commercial paper rate plus 2.35 percent and expired on August 14, 2000.
Under the terms of the facility, all cash collections from the receivables or
cash distributions to the certificate holder under the securitizations are first
applied to pay FISC a servicing fee in the amount of 3 percent on the
outstanding balance of all owned or managed receivables and then to pay interest
on the facility. Excess cash flow available after servicing fees and interest
payments are utilized to reduce the outstanding principal balance on the
indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner and contributed
its assets for a 70 percent interest in the partnership and First Union
Investors, Inc., an affiliate of First Union, serves as the limited partner with
a 30 percent interest in the partnership (the "Partnership"). Pursuant to the
refinancing, the Partnership issued Class A Notes in the amount of $19,204,362
and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were
used to retire the acquisition debt. The Class A Notes bear interest at VFCC's
commercial paper rate plus 0.95 percent per annum and amortize on a monthly
basis by an amount necessary to reduce the Class A Note balance as of the
payment date to 75 percent of the outstanding principal balance of Receivables
Acquired for Investment, excluding Receivables Held for Investment that are
applicable to FIACC, as of the previous month end. The Class B Notes bear
interest at VFCC's commercial paper rate plus 5.38 percent per annum and
amortize on a monthly basis by an amount which varied based on excess cash flows
received from Receivables Acquired for Investment after payment of servicing
fees, trustee and back-up servicer fees, Class A Note interest and Class A Note
principal, plus collections received on the Trust Certificates. The outstanding
balance of the Class A Notes was $13,431,529 as of January 31, 2001. The
Class B Notes were paid in full on September 15, 2000. After the Class B Notes
were paid in full, all cash flows received after payment of Class A Note
principal and interest, servicing fees and other costs, are distributed to the
Partnership for subsequent
11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distribution to the partners based upon the respective partnership interests.
The amount of the partners' cash flow will vary depending on the timing and
amount of residual cash flows. The Company is accounting for First Union's
limited partnership interest in the Partnership as a minority interest.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that was utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December, 1999 and
was scheduled to mature on December 22, 2000. Effective December 22, 2000, the
$13.5 million in outstandings were refinanced through the issuance of a
$13.5 million term loan. Under the terms of the facility, provided by Bank of
America and First Union, the term loan would be repaid in quarterly installments
of $675,000 beginning on March 31, 2001. In addition to the scheduled principal
payments, the term loan also requires an additional principal payment of
$300,000 on June 30, 2001 under certain conditions relating to the size of Bank
of America's portion of the outstanding balance. The remaining unpaid balance of
the term loan is due at maturity on December 22, 2002. Pricing under the
facility is based on the LIBOR rate plus 3 percent. The term loan is secured by
all unencumbered assets of the Company, excluding receivables owned and financed
by wholly-owned, special purpose subsidiaries of the Company and is guaranteed
by First Investors Financial Services Group, Inc. and all subsidiaries that are
not special purpose subsidiaries. In consideration for refinancing the working
capital facility, the Company paid each lender an upfront fee and issued
warrants to each lender to purchase, in aggregate, 167,001 shares of the
Company's common stock at a strike price of $3.81 per share. The warrants expire
on December 22, 2010. The warrant value of $175,000 is estimated based on the
expected difference between financing costs with and without the warrants. These
costs are included as deferred financing costs and will be amortized through the
maturity date of the debt. In addition, the Company agreed to issue additional
warrants to Bank of America to acquire up to a maximum of 47,945 additional
shares of stock at a price equal to the average closing price for the
immediately preceding 30 trading days prior to each grant date which is
June 30, 2001 and December 31, 2001. The actual number of warrants to be issued,
if any, will be based upon the outstanding amount of Bank of America's portion
of the term loan.
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 percent 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 percent and
receives a fixed rate of 7.174 percent from the counterparty. The initial
notional
12
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount of the swap was $167,969,000 which amortizes in accordance with the
expected amortization of the Notes. Final maturity of the swap was August 15,
2002.
On September 27, 2000, the Company elected to terminate the floating swap
at no material gain or loss and enter into a new swap under which the Company
would pay a fixed rate of 6.30 percent on a notional amount of $100 million. The
initial expiration of the swap is April 15, 2001 though the counterparty has the
option to extend the swap for an additional three years, expiring April 15, 2004
at a rate of 6.42 percent.
In connection with the repurchase of the ALAC 97-1 Securitization and the
financing of that repurchase through the FIACC subsidiary on September 15,
2000, FIACC entered into an interest rate swap agreement with First Union under
which FIACC pays a fixed rate of 6.76 percent as compared to the one month
commercial paper index rate. The initial notional amount of the swap is
$6,408,150 which amortizes monthly in accordance with the expected amortization
of the FIACC borrowings. The final maturity of the swap is December 15, 2001.
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 ("Class A swap") 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 ("Class B swap") 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. Class A swap has a final maturity of December 20,
2002, while Class B swap matured on February 20, 2000. The Company also
purchased two interest rate caps which protect the Company and the lender
against any material increases in interest rates which may adversely affect any
outstanding indebtedness which is not fully covered by the aggregate notional
amount outstanding under the swaps. The first cap agreement ("Class A cap")
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 is amortized based on the expected difference
between the outstanding notional amount under Class A swap 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 ("Class B cap") 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 is amortized based on
the expected difference between the outstanding notional amount under Class B
swap 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. Pursuant to the refinance of the acquisition facility on August 8, 2000,
the Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $418,609. This derivative net gain is being amortized over the life
of the initial derivative instrument. In addition, the two remaining hedge
instruments were assigned by FIFS Acquisition to the Partnership.
13
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000 and 2001, are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
------------------------ ------------------------
2000 2001 2000 2001
--------- --------- --------- ---------
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 and
warrants........................... 383 -- 567 18
--------- --------- --------- ---------
Weighted average shares outstanding
for diluted earnings per share..... 5,567,052 5,566,669 5,567,236 5,566,687
========= ========= ========= =========
For the three months ended January 31, 2000 and 2001 and the nine months
ended January 31, 2000 and 2001, the Company had 134,117; 460,001; 133,933; and
459,983, respectively, of stock options and warrants 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
From its inception until July 1999, the Company was a party to a servicing
agreement with General Electric Capital Corporation ("GECC") under which GECC
performed certain loan servicing and collection activities with respect to the
Company's portfolio of Receivables Held for Investment. Servicing fees were paid
monthly to GECC based on the number of receivables being serviced during the
period plus certain reimbursable expenses including legal and third party
recovery costs. Due from servicer primarily represents unremitted principal and
interest payments and proceeds from the sale of repossessed collateral. In July
1999, the Company elected to terminate the servicing agreement with GECC in
connection with the transfer of the servicing and collection activities on the
receivables to the Company's internal servicing and collection platform.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended January 31, 2001 was $385,057, a
decrease of 52% from that reported for the comparable period in the preceding
year of $807,870. Net income for the nine months ended January 31, 2001 was
$1,384,617, a decrease of 39% from that reported for the comparable period in
the preceding year of $2,285,698. Earnings per common share were $0.07 for the
three months ended January 31, 2001, compared to $0.15 per common share for the
prior year period. Earnings per common share were $0.25 for the nine months
ended January 31, 2001, compared to $0.41 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,
-----------------------
2000 2001
-------- --------
Receivables Held for Investment:
Number.......................... 18,540 20,807
Principal balance............... $217,925 $251,910
Average principal balance of
receivables outstanding during
the nine-month period......... 202,711 247,261
Average principal balance of
receivables outstanding during
the three-month period........ 214,921 252,045
Receivables Acquired for Investment:
Number.......................... 3,716 3,647
Principal balance............... $ 32,724 $ 22,181
Securitized Receivables(1):
Number.......................... 4,807 1,748
Principal balance............... $ 35,408 $ 9,944
Total Managed Receivables Portfolio:
Number.......................... 27,063 26,202
Principal balance............... $286,057 $284,035
- ------------
(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. As of January 31, 2001, one of
the asset securitizations liquidated and the receivables were repurchased.
These receivables are included in Receivables Acquired for Investment.
15
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------- ---------------------
2000 2001 2000 2001
------- ------- ------- -------
Interest income(1):
Receivables Held for
Investment.................... $ 8,820 $10,343 $24,762 $30,556
Receivables Acquired for
Investment, Investment in
Trust Certificates and
Minority Interest(2).......... 1,765 1,065 5,495 3,443
------- ------- ------- -------
10,585 11,408 30,257 33,999
Interest expense:
Receivables Held for
Investment(3)................. 3,472 4,786 9,593 14,440
Receivables Acquired for
Investment and Investment in
Trust Certificates............ 670 306 2,414 823
------- ------- ------- -------
4,142 5,092 12,007 15,263
------- ------- ------- -------
Net interest income........ $ 6,443 $ 6,316 $18,250 $18,736
======= ======= ======= =======
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the three and nine months ended January 31, 2001 reflect
$315 and $656, respectively, in interest income related to minority
interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.
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,
----------------- -----------------
2000 2001 2000 2001
---- ---- ---- ----
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1)........ 16.4% 16.4% 16.3% 16.5%
Average cost of debt(2)......... 6.7 7.5 6.5 7.9
---- ---- ---- ----
Net interest spread(3).......... 9.7% 8.9% 9.8% 8.6%
==== ==== ==== ====
Net interest margin(4).......... 10.0% 8.8% 10.0% 8.7%
==== ==== ==== ====
- ------------
(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 decreased for the three
months ended January 31, 2001 from $6.4 million to $6.3 million and increased
for the nine months ended January 31, 2001 to $18.7 million from $18.3 million
for the comparable period in the preceding year. Net interest income in 2001
represents a decrease of 2% from the prior year quarter and an increase of 3%
year to date as compared to 2000.
16
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, 2000 TO 2001 JANUARY 31, 2000 TO 2001
--------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO 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................. $1,523 $-- $ 1,523 $5,442 $ 352 $ 5,794
Interest expense................ 787 527 1,314 2,272 2,575 4,847
------ ----- ------- ------ ------- -------
Net interest income............. $ 736 $(527) $ 209 $3,170 $(2,223) $ 947
====== ===== ======= ====== ======= =======
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 2001 AND 2000 (DOLLARS IN
THOUSANDS)
INTEREST INCOME. Interest income for the 2001 periods increased to $11,408
and $33,999 compared with $10,585 and $30,257 for the comparable periods in
2000. Interest income on Receivables Held for Investment increased 17% and 23%
over the 2000 periods. This is due to an increase in the average principal
balance of Receivables Held for Investment of 17% and 22% from the 2000
comparable periods. Interest income on Receivables Acquired for Investment and
Investment in Trust Certificates decreased for both periods due to a reduction
in the average principal balances of the Receivables Acquired for Investment and
Investment in Trust Certificates.
INTEREST EXPENSE. Interest expense in 2001 increased for both the
three-month and nine-month periods to $5,092 and $15,263 as compared to $4,142
and $12,007 in 2000. Interest expense on Receivables Held for Investment
increased 38% and 51% for the three-month and nine-month periods. This is due to
an increase of 23% for the three-month and 24% for the nine-month periods in the
weighted average borrowings outstanding under the Term Notes and warehouse
credit facilities and increases in the average cost of borrowings of 12% and 22%
over the 2000 periods. Interest expense on Receivables Acquired for Investment
and Investment in Trust Certificates decreased by 54% and 66% for the comparable
three-month and nine-month periods. The decrease is attributable to a reduction
in the weighted average borrowings under the acquisition term facility.
NET INTEREST INCOME. Net interest income decreased slightly quarter to
quarter from $6,443 in 2000 to $6,316 in 2001 and increased from $18,250 to
$18,736 year to date. The quarter to quarter decrease was due to an increase in
the average cost of debt and a lower average principal balance in Receivables
Acquired for Investment and Investment in Trust Certificates which more than
offset the increase in Receivables Held for Investment. The year to date
increase resulted primarily from the growth in Receivables Held for Investment
offset by the reduction in the contributions to interest income from the
Receivables Acquired for Investment and Trust Certificates and an increase in
the average cost of borrowings.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2001
increased to $1,868 and $6,177 as compared to $1,543 and $4,611 in 2000. 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.
17
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3% on the outstanding balance of the principal balance of
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Under the terms of the
securitizations, the servicer may be removed upon breach of its obligations
under the servicing agreements, the deterioration of the underlying receivables
portfolios in violation of certain performance triggers or the deteriorating
financial condition of the servicer. Servicing income was $86 and $433 for the
2001 periods compared to $293 and $1,043 in 2000. Servicing income continues to
decrease as the principal balance outstanding on the securitizations declines.
Additionally, one of the securitizations was liquidated September 15, 2000 and
the receivables were repurchased. Accordingly, no servicing fee income is earned
subsequent to the call date.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $580
and $2,039 in 2001 from $544 and $1,816 in 2000 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 ("GECC") with which the
Company had a servicing relationship on its Receivables Held for Investment.
Effective July 6, 1999, the Company began servicing its portfolio in-house and
terminated the General Electric arrangement. Thus, beginning in July 1999, the
Company incurred no third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs decreased for
the three-month and nine-month periods to $2,294 and $7,009 in 2001 from $2,544
and $7,241 in 2000. The decrease is due to headcount reductions and continued
emphasis on expense control.
OTHER INTEREST EXPENSE. Other interest expense in 2001 increased to $337
and $1,016 as compared to $303 and $773 in 2000. The increase was primarily due
to an increase in the three-month and nine-month average borrowings outstanding
under the working capital facility of $12,100,000 and $9,888,889 in 2000 to
$13,433,333 and $13,344,444 in 2001 and to increases of 0.8% and 1.3% in the
average interest rate on this facility.
OTHER EXPENSES. Other expenses decreased for both the three- and
nine-month periods from $1,619 and $4,451 in 2000 to $1,559 and $4,168 in 2001.
The variance is principally due to management's implementation of tighter
expense controls and the leveraging of operating expenses as duplicative costs
were eliminated when the GECC servicing agreement was terminated in July 1999.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During
2001, income before provision for income taxes and minority interest decreased
to $923 and $2,838 or 27% and 21% from the comparable periods in 2000. The
quarter to quarter decrease was primarily due to increased borrowing costs which
reduced net interest income by $127, an increase in the provision for credit
losses of $326, a $172 reduction in servicing fee income and late fees offset by
a $250 decrease in salaries expense. The year to year decline was the result of
an increase in net interest income of $486 and a decrease in operating expenses
of $706 offset by an increase in the provision for credit losses of $1,565 and a
decrease in other income of $388. The increase in net interest income was
negatively impacted by increased borrowing costs.
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
18
retain receivables, primarily interest expense. 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 $23.4 million and $93.6 million for
receivables acquired for the three months and nine months ended January 31, 2001
compared to $30.0 million and $101.4 million paid in the comparable 2000
periods.
The Company funds the purchase price of the receivables through the use of
a $50 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 $150 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 utilized a $150 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 enhancements for the $150 million
facility are provided to the commercial paper investors by a surety bond issued
by MBIA Insurance Corporation. At April 30, 2000 and January 31, 2001, the
Company had borrowings of $18,004,889 and $113,755,597, respectively,
outstanding under the FIARC commercial paper facility.
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 94% 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 November 14, 2001.
In the event that the facility is not renewed prior to its maturity date, the
facility will automatically convert to a term loan which will amortize in
accordance with the borrowing base over a six month period when the outstanding
balance will be due and payable. The FIARC commercial paper facility was
provided for a term of one year and has been extended to November 28, 2001. 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. Borrowings under the FIRC credit facility were
$59,540,000 and $37,540,000 at April 30, 2000 and January 31, 2001,
respectively.
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 receivables previously
securitized by FISC.
19
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
November 14, 2001. If the facility was terminated, receivables pledged as
collateral would be allowed to amortize; however, no new receivables could be
transferred to the facility. At January 31, 2001, borrowings were $4,887,145
under the FIACC commercial paper facility. There were no outstanding borrowings
at April 30, 2000.
In addition to the $200 million in current available credit facilities
utilized to fund the acquisition of new receivables, the Company also has a
$13.5 million term loan initially utilized to fund working capital requirements
of the Company. This facility was converted to a term loan on December 22, 2000.
Under the terms of the facility, provided by Bank of America and First Union,
the term loan would be repaid in quarterly installments of $675,000 beginning on
March 31, 2001. In addition to the scheduled principal payments, the term loan
also requires an additional principal payment of $300,000 on June 30, 2001 under
certain conditions relating to the size of Bank of America's portion of the
outstanding balance. The remaining unpaid balance of the term loan is due at
maturity on December 22, 2002. Pricing under the facility is based on the LIBOR
rate plus 3%. The term loan is secured by all unencumbered assets of the
Company, excluding receivables owned and financed by wholly-owned, special
purpose subsidiaries of the Company and is guaranteed by First Investors
Financial Services Group, Inc. and all subsidiaries that are not special purpose
subsidiaries. In consideration for refinancing the working capital facility, the
Company paid each lender an upfront fee and issued warrants to each lender to
purchase, in aggregate, 167,001 shares of the Company's common stock at a strike
price of $3.81 per share. The warrants expire on December 22, 2010. The warrant
value of $175,000 is estimated based on the expected difference between
financing costs with and without the warrants. These costs are included as
deferred financing costs and will be amortized through the maturity date of the
debt. In addition, the Company agreed to issue additional warrants to Bank of
America to acquire up to a maximum of 47,945 additional shares of stock at a
price equal to the average closing price for the immediately preceding 30
trading days prior to each grant date which is June 30, 2001 and December 31,
2001. The actual number of warrants to be issued, if any, will be based upon the
outstanding amount of Bank of America's portion of the term loan.
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. As of April 30, 2000 and January 31, 2001, the outstanding
principal balance on the Notes was $151,104,279 and $101,041,698, respectively.
20
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 expired on August 14, 2000.
On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner and contributed
its assets for a 70% interest in the partnership and First Union Investors,
Inc., an affiliate of First Union, serves as the limited partner with a 30%
interest in the partnership (the "Partnership"). Pursuant to the refinancing,
the Partnership issued Class A Notes in the amount of $19,204,362 and Class B
Notes in the amount of $979,453 to VFCC, the proceeds of which were used to
retire the acquisition debt. The Class A Notes bear interest at VFCC's
commercial paper rate plus 0.95% per annum and amortize on a monthly basis by an
amount necessary to reduce the Class A Note balance as of the payment date to
75% of the outstanding principal balance of Receivables Acquired for Investment,
excluding Receivables Held for Investment that are applicable to FIACC, as of
the previous month end. The Class B Notes bear interest at VFCC's commercial
paper rate plus 5.38% per annum and amortize on a monthly basis by an amount
which varied based on excess cash flows received from Receivables Acquired for
Investment after payment of servicing fees, trustee and back-up servicer fees,
Class A Note interest and Class A Note principal, plus collections received on
the Trust Certificates. The outstanding balance of the Class A Notes was
$13,431,529 as of January 31, 2001. The Class B Notes were paid in full on
September 15, 2000. After the Class B Notes were paid in full, all cash flows
received after payment of Class A Note principal and interest, servicing fees
and other costs, are distributed to the Partnership for subsequent distribution
to the partners based upon the respective partnership interests. The amount of
the partners' cash flow will vary depending on the timing and amount of residual
cash flows. The Company is accounting for First Union's limited partnership
interest in the Partnership as a minority interest.
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 $101.1 million and $86.2 million for the nine months
ended January 31, 2001 and 2000, 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 $22.5 million in 2001 and
$39.1 million in 2000 (cash required to acquire Receivables Held for Investment
net of principal payments on receivables) to fund the growth of its receivables
portfolio.
21
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 was August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap
at no material gain or loss and enter into a new swap under which the Company
would pay a fixed rate of 6.30% on a notional amount of $100 million. The
initial expiration of the swap is April 15, 2001 though the counterparty has the
option to extend the swap for an additional three years, expiring April 15, 2004
at a rate of 6.42%.
In connection with the repurchase of the ALAC 97-1 Securitization and the
financing of that repurchase through the FIACC subsidiary on September 15,
2000, FIACC entered into an interest rate swap agreement with First Union under
which FIACC pays a fixed rate of 6.76% as compared to the one month commercial
paper index rate. The initial notional amount of the swap is $6,408,150 which
amortizes monthly in accordance with the expected amortization of the FIACC
borrowings. The final maturity of the swap is December 15, 2001.
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 ("Class A swap") 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 ("Class B swap") 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. Class A swap has a final maturity of December 20, 2002 while
Class B swap matured on February 20, 2000. The Company also purchased two
interest rate caps which protect the Company and the lender against any material
increases in interest rates which may adversely affect any outstanding
indebtedness which is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement ("Class A cap") 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 is amortized based on the expected difference between
the outstanding notional amount under Class A swap 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 ("Class B cap") 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
22
increases initially and is amortized based on the expected difference between
the outstanding notional amount under Class B swap 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. Pursuant to the
refinance of the acquisition facility on August 8, 2000, the Class B cap was
terminated and the notional amounts of the Class A swap and Class A cap were
adjusted downward to reflect the lower outstanding balance of the Class A Notes.
The amendment or cancellation of these instruments resulted in a gain of
$418,609. This derivative net gain is being amortized over the life of the
initial derivative instrument. In addition, the two remaining hedge instruments
were assigned by FIFS Acquisition to the Partnership.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. An allowance for credit losses of
$2,320,040 as of January 31, 2001 and $2,133,994 as of April 30, 2000 as a
percentage of the Receivables Held for Investment of $251,910,366 as of
January 31, 2001 and $231,696,539 as of April 30, 2000 was .9% at January 31,
2001 and April 30, 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, 2001 and April 30, 2000,
the nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 8.4% and 17.3%. This variance is primarily related to the fact
that the April 30, 2000 contract payments receivable was net of estimated excess
cash flows payable to others. When the Partnership was entered into during the
quarter ended October 31, 2000, the contract payments receivable are inclusive
of the limited partner's estimated portion of the future cash flows. 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 90 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. Provisions for credit losses of $1,868,384 and
$1,542,800 have been recorded for the three months ended January 31, 2001, and
January 31, 2000, respectively, for losses on receivables which are either
uninsured or which are reinsured by the Company's captive insurance subsidiary.
Provisions for credit losses of $6,176,834 and $4,611,372 have been recorded for
the nine months ended January 31, 2001, and January 31, 2000, respectively.
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
23
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
receivables by the Company (dollars in thousands):
AS OF OR FOR THE NINE MONTHS ENDED JANUARY 31,
-------------------------------------------------
2000 2001
--------------------- ---------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................... 428 $4,842 412 $4,990
60 - 89 days.................... 116 1,331 176 2,103
90 days or more................. 111 1,161 206 2,602
--- ------ --- ------
Total delinquencies.................. 655 $7,334 794 $9,695
=== ====== === ======
Total delinquencies as a percentage
of outstanding receivables......... 3.5% 3.4% 3.8% 3.8%
Net charge-offs as a percentage of
average receivables outstanding
during the period(1)............... 2.7% 3.2%
- ------------
(1) 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 7.9% and
8.7% as of January 31, 2001 and April 30, 2000, respectively.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are foward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the Company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's credit facilities bear interest at floating rates
which are reset on a short-term basis, whereas its receivables bear interest at
fixed rates which do not generally vary with changes in interest rates. The
Company is therefore exposed primarily to market risks associated with movements
in interest rates on its credit facilities. The Company believes that it takes
the necessary steps to appropriately reduce the potential impact of interest
rate increases on the Company's financial position and operating performance.
24
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently, all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.
As of January 31, 2001, the Company had $49.8 million of floating rate
secured debt outstanding net of swap agreements. For every 1% increase in
commercial paper rates or LIBOR, annual after-tax earnings would decrease by
approximately $316,000, assuming the Company maintains a level amount of
floating rate debt and assuming an immediate increase in rates.
25
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
EXHIBIT NO. DESCRIPTION
---------- -----------
10.80 -- Second Amended and Restated Credit Agreement dated as of
November 15, 2000 Among F.I.R.C., Inc. as Borrower and the
Financial Institutions Now or Hereafter Parties Hereto as
Banks and Bank of America, N. A. as Agent.
10.81 -- Third Amended and Restated Collateral Security Agreement
dated as of November 15, 2000.
10.82 -- Fourth Amendment to Amended and Restated Purchase Agreement
dated as of November 15, 2000.
10.83 -- First Amendment to Servicing Agreement dated as of
November 15, 2000.
10.84 -- Credit Agreement among First Investors Financial Services,
Inc., as Borrower, Bank of America, N. A., as the
Administrative Agent, Banc of America Securities LLC, as
sole lead arranger and sole book manager and the lenders
named herein dated as of December 22, 2000.
10.85 -- Pledge and Security Agreement (Borrower) dated as of
December 22, 2000.
10.86 -- Pledge and Security Agreement (Subsidiaries) dated as of
December 22, 2000.
10.87 -- Pledge and Security Agreement (First Investors (Vermont)
Holdings, Inc.) dated as of December 22, 2000.
10.88 -- Pledge and Security Agreement (First Investors Financial
Services Group, Inc.) dated as of December 22, 2000.
10.89 -- Guaranty (Subsidiary) dated as of December 22, 2000.
10.90 -- Guaranty (First Investors (Vermont) Holdings, Inc.) dated as
of December 22, 2000.
10.91 -- Guaranty (First Investors Financial Services Group, Inc.)
dated as of December 22, 2000.
10.92 -- Amendment No. 2 To Insurance Agreement for First Investors
Auto Receivables Corporation Revolving Automobile
Receivables Financing Facility dated as of November 29,
2000.
10.93 -- Amendment Number 3 To Security Agreement dated as of
November 29, 2000.
10.94 -- Warrant No. 1 to Purchase 111,334 Shares of Common Stock,
$.01 par value.
10.95 -- Warrant No. 2 to Purchase 55,667 Shares of Common Stock,
$.01 par value.
10.96 -- Amendment Number 3 To Purchase Agreement dated as of
November 29, 2000.
10.97 -- Amendment Number 1 To Servicing Agreement dated as of
November 29, 2000.
26
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 15, 2001 By: /s/TOMMY A. MOORE, JR.
Tommy A. Moore, Jr.
President and Chief Executive Officer
Date: March 15, 2001 By: /s/BENNIE H. DUCK
Bennie H. Duck
Secretary, Treasurer and Chief Financial
Officer
27