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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock - $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [____]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 1998, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $15,956,236.
There were 5,566,669 shares of Common Stock of the registrant outstanding
as of June 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held September 3, 1998, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 1998.
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business............................. 1
Item 2. Properties........................... 14
Item 3. Legal Proceedings.................... 14
Item 4. Submission of Matters to a Vote of
Security Holders................... 14
PART II
Item 5. Market for Registrants' Common Equity
and Related Shareholder Matters.... 15
Item 6. Selected Consolidated Financial
Data............................... 16
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Item 8. Financial Statements and
Supplementary Data................. 27
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure............... 27
PART III
Item 10. Directors and Executive Officers..... 28
Item 11. Executive Compensation............... 28
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 28
Item 13. Certain Relationships and Related
Transactions....................... 28
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form
8-K................................ 28
PART I
ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a
specialized consumer finance company engaged in the purchase and retention of
receivables originated by franchised automobile dealers from the sale of new and
late-model used vehicles to consumers with substandard credit profiles. The
Company does not securitize receivables for resale to investors. As of April 30,
1998, the Company held receivables in the aggregate principal amount of
$136,445,808 having an effective yield of 16.1% and a net interest spread to the
Company of 9.6% (net of cost of funds and other carrying costs).
HISTORY
The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A.
Stockard to conduct an automobile finance business, with Mr. Moore providing the
operating expertise and Mr. Stockard and members of his family furnishing the
initial financial support. During the first three years of the Company's
existence, its operations consisted primarily of purchasing and pooling
receivables for resale to financial institutions and others. In March 1992, the
Company obtained additional capital from a group of private investors and
decided to expand its operations and reorient its business. Instead of acquiring
receivables for resale, the Company adopted a strategy of purchasing receivables
for retention. In October 1992, the Company established its FIRC credit facility
for this purpose and began to retain all receivables acquired.
INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States. Most automobile financing is provided by captive
finance subsidiaries of major automobile manufacturers, banks, thrifts, credit
unions and independent finance companies such as the Company. The overall
industry is generally segmented according to the type of vehicle sold (new vs.
used), the nature of the dealership (franchised vs. independent) and the credit
characteristics of the borrower (prime vs. sub-prime). The Company believes that
the vast majority of the automobile financing that is being provided by captive
finance companies and financial institutions tends to be for new vehicles
purchased by borrowers with sound credit profiles. On the other hand, the
independent finance companies generally tend to serve the sub-prime market. The
sub-prime market is comprised of individuals who are relatively high credit
risks and who have limited access to traditional financing sources, generally
due to unfavorable past credit experience, low income or limited financial
resources and/or the absence or limited extent of prior credit history.
ORIGINATING DEALER BASE
GENERAL. The Company primarily purchases receivables from the new and used
car departments of dealers operating under franchises from the major automobile
manufacturers. The Company does not do business with "independent" dealers who
operate used car lots with no manufacturer affiliation. No dealer or group of
dealers (who are affiliated with each other through common ownership) accounted
for more than 5% of the receivables owned by the Company at April 30, 1998, and
no dealer or group of related dealers originated more than 5% of the receivables
held by the Company at that date. The volume and frequency of receivable
purchases from particular dealers vary widely with the size of the dealerships
as well as market and competitive factors in the various dealership locations.
LOCATION OF DEALERS. Approximately 30% of the dealers with whom the
Company has agreements are located in Texas, where the Company has operated
since 1989. The Company commenced operations in Utah and Idaho in 1992 and has
since expanded its dealership base into Missouri, Colorado, Oklahoma, Kansas,
Georgia, Ohio, Michigan, Iowa, Nebraska, Kentucky, Tennessee, North
1
Carolina, South Carolina, Arizona, Virginia and California. As of April 30,
1998, the Company had completed the licensing process in Minnesota, Indiana,
Washington, Oregon, New Mexico, Illinois, Alabama, New York, Florida,
Pennsylvania, and Connecticut but had not commenced operations in those states.
The following table summarizes, with respect to each state in which the
Company operates, the date operations commenced, the number of dealers with whom
the Company had agreements in such state as of April 30, 1998, and the number of
receivables (and percentage of total receivables) by the Company from dealers in
such state during the last two fiscal years:
RECEIVABLES
---------------------------------------
YEAR ENDED YEAR ENDED
DATE NUMBER OF APRIL 30, 1997 APRIL 30, 1998
BUSINESS DEALERS AT ------------------ ------------------
STATES COMMENCED APRIL 30, 1998 NUMBER % NUMBER %
- ------------------------------------- --------- -------------- ------ --------- ------ ---------
Texas................................ 2/89 390 5,026 47.7% 5,348 42.7%
Ohio................................. 9/94 313 1,304 12.4 2,104 16.8
Georgia.............................. 9/94 117 1,408 13.4 1,920 15.3
Oklahoma............................. 7/94 95 784 7.4 959 7.7
Missouri............................. 12/93 91 550 5.2 496 4.0
Michigan............................. 10/94 98 349 3.3 369 3.0
Kansas............................... 12/93 49 174 1.6 264 2.1
North Carolina....................... 11/95 49 111 1.1 218 1.7
Tennessee............................ 11/95 37 148 1.4 202 1.6
Arizona.............................. 2/96 26 155 1.5 165 1.3
Utah................................. 10/92 62 256 2.4 164 1.3
Colorado............................. 8/94 76 198 1.9 156 1.3
All others(1)........................ -- 83 80 0.7 151 1.2
-------------- ------ --------- ------ ---------
1,486 10,543 100.0% 12,516 100.0%
============== ====== ========= ====== =========
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(1) Includes dealers located in Iowa, Kentucky, Nebraska, South Carolina,
California, Virginia, and Idaho. The aggregate receivables from the dealers
in each of these states represented less than 2% of total receivables during
the year ended April 30, 1998.
MARKETING REPRESENTATIVES. The Company utilizes a system of regional
marketing representatives to recruit, enroll and train new dealers as well as to
maintain relationships with the Company's existing dealers. The representatives
are full-time employees who reside in the region for which they are responsible.
In addition to soliciting and enrolling new dealers, the regional
representatives assist new dealers in assimilating the Company's system of
credit application submission, review, acceptance and funding, as well as
dealing with routine dealer relations on a daily basis. The role of the regional
representatives is generally limited to marketing the Company's core finance
programs and maintaining relationships with the Company's originating dealer
base. The representatives do not enter into or modify dealer agreements on
behalf of the Company, do not participate in credit evaluation or loan funding
decisions and do not handle funds belonging to the Company or its dealers. Each
representative reports to, and is supervised by, the Company's marketing manager
in Houston.
It has been the policy of the Company to avoid the establishment of branch
offices because it believes that the expenses and administrative burden of such
offices are generally unjustified. Moreover, in view of the availability of
modern data transmission technology, the Company has concluded that the critical
functions of credit evaluation and loan origination are best performed and
controlled on a centralized basis from its Houston facility. Accordingly, as the
marketing representative system has operated satisfactorily, the Company does
not plan to create branch offices in the future.
2
DEALER FINANCING PROGRAMS
GENERAL. The Company has two types of agreements with its originating
dealers. All agreements are non-exclusive and no "sign up" fees are charged to
the dealers. The most common arrangement is a conventional program (the "core
program") whereby the dealer sells receivables to the Company at a negotiated
price and the dealer retains no further credit risk or interest in the
collections from the receivables sold. The other type of arrangement is a
participating program (the "participating program") under which selected
dealers sell receivables to the Company priced at par (i.e., the outstanding
principal balance of the receivables) but for a period of time retain the credit
risk as well as the right to receive a portion of the finance charge collections
from the receivables sold. The Company is no longer originating loans under the
participating program. Fees paid related to the purchase of receivables under
the core program include rate participation paid to the dealer and premiums for
certain types of third party insurance. In addition to purchasing receivables
from dealers under the core and participating programs as they are originated,
the Company has also acquired seasoned receivables in bulk portfolio
acquisitions or from other third party originators and may continue to do so
from time to time.
CORE PROGRAM. Under its core program, the Company had dealership
agreements with 1,486 dealers at April 30, 1998. These are non-exclusive
agreements terminable at any time by either party and they require no specific
volume levels. The receivables are purchased at par or at prices that may
reflect a discount or premium depending on the annual percentage rates of
particular receivables. The agreements with the core program dealers contain
customary representations and warranties concerning title to the receivables
sold, validity of the liens on the underlying vehicles, compliance with
applicable laws and related matters. Although the dealers are obligated to
repurchase receivables which do not conform to these warranties, under the core
program the dealers do not guarantee collectability or obligate themselves to
repurchase receivables solely because of payment default. As of April 30, 1998,
approximately 99% of the outstanding receivables held by the Company had been
acquired pursuant to the core program.
PARTICIPATING PROGRAM. The Company has participating program agreements
with three groups of affiliated dealers consisting of 28 selected dealerships
located primarily in Texas. Under these agreements, the dealers were obligated
for a period of time (typically 12 to 18 months) to repurchase receivables in
the event of payment defaults. Although the receivables were purchased at par, a
specified portion of the purchase price was set aside in a reserve account to
secure performance of the dealer's repurchase obligations. The receivables
purchased are aggregated into pools of specified size and the dealer is entitled
to receive monthly all finance charge collections from the pool in excess of an
agreed rate. After the agreed period expires and certain conditions are met, the
dealer (either automatically or, in some cases, at its election) is released
from its repurchase obligations and the dealer's right to participate in a
portion of finance charge collections is terminated. The portion of the reserve
account exceeding a specified percentage is then released to the dealer, with
the balance retained in the reserve to fund credit losses until all receivables
in the pool are paid in full, at which time any funds remaining in the reserve
account are paid over to the dealer. After the dealer's right to share in
finance charges has terminated with respect to a particular pool, the Company's
right to receive the yield from the receivables included in the pool becomes the
same as for receivables acquired under the core program and the Company's
default risk with respect to the pool becomes essentially the same as under the
core program except for the continuing protection afforded by the retained
reserve. The specific participating program agreements are subject to
negotiation and differ in various respects, including reserve requirements and
the amount of the dealers' participation in pool yields. As of April 30, 1998,
approximately 1% of the outstanding receivables held by the Company had been
acquired under the participating program. Of this amount, less than 1% of total
receivables continued to be covered by a repurchase obligation from the dealer.
Furthermore, the Company is no longer originating receivables under the
participating program which will cause these loans as a percentage of the total
portfolio to continue to decline.
3
CREDIT EVALUATION
GENERAL. In connection with the origination of a receivable for purchase
by the Company, the Company follows systematic procedures designed to eliminate
unacceptable risks. This involves a three-step process whereby (i) the
creditworthiness of the borrower and the terms of the proposed transaction are
evaluated and either approved, declined or modified by the Company's credit
verification department, (ii) the loan documentation and collateralization is
reviewed by the Company's funding department, and (iii) additional collateral
verification procedures and customer interviews are conducted by the Company.
During the course of this process, the Company's credit verification and funding
personnel coordinate closely with the finance and insurance departments of the
dealers tendering receivables.
COLLATERAL VERIFICATION. As a condition to the purchase of each receivable
originated by the Company, the Company performs an individual audit evaluation
consisting of personal telephonic interviews with each vehicle purchaser to
verify the details of the credit application and to confirm that the material
terms of the sale conform to the purchaser's understanding of the transaction.
The Company will purchase a receivable under its core program only after receipt
and review of a satisfactory audit report.
SERVICING
The Company believes that competent, attentive and efficient servicing is
as important as sound credit evaluation for purposes of assuring the integrity
of a receivable.
Since its inception in 1989, the Company has had a servicing relationship
with General Electric Capital Corporation ("GECC"), an affiliate of the
General Electric Corporation. The division of GECC which services the Company's
receivables operates primarily as a servicer of automobile installment loans and
is one of the largest such servicers in the United States. The Company has been
advised that it is the only independent finance company operating in the
sub-prime market for which this division performs the servicing function.
A specific team of employees at GECC is dedicated primarily to servicing
the Company's receivables. These persons coordinate with the Company's personnel
on a daily basis and their familiarity with the Company's business and portfolio
enable them to perform in a timely, responsive and cost-effective manner. The
Company maintains data bases enabling it to monitor and confirm the accuracy of
the periodic reports and other information provided by GECC and to reconcile
discrepancies when they exist.
The following table sets forth certain information concerning the volumes
of receivables serviced for the Company by GECC as of the dates indicated:
AS OF APRIL 30,
----------------------------------
1997 1998
---------------- ----------------
Number of Receivables................ 10,543 12,516
Aggregate Principal Amount of
Receivables........................ $ 115,742,904 $ 136,445,808
Under its servicing agreements with the Company, GECC is responsible for
three primary functions: (i) receipt, review and verification of all collateral
and documentation requirements, (ii) establishment and administration of payment
and collection schedules, and (iii) repossession and, in most instances,
disposition of vehicles securing defaulted receivables.
Servicing fees paid by the Company represent a variable cost that increases
in proportion to the volume of receivables carried. During its two fiscal years
ended April 30, 1998, the Company incurred servicing and related fees in the
amount of $1,536,225 and $1,838,002, respectively, which represented 1.5% of the
average principal amount of receivables outstanding in each of the respective
periods.
4
The Company's current relationship with GECC is governed by a servicing
agreement entered into in October 1992, although the Company has done business
with GECC under prior agreements since its inception in 1989. The present
agreement terminates on October 31, 2000, subject to earlier termination
depending on the outcome of annual pricing renegotiations. In the event the GECC
arrangement were to terminate, GECC would remain obligated to continue to
service the existing receivables through their maturity. The Company considers
its relationship with GECC to be satisfactory and has no reason to believe that
the servicing arrangements will be terminated prior to the expiration of the
current agreement.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify vehicle purchasers whom it regards as creditworthy
despite credit histories that limit their access to traditional sources of
consumer credit. In addition to personal credit qualifications, the Company
attempts to assure that the characteristics of the automobile sold and the terms
of the sale are likely to result in a consistently performing receivable. These
considerations include amount financed, monthly payments required, duration of
the loan, age of the automobile, mileage on the automobile and other factors.
CUSTOMER PROFILE. The Company's primary goal in credit evaluation is to
select receivables arising from sales to customers having stable personal
situations, predictable incomes and the ability and inclination to perform their
obligations in a timely manner. Many of the Company's customers are persons who
have experienced credit difficulties in the past by reason of illness, divorce,
job loss, reduction in pay or other adversities, but who appear to the Company
to have the capability and commitment to meet their obligations. Through its
credit evaluation process, the Company seeks to distinguish these persons from
those applicants who are chronically poor credit risks. Certain information
concerning the Company's obligors for the past two fiscal years (based on credit
information compiled at the time of the loan origination) is set forth in the
following table:
APRIL 30,
--------------------
1997 1998
--------- ---------
Average monthly gross income......... $ 3,397 $ 3,449
Average ratio of consumer debt to
gross income....................... 34% 34%
Average years in current
employment......................... 6 5
Average years in current residence... 5 6
Residence owned...................... 35% 40%
Residence rented..................... 56% 52%
Other residence arrangements(1)...... 9% 8%
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(1) Includes military personnel and persons residing with relatives.
5
PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the sub-prime market, the Company endeavors
to maintain a receivables portfolio having characteristics that, in its
judgment, reflect an optimal balance between achievable yield and acceptable
risk. The following table sets forth certain information concerning the
composition of the Company's portfolio as of the end of the past two fiscal
years:
APRIL 30,
----------------------
1997 1998
---------- ----------
New Vehicles:
Percentage of portfolio(1)...... 35% 29%
Number of receivables
outstanding.................... 3,720 3,665
Average amount at date of
acquisition.................... $ 15,890 $ 16,386
Average term (months) at date of
acquisition(2)................. 59 60
Average remaining term
(months)(2).................... 44 37
Average monthly payment......... $407 $415
Average annual percentage
rate........................... 17.8% 17.6%
Used Vehicles:
Percentage of portfolio(1)...... 65% 71%
Number of receivables
outstanding.................... 6,823 8,851
Average age of vehicle at date
of acquisition (years)......... 1.8 2.0
Average amount at date of
acquisition.................... $ 13,148 $ 13,474
Average term (months) at date of
acquisition(2)................. 52 54
Average remaining term
(months)(2).................... 43 39
Average monthly payment......... $370 $368
Average annual percentage
rate........................... 18.3% 17.9%
- ------------
(1) Calculated on the basis of number of receivables outstanding as of the date
indicated.
(2) Because the actual life of many receivables will differ from the stated term
by reason of prepayments and defaults, data reflecting the average stated
term of receivables included in a portfolio will not correspond with actual
average life.
FINANCING ARRANGEMENTS
GENERAL. At the time the Company acquires receivables, they are financed
by transferring them, at an amount equal to the outstanding principal balance,
to one of two wholly-owned special-purpose financing subsidiaries, F.I.R.C, Inc.
("FIRC") or First Investors Auto Capital Corporation ("FIACC"). FIRC
maintains a $55 million revolving bank facility with NationsBank of Texas, N.A.,
Wells Fargo Bank (Texas) and Sumitomo Bank, Ltd. (the "FIRC credit facility").
FIACC maintains a $25 million commercial paper warehouse facility with Variable
Funding Capital Corporation ("VFCC"), a commercial paper conduit administered
by First Union National Bank (the "FIACC commercial paper facility").
Together, these two facilities provide warehouse financing for the initial
purchase of receivables. The Company selects the warehouse facility to be
utilized for a specific funding based primarily upon the relative risk profile
of the receivable being purchased as indicated by the Company's empirical-based,
proprietary credit scoring system and, to a lesser extent, the remaining
availability under the respective facilities. In addition, the company also has
a $105 million conduit finance facility with Enterprise Funding Corporation
("Enterprise"), a commercial paper conduit administered by NationsBank, N.A.,
(the "FIARC commercial paper facility") which allows the Company to refinance
borrowings under the FIRC credit facility in order to maintain sufficient
capacity to acquire new receivables. Together, these three facilities provide
$185 million in financing capacity to fund the purchase and long-term financing
of receivables.
FIRC CREDIT FACILITY. As designated receivables are purchased from dealers
and transferred to FIRC, they are immediately pledged to a commercial bank that
serves as the collateral agent for
6
the bank lenders. The FIRC credit facility has a borrowing base that, subject to
certain adjustments, permits FIRC to draw advances up to the outstanding
principal balance of qualified receivables but not in excess of the present
facility limit of $55 million. Uninsured losses on receivables, or certain other
events adversely affecting the collectability of receivables, can result in
their ineligibility for inclusion in the borrowing base, and in the event that
the Company's advances exceed the borrowing base the Company must prepay the
credit line until the imbalance is corrected.
Under the FIRC credit facility the Company has three interest rate options:
(i) the NationsBank prime rate in effect from time to time, (ii) a rate equal to
.5% above the "LIBOR" rate (the average U.S. dollar deposit rate prevailing
from time to time in the London interbank market) for selected advance terms, or
(iii) any other short-term fixed interest rate agreed upon by the Company and
the lenders. The Company is also required to pay periodic facility fees as well
as an annual agency fee, and to maintain certain escrow reserves. This facility
is secured by the pledge of all of the receivables financed, as well as the
related escrow accounts and all of the capital stock of FIRC. Collections of
principal and interest on the Company's receivables are remitted directly to the
collateral agent for application to the payment of interest due on the credit
facility and certain other charges, with the balance of collections then being
distributed to the Company.
The current term of the FIRC credit facility expires on October 15, 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 this facility has been extended on seven occasions since its inception
in October, 1992. Management considers its relationship with its warehouse
lenders to be satisfactory and has no reason to believe that this credit
facility will not be renewed.
FIARC COMMERCIAL PAPER FACILITY. When a sufficient number of receivables
have been accumulated under the FIRC credit facility, they may be refinanced
under the FIARC commercial paper facility through a transfer of a group of
specified receivables from FIRC to FIARC. FIARC's purchase is funded through
borrowings under the commercial paper facility equal to 90% of the aggregate
principal balance of the receivables transferred. The remaining 10% of funds
required to repay borrowings under the warehouse credit facility by the amount
of the receivables transferred, are advanced by the Company in the form of an
equity contribution to FIARC. Enterprise funds the advance to FIARC through the
issuance, by an affiliate of Enterprise, of commercial paper (indirectly secured
by the receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. At April 30, 1998,
the maximum borrowings available under the commercial paper facility was $105
million. The Company's interest cost is based on Enterprises commercial paper
rates for specific maturities plus 0.25%. In addition, the Company is required
to pay periodic facility fees and other costs related to the issuance of
commercial paper.
As collections are received on the transferred receivables they are
remitted directly to a collection account maintained by the collateral agent for
the FIARC commercial paper facility. From that account, a portion of the
collected funds are distributed to Enterprise in an amount equal to the
principal reduction required to maintain the 90% advance rate and to pay
carrying costs and related expenses, with the balance released to the Company.
In addition to the 90% advance rate, FIARC must maintain a 1% cash reserve as
additional credit support for the facility.
The commercial paper facility was established in March 1994 for an initial
term of one year and was subsequently extended on three occasions to May 1997.
In October 1996, the Company replaced the original commercial paper facility,
which had been increased to $75 million, with a $105 million facility with
Enterprise which is credit enhanced by a surety bond issued by MBIA Insurance
Corporation. The new facility expires in October 1998. If the facility were
terminated, no new receivables could be transferred to FIARC from FIRC and the
receivables financed under the commercial paper facility would be allowed to
amortize. The Company presently intends to seek an extension of this arrangement
prior to its expiration.
7
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 1998, the maximum
borrowings available under the facility were $25 million. The Company's interest
cost is based on VFCC's commercial paper rates for specific maturities plus
0.55%. In addition, the Company is required to pay periodic facility fees of
0.25% on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
The initial term of the FIACC commercial paper facility expires December
21, 1998. If the facility was not extended, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1998, there were no
outstanding borrowings under this facility.
WORKING CAPITAL FACILITY. The Company also maintains a $6 million working
capital line of credit with NationsBank of Texas, N.A. that is utilized for
working capital and general corporate purposes. Borrowings under this facility
bear interest at the Company's option of (i) NationsBank's prime lending rate,
or (ii) a rate equal to 3.0% above the LIBOR rate for the applicable interest
period. In addition, the Company is also required to pay period facility fees,
as well as an annual agency fee. The initial expiration of the facility was July
1998. In July 1998, the expiration date of the facility was extended to
September 30, 1998. If the lender elected not to renew, any outstanding
borrowings would be amortized over a one-year period. The Company presently
intends to seek an extension of this arrangement prior to its expiration. At
April 30, 1998, there was $2.5 million outstanding under this facility.
LOAN COVENANTS. The documentation governing each of the Company's
financing arrangements contains numerous covenants relating to the Company's
business, the maintenance of credit enhancement insurance covering the
receivables (if applicable), the observance of certain financial covenants, the
avoidance of certain levels of delinquency experience, and other matters. The
breach of these covenants, if not cured within the time limits specified, could
precipitate events of default that might result in the acceleration of the FIRC
credit line and working capital facility or the termination of the commercial
paper facilities. Through the operation of the collateral agency arrangements
described above, which are in the nature of a "lock-box" security device
embracing the collection of principal and interest on almost all of the
Company's receivables, such a default could cause the immediate termination of
the Company's primary sources of liquidity. The Company is currently in
compliance with all covenants governing these financing arrangements.
INTEREST RATE MANAGEMENT. Since interest paid on the Company's borrowings
varies with indexed rates in the case of the FIRC credit facility and working
capital facility and varies with commercial paper rates under the two commercial
paper facilities, the Company's cost of funds will fluctuate with interest rates
generally. In order to achieve some degree of protection from the potential
impact of rising interest rates on its results of operations, the Company has
utilized conventional interest rate management contracts, including so-called
"caps" and "swaps". Under these swap agreements, the Company is obligated to
make net monthly payments to the counter party
8
only in the event that the prevailing 30-day LIBOR interest rate declines below
the applicable ceiling rates specified in the agreements. In the event that
interest rates should decline generally in that manner, the cost to the Company
would be offset in large part by a corresponding decline in the Company's cost
of funds under its variable rate credit facilities. Accordingly, the Company's
maximum exposure under these swap arrangements is reasonably quantifiable and
management believes that they entail substantially less risk than certain other
types of interest rate hedging products. Furthermore, the risk that the
Company's interest rate management becomes ineffective is generally limited to
the extent that the swap agreements may expire prior to the maturity of the
receivables.
The Company is currently a party to a swap agreement with NationsBank
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 6 in the Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of
NationsBank. The Company is currently evaluating additional interest rate
management products with a view to fixing or limiting its interest rate exposure
with respect to amounts that are substantially equivalent to its aggregate
outstanding borrowings under the FIRC credit facility and the commercial paper
facilities.
CREDIT ENHANCEMENT -- FIRC CREDIT FACILITY. In order to obtain a lower
cost of funding, the Company has agreed under the FIRC credit facility to
maintain credit enhancement insurance covering all of its receivables pledged as
collateral under this facility. The facility lenders are named as additional
insureds under these policies. The coverages are obtained on each receivable at
the time it is purchased by the Company and the applicable premiums are prepaid
for the life of the receivable. Each receivable is covered by three separate
credit insurance policies, consisting of basic default insurance under a
standard auto loan protection policy (known as "ALPI" insurance) together with
certain supplemental coverages relating to physical damage and other risks.
These coverages are carried solely by the Company at its expense and neither the
vehicle purchasers nor the dealers are charged for the coverages and they are
usually unaware of their existence. The Company's ALPI insurance policy is
written by National Union Fire Insurance Company of Pittsburgh ("National
Union"), which is a wholly-owned subsidiary of American International Group. As
of April 30, 1998, National Union had been assigned a rating of A+ + by A.M.
Best Company, Inc.
The premiums that the Company paid during its past fiscal year for its
three credit enhancement insurance coverages, which consist primarily of the
basic ALPI insurance, represented approximately 4.6% of the principal amount of
the receivables acquired during the year. Aggregate premiums paid for ALPI
coverage alone during the three fiscal years ended April 30, 1998 were
$2,495,686, $2,510,266 and $2,860,491, respectively, and accounted for 3.8% of
the aggregate principal balance of the receivables acquired during such
respective periods.
Prior to establishing its relationship with National Union in March 1994,
the Company's ALPI policy was provided by another third-party insurer. Since the
premiums the Company was paying for its ALPI coverage to a third-party insurer
greatly exceeded the amount of claims paid, the Company decided that creating a
"captive" insurance affiliate to reinsure the ALPI coverage would be more
cost-effective. In April 1994 the Company organized First Investors Insurance
Company (the "Insurance Affiliate") under the captive insurance company laws
of the State of Vermont. The Insurance Affiliate is an indirect wholly-owned
subsidiary of the Company and is a party to a reinsurance agreement whereby the
Insurance Affiliate reinsures 100% of the risk under the Company's ALPI
insurance policy. At the time each receivable is insured by National Union, the
risk is automatically reinsured to its full extent and approximately 96% of the
premium paid by the Company to National Union with respect to such receivable is
ceded to the Insurance Affiliate. When a loss covered by the ALPI policy occurs,
it is paid by National Union after the claim is processed, and National Union is
then reimbursed in full by the Insurance Affiliate. As of April 30, 1998, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $9,667,851 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the
9
amount of $3,525,375. In addition to the monthly premiums and liquidity reserves
of the Insurance Affiliate, a trust account is maintained by National Union to
secure the Insurance Affiliates obligations for losses it has reinsured.
The result of the foregoing reinsurance structure is that National Union,
as the "fronting" insurer under the captive arrangement, is unconditionally
obligated to the Company's credit facility lenders for all losses covered by the
ALPI policy and the Company, through its Insurance Affiliate, is obligated to
indemnify National Union for all such losses. As of April 30, 1998, the
Insurance Affiliate had capital and surplus of $501,771 and unencumbered cash
reserves of $766,682 in addition to the $1,250,000 trust account.
The ALPI coverage, as well as the Insurance Affiliates' liability under the
Reinsurance Agreement, remains in effect for each receivable that is pledged as
collateral under the warehouse credit facility. Once receivables are transferred
from FIRC to FIARC and financed under the commercial paper facility, ALPI
coverage and the Insurance Affiliate's liability under the Reinsurance Agreement
is cancelled with respect to the transferred receivables. Any unearned premium
associated with the transferred receivables is returned to the Company. The
Company believes the losses its Insurance Affiliate will be required to
indemnify will be less than the premiums ceded to it. However, there can be no
assurance that losses will not exceed the premiums ceded and the capital and
surplus of the Insurance Affiliate.
CREDIT ENHANCEMENT -- FIARC COMMERCIAL PAPER FACILITY. Prior to October
1996, the ALPI Policy, through the structure outlined above, served as credit
enhancement for both the bank warehouse credit facility and the commercial paper
facility. In October 1996, in connection with the increase in the commercial
paper facility to $105 million, the Company elected to diversify its credit
enhancement mechanisms, obtaining a surety bond from MBIA Insurance Corporation
to enhance the commercial paper facility and retaining the ALPI Policy to
enhance the warehouse facility. The surety bond provides payment of principal
and interest to Enterprise in the event of a payment default by FIARC. MBIA is
paid a surety premium equal to 0.35% per annum on the average outstanding
borrowings under the facility. The surety bond was issued for an initial term of
two years, expiring in October, 1998. Termination of the surety bond would
result in a default under the commercial paper facility. The Company presently
intends to endeavor to extend this arrangement when the current term expires.
CREDIT ENHANCEMENT -- FIACC COMMERCIAL PAPER FACILITY. Under the structure
of the FIACC commercial paper facility, no third-party credit insurance or
surety bond is required. Credit enhancement is provided in the form of the 88%
advance rate and 2% cash reserve requirement.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company seeks to manage its risk of credit loss through (i) prudent
credit evaluations 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 loss and (iii) insurance against
certain losses from independent third party insurers. As a result of its
participating programs and third
10
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):
APRIL 30,
---------------------------------------------------
1997 1998
----------------------- -----------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- -------- ----------- --------
Core Program:
Insured by third party
insurers...................... $ 2,293 $-- $ 754 $ --
Other receivables(1)............ 109,391 1,182(2) 134,153 1,199(2)
Participating Program................ 4,059 340(3) 1,539 238(3)
----------- -----------
$ 115,743 $ 136,446
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 1.1% 0.9%
Dealer reserves as a percentage of
participating program
receivables........................ 8.4% 15.5%
- ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables financed under one of the Company's commercial paper conduit
facilities 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 following table sets forth certain information regarding the Company's
delinquency and charge-off experience (based on the gross principal balance of
the Company's portfolio) over its last two fiscal years (dollars in thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
-------------------------------------------
1997 1998
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Delinquent amount outstanding:
30 - 59 days.................... 181 $ 2,682 178 $ 2,371
60 - 89 days.................... 57 900 45 706
90 days or more................. 107 1,683 131 1,987
-------- --------- -------- ---------
Total delinquencies.................. 345 $ 5,265 354 $ 5,064
======== ========= ======== =========
Total delinquencies as a percentage
of outstanding receivables......... 3.1% 3.2% 2.7% 2.7%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... -- 2.0% -- 3.2%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage of outstanding receivables are based on gross receivables
balances, which include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed under such policies. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Company personnel (described above under "Credit
Evaluation") and attentive servicing of receivables. In addition, based on its
11
experience, the Company believes that delinquency risk can be reduced to some
degree by managing the composition of its portfolio to include a relatively
large proportion of receivables arising from the sale of new or late-model used
cars. These vehicles are less likely to experience mechanical problems during
the initial 24 months of the loan (which is the period of highest delinquency
risk) and the purchasers of such vehicles appear to have a relatively higher
commitment to loan performance than the purchasers of older used automobiles.
Therefore, the Company (unlike many of its competitors in the sub-prime market)
concentrates on financing new and late-model used cars to the extent
practicable. In view of the popularity in recent years of new automobile leasing
programs sponsored by manufacturers and franchised dealers, the Company believes
that large numbers of late-model used automobiles will be available for sale
over the near term as these vehicles come "off lease". As of April 30, 1998,
approximately 29% of the receivables that had been acquired by the Company
related to new vehicles and approximately 71% of the receivables arose from the
sale of used vehicles. Of the Company's receivables held at that date,
approximately 68% originated from the sale of vehicles that were either new or
no more than two model years old at the time of sale.
SECURITIZATION
Many finance companies similar to the Company engage in "securitization"
transactions whereby receivables are pooled and conveyed to a trust or other
special purpose entity, with interests in the entity being sold to investors. As
the pooled receivables amortize, finance charge collections are passed through
to the investors at a specified rate for the life of the pool and an interest in
collections exceeding the specified rate is retained by the sponsoring finance
company. For accounting purposes, the sponsor often recognizes as revenue the
discounted present value of this interest as estimated over the life of the
pool. This revenue, or "gain on sale", is recognized for the period in which
the transaction occurs.
The Company has only effected one such transaction, which involved a $6.9
million receivables pool securitized in early 1992. Consequently, the Company's
results of operations for its last three fiscal years do not reflect sales of
receivables. Consistent with the Company's business strategy of acquiring and
retaining receivables, the Company does not currently intend to engage in
securitization transactions resulting in gains on sale of receivables. However,
in the event that securitization should appear appropriate in the future as a
means of reducing interest rate exposure, enhancing liquidity or for other
reasons, the Company believes that its operating history, as well as its
established servicing and credit enhancement insurance arrangements, would
enable it to securitize its receivables portfolio efficiently and expeditiously.
EMPLOYEES
The Company had 66 employees at April 30, 1998. The Company believes that
it operates with relatively fewer employees than are typically associated with
finance companies of comparable size, because it conducts its servicing
functions under contract with GECC. The Company also believes that this
servicing arrangement enables it to absorb substantially increased volumes of
receivables without proportionate increases in staffing.
All of the Company's employees are located in Houston, with the exception
of the regional marketing representatives residing in their respective regions.
The Company's employees are covered by group health insurance, but the Company
has no pension, profit-sharing or bonus plans or other material benefit
programs. The Company maintains a "401(k)" retirement plan for which it has no
contribution obligations. The Company has no collective bargaining agreements
and considers its employee relations to be satisfactory.
INFORMATION SYSTEMS
The Company utilizes advanced information management systems including a
fully integrated software program designed to expedite each element in the
receivables acquisition process, including the entry and verification of credit
application data, credit analysis and the communication of credit
12
decisions to originating dealers. This system, together with the data management
resources of GECC available to the Company under its servicing arrangements,
allows the prompt collation and retrieval of data concerning the composition of
the receivables portfolio, the characteristics and performance status of the
underlying receivables, and other information necessary for management purposes.
The Company believes that its data processing capacity is sufficient to
accommodate significantly increased volumes of receivables without material
additional capital expenditures for this purpose.
COMPETITION
The business of direct and indirect lending for the purchase of new and
used automobiles is intensely competitive in the United States. Such financing
is provided by commercial banks, thrifts, credit unions, the large captive
finance companies affiliated with automobile manufacturers, and many independent
finance companies such as the Company. Many of these competitors and potential
competitors have significantly greater financial resources than the Company and,
particularly in the case of the captive finance companies, enjoy ready access to
large numbers of dealers. The Company believes that a number of factors
including historical market orientations, traditional risk-aversion preferences
and in some cases regulatory constraints, have discouraged many of these
entities from entering the sub-prime sector of the market where the Company
operates. However, as competition intensifies, these well-capitalized concerns
could enter the market, and the Company could find itself at a competitive
disadvantage.
The sub-prime market in which the Company operates presently consists of a
large number of both large and small independent finance companies doing
business on a local, regional or national basis. Reliable data regarding the
number of such companies and their market shares is unavailable; however, the
market is highly fragmented and intensely competitive. There are no significant
barriers to entry in this market and, as capital has become available to the
existing companies and new entrants, competition has intensified.
REGULATION
The operations of the Company are subject to regulation, supervision and
licensing under various federal and state laws and regulations. State consumer
protection laws, motor vehicle installment sales acts and usury laws impose
ceilings on permissible finance charges, require licensing of finance companies
as consumer lenders, and prescribe many of the substantive provisions of the
retail installment sales contracts that the Company purchases. Federal consumer
credit statutes and regulations primarily require disclosure of credit terms in
consumer finance transactions, although rules adopted by the Federal Trade
Commission (including the so-called holder-in-due-course rule) also affect the
substantive rights and remedies of finance companies purchasing automobile
installment sales contracts.
The Company's business requires it to hold consumer lending licenses issued
by individual states, under which the Company is subject to periodic
examinations. State consumer credit regulatory authorities generally enjoy broad
discretion in the revocation and renewal of such licenses and the loss of one or
more of these could adversely affect the Company's operations.
In addition to specific licensing and consumer regulations applicable to
the Company's business, the Company's ability to enforce and collect its
receivables is limited by several laws of general application including the
Federal bankruptcy laws and the Uniform Commercial Codes of the various states.
These and similar statutes govern the procedures, and in many instances limit
the rights of creditors, in connection with asserting defaults, repossessing and
selling collateral, realizing on the proceeds thereof, and enforcing
deficiencies.
The Company's insurance subsidiary is subject to regulation by the
Department of Banking, Insurance and Securities of the State of Vermont. The
plan of operation of the subsidiary, described above under "Financing
Arrangements" and "Credit Enhancement", was approved by the Department and
any material changes in those operations would likewise require the Department's
13
approval. The subsidiary is subject to minimum capital and surplus requirements,
restrictions on dividend payments, annual reporting, and periodic examination
requirements.
The Company believes that its operations comply in all material respects
with the requirements of laws and regulations applicable to its business. These
requirements, and the interpretations thereof, change from time to time and are
not uniform among the states in which the Company operates. The Company retains
a specialized consumer credit legal counsel that engages and supervises local
legal counsel in each state where the Company does business, to monitor
compliance on an ongoing basis and to respond to changes in applicable
requirements as they occur. Moreover, the Company's servicer operates on a
nationwide basis and assists the Company in conforming to the various
requirements concerning loan documentation, collection procedures and collateral
liquidation.
ITEM 2. PROPERTIES
The Company's principal physical properties are its data processing and
communications equipment and furniture and fixtures, all of which the Company
believes to be adequate for its intended use.
The Company's offices in suburban Houston consist of approximately 11,752
square feet on the first and seventh floor of an eight-story office building.
This space is held under a lease requiring average annual rentals of
approximately $165,000 and expiring in February 2003, with an option to renew
for five years at the market rate then prevailing. The Company owns no real
property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is currently not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders
during the fourth quarter of the past fiscal year.
14
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on the Nasdaq National Market
System, under the symbol FIFS since the completion of the Company's initial
public offering on October 4, 1995. High and low bid prices of the common stock
are set forth below for the periods indicated.
THREE MONTHS ENDED HIGH LOW
- ------------------------------------- ---- ----
April 30, 1998....................... 8 1/8 6
January 31, 1998..................... 8 6
October 31, 1997..................... 8 1/2 7 1/4
July 31, 1997........................ 7 3/4 6 3/4
April 30, 1997....................... 9 6 3/4
January 31, 1997..................... 10 1/8 6 7/8
October 31, 1996..................... 10 1/4 8 5/8
July 31, 1996........................ 12 3/8 9 1/2
As of June 30, 1998, there were approximately 40 shareholders of record of
the Company's common stock. The number of beneficial owners is unknown to the
Company at this time.
The Company has not declared or paid any cash dividends on its common stock
since its inception. The payment of cash dividends in the future will depend on
the Company's earnings, financial condition and capital needs and on other
factors deemed pertinent by the Company's Board of Directors. It is currently
the policy of the Board of Directors to retain earnings to finance the operation
and expansion of the Company's business and the Company has no plans to pay any
cash dividends on the common stock in the foreseeable future.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 1998, has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with such statements (dollars in thousands, except share data).
YEARS ENDED APRIL 30,
--------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ----------
STATEMENT OF OPERATIONS:
Interest income(1)............... $ 3,587 $ 8,977 $ 14,144 $ 18,151 $ 20,049
Interest expense................. 1,064 3,502 5,245 6,706 7,834
--------- --------- ---------- ---------- ----------
Net interest income......... 2,523 5,475 8,899 11,445 12,215
Provision for credit losses(2)... 115 597 704 2,520 3,901
--------- --------- ---------- ---------- ----------
Net interest income after
provision for credit
losses.................... 2,408 4,878 8,195 8,925 8,314
--------- --------- ---------- ---------- ----------
Loss on receivables sold with
recourse(1)................... -- (138) -- -- --
Other income..................... 32 207 587 693 617
--------- --------- ---------- ---------- ----------
Total other income.......... 32 69 587 693 617
--------- --------- ---------- ---------- ----------
Servicing fees................... 360 732 1,126 1,536 1,838
Salaries and benefits............ 663 1,149 1,900 2,351 2,639
Other............................ 804 1,330 2,002 2,356 2,526
--------- --------- ---------- ---------- ----------
Total operating expenses.... 1,827 3,211 5,028 6,243 7,003
--------- --------- ---------- ---------- ----------
Income before provision for
income taxes.................. 613 1,736 3,754 3,375 1,928
Provision for income taxes....... 120 627 1,295 1,232 704
--------- --------- ---------- ---------- ----------
Net income....................... $ 493 $ 1,109 $ 2,459 $ 2,143 $ 1,224
--------- --------- ---------- ---------- ----------
Preferred stock dividends........ (103) (107) (50) -- --
--------- --------- ---------- ---------- ----------
Net income allocable to common
shareholders before redemption
of preferred stock............ 390 1,002 2,409 2,143 1,224
Premium paid upon redemption of
preferred stock............... -- -- (160) -- --
--------- --------- ---------- ---------- ----------
Net income allocable to common
shareholders after redemption
of preferred stock............ $ 390 $ 1,002 $ 2,249 $ 2,143 $ 1,224
========= ========= ========== ========== ==========
Basic and Diluted net income per
common share before redemption
of preferred stock(3)......... $ 0.11 $ 0.27 $ 0.51 $ 0.39 $ 0.22
========= ========= ========== ========== ==========
Basic and Diluted net income per
common share after redemption
of preferred stock(3)......... $ 0.11 $ 0.27 $ 0.47 $ 0.39 $ 0.22
========= ========= ========== ========== ==========
AS OF APRIL 30,
--------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ----------
BALANCE SHEET DATA:
Receivables, net................. $ 36,300 $ 63,166 $ 96,263 $ 118,299 $ 139,599
Other assets..................... 4,184 11,468 19,397 21,444 21,654
--------- --------- ---------- ---------- ----------
Total assets................ $ 40,484 $ 74,634 $ 115,660 $ 139,743 $ 161,253
========= ========= ========== ========== ==========
Debt............................. $ 38,018 $ 69,664 $ 91,049 $ 112,894 $ 130,813
Other liabilities................ 1,590 3,093 2,818 2,913 5,280
Shareholders' equity............. 876 1,877 21,793 23,936 25,160
--------- --------- ---------- ---------- ----------
Total liabilities and
shareholders' equity...... $ 40,484 $ 74,634 $ 115,660 $ 139,743 $ 161,253
========= ========= ========== ========== ==========
(FOOTNOTES ON FOLLOWING PAGE)
16
- ------------
(1) In November 1992, the Company changed its business strategy from the sale of
receivables to retaining receivables for investment. Since November 1992,
the primary source of the Company's revenues has been interest income from
receivables retained for investment. Prior to such date, the principal
source of income was gain from sale of receivables to investors. The loss on
receivables sold with recourse recognized in 1995 related to the revision of
the Company's estimated recourse obligations which arose in conjunction with
the Company's sale of certain receivables to third party investors. Such
receivables were acquired from the third party investors by certain
shareholders, then repurchased by the Company. See Note 3 to Notes to
Consolidated Financial Statements. The Company is not subject to any further
recourse obligations on receivables sold to investors.
(2) The Company purchases credit enhancement insurance from third-party insurers
which covers the risk of loss upon default and certain other risks. Until
March 1994, such insurance and dealer reserves absorbed substantially all
credit losses. In May 1994, the Company established a captive insurance
subsidiary to reinsure certain risks under the credit enhancement insurance
coverage for all receivables acquired in March 1994 and thereafter.
Beginning in October 1996, the Company limited the extent of the receivables
covered by credit enhancement insurance to those receivables financed under
the warehouse credit facility. Receivables financed under the commercial
paper facility are either insured by third parties or uninsured.
Accordingly, the Company is exposed to credit losses on receivables which
are either uninsured or reinsured by its captive insurance subsidiary and
must provide an allowance for such losses.
(3) Basic and Diluted net income per common share amounts are calculated based
on net income available to common shareholders after preferred dividends, if
any, and in the case of the year ended April 30, 1996, the premium paid to
the holders of the 1993 preferred stock upon its redemption divided by the
weighted average number of shares outstanding, adjusted for the 3-for-1
stock split.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a specialized consumer finance company engaged in the
purchase and retention of receivables originated by franchised automobile
dealers from the sale of new and late-model used vehicles to consumers with
substandard credit profiles. At April 30, 1998, the Company had a network of
1,486 franchised dealers in 19 states from which it purchases the receivables at
the time of origination. The Company has completed the licensing process in 11
additional states. While the Company intends to continue to geographically
diversify its receivables portfolio, approximately 43% of receivables by
principal balance at April 30, 1998 represent receivables acquired from dealers
located in Texas.
From its inception in 1989 through October 1992, the business strategy of
the Company was to purchase, pool and sell receivables to third-party investors
and to recognize gains associated with those sales on a current basis. In
November 1992, the Company decided that it could achieve a more stable and
predictable income stream through acquiring and retaining receivables for net
interest income recognized over the life of the receivables. The primary element
in this strategy is access to institutional financing in sufficient magnitudes
and at rates enabling the Company to purchase significant volumes of receivables
and retain them at a funding cost allowing an adequate net interest margin
between portfolio yield and cost of funds. Through the utilization of flexible
secured credit facilities and comprehensive credit insurance, the Company has
been able to access financing on terms permitting it to implement this strategy
and to pursue it successfully through the present time. Management believes that
continued pursuit of this strategy will enable the Company to sustain its growth
and maintain a stable earnings stream on a relatively conservative basis.
Therefore, since November 1992, the primary source of the Company's
revenues has been interest income from receivables retained as investments,
while its primary cost has been interest expense arising from the financing of
the Company's investment in such receivables. The profitability of the Company
during this period has been determined by the growth of the receivables
portfolio and effective management of net interest income and fixed operating
expenses. The following table summarizes the Company's growth in receivables and
net interest income for the last two fiscal years (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED APRIL 30,
------------------------
1997 1998
----------- -----------
Investment in receivables:
Number.......................... 10,543 12,516
Principal balance............... $ 115,743 $ 136,446
Average principal balance of
receivables outstanding during
the twelve month period....... $ 105,857 $ 124,436
Average principal balance of
receivables outstanding during
the three month period........ $ 112,544 $ 132,075
Interest income...................... $ 18,151 $ 20,049
Interest expense..................... 6,706 7,834
----------- -----------
Net interest income............. $ 11,445 $ 12,215
=========== ===========
18
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
receivables and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
YEARS ENDED
APRIL 30,
--------------------
1997 1998
--------- ---------
Effective yield on receivables(1).... 17.1% 16.1%
Average cost of debt(2).............. 6.5 6.5
--------- ---------
Net interest spread(3)............... 10.6% 9.6%
========= =========
Net interest margin(4)............... 10.8% 9.8%
========= =========
- ------------
(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.
The Company intends to increase its acquisition of receivables by expanding
its dealer base in existing states served, and by expanding its dealer base into
new states. To the extent that the Company's receivables acquisitions exceed the
extinguishment of receivables through principal payments, payoffs or defaults,
its receivables portfolio and interest income will continue to increase. The
following table summarizes the activity in the Company's receivables portfolio
(dollars in thousands):
YEARS ENDED
APRIL 30,
------------------------
1997 1998
----------- -----------
Principal balance, beginning of
period............................. $ 94,357 $ 115,743
Acquisitions......................... 66,081 75,249
Principal payments and payoffs....... (36,567) (44,001)
Defaults prior to liquidations and
recoveries (1)..................... (8,128) (10,545)
----------- -----------
Principal balance, end of period..... $ 115,743 $ 136,446
=========== ===========
- ------------
(1) Represents gross principal balances.
Receivables may be paid earlier than their contractual term, primarily due
to prepayments and liquidation of collateral after defaults. See "Delinquency
and Credit Loss Experience".
ANALYSIS OF NET INTEREST INCOME
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased to $12.2 million
in 1998, an increase of 37% and 7% when compared to amounts reported in 1996 and
1997. The increase resulted primarily from the growth of the receivables
portfolio which was offset by a decline in the effective yield earned on the
receivables.
The amount of net interest income is the result of the relationship between
the average principal amount of receivables held and average rate earned thereon
and the average principal amount of debt incurred to finance such receivables
and the average rates paid thereon. Changes in the principal amount and rate
components associated with the receivables and debt can be segregated to analyze
19
the periodic changes in net interest income. The following table analyzes the
changes attributable to the principal amount and rate components of net interest
income (dollars in thousands):
YEARS ENDED APRIL 30,
-------------------------------------------------------------------
1996 TO 1997 1997 TO 1998
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------- -------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- ---------- --------- ------- ----------
Interest income...................... $ 4,990 $ (983 ) $4,007 $ 3,185 $(1,288) $1,897
Interest expense..................... 1,723 (262 ) 1,461 1,214 (87) 1,127
--------- ------- ---------- --------- ------- ----------
Net interest income.................. $ 3,267 $ (721 ) $2,546 $ 1,971 $(1,201) $ 770
========= ======= ========== ========= ======= ==========
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 1998, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1998 increased by $1,897, or 10%,
over 1997, primarily as a result of an increase in the average principal balance
of receivables held of 18% from 1997 to 1998 which offset a 1.0% decline in the
effective yield realized on the receivables.
INTEREST EXPENSE. Interest expense for 1998 increased by $1,127, or 17%,
over 1997. An increase in the weighted average borrowings outstanding of 18%
resulted in $1,214 of this difference. The weighted average cost of debt
remained flat and positively impacted interest expense by $87.
NET INTEREST INCOME. Net interest income increased to $12,215 in 1998, an
increase of 7% over 1997. The increase resulted primarily from the growth of the
receivables portfolio which offset a decline in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased by $1,381, or 55%, over 1997, as a result of an increase in net
charge-offs from $1,968 in fiscal year 1997 to $3,884 in fiscal year 1998. The
increase in charge-offs is attributable to the growth in the portfolio, an
increase in the number of loans that are seasoned nine to 24 months, which is
generally where the highest percentage of repossessions occur and lower recovery
amounts on the sale of the vehicle collateral. At April 30, 1998, the Company
increased its estimate of losses associated with certain assets held for sale to
adjust for lower than expected realized amounts of those assets. Accordingly, an
additional $250,000 incremental charge was taken in the fourth quarter to adjust
the carrying value of the repossessed inventory to better reflect the impact of
lower used car prices during the period. This resulted in a corresponding
increase in net charge-offs and provision for the period.
OTHER INCOME. For 1998, other income, which consists primarily of late
fees and interest income from short-term investments, decreased by $77, or 11%,
over 1997 primarily as a result of a decline in interest-earning investments.
SERVICING FEE EXPENSES. Servicing fee expenses increased $302, or 20%,
from 1997 to 1998. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the increase in the number
of receivables serviced, which increased by 1,973, or 19%, from 1997 to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $2,351
in 1997 to $2,639 in 1998, an increase of $288 or 12%. As a percentage of
interest income, salaries and benefits increased from 13.0% in 1997 to 13.2% in
1998. This dollar increase was primarily due to increases in base compensation
and is directly attributable to the growth in the receivables portfolio and the
Company's expansion into new markets.
20
OTHER EXPENSES. Other expenses for 1998 increased 7% from 1997 primarily
due to the overall expansion of the Company's operations. As a percentage of
interest income, other operating expenses declined from 13.0% in 1997 to 12.6%
in 1998.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased by $1,447, or 43%, from 1997 as a result of
the increase in provision for credit losses of $1,381 and other factors
discussed above.
FISCAL YEAR ENDED APRIL 30, 1997, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1996
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1997 increased by $4,007, or 28%,
over 1996, primarily as a result of an increase in the average principal balance
of receivables held of 35% from 1996 to 1997 which offset a 1.0% decline in the
effective yield realized on the receivables.
INTEREST EXPENSE. Interest expense for 1997 increased by $1,461, or 28%,
over 1996. An increase in the weighted average borrowings outstanding of 33%
resulted in $1,723 of this difference which was offset by a reduction of 0.3% in
the weighted average cost of debt which positively impacted interest expense by
$262.
NET INTEREST INCOME. Net interest income increased to $11,445 in 1997, an
increase of 29% over 1996. The increase resulted primarily from the growth of
the receivables portfolio and an increase in the percentage of the portfolio
financed with equity which offset a decline in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1997
increased by $1,816, or 258%, over 1996, as a result of an increase in net
charge-offs from $604 in fiscal year 1996 to $1,968 in fiscal year 1997. An
approximate 53% growth in the April 30, 1996 average principal balance of the
Company's receivables portfolio over the prior year led to increased charge-offs
which generally occur as the portfolio seasons. At April 30, 1997, the Company
increased its estimate of losses associated with certain assets held for sale to
adjust for lower than expected realized amounts of those assets. This resulted
in a corresponding increase in net charge-offs and provision for the period.
OTHER INCOME. For 1997, other income, which consists primarily of late
fees, increased by $107, or 18%, over 1996, primarily as a result of an increase
in the volume of receivables retained.
SERVICING FEE EXPENSES. Servicing fee expenses increased $411, or 36%,
from 1996 to 1997. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the increase in the number
of receivables serviced, which increased by 2,014, or 24%, from 1996 to 1997.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $1,900
in 1996 to $2,351 in 1997, an increase of $451 or 24%. As a percentage of
interest income, salaries and benefits declined from 13.4% in 1996 to 13.0% in
1997. This dollar increase was primarily due to increases in base compensation
and is directly attributable to the growth in the receivables portfolio and the
Company's expansion into new markets.
OTHER EXPENSES. Other expenses for 1997 increased 18% from 1996 primarily
due to the overall expansion of the Company's operations. As a percentage of
interest income, other operating expenses declined from 14% in 1996 to 13% in
1997.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1997, income before
provision for income taxes decreased by $378, or 10%, from 1996 as a result of
the increase in provision for credit losses of $1,816 and other factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from dealers
and fund required reserve accounts, (ii) amounts necessary to fund premiums for
credit enhancement insurance or other credit enhancement required by the
Company's
21
financing programs, and (iii) amounts necessary to fund costs to retain
receivables, primarily interest expense and servicing fees. The Company also
requires a significant amount of cash flow for working capital to fund fixed
operating expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company funds the purchase price of receivables
through a combination of two warehouse facilities. The FIRC credit facility
generally permits the Company to borrow up to the outstanding principal balance
of qualified receivables, but not to exceed $55 million. The FIACC commercial
paper facility generally allows the Company to borrow up to 88% of the
outstanding principal balance of the receivables, but not to exceed $25 million.
The Company paid $78.0 million for receivables acquired in 1998 compared to
$68.9 million paid in 1997, all of which was initially funded through the FIRC
credit facility. Receivables that have accumulated in the FIRC credit facility
may be transferred to the FIARC commercial paper facility at the option of the
Company. The FIARC commercial paper facility provides an additional financing
source up to $105 million. Substantially all of the Company's receivables are
pledged to collateralize these credit facilities.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of $74.2 million in 1998 and $61.4 million in 1997.
Such cash flow funds repayment of amounts borrowed under secured financing
facilities and other holding costs, primarily interest expense and servicing and
custodial fees. During fiscal years 1998 and 1997, the Company required net cash
flow, respectively, of $23.6 million and $23.3 million (cash required to acquire
receivables net of principal payments on receivables) to fund the growth of its
receivables portfolio. The Company has relied on borrowed funds to provide the
source of cash flow to fund such growth.
CAPITALIZATION. Since the change in business strategy to retaining
receivables in November 1992, the Company has financed its acquisition of such
receivables primarily through two related credit facilities. The Company's
equity was not a significant factor in its capitalization until the completion
of the Company's initial public offering of common stock in October 1995,
resulting in net proceeds of $18.5 million. However, the Company expects to
continue to rely primarily on its credit facilities to acquire and retain
receivables. The Company believes its existing credit facilities have adequate
capacity to fund the increase of the receivables portfolio expected in the
foreseeable future. While the Company has no reason to believe that these
facilities will not continue to be available, their termination could have a
material adverse effect on the Company's operations if substitute financing on
comparable terms was not obtained.
FIRC CREDIT FACILITY. The primary source of acquisition financing for
receivables has been through a syndicated warehouse credit facility agented by
NationsBank of Texas, N.A. ("NationsBank"). The FIRC credit facility currently
provides for maximum borrowings, subject to certain adjustments, up to the
outstanding principal balance of qualified receivables, but not to exceed the
current facility limit of $55 million. Borrowings under the FIRC credit facility
bear interest pursuant to certain indexed variable rate options at the election
of the Company or any other short-term fixed interest rate agreed upon by the
Company and the lenders. The Company bases its selection of the interest rate
option primarily on its expectations of market interest rate fluctuations, the
timing and the amount of the required funding and the period of time it
anticipates requiring the funding prior to transfer to the FIARC commercial
paper facility. The FIRC credit facility provides for a term of one year at
which time the outstanding principal balance will be payable in full, although
there are provisions allowing the Company a period of six months to refinance
the facility in the event that it is not renewed.
22
The following table summarizes borrowings under the FIRC credit facility
(dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1997 1998
---------- ----------
At period-end:
Balance outstanding............. $ 49,650 $ 43,610
Weighted average interest
rate(1)........................ 6.31% 6.35%
During period(2):
Maximum borrowings
outstanding.................... $ 55,000 $ 53,270
Weighted average balance
outstanding.................... 46,585 42,235
Weighted average interest
rate........................... 6.50% 6.25%
- ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a $105 million commercial paper conduit facility
with Enterprise Funding Corporation ("Enterprise"), a commercial paper conduit
managed by NationsBank, N.A. Receivables that have accumulated in the FIRC
credit facility may be transferred to the FIARC commercial paper facility by
transferring a specific group of receivables to a discrete special purpose
financing subsidiary and pledging those receivables as collateral. Receivables
are generally transferred from the FIRC credit facility to the FIARC commercial
paper facility to refinance them on a longer term basis at interest rates based
on commercial paper rates and to provide additional borrowing capacity under the
FIRC credit facility. Borrowings under this commercial paper facility bear
interest at the commercial paper rate plus .25%. If the FIARC commercial paper
facility were terminated, no new receivables could be transferred from the FIRC
credit facility to Enterprise; however, the then outstanding receivables would
continue to be financed until fully amortized.
The following table summarizes borrowings under the FIARC commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1997 1998
---------- ----------
At period-end:
Balance outstanding............. $ 63,244 $ 87,203
Weighted average interest
rate(1)........................ 6.09% 6.17%
During period(2):
Maximum borrowings
outstanding.................... $ 71,387 $ 91,514
Weighted average balance
outstanding.................... 55,856 78,754
Weighted average interest
rate........................... 6.59% 6.57%
- ------------
(1) Based on interest rates, facility fees, surety bond fees and hedge
instruments applied to borrowings outstanding at period-end.
(2) Based on month-end balances.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 1998, the maximum
borrowings available
23
under the facility were $25 million. The Company's interest cost is based on
VFCC's commercial paper rates for specific maturities plus 0.55%. In addition,
the Company is required to pay periodic facility fees of 0.25% on the unused
portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
The initial term of the FIACC commercial paper facility expires December
21, 1998. If the facility was not extended, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1998, there were no
outstanding borrowings under this facility.
WORKING CAPITAL FACILITY. The Company also maintains a $6 million working
capital line of credit with NationsBank of Texas, N.A. that is utilized for
working capital and general corporate purposes. Borrowings under this facility
bear interest at the Company's option of (i) NationsBank's prime lending rate,
or (ii) a rate equal to 3.0% above the LIBOR rate for the applicable interest
period. In addition, the Company is also required to pay period facility fees,
as well as an annual agency fee. The initial expiration of the facility was July
1998. In July 1998, the facility was extended to September 30, 1998. If the
lender elected not to renew, any outstanding borrowings would be amortized over
a one-year period. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1998, there was $2.5 million
outstanding under this facility.
INTEREST RATE MANAGEMENT. The Company's operating revenues are derived
almost entirely from the collection of interest on the receivables that it
retains and its primary expense is the interest that it pays on borrowings
incurred to purchase and retain such receivables. The Company's capacity to
generate earnings is therefore largely a function of its ability to maintain a
sufficient net interest margin. Accordingly, significant increases in the
interest rates at which the Company borrows funds could promptly reduce the net
interest margin between portfolio yield and cost of funds and thereby adversely
affect the Company's results of operations. The Company endeavors to offset rate
fluctuation risk by using interest rate management products that convert all or
a substantial portion of its floating rate exposure to fixed rates. The Company
seeks to minimize its exposure to adverse interest rate movements by entering
into interest rate swap agreements with notional principal amounts which
approximate the balance of its debt outstanding under its warehouse and
commercial paper credit facilities. However, the Company will be exposed to
limited rate fluctuation risk to the extent it cannot perfectly match the timing
of net advances from its credit facilities and acquisitions of additional
interest rate swaps.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law which do
not generally vary with changes in interest rates. To manage the risk of
fluctuation in the interest rate environment, the Company enters into interest
rate swaps and caps to lock in what management believes to be an acceptable net
interest spread. During the years ended April 30, 1998, 1997 and 1996 amounts
paid pursuant to the Company's interest rate management products were not
material in relation to interest expense in the aggregate nor did they have a
material impact on the Company's weighted average costs of funds during such
periods.
The Company is currently a party to a swap agreement with NationsBank
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 6 to Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of the counter
party.
24
As a result, at April 30, 1998, the Company had converted a total of $120
million in floating rate debt to a fixed rate and had outstanding floating rate
debt of $10,813,078. The Company is currently evaluating additional interest
rate management products with a view to fixing or limiting its interest rate
exposure with respect to amounts that are substantially equivalent to its
aggregate outstanding borrowings under the FIRC credit facility and the
commercial paper facilities.
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 prudent credit evaluations and effective
collection procedures; and, to a lesser extent, requiring recourse to dealers
under its participating program for a period of time and thereafter maintaining
cash reserves in the event of losses or by purchasing 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):
APRIL 30,
------------------------------------------------
1997 1998
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Core Program:
Insured by third party
insurer....................... $ 2,293 $ -- $ 754 $ --
Other receivables(2)............ 109,391 1,182 (2) 134,153 1,199(2)
Participating Program................ 4,059 340 (3) 1,539 238(3)
----------- -----------
$ 115,743 $ 136,446
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 1.1 % 0.9%
Dealer reserves as a percentage of
participating program
receivables........................ 8.4 % 15.5%
- ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables financed under one of the Company's commercial paper conduit
facilities 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. Historically, the Company has
purchased credit enhancement insurance from third party insurers which covers
the risk of loss upon default and certain other risks. Until March 1994, such
insurance absorbed substantially all credit losses. In April 1994, the Company
established a captive insurance subsidiary to reinsure certain risks under the
credit enhancement insurance coverage for all receivables acquired in March 1994
and thereafter. In addition, receivables financed under the FIARC and FIACC
commercial paper facilities do not carry default insurance. Provisions for
credit losses of $2,520,253 and $3,900,966 have been recorded for the years
ended April 30, 1997 and 1998, respectively for losses on receivables which are
either uninsured or which are reinsured by the Company's captive insurance
subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that may become uncollectable. In making this estimate,
management analyzes portfolio characteristics in
25
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 establishing relationships only with
franchised dealers and securing each dealer's repurchase obligation with a
funded reserve account, the Company has incurred no losses under the
participating program.
The following table summarizes the status and collection experience of all
receivables acquired by the Company (dollars in thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
------------------------------------------------
1997 1998
---------------------- ----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- ---------- -------- ----------
Delinquent amount outstanding:
30 - 59 days....................... 181 $2,682 178 $2,371
60 - 89 days....................... 57 900 45 706
90 days or more.................... 107 1,683 131 1,987
-------- ---------- -------- ----------
Total delinquencies.................. 345 $5,265 354 $5,064
======== ========== ======== ==========
Total delinquencies as a percentage
of outstanding receivables......... 3.1% 3.2% 2.7% 2.7%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... -- 2.0% -- 3.2%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage of outstanding receivables are based on gross receivables
balances, which include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed under such policies. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
YEAR 2000 ISSUE
Like all other financial service providers, the Company utilizes systems
that may be affected by Year 2000 transition issues. The Company has reviewed
the Year 2000 issue and has identified three primary areas in which it could be
affected. First, the Company utilizes a software program in connection with its
loan origination and loan funding functions. The software vendor has indicated
to the Company that its software is Year 2000 compatible. Therefore, the Company
believes that it has no material exposure in this area. Second, the Company
utilizes a number of third party vendors, or computer software provided by these
vendors, which perform various administrative functions for
26
the Company including general ledger, payroll, cash management, stock transfer
services, and collateral or paying agency functions under the Company's
financing arrangements. With the exception of cash management services and the
collateral or paying agency functions, the vendors that supply material software
or services to the Company have indicated that its software or internal systems
are Year 2000 compatible. With respect to cash management providers and the
collateral or paying agents, the Company is unaware of any potential exposure
related to these institutions' internal systems. However, the Company intends to
analyze these areas further in fiscal year 1999 and monitor each institution's
progress in addressing any compliance issues. Third, the Company has outsourced
its loan servicing and collection functions to a third party, GECC (see Item 1.
Business -- Servicing). It is the Company's understanding that the systems and
software that GECC utilizes to process and account for loan collections on
behalf of the Company are not currently Year 2000 compliant. It is the Company's
belief, based on discussions with management of GECC, that GECC expects to
update its systems to be Year 2000 compliant in advance of December 31, 2000. To
the extent that GECC's system is not updated to address Year 2000 issues, it
could have a material adverse impact on the loan servicing and collection
activities related to the Company's portfolio of receivables. The Company
intends to continue to monitor the progress of this effort to insure that any
exposure issues are resolved.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in this Form
10-K are listed under Item 14(a). The Company is not required to file any
supplementary financial data under this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information responsive to this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders expected to be held September 3, 1998, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this item appears under the caption "Summary
Compensation Table" in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders expected to be held September 3, 1998, which is to be
filed with the Securities and Exchange Commission, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this item appears under the caption "Security
Ownership of Management and Certain Beneficial Owners" in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders expected to be held
September 3, 1998, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item appears under the caption "Certain
Transactions" in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders expected to be held September 3, 1998, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page F-1.
(3) EXHIBITS
3.1(a) -- Articles of Incorporation, as amended
3.2(a) -- Bylaws, as amended
4.1(a) -- Excerpts from the Articles of Incorporation, as amended (included in
Exhibit 3.1).
4.3(a) -- Specimen Stock Certificate
10.5(a) -- Credit Agreement dated as of October 16, 1992 among F.I.R.C., Inc. ("FIRC") and
NationsBank of Texas, N.A., individually and as agent for the banks party thereto, as
amended by First Amendment to Credit Agreement and Loan Documents dated as of November 5,
1993, Second Amendment to Credit Agreement and Loan Documents dated as of March 3, 1994,
Third Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995 and
Fourth Amendment to Credit Agreement and Loan Documents dated as of July 7, 1995.
10.6(a) -- Collateral Security Agreement dated as of October 16, 1992 between FIRC and Texas Commerce
Bank National Association as collateral agent for the ratable benefit of NationsBank of
Texas, N.A., as agent, and the banks party to the Credit Agreement filed as Exhibit 10.5.
28
10.7(a) -- Escrow Agreement dated as of October 16, 1992 among FIRC, NationsBank of Texas, N.A. as
agent for the banks party to the Credit Agreement filed as Exhibit 10.5, and Texas
Commerce Bank National Association as Escrow Agent.
10.8(a) -- Transfer and Administration Agreement dated as of March 3, 1994 among FIRC, Enterprise
Funding Corporation, Texas Commerce Bank National Association and NationsBank N.A.
(Carolinas) (formerly NationsBank of North Carolina, N.A.), as amended by Amendment Number
1 dated August 1, 1994, Amendment Number 2 dated February 28, 1995 and Amendment No. 3
dated March 21, 1995.
10.9(a) -- Servicing Agreement dated as of October 16, 1992 between FIRC and General Electric Capital
Corporation, as amended by First Amendment to Servicing Agreement dated as of November 4,
1993, Second Amendment to Servicing Agreement dated as of March 1, 1994 and Third
Amendment to Servicing Agreement dated as of June 1, 1995.
10.10(a) -- Purchase Agreement between FIRC and First Investors Financial Services, Inc. ("First
Investors") dated October 16, 1992, as amended by First Amendment to Purchase Agreement
dated as of November 5, 1993 and Second Amendment to Purchase Agreement dated as of March
3, 1994.
10.11(a) -- Auto Loan Protection Insurance Policy dated October 13, 1992 issued by Agricultural Excess
& Surplus Insurance Company to FIRC as insured.
10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994 issued by National Union Fire
Insurance Company of Pittsburgh to FIRC as insured.
10.13(a) -- Facultative Reinsurance Agreement between National Fire Insurance Company of Pittsburgh
and First Investors Insurance Company, as reinsurer, dated as of May 26, 1995.
10.14(a) -- Blanket Collateral Protection Insurance Policy dated October 5, 1992 issued by
Agricultural Excess & Surplus Insurance Company to FIRC as insured.
10.15(a) -- ISDA Master Agreement dated August 12, 1994 between FIRC and NationsBank of Texas, N.A.
together with Confirmation of U.S. Dollar Rate Swap Transaction dated June 14, 1995 and
Confirmation for U.S. Dollar Rate Swap Transaction dated May 16, 1995.
10.16(a) -- Employment Agreement dated as of March 20, 1992 between the Registrant and Tommy A. Moore,
Jr., as amended by First Amendment dated as of March 15, 1995 and Second Amendment dated
as of July 1, 1995.
10.17(a) -- Lease Agreement between A.I.G. Realty, Inc. and First Investors dated as of June 1, 1992,
as amended by Amendment One dated October 29, 1993 and Amendment Two dated October 26,
1994.
10.18(a) -- Redemption Agreement dated as of June 8, 1995 among the Registrant and all holders of its
class of 1993 Preferred Stock.
10.21(a) -- 1995 Employee Stock Option Plan of the Registrant.
10.22(a) -- Form of Stock Option Agreement between the Registrant and Robert L. Clarke dated August
25, 1995.
10.23(b) -- Amendment No. 4 dated November 20, 1995 to the Transfer and Administration Agreement dated
as of March 3, 1994, filed as Exhibit 10.8.
10.24(b) -- Employment Agreement dated as of May 1, 1996 between the Registrant and Bennie H. Duck.
10.25(b) -- Amendment Three dated October 10, 1995 to the Lease Agreement between A.I.G. Realty, Inc.
and the Registrant, filed as Exhibit 10.17.
10.26(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated November 16, 1995.
10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise Funding Corporation and FIRC,
Inc.
10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated August 7, 1996.
10.29(d) -- Security Agreement dated as of October 22, 1996 among First Investors Auto Receivables
Corporation, Enterprise Funding Corporation, Texas Commerce Bank National Association,
MBIA Insurance Corporation, NationsBank N.A., and First Investors Financial Services, Inc.
29
10.30(d) -- Note Purchase Agreement dated as of October 22, 1996 between First Investors Auto
Receivables Corporation and Enterprise Funding Corporation.
10.31(d) -- Purchase Agreement dated as of October 22, 1996 between First Investors Financial
Services, Inc. and First Investors Auto Receivables Corporation.
10.32(d) -- Insurance Agreement dated as of October 1, 1996 among First Investors Auto Receivables
Corporation, MBIA Insurance Corporation, First Investors Financial Services, Inc., Texas
Commerce Bank National Association, and NationsBank N.A.
10.33(d) -- Servicing Agreement dated as of October 22, 1996 between First Investors Auto Receivables
Corporation and General Electric Capital Corporation.
10.34(d) -- Amended and Restated Credit Agreement dated as of October 30, 1996 among F.I.R.C., Inc.
and NationsBank of Texas, N.A., individually and as Agent for the financial institutions
party thereto.
10.35(d) -- Amended and Restated Collateral Security Agreement dated as of October 30, 1996 between
F.I.R.C., Inc. and Texas Commerce Bank National Association as collateral agent for the
ratable benefit of NationsBank of Texas, N.A. individually and as agent for the financial
institutions party to the Amended and Restated Credit Agreement filed as Exhibit 10.34.
10.36(d) -- Amended and Restated Purchase Agreement dated as of October 30, 1996 between First
Investors Financial Services, Inc. and F.I.R.C., Inc.
10.37(d) -- Amended and Restated Servicing Agreement between F.I.R.C., Inc. and General Electric
Capital Corporation.
10.38(e) -- Third Amendment dated January 20, 1997 to the Employment Agreement dated as of March 20,
1992 between the Registrant and Tommy A. Moore, Jr.
10.39(f) -- First Amendment to the Amended and Restated Credit Agreement dated January 31, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.40(f) -- Second Amendment to the Amended and Restated Credit Agreement dated May 15, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.41(f) -- Employment Agreement dated July 16, 1997 between First Investors Financial Services, Inc.
and Tommy A. Moore, Jr.
10.42(f) -- Credit Agreement dated as of July 18, 1997 between First Investors Financial Services,
Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party
thereto.
10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997 by and among First Investors
(Vermont) Holdings, Inc. and NationsBank of Texas, N.A., as agent for the banks party
thereto.
10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among First Investors Financial
Services, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto.
10.45(g) -- Security Agreement dated as of January 1, 1998 among First Investors Auto Capital
Corporation, First Union Capital Markets Corp., and First Investors Financial Services,
Inc.
10.46(g) -- Note Purchase Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation, First Union Capital Markets Corp., the Investors, First Union National Bank,
and Variable Funding Capital Corporation.
10.47(g) -- Purchase Agreement dated as of January 1, 1998 between First Investors Financial Services,
Inc. and First Investors Auto Capital Corporation.
10.48(g) -- Servicing Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation and General Electric Capital Corporation.
10.49 -- Employment Agreement dated as of May 1, 1998 between the Registrant and Bennie H. Duck.
10.50 -- Employment Agreement dated as of May 1, 1998 between the Registrant and Joseph A. Pisano.
30
21.1(a) -- Subsidiaries of the Registrant.
------------
(a) -- Exhibit previously filed with the Company's Registration Statement on Form S-1,
Registration No. 33-94336 and incorporated herein by reference.
(b) -- Exhibit previously filed on 1996 Form 10-K and incorporated herein by reference.
(c) -- Exhibit previously filed on July 31, 1996 First Quarter Form 10-Q and incorporated
herein by reference.
(d) -- Exhibit previously filed on October 31, 1996 Second Quarter Form 10-Q and incorporated
herein by reference.
(e) -- Exhibit previously filed on January 31, 1997 Third Quarter Form 10-Q and incorporated
herein by reference.
(f) -- Exhibit previously filed on July 31, 1997 First Quarter Form 10-Q and incorporated
herein by reference.
(g) -- Exhibit previously filed on January 31, 1998 Third Quarter Form 10-Q and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
None.
31
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: July 20, 1998 By: /s/Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of First
Investors Financial Services Group, Inc. and in the capacities and on the date
indicated.
SIGNATURE TITLE
--------- -----
/s/Fentress Bracewell Chairman of the Board, Director
FENTRESS BRACEWELL
/s/Tommy A. Moore, Jr. President and Chief Executive Officer, Director
TOMMY A. MOORE, JR. (Principal Executive Officer)
/s/Bennie H. Duck Vice President and Chief Financial Officer
BENNIE H. DUCK (Principal Financial and Accounting Officer)
/s/Bradley F. Bracewell Director
BRADLEY F. BRACEWELL
/s/Robert L. Clarke Director
ROBERT L. CLARKE
/s/Roberto Marchesini Director
ROBERTO MARCHESINI
/s/J. W. Smelley Director
J. W. SMELLEY
/s/Walter A. Stockard Director
WALTER A. STOCKARD
/s/Walter A. Stockard, Jr. Director
WALTER A. STOCKARD, JR.
Date: July 20, 1998
32
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets as of
April 30, 1997 and 1998............ F-3
Consolidated Statements of Operations
for the Years Ended April 30, 1996,
1997 and 1998...................... F-4
Consolidated Statements of
Shareholders' Equity for the Years
Ended April 30, 1996,
1997 and 1998...................... F-5
Consolidated Statements of Cash Flows
for the Years Ended April 30, 1996,
1997 and 1998...................... F-6
Notes to Consolidated Financial
Statements......................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:
We have audited the accompanying consolidated balance sheets of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 1997 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 12, 1998
F-2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1997 AND 1998
1997 1998
---------------- ----------------
ASSETS
------
Receivables Held for Investment,
net................................ $ 118,299,063 $ 139,598,675
Cash and Short-Term Investments,
including restricted cash of
$3,550,391 and $3,215,540.......... 5,967,358 3,698,121
Other Receivables:
Due from servicer............... 8,427,565 10,229,975
Accrued interest................ 1,923,360 2,057,346
Assets Held for Sale................. 1,072,463 1,219,885
Other Assets:
Funds held under reinsurance
agreement..................... 2,563,454 2,016,682
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $553,143 and $846,250...... 1,101,947 1,638,947
Deferred income tax asset,
net........................... 387,876 298,235
Federal income tax receivable... -- 495,280
---------------- ----------------
Total assets............... $ 139,743,086 $ 161,253,146
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 112,894,131 $ 130,813,078
Unsecured credit facilities..... -- 2,500,000
Other Liabilities:
Due to dealers.................. 342,697 241,988
Accounts payable and accrued
liabilities................... 2,460,685 2,317,840
Current income taxes payable.... 109,472 219,770
---------------- ----------------
Total liabilities.......... 115,806,985 136,092,676
---------------- ----------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares
authorized, 5,566,669 and
5,566,669 issued
and outstanding............... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 5,465,616 6,689,985
---------------- ----------------
Total shareholders'
equity.................. 23,936,101 25,160,470
---------------- ----------------
Total liabilities and
shareholders' equity.... $ 139,743,086 $ 161,253,146
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
1996 1997 1998
-------------- -------------- --------------
Interest Income...................... $ 14,143,871 $ 18,151,669 $ 20,049,129
Interest Expense..................... 5,245,356 6,706,341 7,833,677
-------------- -------------- --------------
Net interest income........ 8,898,515 11,445,328 12,215,452
Provision for Credit Losses.......... 704,000 2,520,253 3,900,966
-------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 8,194,515 8,925,075 8,314,486
-------------- -------------- --------------
Other Income:
Late fees and other............. 586,792 693,807 617,140
-------------- -------------- --------------
Operating Expenses:
Servicing fees.................. 1,125,520 1,536,225 1,838,002
Salaries and benefits........... 1,899,970 2,350,986 2,639,080
Other........................... 2,002,113 2,356,316 2,526,404
-------------- -------------- --------------
Total operating expenses... 5,027,603 6,243,527 7,003,486
-------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 3,753,704 3,375,355 1,928,140
-------------- -------------- --------------
Provision (Benefit) for Income Taxes:
Current......................... 1,018,459 1,745,352 614,130
Deferred........................ 276,665 (513,348) 89,641
-------------- -------------- --------------
Total provision for income
taxes................... 1,295,124 1,232,004 703,771
-------------- -------------- --------------
Net Income........................... $ 2,458,580 $ 2,143,351 $ 1,224,369
-------------- -------------- --------------
Preferred Stock Dividends............ (50,033) -- --
-------------- -------------- --------------
Net Income Allocable to Common
Shareholders before Redemption of
Preferred Stock.................... 2,408,547 2,143,351 1,224,369
Premium Paid Upon Redemption of
Preferred Stock.................... (160,000) -- --
-------------- -------------- --------------
Net Income Allocable to Common
Shareholders after Redemption of
Preferred Stock.................... $ 2,248,547 $ 2,143,351 $ 1,224,369
============== ============== ==============
Basic and Diluted Net Income Per
Common Share before Redemption of
Preferred Stock.................... $0.51 $0.39 $0.22
============== ============== ==============
Basic and Diluted Net Income Per
Common Share after Redemption of
Preferred Stock.................... $0.47 $0.39 $0.22
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
1993 ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ----------- ------------- --------------
Balance, April 30, 1995.............. $800,000 $3,667 $ -- $ 1,073,718 $ 1,877,385
Issuance of 1,900,000 common
shares, net of issuance
costs......................... -- 1,900 18,464,918 -- 18,466,818
Redemption of preferred stock... (800,000) -- -- (160,000) (960,000)
Preferred stock dividends....... -- -- -- (50,033) (50,033)
Net income...................... -- -- -- 2,458,580 2,458,580
---------- ------- ----------- ------------- --------------
Balance, April 30, 1996.............. -- 5,567 18,464,918 3,322,265 21,792,750
Net income...................... -- -- -- 2,143,351 2,143,351
---------- ------- ----------- ------------- --------------
Balance, April 30, 1997.............. -- 5,567 18,464,918 5,465,616 23,936,101
Net income...................... -- -- -- 1,224,369 1,224,369
---------- ------- ----------- ------------- --------------
Balance, April 30, 1998.............. $ -- $5,567 $18,464,918 $ 6,689,985 $ 25,160,470
========== ======= =========== ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1996, 1997 AND 1998
1996 1997 1998
-------------- ---------------- ----------------
Cash Flows From Operating Activities:
Net income...................... $ 2,458,580 $ 2,143,351 $ 1,224,369
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense.... 1,144,981 1,816,195 2,369,672
Provision for credit
losses.................. 704,000 2,520,253 3,900,966
Charge-offs, net of
recoveries.............. (603,873) (1,968,383) (3,884,418)
(Increase) decrease in:
Accrued interest
receivable.............. (892,199) (309,407) (133,986)
Restricted cash............ 11,372 (502,243) 334,851
Deferred financing costs
and other............... (278,988) (436,350) (664,036)
Funds held under
reinsurance agreement... (1,385,598) 267,235 546,772
Due from servicer.......... (1,923,305) (3,161,034) (1,802,410)
Deferred income tax asset,
net..................... 231,420 (387,876) 89,641
Federal income tax
receivable.............. (295,523) 295,523 (495,280)
Increase (decrease) in:
Due to dealers............. (472,876) (463,937) (100,709)
Accounts payable and
accrued liabilities..... 539,452 767,743 (142,845)
Due to shareholders........ (46,667) -- --
Current income taxes
payable................. (419,896) (83,962) 110,298
Deferred income tax
liability, net.......... 125,472 (125,472) --
-------------- ---------------- ----------------
Net cash provided by (used in)
operating activities....... (1,103,648) 371,636 1,352,885
-------------- ---------------- ----------------
Cash Flows From Investing Activities:
Purchases of receivables........ (68,738,319) (68,854,056) (77,965,915)
Principal payments from
receivables................... 33,171,742 45,535,622 54,397,892
Purchase of furniture and
equipment..................... (87,832) (82,999) (138,195)
-------------- ---------------- ----------------
Net cash used in investing
activities.............. (35,654,409) (23,401,433) (23,706,218)
-------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 58,365,425 61,419,920 68,478,349
Unsecured debt............. -- -- 2,500,000
Principal payments made on --
Secured debt............... (31,980,322) (39,574,425) (50,559,402)
Unsecured debt............. (5,000,000) -- --
Proceeds from issuance of common
stock, net of issuance
costs......................... 18,466,818 -- --
Redemption of preferred stock... (960,000) -- --
Preferred stock dividends
paid.......................... (50,033) -- --
-------------- ---------------- ----------------
Net cash provided by
financing activities.... 38,841,888 21,845,495 20,418,947
-------------- ---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. 2,083,831 (1,184,302) (1,934,386)
Cash and Short-Term Investments at
Beginning of Year.................. 1,517,438 3,601,269 2,416,967
-------------- ---------------- ----------------
Cash and Short-Term Investments at
End of Year........................ $ 3,601,269 $ 2,416,967 $ 482,581
============== ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for --
Interest................... $ 5,153,027 $ 6,294,815 $ 7,748,529
Income taxes............... 1,654,100 1,533,791 999,112
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996, 1997 AND 1998
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) was established to serve as a holding company for First Investors
Financial Services, Inc. (FIFS) and FIFS's wholly owned subsidiaries, First
Investors Insurance Company (FIIC), First Investors Auto Receivables Corporation
(FIARC), F.I.R.C., Inc. (FIRC), and First Investors Auto Capital Corporation
(FIACC). First Investors, together with its subsidiaries, is hereinafter
referred to as the Company.
FIFS began operations in May 1989 and is principally involved in the
business of acquiring and holding for investment retail installment contracts
secured by new and used automobiles and light trucks (receivables) originated by
factory authorized franchised dealers. As of April 30, 1998, approximately 43
percent of receivables held for investment had been originated in Texas. The
Company currently operates in 19 states.
FIIC was organized under the captive insurance company laws of the state of
Vermont for the purpose of reinsuring certain credit enhancement insurance
policies which have been written by unrelated third party insurance companies.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of First Investors and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECEIVABLES HELD FOR INVESTMENT. The Company acquires receivables from
dealers under two primary programs, one involving recourse to the dealer and the
other a non-recourse program (see Note 3). The basis in the receivables includes
the costs to acquire the receivables from the dealer, plus any fees paid related
to the purchase of the receivables.
Receivables are generally acquired from dealers at a premium or discount
from the principal amounts financed by the borrower. This premium or discount is
negotiated by the Company and the dealers. Included in the carrying amount of
receivables is the insurance premium paid to third-party insurers, net of any
premiums ceded to FIIC for reinsurance. The Company amortizes the difference
between the principal balance of the receivables and its carrying amount over
the expected remaining life of the receivables using the interest method.
INCOME RECOGNITION. The Company accrues interest income monthly based upon
contractual terms using the effective interest method. Interest income also
includes additional amounts received upon early payoffs of certain receivables
attributable to the difference between the principal balance of the receivables
calculated using the Rule of 78's method and the principal balance of the
receivables calculated using the effective interest method. If a dealer
participates in the receivable, the Company recognizes interest income net of
the dealer participation. When a receivable becomes two months past due, income
accrual is suspended until the payments become current. Other income relates
primarily to late charge fees and is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES. For receivables financed under the FIRC
credit facility, the Company purchases credit enhancement insurance from
third-party insurers which covers the risk of loss upon default and certain
other risks. Until March 1994, such insurance and dealer reserves
F-7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
absorbed substantially all credit losses. In April 1994, the Company established
a captive insurance subsidiary to reinsure the credit enhancement insurance
coverage. The credit enhancement insurance coverage for all receivables acquired
in March 1994 and thereafter has been reinsured by FIIC. Beginning in October
1996 all receivables recorded by the Company were covered by credit enhancement
insurance while pledged as collateral for the FIRC credit facility. Once
receivables are transferred to the FIARC commercial paper facility, credit
enhancement insurance is cancelled. In addition, no default insurance is
purchased for core receivables originated and financed under the FIACC
commercial paper facility. Accordingly, the Company is exposed to credit losses
for all receivables either reinsured by FIIC or uninsured and provides an
allowance for such losses.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. In making this estimate, management
segregates the receivables acquired under its "core program" from receivables
acquired under its "participating program" (see Note 3). For receivables
acquired under the participating program, the Company recovers actual losses
from direct dealer reimbursements and from dealer reserves. Management analyzes
the core program receivable portfolio characteristics as compared to its
underwriting criteria, delinquency and repossession statistics, historical loss
experience, size, quality and concentration characteristics of the receivable
portfolio, as well as external factors such as future economic outlooks.
Most of the automobile purchasers in the sub-prime market segment are
hourly wage-earners with little or no personal savings. In most cases such
purchasers' ability to remit payments as required by the terms of the
receivables is entirely dependent on their continued employment and stability of
household and medical expenses. Job losses or events which cause a significant
increase in household or medical expenses could result in defaults on their
consumer debts. A prolonged economic recession resulting in widespread
unemployment in this wage-earning sector could cause a significant rise in
delinquencies and charge-offs, which would adversely affect the Company.
Although the Company considers its allowance to be adequate, there can be no
assurance that it would suffice in the event of a sustained period of economic
distress. The allowance for credit losses is based on estimates and qualitative
evaluations, and ultimate losses will vary from current estimates. These
estimates are reviewed periodically and, as adjustments, either positive or
negative, become necessary, they are reported in earnings in the period they
become known.
SERVICING AGREEMENT. The Company has entered into a servicing agreement
with General Electric Capital Corporation (GECC) which terminates on October 31,
2000, subject to earlier termination depending on the outcome of annual pricing
renegotiations. In the event the GECC agreement were to terminate, GECC would
remain obligated to continue to service existing receivables through their
maturities. Under this agreement, GECC is responsible for (i) receipt, review
and verification of all collateral and documentation requirements, (ii)
establishment and administration of payment and collection schedules and (iii)
repossession and disposition of vehicles securing defaulted receivables.
Servicing fees are paid to GECC monthly based on the number of receivables being
serviced during the period, and GECC is entitled to reimbursement for certain
expenses relating primarily to liquidation of collateral. Due from servicer
primarily represents unremitted principal and interest payments and proceeds
from sale of repossessed collateral.
FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial
assurance for the third party insurance company it reinsures by maintaining
premiums ceded to it in a restricted trust account for the benefit of the third
party insurance company. The reinsurance agreement provides, among other things,
that the funds held can be withdrawn by the third party insurance company due to
an insolvency of the Company or to reimburse the third party insurance company
for the Company's share of losses paid by the third party insurance company
pursuant to the reinsurance agreement.
F-8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS HELD FOR SALE. GECC commences repossession procedures against the
underlying collateral when it and the Company determine that collection efforts
are likely to be unsuccessful. Upon repossession, the receivable is written down
to the estimated fair value of the collateral, less the cost of disposition and
plus the expected recoveries from third-party insurers, through a charge to the
allowance for credit losses. Additionally, the repossessed collateral is
reclassified to assets held for sale.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the FIRC credit facility over an 18 month period which
represents the committed term of such facility. Additionally, the Company
amortizes the costs related to the respective commercial paper facilities over
the estimated average life of the receivables financed as the provisions of such
facility provide that receivables assigned to such facility would be allowed to
amortize should the facilities not be extended.
OTHER OPERATING EXPENSES. Other operating expenses include primarily
professional fees, interest expense on the Company's unsecured working capital
line of credit, service bureau fees, telephone, postage, and rent.
INCOME TAXES. The Company follows Statement of Financial Accounting
Standards (SFAS) No. 109, which prescribes that deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the enactment
date.
INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest
rate swap and cap agreements to manage the exposure of floating interest rates
under the terms of its credit facilities (see Note 6). The Company endeavors to
maintain the effectiveness of the interest rate swap or cap agreements by
selecting products with dollar denominated notional principal amounts, LIBOR
rate indices and interest reset periods similar to its credit facilities. The
differentials paid or received on interest rate agreements are accrued and
recognized currently as adjustments to interest expense. Premiums paid or
received on these agreements, if any, are amortized to interest expense over the
term of the related agreement. Gains and lossses on early terminations of
interest rate swap and cap agreements are included in the carrying amount of the
related debt and amortized as yield adjustments over the estimated remaining
term of the swap.
ACCOUNTING POLICY FOR EMPLOYEE STOCK OPTIONS. In October 1995, the
Financial Accounting Standards Board issued SFAS No. 123, a standard on
accounting for stock based compensation. SFAS No. 123 encourages companies to
account for stock based compensation awards based on the fair value of the
awards at the date they are granted. The resulting compensation cost would be
shown as an expense in the statement of operations. Companies can choose not to
apply the new accounting method and continue to apply current accounting
requirements; however, disclosure is required as to what net income and earnings
per share would have been had the new accounting method been followed. The
Company accounts for its stock-based compensation under Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." Under
this accounting method, no compensation expense is recognized in the
consolidated statements of operations if no intrinsic value of the option exists
at the date of grant. While the Company has not adopted SFAS No. 123 for
accounting purposes; it has made annual pro forma disclosures of its effects
(see Note 11).
ACCOUNTING POLICY FOR DERIVATIVES. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (SFAS) No.
133, "Accounting for Derivative
F-9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. The Company
anticipates adopting SFAS No. 133 effective for its fiscal year beginning May 1,
2000. Management has not yet quantified the impact of adopting SFAS No. 133 on
the consolidated financial statements. However, the Statement could increase
volatility in earnings.
ACCOUNTING POLICY FOR INTERNAL USE SOFTWARE COSTS. In March 1998, the
American Institute of Certified Public Accountants issued Statement of Position
(SOP) 98-1, "Accounting For The Costs Of Computer Software Developed Or
Obtained For Internal Use". This SOP specifies certain costs of computer
software developed or obtained for internal use that should be capitalized. The
Company capitalizes external direct costs of materials and services consumed in
developing internal-use computer software and payroll costs for employees who
devote time to developing internal-use computer software, in accordance with SOP
98-1.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders after preferred dividends, if any, and
in the case of the year ended April 30, 1996, the premium paid to the holders of
the 1993 preferred stock upon its redemption, divided by the weighted average
number of shares of common stock outstanding, adjusted for a 3-for-1 stock split
(see Note 11 and Note 13).
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". The Company adopted SFAS No. 128 in fiscal 1998 and
the impact was immaterial to the Company's calculation of earnings per share.
FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciable assets are amortized using the
straight-line method over the estimated useful lives (two to five years) of the
respective assets.
CASH AND SHORT-TERM INVESTMENTS. The Company considers all investments
with a maturity of three months or less when purchased to be short-term
investments and treated as cash equivalents.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1996
and 1997 amounts to conform with the 1998 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
The receivables generally have terms of 36 to 60 months and are
collateralized by the underlying vehicles. Net receivable balances consisted of
the following at April 30, 1997 and 1998:
1997 1998
---------------- ----------------
Receivables.......................... $ 115,742,904 $ 136,445,808
Unamortized premium and deferred
fees................................. 3,738,156 4,351,412
Allowance for credit losses.......... (1,181,997) (1,198,545)
---------------- ----------------
Net receivables................. $ 118,299,063 $ 139,598,675
================ ================
F-10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At April 30, 1998, the weighted average remaining term of the receivable
portfolio is 44 months and the weighted average contractual interest rate is
17.7 percent. Principal payments expected to be received on the receivable
portfolio, assuming no defaults and that payments are received in accordance
with contractual terms, are summarized in the following table. Receivables may
pay off prior to contractual due dates, primarily due to defaults and early
payoffs.
Year ending April 30-
1999....................... $ 35,172,279
2000....................... 36,565,321
2001....................... 33,121,207
2002....................... 22,902,634
2003....................... 8,684,367
----------------
$ 136,445,808
================
CORE PROGRAM. Under the core program, the Company has nonexclusive
agreements with dealerships which may be terminated at any time by either party.
These agreements, which contain customary representations and warranties
concerning title to the receivables sold, validity of the liens on the
underlying vehicles and compliance with applicable laws and other matters, do
not guarantee collectability solely because of payment default. At April 30,
1997 and 1998, the Company had investments in receivables pursuant to the core
program with aggregate principal balances of $111,683,932 and $134,907,079,
respectively.
Activity in the allowance for credit losses for the years ended April 30,
1997 and 1998, was as follows:
1997 1998
-------------- --------------
Balance, beginning of year........... $ 630,127 $ 1,181,997
Provision for credit losses.......... 2,520,253 3,900,966
Charge-offs, net of recoveries....... (1,968,383) (3,884,418)
-------------- --------------
Balance, end of year................. $ 1,181,997 $ 1,198,545
============== ==============
PARTICIPATING PROGRAM. The Company instituted a dealer recourse program in
November 1992, whereby the participating dealers are obligated for an agreed
period of time, usually from 12 to 18 months, to reimburse the Company for
losses upon the occurrence of default by the borrower. The Company was
reimbursed by participating dealers for $54,568, $14,631 and $7,384 of losses
incurred during the three years ended April 30, 1998, respectively. At April 30,
1997 and 1998, the Company had investments in receivables pursuant to the dealer
recourse program with aggregate principal balances of $4,058,972 and $1,538,729,
respectively. A specified portion of the purchase price, generally from 5
percent to 7 percent, is set aside in a reserve account to secure performance of
the dealer's obligations. In exchange for such obligation, the dealers are
entitled to the excess cash flows above a specified yield guaranteed to the
Company. During the three years ended April 30, 1998, excess interest of
$211,507, $73,669 and $6,536, respectively, were remitted to the dealers
pursuant to this program. Pursuant to the various receivables purchase
agreements, the dealers (either automatically or, in some cases, at their
election) are released from the repurchase obligation after a specified period
has elapsed and certain conditions are met. Losses are then covered by funds
maintained in the dealer reserve accounts. Any funds remaining in the reserve
account upon payoff of all receivables in a pool are remitted to the dealer.
Such funds have been reported in the accompanying consolidated balance sheets as
restricted cash (see Note 4) and due to dealers. The Company believes the
dealers subject to the recourse provisions have the intent and ability to honor
such
F-11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions, and the amount of the dealer reserve held in trust when the dealers
are released from the recourse obligation are adequate to cover possible credit
losses on receivables acquired pursuant to the participating program.
Accordingly, the Company has determined that an allowance for credit losses is
not necessary on the receivables subject to the dealer participating program.
The following table summarizes activity in the dealer reserves for the
years ended April 30, 1997 and 1998:
1997 1998
------------- -------------
Balance, beginning of year........... $ 765,504 $ 339,602
Additions............................ 18,220 16,101
Charges to dealer reserve account.... (441,740) (117,703)
Amounts remitted to dealers.......... (2,382) --
------------- -------------
Balance, end of year................. $ 339,602 $ 238,000
============= =============
4. RESTRICTED CASH
The components of restricted cash at April 30, 1997 and 1998, are as
follows:
1997 1998
------------- -------------
Dealer reserves (Note 3)............. $ 339,602 $ 238,000
Commercial paper facility
compensating balance
(Note 6)........................... 882,568 1,145,912
Funds held in trust for receivable
fundings........................... 1,718,358 1,322,427
Warehouse credit facility account
(Note 6)........................... 351,522 251,511
Other................................ 258,341 257,690
------------- -------------
Total restricted cash........... $ 3,550,391 $ 3,215,540
============= =============
5. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets at April 30,
1997 and 1998, are as follows:
1997 1998
------------- -------------
Deferred financing costs, net........ $ 374,384 $ 642,044
Furniture and equipment, net......... 141,125 206,380
Other, net........................... 586,438 790,523
------------- -------------
Total........................... $ 1,101,947 $ 1,638,947
============= =============
6. DEBT
The Company finances the acquisition of its receivables portfolio through
three credit facilities. The Company's credit facilities provide for one year
terms and have been renewed annually. Management of the Company believes that
the credit facilities will continue to be renewed or extended or that it would
be able to secure alternate financing on satisfactory terms; however, there can
be no assurance that it will be able to do so. Substantially all receivables
retained by the Company are pledged as collateral for the credit facilities.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been primarily provided through a syndicated warehouse
credit facility agented by NationsBank of Texas, N.A. (NationsBank). The FIRC
credit facility was entered into in October 1992 and provided for maximum
borrowings of the lesser of the borrowing base or $25 million and is structured
to permit
F-12
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
additional increases in the maximum borrowings allowable through further
syndication as the needs of the Company require. The borrowing base is defined
as the sum of the principal balance of the receivables pledged and the amount on
deposit in an escrow account. The Company is required to maintain a reserve
account equal to the greater of one percent of the principal amount of
receivables financed or $250,000. At April 30, 1995 the FIRC credit facility had
been expanded to provide for borrowings of the lesser of the borrowing base or
$45 million through a $20 million participation by The Sumitomo Bank, Limited.
During fiscal year 1996, the FIRC credit facility was increased to $55 million
through a $10 million participation by Wells Fargo Bank (Texas). Borrowings
under the FIRC credit facility bear interest at a rate selected by the Company
at the time of the advance of either the base rate, defined as the higher of the
prime rate or the federal funds rate plus .5 percent, the LIBOR rate plus .5
percent, or a rate agreed to by the Company and the banks. The facility also
provides for the payment of a fee of .25 percent per annum based on the total
committed amount.
Borrowings under the FIRC credit facility were $49,650,000 and $43,610,000
at April 30, 1997 and 1998, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.31 percent and 6.35 percent as of such dates. The FIRC credit
facility provides for a term of one year at which time the outstanding principal
balance will be payable in full, although there are provisions allowing the
Company a period of six months to refinance the facility in the event that it is
not renewed. The current term of the FIRC credit facility expires on October 15,
1998. The Company presently intends to seek an extension of this arrangement
prior to its expiration.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility through
Enterprise Funding Corporation (Enterprise), a commercial paper conduit
administered by NationsBank, N.A. On June 24, 1996, the FIARC commercial paper
facility was increased from $50 million to $75 million. Receivables are
transferred periodically from the FIRC credit facility to Enterprise through the
assignment of an undivided interest in a specified group of receivables.
Enterprise issues commercial paper (indirectly secured by the receivables), the
proceeds of which are used to repay the FIRC credit facility.
On October 22, 1996, an existing $75 million commercial paper conduit
facility, which was provided by Enterprise to another special-purpose,
wholly-owned subsidiary of the Company, FIRC, was terminated and the Company
completed a $105 million commercial paper conduit financing through Enterprise.
The financing was provided to a special-purpose, wholly-owned subsidiary of the
Company, FIARC. Credit enhancement for the $105 million facility is provided to
the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Borrowings under the commercial paper facility bear interest at the
commercial paper rate plus a borrowing spread equal to .25 percent per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to .35 percent per annum is
assessed based on the outstanding borrowings under the facility. A one percent
cash reserve must be maintained as additional credit support for the facility.
The commercial paper facility was provided for a term of one year 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 FIRC credit facility. At April 30,
1997 and 1998, the Company had borrowings of $63,244,131 and $87,203,078,
respectively, outstanding under the commercial paper facility at weighted
average interest rates, including the effect of program fees, dealer fees and
hedge instruments, as applicable, of 6.09 percent and 6.17 percent,
respectively. The Company presently intends to seek an extension of this
arrangement prior to its expiration.
F-13
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquired receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 1998, the maximum
borrowings available under the facility were $25 million. The Company's interest
cost is based on VFCC's commercial paper rates for specific maturities plus .55
percent. In addition, the Company is required to pay periodic facility fees of
.25 percent on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88 percent advance rate and to pay carrying costs and
related expenses, with the balance released to the Company. In addition to the
88 percent advance rate, FIACC must maintain a 2 percent cash reserve as
additional credit support for the facility.
The initial term of the FIACC commercial paper facility expires December
21, 1998. If the facility was not extended, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1998, there were no
outstanding borrowings under this facility.
WORKING CAPITAL FACILITY. The Company also maintains a $6 million working
capital line of credit with NationsBank of Texas, N.A. that is utilized for
working capital and general corporate purposes. Borrowings under this facility
bear interest at the Company's option of (i) NationsBank's prime lending rate,
or (ii) a rate equal to 3.0 percent above the LIBOR rate for the applicable
interest period. In addition, the Company is also required to pay period
facility fees, as well as an annual agency fee. The facility expires in July
1998. If the lender elected not to renew, any outstanding borrowings would be
amortized over a one-year period. In July 1998, the expiration date of the
facility was extended to September 30, 1998. The Company presently intends to
seek an extension of this arrangement prior to its expiration. At April 30,
1998, there was $2.5 million outstanding under this facility.
LOAN COVENANTS. The documentation governing these credit facilities
contains numerous covenants relating to the Company's business, the maintenance
of credit enhancement insurance covering the receivables (if applicable), the
observance of certain financial covenants, the avoidance of certain levels of
delinquency experience and other matters. The breach of these covenants, if not
cured within the time limits specified, could precipitate events of default that
might result in the acceleration of the FIRC credit facility and the working
capital facility or the termination of the commercial paper facilities.
Management of the Company believes it was in compliance with all covenants at
April 30, 1998.
HEDGE INSTRUMENTS. The Company's earnings are directly dependent on its
ability to maintain a sufficient net interest spread between its fixed portfolio
yield and its floating cost of funds. Accordingly, increases in the interest
rates of the Company's borrowings could have an adverse impact on the Company's
earnings. The Company has entered into various interest rate swap and cap
agreements to minimize the adverse impact of increasing interest rates on its
earnings by converting the floating rate exposure of the debt to a fixed rate.
There can be no assurance, however, that this strategy will consistently or
completely offset adverse interest rate movements. Furthermore, while
F-14
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company believes that this strategy will enable it to achieve a sufficient
net interest spread, it precludes the Company from realizing higher earnings
from decreases in the interest rates of its credit facilities.
In May, 1995, the Company entered into a swap agreement with NationsBank
covering a notional amount of $25 million for an initial term of one year. Under
the agreement, the Company pays a fixed rate of 5.74 percent times the notional
amount and receives an amount equal to the then current one-month LIBOR rate
times the notional amount. In June, 1995, the Company entered into a swap
agreement with NationsBank which provides for a notional amount of $40 million
and a term of one year. Under this agreement, the Company pays a fixed rate of
5.55 percent times the notional amount and receives an amount equal to the
one-month LIBOR rate times the notional amount. In November, 1995, the Company
entered into a third swap agreement with NationsBank covering a notional amount
of $20 million. Under the terms of the agreement, the Company pays a fixed rate
equal to 5.69 percent times the notional amount and receives an amount equal to
the the then current one-month LIBOR rate times the notional amount. This
agreement expires in November, 1998. The $25 million swap and the $40 million
swap expired in May and June, 1996, respectively.
In August 1996, the Company elected to terminate the $20 million swap in
connection with its decision to enter into a swap agreement with NationsBank
covering a notional amount of $100 million for an initial term of one year.
Under the agreement, the Company pays a fixed rate of 5.545 percent times the
notional amount and receives an amount equal to the then current one-month LIBOR
rate times the notional amount. The Company received proceeds of $100,000 upon
the termination of the $20 million swap.
In August 1997, NationsBank elected not to extend the maturity of the $100
million swap. In September 1997, the Company elected to enter into three swap
agreements having an aggregate notional amount of $120 million and fixing the
Company's weighted average interest rate at 5.63 percent. Two of these swap
agreements, having a notional amount of $90 million, were scheduled to expire in
September 1998; while the remaining swap agreement, covering a notional amount
of $30 million was scheduled to expire in October 1998. Under each swap
agreement, NationsBank had the option of extending the maturity for an
additional two years from the initial expiration date.
On January 14, 1998, the Company elected to terminate the three swap
agreements having an aggregate notional amount of $120 million swap in
connection with its decision to enter into a swap agreement with NationsBank
covering a notional amount of $120 million for an initial term of two years,
expiring January 12, 2000. Under this agreement, the Company's interest rate is
fixed at 5.565 percent on the $120 million notional amount. NationsBank has the
option of extending the maturity to January 14, 2002.
F-15
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The temporary differences which give rise to net deferred tax assets are as
follows at April 30, 1997 and 1998, respectively:
1997 1998
------------ ------------
Deferred tax assets
Allowance for credit losses..... $ 459,562 $ 500,660
Accrued expenses................ 80,617 57,251
Other........................... 34,669 --
------------ ------------
574,848 557,911
------------ ------------
Deferred tax liabilities
Receivables held for
investment.................... (58,505) (83,328)
Deferred costs, net............. (111,559) (74,697)
Interest rate swap.............. (16,908) --
Internally developed software... -- (101,651)
------------ ------------
(186,972) (259,676)
------------ ------------
Net deferred tax assets.............. $ 387,876 $ 298,235
============ ============
The provision (benefit) for income taxes for the years ended April 30,
1996, 1997 and 1998, consists of the following:
1996 1997 1998
------------- ------------- -----------
Current --
Federal......................... $ 883,581 $ 1,541,900 $ 548,343
State........................... 134,878 203,452 65,787
------------- ------------- -----------
$ 1,018,459 $ 1,745,352 $ 614,130
============= ============= ===========
Deferred --
Federal......................... $ 281,920 $ (409,156) $ 89,023
State........................... (5,255) (104,192) 618
------------- ------------- -----------
$ 276,665 $ (513,348) $ 89,641
============= ============= ===========
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the years ended April 30,
1996, 1997 and 1998.
1996 1997 1998
------ ------ ---------
Income tax -- statutory rate......... 34.00% 34.00% 34.00%
State income tax, net of federal
benefit.............................. 2.28 2.50 2.50
Expenditures deducted for tax,
capitalized for books.............. (1.99) -- --
Non-deductible expenses.............. -- .20 .50
Tax free income...................... -- (.20) (1.10)
Other................................ .21 -- .60
------ ------ ---------
Effective income tax rate....... 34.50% 36.50% 36.50%
====== ====== =========
8. CREDIT RISKS
Approximately 43 percent of the Company's receivables by principal balance
at April 30, 1998, represent receivables acquired from dealers located in Texas.
The economy of Texas is primarily
F-16
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dependent on petroleum and natural gas production and sales of related supplies
and services, petrochemical operations, light and medium manufacturing
operations, agribusiness and tourism. Job losses in any or all of these primary
economic segments of the Texas economy may result in a significant increase in
delinquencies or defaults in the Company's receivable portfolio. While the
receivables are secured by vehicles, the Company has recourse to reserve
accounts and dealers for losses on certain receivables and the Company has
third-party default insurance for receivables originated prior to April 1994,
there can be no assurance that such remedies would mitigate additional credit
losses.
The Company is exposed to credit loss in the event that the counterparty to
the swap agreements does not perform its obligations. The terms of the Company's
interest rate agreements provide for settlement on a monthly basis and
accordingly, any credit loss due to non-performance of the counterparty would be
limited to the amount due from the counterparty for the month non-performance
occurred. The Company would be exposed to adverse interest rate fluctuations
following any such non-performance. While management believes that it could
enter into interest rate swap agreements with other counterparties to
effectively manage such rate exposure, there is no assurance that it would be
able to enter interest rate agreements on comparable terms as those of its
present agreements.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and estimated fair
values of the Company's financial instruments for those financial instruments
whose carrying amounts differ from their estimated fair values. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
shown in the table are included in the balance sheet under the indicated
captions.
APRIL 30, 1997 APRIL 30, 1998
------------------------------- -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------- ------------ ---------------- ------------
Financial assets --
Receivables held for investment,
net of unamortized premium and
deferred fees................. $ 115,742,904 $125,637,331 $ 136,445,808 $145,829,396
Off-balance sheet instruments --
Swap agreements................. -- 75,105 -- (152,043)
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:
CASH AND SHORT-TERM INVESTMENTS, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES. The carrying amounts approximate fair value because of the
short maturity and market interest rates of those instruments.
RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by
discounting expected cash flows at a risk-adjusted rate of return deemed to be
appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
F-17
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SWAP AGREEMENTS. The fair value approximates the payment the Company would
have made to or received from the swap counterparty to terminate the swap
agreements.
10. DEFINED CONTRIBUTION PLAN
Effective May 1, 1994, the Company adopted a participant-directed 401(k)
retirement plan (the 401(k)) for its employees. An employee becomes eligible to
participate on May 1 or November 1 immediately following the employee's
attaining age 21 and completing one year of service. The Company pays the
administrative expenses of the 401(k), and at the discretion of the Board of
Directors, may make contributions to the 401(k). The Company did not make any
contributions to the 401(k) during the fiscal years ended April 30, 1996, 1997
and 1998.
11. SHAREHOLDERS' EQUITY
PREFERRED STOCK. The nonvoting cumulative preferred stock had a par value
of $1.00 per share and was entitled to receive cumulative cash dividends of $.07
per share on May 31, 1995, and on the last day of each succeeding November and
May thereafter. The nonvoting cumulative preferred stock was redeemable at the
option of the Company, either in whole or in part, upon receiving written
consent of the holders of at least 65 percent of the shares. In May 1995, the
Board of Directors approved the redemption of the nonvoting cumulative preferred
stock for $960,000 plus dividends accruing through the date of redemption. The
premium of $160,000 over the stated redemption price was consideration for the
holders' consent for the redemption and was recorded as a reduction of retained
earnings. Proceeds from the offering of Common Stock were used to redeem all of
the outstanding nonvoting cumulative preferred stock.
In June 1995, the shareholders approved a new series of preferred stock
(New Preferred Stock) with a $1.00 par value, and authorized 1,000,000 shares.
As of April 30, 1998, no shares have been issued.
STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the
Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered
by the Compensation Committee of the Board of Directors and provides that
options may be granted to officers and other key employees for the purchase of
up to 300,000 shares of Common Stock, subject to adjustment in the event of
certain changes in capitalization. Options may be granted either as incentive
stock options (which are intended to qualify for certain favorable tax
treatment) or as non-qualified stock options.
The Compensation Committee selects the persons to receive options and
determines the exercise price, the duration, any conditions on exercise and
other terms of the options. In the case of options intended to be incentive
stock options, the exercise price may not be less than 100% of the fair market
value per share of Common Stock on the date of grant. With respect to
non-qualified stock options, the exercise price may be fixed as low as 50% of
the fair market value per share at the time of grant. In no event may the
duration of an option exceed 10 years and no option may be granted after the
expiration of 10 years from the adoption of the Plan.
The exercise price of the option is payable in full upon exercise and
payment may be in cash, by delivery of shares of Common Stock (valued at their
fair market value at the time of exercise), or by a combination of cash and
shares. At the discretion of the Compensation Committee, options may be issued
in tandem with stock appreciation rights entitling the option holder to receive
an amount in cash or in shares of Common Stock, or a combination thereof, equal
in value to any increase since the date of grant in the fair market value of the
Common Stock covered by the option.
Effective June 20, 1996, the Compensation Committee granted an option
covering 10,000 shares of Common Stock to an officer of the Company. The
exercise price of this option is $11.00 per share
F-18
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(the fair market value of the Common Stock on the date of grant) and the option
is exercisable in cumulative annual increments of 20 percent beginning June 20,
1997.
Effective July 15, 1997, the Compensation Committee granted options
covering a total of 58,000 shares of Common Stock to key employees of the
Company. The exercise price of these options are $7.375 per share (the fair
market value of the Common Stock on the date of grant) and the options are
exercisable in cumulative annual increments of 20 percent beginning on July 15,
1998.
Effective March 19, 1998, the Compensation Committee granted an option
covering 10,000 shares of Common Stock to an officer of the Company. The
exercise price of this option is $6.75 per share (the fair market value of the
Common Stock on the date of grant) and the option is exercisable in cumulative
annual increments of 20 percent beginning on March 19, 1999.
A summary of the status of the Company's stock option plans for the years
ended April 30, 1996, 1997 and 1998 is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES UNDER PRICE PER
OPTION SHARE
------------ ---------
Outstanding at April 30, 1996........ 70,000 $ 11.00
Granted.............................. 10,000 $ 11.00
------------
Outstanding at April 30, 1997........ 80,000 $ 11.00
Granted.............................. 68,000 $ 7.29
Forfeited............................ (10,000) $ 11.00
------------
Outstanding at April 30, 1998........ 138,000 $ 9.17
============
Options available for future grants
at April 30, 1998.................... 182,000
============
FISCAL
-------------------------------
1996 1997 1998
--------- --------- ---------
Options exercisable at end of year... 20,000 30,000 38,000
Weighted average exercise price of
options exercisable.................. $ 11.00 $ 11.00 $ 11.00
Weighted average fair value of
options granted...................... $ 5.01 $ 5.22 $ 4.27
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE AVERAGE OPTIONS OPTIONS CONTRACTUAL
PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
- ------------------------------------- -------------- ----------- ----------- -------------
$11.00 $11.00 20,000 20,000 (1)
$6.75-$11.00 $ 8.86 118,000 18,000 7.23
----------- -----------
138,000 38,000
=========== ===========
- ------------
(1) The option will terminate one year after the Director ceases to be a member
of the Board of Directors, except that in the event of the Director's death
while serving as a Director the option would be exercisable by his heirs or
representatives of his estate for a period of two years after date of death.
F-19
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for these plans under APB Opinion No. 25 under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
FISCAL
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
Net Income........................... As Reported $ 2,458,580 $ 2,143,351 $ 1,224,369
Pro Forma $ 2,367,967 $ 2,104,516 $ 1,194,946
Basic and Diluted Net Income Per
Common Share before Redemption of
Preferred Stock.................... As Reported $ 0.51 $ 0.39 $ 0.22
Pro Forma $ 0.49 $ 0.38 $ 0.21
Basic and Diluted Net Income Per
Common Share after Redemption of
Preferred Stock.................... As Reported $ 0.47 $ 0.39 $ 0.22
Pro Forma $ 0.45 $ 0.38 $ 0.21
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.
The following weighted-average assumptions were used:
FISCAL
--------------------
1997 1998
--------- ---------
Risk free interest rate................. 6.43% 6.06%
Expected life of options in years....... 10 10
Expected stock price volatility......... 48% 37%
Expected dividend yield................. 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
12. COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO FUND. As of April 30, 1998, the Company had unfunded
receivables in process of approximately $1.4 million.
EMPLOYMENT AGREEMENT. The Company has entered into employment agreements
with three key executives, one of which expired on July 15, 1998, with the
remaining two expiring in July 2000. Each agreement provides for an annual
salary plus the potential to earn an annual cash bonus to be determined by the
Compensation Committee of the Board of Directors based on the financial results
for the fiscal year then ended. In the event the executive is terminated for any
reason other than death, disability, mutual agreement or conduct of a material
illegal act, he is entitled to a sum equal to the annual salary for the
remaining term of the agreement.
F-20
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES. The Company is a party to a lease agreement for office space which
began on June 1, 1992, and was amended on October 29, 1993, October 26, 1994,
October 10, 1995, and March 1, 1998, to include additional office space. The
lease expires on February 28, 2003. The Company also holds equipment under
operating leases which expire in fiscal year 1998. Rent expense for office space
and other operating leases for the years ended April 30, 1996, 1997 and 1998,
was $251,881, $283,463 and $289,257, respectively. Required minimum lease
payments for the remaining term of the above leases are:
Year ending April 30-
1999.......................... $ 217,506
2000.......................... 204,063
2001.......................... 193,876
2002.......................... 178,216
2003.......................... 151,797
13. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the years ended April 30, 1996, 1997 and 1998 are
as follows:
FOR THE YEAR ENDED APRIL 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share.... 4,756,833 5,566,669 5,566,669
Effect of dilutive stock options... -- 312 628
------------ ------------ ------------
Weighted average shares outstanding
for diluted earnings per
share........................... 4,756,833 5,566,981 5,567,297
============ ============ ============
At April 30, 1998, the Company had 137,372 employee stock options which
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the period presented.
F-21