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, 1998
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 FEBRUARY 27, 1998
- ---------------------------- -----------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JANUARY 31, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1997 and
January 31, 1998..................... 3
Consolidated Statements of Operations
for the Three Months
and Nine Months Ended January 31,
1997 and 1998........................ 4
Consolidated Statement of
Shareholders' Equity for the Nine
Months Ended January 31, 1998........ 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
January 31, 1997 and 1998............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 18
SIGNATURES................................... 18
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1997 AND JANUARY 31, 1998
APRIL 30, JANUARY 31,
1997 1998
--------------- ------------
(UNAUDITED)
ASSETS
- -------------------------------------
Receivables Held for Investment,
net................................ $ 118,299,063 $131,018,927
Cash and Short-Term Investments,
including restricted cash of
$3,550,391 and $2,975,376.......... 5,967,358 3,893,774
Other Receivables:
Due from servicer............... 8,427,565 9,563,519
Accrued interest................ 1,923,360 2,140,363
Assets Held for Sale................. 1,072,463 2,178,734
Other Assets:
Funds held under reinsurance
agreement..................... 2,563,454 2,138,507
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $553,143 and $758,324...... 1,101,947 1,321,939
Deferred income tax asset,
net........................... 387,876 439,953
--------------- ------------
Total assets............... $ 139,743,086 $152,695,716
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Secured credit facilities....... $ 112,894,131 $125,206,224
Other Liabilities:
Due to dealers.................. 342,697 258,014
Accounts payable and accrued
liabilities................... 2,460,685 1,745,907
Current income taxes payable.... 109,472 183,028
--------------- ------------
Total liabilities.......... 115,806,985 127,393,173
--------------- ------------
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............... 5,465,616 6,832,058
--------------- ------------
Total shareholders'
equity................... 23,936,101 25,302,543
--------------- ------------
Total liabilities and
shareholders' equity..... $ 139,743,086 $152,695,716
=============== ============
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, 1997 AND 1998
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- ------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1997 1998 1997 1998
------------ ------------ -------------- --------------
Interest Income...................... $ 4,553,835 $ 5,073,243 $ 13,631,492 $ 14,878,206
Interest Expense..................... 1,739,780 2,052,530 4,968,603 5,811,799
------------ ------------ -------------- --------------
Net interest income........ 2,814,055 3,020,713 8,662,889 9,066,407
Provision for Credit Losses.......... 521,000 1,070,000 1,281,974 2,409,276
------------ ------------ -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 2,293,055 1,950,713 7,380,915 6,657,131
------------ ------------ -------------- --------------
Other Income:
Late fees and other............. 163,292 148,879 480,886 454,918
------------ ------------ -------------- --------------
Operating Expenses:
Servicing fees.................. 389,116 468,906 1,123,641 1,342,598
Salaries and benefits........... 602,618 616,341 1,720,048 1,882,242
Other........................... 631,544 617,959 1,729,591 1,735,332
------------ ------------ -------------- --------------
Total operating expenses... 1,623,278 1,703,206 4,573,280 4,960,172
------------ ------------ -------------- --------------
Income Before Provision for Income
Taxes.............................. 833,069 396,386 3,288,521 2,151,877
------------ ------------ -------------- --------------
Provision for Income Taxes:
Current......................... 834,379 204,724 1,477,759 837,512
Deferred........................ (530,309) (60,043) (277,449) (52,077)
------------ ------------ -------------- --------------
Total provision for income
taxes.................... 304,070 144,681 1,200,310 785,435
------------ ------------ -------------- --------------
Net Income........................... $ 528,999 $ 251,705 $ 2,088,211 $ 1,366,442
============ ============ ============== ==============
Basic and Diluted Net Income per
Common Share....................... $0.10 $0.05 $0.38 $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, 1998
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- ------------ --------------
Balance, April 30, 1997.............. $ 5,567 $ 18,464,918 $ 5,465,616 $ 23,936,101
Net income...................... -- -- 1,366,442 1,366,442
------- -------------- ------------ --------------
Balance, January 31, 1998............ $ 5,567 $ 18,464,918 $ 6,832,058 $ 25,302,543
======= ============== ============ ==============
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, 1997 AND 1998
(UNAUDITED)
1997 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 2,088,211 $ 1,366,442
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 1,296,635 1,725,386
Provision for credit
losses................... 1,281,974 2,409,276
Charge-offs, net of
recoveries............... (1,078,110) (2,275,540)
(Increase) decrease in:
Accrued interest
receivable............... (332,458) (217,003)
Restricted cash............ 602,133 575,015
Deferred financing costs
and other................ (351,911) (349,234)
Funds held under
reinsurance agreement.... 753,289 424,947
Due from servicer.......... (1,893,576) (1,135,954)
Deferred income tax asset,
net...................... (151,977) (52,077)
Federal income tax
receivable............... 295,523 --
Increase (decrease) in:
Due to dealers............. (334,980) (84,683)
Accounts payable and
accrued liabilities...... (475,425) (714,778)
Current income taxes
payable.................. 138,445 73,556
Deferred income tax
liability, net........... (125,472) --
--------------- ---------------
Net cash provided by
operating
activities.......... 1,712,301 1,745,353
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (50,343,166) (53,862,332)
Principal payments from
receivables................... 32,708,055 38,365,894
Purchase of furniture and
equipment..................... (59,308) (59,577)
--------------- ---------------
Net cash used in
investing
activities.......... (17,694,419) (15,556,015)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on
secured debt.................. 43,578,774 47,413,736
Principal payments made on
secured debt............... (29,790,744) (35,101,643)
--------------- ---------------
Net cash provided by
financing
activities.......... 13,788,030 12,312,093
--------------- ---------------
Decrease in Cash and Short-Term
Investments........................ (2,194,088) (1,498,569)
Cash and Short-Term Investments at
Beginning of Period................ 3,601,269 2,416,967
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 1,407,181 $ 918,398
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 4,610,661 $ 5,824,400
Income taxes............... 1,043,793 763,956
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, 1997 AND 1998
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, 1998, approximately 43 percent of
receivables held for investment were located in Texas. The Company currently
operates in 17 states.
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, 1998, and the results of its
operations for the three months and nine months ended January 31, 1997 and 1998,
and its cash flows for the nine months ended January 31, 1997 and 1998.
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.
Certain reclassifications have been made to the 1997 amounts to conform
with the 1998 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders. The weighted average common shares
outstanding for the three months and nine months ended January 31, 1997 and
1998, were 5,566,669.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JANUARY 31,
1997 1998
--------------- ---------------
Receivables.......................... $ 115,742,904 $ 128,250,078
Unamortized premium and deferred
fees............................... 3,738,156 4,084,582
Allowance for credit losses.......... (1,181,997) (1,315,733)
--------------- ---------------
Net receivables................. $ 118,299,063 $ 131,018,927
=============== ===============
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. At January 31, 1998, the Company had investments in
receivables pursuant to the core program with an aggregate principal balance of
$126,258,299.
Activity in the allowance for credit losses for the nine months ended
January 31, 1998, was as follows:
Balance, beginning of period......... $ 1,181,997
Provision for credit losses.......... 2,409,276
Charge-offs, net of recoveries....... (2,275,540)
------------
Balance, end of period............... $ 1,315,733
============
PARTICIPATING PROGRAM. At January 31, 1998, the Company had investments in
receivables pursuant to the dealer recourse program with an aggregate principal
balance of $1,991,779. The Company was reimbursed by participating dealers for
$5,180 of expenses incurred during the nine months ended January 31, 1998.
During the nine months ended January 31, 1998, excess interest of $5,188 was
remitted to the dealers pursuant to this program.
The following table summarizes activity in the dealer reserves for the nine
months ended January 31, 1998.
Balance, beginning of period......... $ 339,602
Additions............................ 14,582
Charges to dealer reserve accounts,
net of recoveries.................. (97,966)
----------
Balance, end of period............... $ 256,218
==========
4. DEBT
Borrowings under the warehouse credit facility and commercial paper
facility were $46,265,000 and $78,941,224, respectively, at January 31, 1998,
and had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.35 percent
and 6.19 percent, respectively. The effect of the hedge instrument on the
weighted average interest rate is immaterial.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law and do not
generally vary with changes in interest rates. To manage the risk of fluctuation
in the interest rate environment, the Company enters into interest rate swaps
and caps to lock in what management believes to be an acceptable net interest
spread. However, the Company will be exposed to limited rate fluctuation risk to
the extent it cannot perfectly match the timing of net advances from its credit
facilities and acquisitions of additional interest rate protection agreements.
The Company, through its wholly-owned subsidiary, First Investors Financial
Services, Inc. ("FIFS"), also maintains a $6 million working capital facility
with NationsBank of Texas, N.A. as agent for the banks party thereto. The
purpose of the facility is to support the Company's working capital needs and
for other general corporate purposes. Under the terms of the facility, the
Company may borrow, repay and reborrow up to the lesser of $6 million or a
borrowing base. The initial term of the facility expires on July 10, 1998, and
is renewable annually at the option of the lenders. In the event that the
lenders elect not to renew, any borrowings outstanding at maturity will be
converted to a term loan which would amortize quarterly in equal increments to
fully amortize the balance within one year from the maturity date. At January
31, 1998, there were no outstanding borrowings under this facility.
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The document governing the working capital facility contains numerous
covenants governing the Company's business, the observance of certain covenants
and other matters. The Company serves as a guarantor of the indebtedness which
is additionally secured by the pledge of the outstanding stock of FIFS and two
of FIFS' primary subsidiaries. Under the terms of the guaranty, the Company is
prohibited from paying dividends to shareholders without the consent of the
banks.
On January 1, 1998, the Company entered into a $25 million commercial paper
conduit financing (the "First Union Facility") through Variable Funding
Capital Corporation, 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 First Union Facility must be maintained in a reserve
account for the benefit of the creditors.
The initial term of the First Union Facility expires on December 31, 1998.
If the facility was not extended, receivables pledged as collateral would be
allowed to amortize; however, no new receivables could be transferred to the
facility. At January 31, 1998, there were no outstanding borrowings under this
facility.
5. EARNINGS PER SHARE
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- --------- --------- ---------- --------- ---------
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1998
------------------------------------ ------------------------------------
Basic Earnings Per Share
Income available to common
shareholders....................... $ 528,999 5,566,669 $0.10 $ 251,705 5,566,669 $0.05
===== =====
Options............................... -- -- -- --
---------- --------- ---------- ---------
Diluted Earnings Per Share
Income available to common
shareholders....................... $ 528,999 5,566,669 $0.10 $ 251,705 5,566,669 $0.05
========== ========= ===== ========== ========= =====
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
JANUARY 31, 1997 JANUARY 31, 1998
------------------------------------ ------------------------------------
Basic Earnings Per Share
Income available to common
shareholders....................... $2,088,211 5,566,669 $0.38 $1,366,442 5,566,669 $0.25
===== =====
Options............................... -- -- -- 122
---------- --------- ---------- ---------
Diluted Earnings Per Share
Income available to common
shareholders....................... $2,088,211 5,566,669 $0.38 $1,366,442 5,566,791 $0.25
========== ========= ===== ========== ========= =====
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods. In 1998, the Company adopted SFAS No. 128, "Earnings per Share," for
all periods shown. Options were not dilutive during the 1997 and 1998 periods.
The accounting change had no effect on previously reported earnings per share.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended January 31, 1998 was $251,705, a
decrease of 52% from that reported for the comparable period in the preceding
year of $528,999. Net income for the nine months ended January 31, 1998 was
$1,366,442, a decrease of 35% from that reported for the comparable period in
the preceding year of $2,088,211. Earnings per common share was $0.05 for the
three months ended January 31, 1998, compared to $0.10 per common share for the
prior period. Earnings per common share was $0.25 for the nine months ended
January 31, 1998, compared to $0.38 per common share for the prior period.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio 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,
----------------------
1997 1998
---------- ----------
Investment in receivables:
Number.......................... 10,021 11,840
Principal balance............... $ 109,773 $ 128,250
Average principal balance of
receivables outstanding during
the nine month period.......... 103,577 121,755
Average principal balance of
receivables outstanding during
the three month period......... 108,123 125,546
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
Interest income(1)................. $ 4,554 $ 5,073 $ 13,631 $ 14,878
Interest expense................... 1,740 2,052 4,968 5,812
--------- --------- --------- ---------
Net interest income........... $ 2,814 $ 3,021 $ 8,663 $ 9,066
========= ========= ========= =========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
10
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
receivables and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
THREE MONTHS ENDED NINE MONTHS
ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
Effective yield on receivables(1).... 16.9% 16.1% 17.5% 16.3%
Average cost of debt(2).............. 6.7 6.7 6.6 6.5
--------- --------- --------- ---------
Net interest spread(3)............... 10.2% 9.4% 10.9% 9.8%
========= ========= ========= =========
Net interest margin(4)............... 10.4% 9.6% 11.2% 9.9%
========= ========= ========= =========
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
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, 1998 to $3.0 million and $9.1 million,
respectively, from $2.8 million and $8.7 million for the comparable periods in
the preceding year. Net interest income in 1998 represents increases of 7% and
5% from the same periods in 1997.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 TO 1998 1997 TO 1998
--------------------------------- ---------------------------------
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
--------- ------- --------- --------- ------- ---------
Interest income...................... $ 733 $ (214) $ 519 $ 2,392 $(1,145) $ 1,247
Interest expense..................... 297 15 312 909 (65) 844
--------- ------- --------- --------- ------- ---------
Net interest income.................. $ 436 $ (229) $ 207 $ 1,483 $(1,080) $ 403
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997 (DOLLARS IN
THOUSANDS)
INTEREST INCOME. Interest income for the 1998 periods increased to $5,073
and $14,878 compared with $4,554 and $13,631 for the comparable periods in 1997
and reflects an increase of 11% and 9% over the respective periods. The increase
in interest income is due to an increase in the average principal balance of
receivables held of 16% and 18% from the 1997 to 1998 comparable periods. The
increase in average principal balance of receivables held for the three and nine
months ended offset a .8% and 1.2% decline in the effective yield realized on
the receivables from the 1997 to 1998 comparable periods. Management attributes
the decrease in yield to a reduction in financing fees paid by dealers and an
increase in the percentage of receivables on which rate participation is paid to
dealers as incentive to utilize the Company's financing programs.
11
INTEREST EXPENSE. Interest expense in 1998 increased to $2,052 and $5,812
as compared to $1,740 and $4,968 in 1997. The increase of 18% and 17% over the
respective periods was due to an increase in the weighted average borrowings
outstanding of 17% and 18%. The weighted average cost of debt was flat for the
three month period and declined .1% for the nine month period, reflecting a
general decline in market rates and the positive impact of the Company's hedging
programs.
NET INTEREST INCOME. Net interest income increased to $3,021 and $9,066 in
1998, an increase of 7% and 5% over the comparable 1997 periods. The increase
resulted from the growth of the receivables portfolio which offset a decline of
.8% and 1.1% in the net interest spread over the prior year periods.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased to $1,070 and $2,409 as compared to $521 and $1,282 in 1997. The
increase was the result of the growth of the Company's receivables portfolio, an
increase in charge-offs and the continued strategy of maintaining loan loss
reserves as a percentage of total loans.
LATE FEES AND OTHER INCOME. Other income decreased to $149 and $455 in
1998 from $163 and $481 in 1997 primarily as a result of lower yields on cash
investments. Other income primarily represents interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $469 and
$1,343 in 1998 from $389 and $1,124 in 1997. Since these costs vary with the
volume of receivables serviced, this increase was primarily attributable to the
growth in the number of receivables serviced, which increased by 1,819 from 1997
to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $616 and
$1,882 in 1998 from $603 and $1,720 in 1997. The increase was due to higher
salary levels per employee and an expansion of the Company's operations.
OTHER EXPENSES. Other expenses decreased to $618 and increased to $1,735
in 1998 from $632 and $1,730 in 1997. The overall increase was primarily due to
an overall expansion of the Company's asset base and an increase in the volume
of applications for credit processed by the Company in the 1998 periods versus
the comparable periods.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased to $396 and $2,152 or 52% and 35% from the
comparable periods in 1997. This change was a result of the decrease in net
interest income after provision for credit losses of $342 and $724 and an
increase in operating expenses of $80 and $387.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. On October 4, 1995 the Company sold 1.9
million shares of common stock in a public offering and received proceeds of
$19.4 million, net of underwriting discounts and commissions. Approximately $7
million of the proceeds were used to prepay promissory notes plus accrued
interest, to redeem outstanding preferred stock including accrued dividends and
redemption premium, and to pay issuance costs.
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 and servicing fees. The Company also requires a
significant amount of cash flow for working capital to fund fixed operating
expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company funds the purchase price of the
receivables through the use of a $55 million warehouse credit facility provided
to F.I.R.C., Inc. ("FIRC") a wholly-owned special
12
purpose financing subsidiary of the Company. The current warehouse credit
facility generally permits the Company to draw advances up to the outstanding
principal balance of qualified receivables. The Company paid $18.6 million and
$53.9 million for receivables acquired for the three months and nine months
ended January 31, 1998, compared to $15.0 million and $50.3 million paid in the
comparable 1997 periods. Receivables that have accumulated in the warehouse
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 $105 million to fund the Company's investment in the
receivables portfolio. Substantially all of the Company's receivables are
pledged to collateralize these credit facilities.
On October 22, 1996, the Company entered into a $105 million commercial
paper conduit financing through Enterprise Funding Corporation, a commercial
paper conduit administered by NationsBank, N.A.. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). It replaced an existing $75 million
commercial paper conduit facility which was provided by Enterprise Funding to
FIRC. Credit enhancement for the new $105 million facility is provided to the
commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Credit enhancement for the replaced $75 million facility was
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 ALPI policy continues to provide
credit enhancement for the $55 million warehouse credit facility.
Receivables originally purchased by the Company are financed with
borrowings under the warehouse credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the commercial paper facility used to repay borrowings
under the warehouse 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 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 warehouse credit facility expires on October 15,
1998, 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 seven occasions since its inception in
October 1992. The commercial paper facility was provided for a term of one year,
expiring October 21, 1997 and has been extended to October 20, 1998. If the
facility was not extended, receivables pledged as collateral would be allowed to
amortize; however, no new receivables would be allowed to be transferred from
the warehouse credit facility. Management considers its relationship with all of
the Company's lenders to be satisfactory and has no reason to believe either the
warehouse credit facility or the commercial paper facility will not be renewed.
On January 1, 1998, the Company entered into a $25 million commercial paper
conduit financing (the "First Union Facility") through Variable Funding
Capital Corporation, a commercial paper conduct 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
13
addition, a cash reserve equal to 2% of the outstanding borrowings under the
First Union Facility must be maintained in a reserve account for the benefit of
the creditors.
The initial term of the First Union Facility expires on December 31, 1998.
If the facility was not extended, receivables pledged as collateral would be
allowed to amortize; however, no new receivables could be transferred to the
facility. At January 31, 1998, there were no outstanding borrowings under this
facility.
In addition to the $185 million in currently available debt facilities
utilized to fund the acquisition of receivables, the Company also maintains a $6
million working capital line of credit to be used for working capital and
general corporate purposes. The facility expires on July 10, 1998. If the
lenders elect not to renew, any outstandings will be amortized over a one year
period. There were no outstandings under the facility at January 31, 1998.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of $53.3 million and $45.1 million for the nine
months ended January 31, 1998 and 1997, respectively. Such cash flow funds
repayment of amounts borrowed under the warehouse credit and commercial paper
facilities and other holding costs, primarily interest expense and servicing and
custodial fees. During the nine months ended, the Company required net cash flow
of $15.5 million in 1998 and $17.6 million in 1997 (cash required to acquire
receivables net of principal payments on receivables) to fund the growth of its
receivables portfolio.
The following table summarizes borrowings under the warehouse credit
facility and the commercial paper facility (dollars in thousands):
AS OF OR FOR THE
NINE MONTHS
ENDED
JANUARY 31,
--------------------
1997 1998
--------- ---------
WAREHOUSE CREDIT FACILITY:
At period-end:
Balance outstanding............. $ 33,450 $ 46,265
Weighted average interest
rate(1)........................ 6.25% 6.35%
During period(2):
Maximum borrowings
outstanding.................... $ 55,000 $ 53,270
Weighted average balance
outstanding.................... 47,335 41,468
Weighted average interest
rate........................... 6.72% 6.29%
COMMERCIAL PAPER FACILITY:
At period-end:
Balance outstanding............. $ 71,387 $ 78,941
Weighted average interest
rate(1)........................ 6.24% 6.19%
During period(2):
Maximum borrowings
outstanding.................... $ 71,387 $ 91,302
Weighted average balance
outstanding.................... 52,808 76,987
Weighted average interest
rate........................... 6.52% 6.68%
- ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
INTEREST RATE MANAGEMENT. The Company's credit facilities bear interest at
floating interest rates which are reset on a short-term basis whereas its
receivables bear interest at fixed rates which are generally at the maximum
rates allowable by law and do not generally vary with changes in interest rates.
To manage the risk of fluctuation in the interest rate environment, the
14
Company enters into interest rate swaps and caps with notional principal amounts
which approximate the balance of its debt outstanding to lock in what management
believes to be an acceptable net interest spread. However, the Company will be
exposed to limited rate fluctuation risk to the extent it cannot perfectly match
the timing of net advances from its credit facilities and acquisitions of
additional interest rate protection agreements. As of January 31, 1998 the
Company was party to a swap agreement with NationsBank of Texas, N.A. pursuant
to which the Company's interest rate is fixed at 5.565% on a notional amount of
$120 million. The swap agreement expires on January 12, 2000 and may be extended
to January 14, 2002 at the option of NationsBank. This swap was entered into on
January 12, 1998 and replaced three existing swaps having an aggregate notional
amount of $120 million and fixing the Company's weighted average interest rate
at 5.63%. Two of these swap agreements having a notional amount of $90 million
were set to expire in September, 1998; while, the remaining swap, having a
notional amount of $30 million, was scheduled to expire in October, 1998. The
expiration of each swap could have been extended for an additional two years
from the initial expiration date at the option of NationsBank. Upon termination
of the three swaps, NationsBank was due $785,000 which was factored into the
determination of the interest rate on the alternate swap agreement.
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 and effective
collection procedures, (ii) providing recourse to dealers under its
participating program for a period of time and thereafter secured by cash
reserves in the event of losses and (iii) insurance against certain losses from
independent third party insurers. As a result of its recourse programs and third
party insurance, the Company is not exposed to credit losses on its entire
receivables portfolio. The following table summarizes the credit loss exposure
of the Company (dollars in thousands):
JANUARY 31,
-----------------------------------------------
1997 1998
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Core Program:
Insured by third party
insurer....................... $ 2,720 $ -- $ 980 $ --
Other receivables(1)............ 101,443 834(2) 125,278 1,316(2)
Participating Program................ 5,610 463(3) 1,992 256(3)
----------- -----------
$ 109,773 $ 128,250
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.8% 1.1%
Dealer reserves as a percentage of
participating program
receivables........................ 8.3% 12.9%
- ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables on which no credit loss insurance exists.
(2) Represents the balance of the Company's allowance for credit losses.
(3) Represents the balance of the dealer reserve accounts.
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.
CORE PROGRAM. Under the core program, the Company retains the credit risk
associated with the receivables acquired. The Company purchases credit
enhancement insurance from third
15
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. With the completion of the
$105 million commercial paper conduit financing in October 1996, credit loss
insurance and the Company's reinsurance liability is cancelled upon the transfer
of receivables to FIARC utilizing commercial paper borrowings. Provision for
credit losses of $1,070,000 and $2,409,276 have been recorded for the three
months and nine months ended January 31, 1998, respectively, for losses which
are reinsured by the Company's captive insurance subsidiary and for losses on
receivables pledged as collateral under the commercial paper conduit facility.
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.
PARTICIPATING PROGRAM. Under the Company's participating program, the
dealer retains the credit risk for a period of time, usually twelve to eighteen
months. In the event of payment default, the dealer is obligated to repurchase
the receivable. A specified portion of the purchase price is set aside in a
reserve account to secure performance of the dealer's repurchase obligation.
Receivables purchased from each dealer are aggregated into pools of specified
size for purposes of tracking the dealer's participation. When the dealer's
participation in a pool is terminated, a portion of the reserve account
exceeding a specified percentage is released to the dealer and the balance is
retained in the reserve account to fund credit losses until all receivables in
the pool are paid in full.
As a result of a shift in the preference of dealers to sell receivables to
the Company under the core program rather than the participating program, the
participating program accounted for less than 2% of the aggregate receivables
held by the Company as of January 31, 1998, representing a 3% decrease from 5%
on January 31, 1997. Management believes that this trend will continue and that
the significance of the participating program by comparison to the core program,
will diminish over future periods.
16
The following table summarizes the status and collection experience of
receivables acquired by the Company (dollars in thousands):
AS OF OR FOR THE NINE MONTHS ENDED JANUARY 31,
----------------------------------------------------
1997 1998
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Delinquent amount outstanding:
30 - 59 days.................... 186 $ 2,728 251 $ 3,687
60 - 89 days.................... 72 1,001 96 1,400
90 days or more................. 88 1,422 169 2,627
--- --------- --- ---------
Total delinquencies.................. 346 $ 5,151 516 $ 7,714
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 3.3% 3.3% 4.2% 4.3%
Net charge-offs as a percentage of
average receivables outstanding
during the
period(2)(3)....................... -- 1.5% -- 2.6%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables are based on gross receivables balances,
which include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed 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.
17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.45 -- Security Agreement dated as of January 1, 1998 among First Investors Auto Capital
Corporation, First Union Capital Markets Corp., and First Investors Financial
Services, Inc.
10.46 -- Note Purchase Agreement dated as of January 1, 1998 between First Investors Auto
Capital Corporation, First Union Capital Markets Corp., the Investors, First Union
National Bank, and Variable Funding Capital Corporation.
10.47 -- Purchase Agreement dated as of January 1, 1998 between First Investors Financial
Services, Inc. and First Investors Auto Capital Corporation.
10.48 -- Servicing Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation and General Electric Capital Corporation.
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 16, 1998 By: /s/TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 16, 1998 By: /s/BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
18