- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO __________________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS AUGUST 28, 1998
--------------- ---------------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
================================================================================
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JULY 31, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1998 and
July 31, 1998........................ 3
Consolidated Statements of Operations
for the Three Months
Ended July 31, 1997 and 1998......... 4
Consolidated Statement of
Shareholders' Equity for the Three
Months Ended July 31, 1998........... 5
Consolidated Statements of Cash Flows
for the Three Months Ended
July 31, 1997 and 1998............... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 16
SIGNATURES................................... 16
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1998 AND JULY 31, 1998
APRIL 30, JULY 31,
1998 1998
--------------- ---------------
(UNAUDITED)
ASSETS
------------
Receivables Held for Investment,
net................................ $ 139,598,675 $ 146,145,010
Cash and Short-Term Investments,
including restricted cash of
$3,215,540 and $4,297,145.......... 3,698,121 4,346,885
Other Receivables:
Due from servicer............... 10,229,975 9,274,003
Accrued interest................ 2,057,346 2,286,963
Assets Held for Sale................. 1,219,885 2,009,906
Other Assets:
Funds held under reinsurance
agreement..................... 2,016,682 2,673,215
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $846,250 and $962,802...... 1,638,947 1,556,366
Deferred income tax asset,
net........................... 298,235 352,931
Federal income tax receivable... 495,280 233,783
--------------- ---------------
Total assets............... $ 161,253,146 $ 168,879,062
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 130,813,078 $ 137,552,601
Unsecured credit facilities..... 2,500,000 3,680,000
Other Liabilities:
Due to dealers.................. 241,988 223,724
Accounts payable and accrued
liabilities................... 2,317,840 1,837,513
Current income taxes payable.... 219,770 109,771
--------------- ---------------
Total liabilities.......... 136,092,676 143,403,609
--------------- ---------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669,
shares issued and
outstanding................... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 6,689,985 7,004,968
--------------- ---------------
Total shareholders'
equity..................... 25,160,470 25,475,453
--------------- ---------------
Total liabilities and
shareholders' equity....... $ 161,253,146 $ 168,879,062
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1998
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
JULY 31, JULY 31,
1997 1998
------------ ------------
Interest Income...................... $ 4,853,298 $ 5,658,594
Interest Expense..................... 1,819,265 2,224,471
------------ ------------
Net interest income........ 3,034,033 3,434,123
Provision for Credit Losses.......... 711,000 950,000
------------ ------------
Net Interest Income After Provision
for Credit Losses.................. 2,323,033 2,484,123
------------ ------------
Other Income:
Late fees and other............. 179,626 159,603
------------ ------------
Operating Expenses:
Servicing fees.................. 426,694 505,917
Salaries and benefits........... 656,159 855,834
Other........................... 498,629 785,939
------------ ------------
Total operating expenses... 1,581,482 2,147,690
------------ ------------
Income Before Provision for Income
Taxes.............................. 921,177 496,036
------------ ------------
Provision for Income Taxes:
Current......................... 421,267 235,749
Deferred........................ (85,037) (54,696)
------------ ------------
Total provision for income
taxes.................... 336,230 181,053
------------ ------------
Net Income........................... $ 584,947 $ 314,983
============ ============
Basic and Diluted Net Income per
Common Share....................... $0.11 $0.06
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 1998
(UNAUDITED)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- ------------ --------------
Balance, April 30, 1998.............. $5,567 $ 18,464,918 $ 6,689,985 $ 25,160,470
Net income...................... -- -- 314,983 314,983
------- -------------- ------------ --------------
Balance, July 31, 1998............... $5,567 $ 18,464,918 $ 7,004,968 $ 25,475,453
======= ============== ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1998
(UNAUDITED)
1997 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 584,947 $ 314,983
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 550,497 708,826
Provision for credit
losses................... 711,000 950,000
Charge-offs, net of
recoveries............... (629,433) (947,519)
(Increase) decrease in:
Accrued interest
receivable............... (62,475) (229,617)
Restricted cash............ (430,659) (1,081,605)
Deferred financing costs
and other................ (346,542) (11,330)
Funds held under
reinsurance agreement.... 517,525 (656,533)
Due from servicer.......... 467,903 955,972
Deferred income tax asset,
net...................... (85,037) (54,696)
Federal income tax
receivable............... -- 261,497
Increase (decrease) in:
Due to dealers............. (54,991) (18,264)
Accounts payable and
accrued liabilities...... (674,645) (480,327)
Current income taxes
payable.................. 312,310 (109,999)
--------------- ---------------
Net cash provided by
(used in) operating
activities.......... 860,400 (398,612)
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (18,316,433) (22,370,167)
Principal payments from
receivables................... 12,426,545 14,427,635
Purchase of furniture and
equipment..................... (22,772) (11,220)
--------------- ---------------
Net cash used in
investing
activities.......... (5,912,660) (7,953,752)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 16,179,881 18,544,879
Unsecured debt............. -- 2,180,000
Principal payments made on --
Secured Debt............... (10,892,272) (11,805,356)
Unsecured debt............. -- (1,000,000)
--------------- ---------------
Net cash provided by
financing
activities.......... 5,287,609 7,919,523
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. 235,349 (432,841)
Cash and Short-Term Investments at
Beginning of Period................ 2,416,967 482,581
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 2,652,316 $ 49,740
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 1,843,788 $ 2,026,762
Income taxes............... 108,957 84,251
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1998
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) is principally involved in the business of acquiring
and holding for investment retail installment contracts secured by new and used
automobiles and light trucks (receivables) originated by factory authorized
franchised dealers. As of July 31, 1998, approximately 41 percent of receivables
held for investment were located in Texas. The Company currently operates in 19
states.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of July 31, 1998, and the results of its
operations for the three months ended July 31, 1997 and 1998, and its cash flows
for the three months ended July 31, 1997 and 1998.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading.
Certain reclassifications have been made to the 1997 amounts to conform
with the 1998 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of common shares outstanding. See Note 5.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, JULY 31,
1998 1998
--------------- ---------------
Receivables.......................... $ 136,445,808 $ 142,974,669
Unamortized premium and deferred
fees............................... 4,351,412 4,371,367
Allowance for credit losses.......... (1,198,545) (1,201,026)
--------------- ---------------
Net receivables................. $ 139,598,675 $ 146,145,010
=============== ===============
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 1998, the Company had investments in receivables pursuant to
the core program with an aggregate principal balance of $141,847,007.
Activity in the allowance for credit losses for the three months ended July
31, 1998, was as follows:
Balance, beginning of period......... $ 1,198,545
Provision for credit losses.......... 950,000
Charge-offs, net of recoveries....... (947,519)
------------
Balance, end of period............... $ 1,201,026
============
At July 31, 1998, the Company had investments in receivables pursuant to
the dealer recourse program with an aggregate principal balance of $1,127,662
and dealer reserves of $214,885.
4. DEBT
Borrowings under the F.I.R.C., Inc. (FIRC) credit facility, First Investors
Auto Receivables Corporation (FIARC) commercial paper facility and First
Investors Auto Capital Corporation (FIACC) commercial paper facility were
$33,830,000, $95,202,415 and $8,520,186, respectively, at July 31, 1998, and had
weighted average interest rates, including the effect of facility fees, program
fees, dealer fees, and hedge instruments, as applicable, of 6.31 percent, 6.16
percent and 6.52 percent, respectively. The effect of the hedge instrument on
the weighted average interest rate is immaterial.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law and do not
generally vary with changes in interest rates. To manage the risk of fluctuation
in the interest rate environment, the Company enters into interest rate swaps
and caps to lock in what management believes to be an acceptable net interest
spread. However, the Company will be exposed to limited rate fluctuation risk to
the extent it cannot perfectly match the timing of net advances from its credit
facilities and acquisitions of additional interest rate protection agreements.
The Company, through its wholly-owned subsidiary, First Investors Financial
Services, Inc. (FIFS), also maintains a $6 million working capital facility with
NationsBank of Texas, N.A. as agent for the banks party thereto. The purpose of
the facility is to support the Company's working capital needs and for other
general corporate purposes. Under the terms of the facility, the Company may
borrow, repay and reborrow up to the lesser of $6 million or a borrowing base.
The initial term of the facility expired on July 10, 1998. In July 1998, the
expiration date of the facility was extended to September 30, 1998, and is
renewable at the option of the lenders. In the event that the lenders elect not
to renew, any borrowings outstanding at maturity will be converted to a term
loan which would amortize quarterly in equal increments to fully amortize the
balance within one year from the maturity date. At July 31, 1998, there was
$3,680,000 outstanding borrowings under this facility.
The document governing the working capital facility contains numerous
covenants governing the Company's business, the observance of certain covenants
and other matters. The Company serves as a guarantor of the indebtedness which
is additionally secured by the pledge of the outstanding stock of FIFS and two
of FIFS' primary subsidiaries. Under the terms of the guaranty, the Company is
prohibited from paying dividends to shareholders without the consent of the
banks.
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the three months ended July 31, 1997 and 1998,
are as follows:
FOR THE THREE MONTHS
ENDED JULY 31,
------------------------
1997 1998
----------- -----------
Weighted average shares:
Weighted average shares outstanding
for basic earnings
per share.......................... 5,566,669 5,566,669
Effect of dilutive stock options...... -- 109
----------- -----------
Weighted average shares outstanding
for diluted earnings
per share.......................... 5,566,669 5,566,778
=========== ===========
At July 31, 1998, the Company had 137,891 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.
6. SUBSEQUENT EVENT
On September 9, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding stock and to repay all intercompany indebtedness
of Auto Lenders Acceptance Corporation, a wholly-owned subsidiary of Fortis,
Inc. The total value of the transaction is approximately $77.4 million and will
be treated as a purchase for accounting purposes. First Union Capital Markets
has provided a commitment to finance the acquisition. The transaction is
scheduled to be completed in October 1998, subject to customary closing
conditions and requisite regulatory approvals.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended July 31, 1998, was $314,983, a
decrease of 46% from that reported for the comparable period in the preceding
year of $584,947. Earnings per common share was $0.06 for the three months ended
July 31, 1998, compared to $0.11 per common share for the prior period.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio and effective management of
net interest income. The following table summarizes the Company's growth in
receivables and net interest income (dollars in thousands):
AS OF OR FOR THE
THREE MONTHS ENDED
JULY 31,
----------------------
1997 1998
---------- ----------
Investment in receivables:
Number.......................... 10,989 13,097
Principal balance............... $ 120,145 $ 142,975
Average principal balance of
receivables outstanding during
the three month period........ 117,808 139,400
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1998
--------- ---------
Interest income(1)................... $ 4,853 $ 5,658
Interest expense..................... 1,819 2,224
--------- ---------
Net interest income............. $ 3,034 $ 3,434
========= =========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
receivables and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1998
--------- ---------
Effective yield on receivables(1).... 16.5% 16.2%
Average cost of debt(2).............. 6.3 6.6
--------- ---------
Net interest spread(3)............... 10.2% 9.6%
========= =========
Net interest margin(4)............... 10.3% 9.9%
========= =========
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest
10
income increased for the three months ended July 31, 1998 to $3.4 million from
$3.0 million for the comparable period in the preceding year. Net interest
income in 1998 represents an increase of 13% from the same period in 1997.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED
JULY 31, 1997 TO 1998
---------------------------------
INCREASE DUE TO
CHANGE IN
--------------------
AVERAGE
PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE
--------- ------- ---------
Interest income...................... $ 889 $ (84) $ 805
Interest expense..................... 307 98 405
--------- ------- --------
Net interest income.................. $ 582 $ (182) $ 400
========= ======= ========
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 AND 1997 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 1998 period increased to $5,658
compared with $4,853 for the comparable period in 1997 and reflects an increase
of 17%. The increase in interest income is due to an increase in the average
principal balance of receivables held of 18% from the 1997 to 1998 comparable
period. The increase in average principal balance of receivables held for the
three months ended offset a .3% decline in the effective yield realized on the
receivables from the 1997 to 1998 comparable period. Management attributes the
decrease in yield to a reduction in financing fees paid by dealers and an
increase in the percentage of receivables on which rate participation is paid to
dealers as incentive to utilize the Company's financing programs.
INTEREST EXPENSE. Interest expense in 1998 increased to $2,224 as compared
to $1,819 in 1997. The increase of 22% was due to an increase in the weighted
average borrowings outstanding of 17%. The weighted average cost of debt
increased .3% for the three month period.
NET INTEREST INCOME. Net interest income increased to $3,434 in 1998, an
increase of 13%. The increase resulted from the growth of the receivables
portfolio which offset a decline of .6% in the net interest spread over the
prior year period.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased to $950 as compared to $711 in 1997. The increase was the result of
the growth of the Company's receivables portfolio, an increase in charge-offs
and the continued strategy of maintaining loan loss reserves as a percentage of
total loans.
LATE FEES AND OTHER INCOME. Other income decreased to $160 in 1998 from
$180 in 1997. Other income primarily represents interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $506 in 1998
from $427 in 1997. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the growth in the number
of receivables serviced, which increased by 2,108 from 1997 to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $856 in
1998 from $656 in 1997. The increase was due to higher salary levels per
employee and an expansion of the Company's operations.
11
OTHER EXPENSES. Other expenses increased to $786 in 1998 from $499 in
1997. The overall increase was primarily due to an overall expansion of the
Company's asset base and an increase in the volume of applications for credit
processed by the Company in the 1998 period versus the comparable period.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased to $496 or 46% from the comparable period
in 1997. This change was a result of the increase in net interest income after
provision for credit losses of $161 offset by an increase in operating expenses
of $566.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from dealers
and fund required reserve accounts, (ii) amounts necessary to fund premiums for
credit enhancement insurance, and (iii) amounts necessary to fund costs to
retain receivables, primarily interest expense and servicing fees. The Company
also requires a significant amount of cash flow for working capital to fund
fixed operating expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company funds the purchase price of the
receivables through the use of a $55 million warehouse credit facility provided
to F.I.R.C., Inc. ("FIRC") a wholly-owned special purpose financing subsidiary
of the Company. The current FIRC credit facility generally permits the Company
to draw advances up to the outstanding principal balance of qualified
receivables. The Company paid $22.4 million for receivables acquired for the
three months ended July 31, 1998, compared to $18.3 million paid in the
comparable 1997 period. Receivables that have accumulated in the FIRC credit
facility may be transferred to a commercial paper conduit facility at the option
of the Company. The commercial paper facility provides additional liquidity of
up to $105 million to fund the Company's investment in the receivables
portfolio.
On October 22, 1996, the Company entered into a $105 million commercial
paper conduit financing through Enterprise Funding Corporation, a commercial
paper conduit administered by NationsBank, N.A.. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). It replaced an existing $75 million
commercial paper conduit facility which was provided by Enterprise Funding to
FIRC. Credit enhancement for the new $105 million facility is provided to the
commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Credit enhancement for the replaced $75 million facility was
provided by an Auto Loan Protection Insurance ("ALPI") policy issued by
National Union Fire Insurance Company of Pittsburgh and reinsured by the
Company's captive insurance subsidiary. The ALPI policy continues to provide
credit enhancement for the $55 million FIRC credit facility.
Receivables originally purchased by the Company are financed with
borrowings under the FIRC credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the FIARC commercial paper facility used to repay
borrowings under the FIRC credit facility. Once receivables are transferred to
the FIARC subsidiary and pledged as collateral for commercial paper borrowings,
the ALPI policy with respect to the transferred receivables is cancelled with
any unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the FIARC commercial paper facility
must be maintained in a reserve account for the benefit of the creditors and
surety bond provider.
The current term of the FIRC credit facility expires on October 15, 1998,
at which time the outstanding balance will be payable in full, subject to
certain notification provisions allowing the
12
Company a period of six months in order to endeavor to refinance the facility in
the event of termination. The term of the facility has been extended on seven
occasions since its inception in October 1992. The FIARC 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. Management considers its relationship
with all of the Company's lenders to be satisfactory and has no reason to
believe either the FIRC credit facility or the FIARC commercial paper facility
will not be renewed.
On January 1, 1998, the Company entered into a $25 million commercial paper
conduit financing through Variable Funding Capital Corporation ("VFCC"), a
commercial paper conduit administered by First Union National Bank. The
financing was provided to a special-purpose, wholly-owned subsidiary of the
Company, First Investors Auto Capital Corporation ("FIACC") to fund the
acquisition of additional receivables generated under certain of the Company's
financing programs.
FIACC acquires receivables from the Company and may borrow up to 88% of the
face amount of receivables which are pledged as collateral for the commercial
paper borrowings. In addition, a cash reserve equal to 2% of the outstanding
borrowings under the FIACC commercial paper facility must be maintained in a
reserve account for the benefit of the creditors.
The initial term of the FIACC commercial paper facility expires on December
31, 1998. If the facility was not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables could be transferred
to the facility.
Substantially all of the Company's receivables are pledged to collateralize
the credit facilities.
In addition to the $185 million in currently available debt facilities
utilized to fund the acquisition of receivables, the Company also maintains a $6
million working capital line of credit to be used for working capital and
general corporate purposes. The facility expired on July 10, 1998 and was
extended to September 30, 1998. If the lenders elect not to renew, any
outstandings will be amortized over a one year period. There was $3.7 million
outstanding under this facility at July 31, 1998.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of $20.8 million and $17.9 million for the three
months ended July 31, 1998 and 1997, respectively. Such cash flow funds
repayment of amounts borrowed under the FIRC credit and commercial paper
facilities and other holding costs, primarily interest expense and servicing and
custodial fees. During the three months ended, the Company required net cash
flow of $7.9 million in 1998 and $5.9 million in 1997 (cash required to acquire
receivables net of principal payments on receivables) to fund the growth of its
receivables portfolio.
INTEREST RATE MANAGEMENT. The Company's credit facilities bear interest at
floating interest rates which are reset on a short-term basis whereas its
receivables bear interest at fixed rates which are generally at the maximum
rates allowable by law and do not generally vary with changes in interest rates.
To manage the risk of fluctuation in the interest rate environment, the Company
enters into interest rate swaps and caps with notional principal amounts which
approximate the balance of its debt outstanding to lock in what management
believes to be an acceptable net interest spread. However, the Company will be
exposed to limited rate fluctuation risk to the extent it cannot perfectly match
the timing of net advances from its credit facilities and acquisitions of
additional interest rate protection agreements. As of July 31, 1998 the Company
was party to a swap agreement with NationsBank of Texas, N.A. pursuant to which
the Company's interest rate is fixed at 5.565% on a notional amount of $120
million. The swap agreement expires on January 12, 2000 and may be extended to
January 14, 2002 at the option of NationsBank. This swap was entered into on
January 12, 1998 and replaced three existing swaps
13
having an aggregate notional amount of $120 million and fixing the Company's
weighted average interest rate at 5.63%. Two of these swap agreements having a
notional amount of $90 million were set to expire in September, 1998; while, the
remaining swap, having a notional amount of $30 million, was scheduled to expire
in October, 1998. The expiration of each swap could have been extended for an
additional two years from the initial expiration date at the option of
NationsBank.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations and effective
collection procedures, (ii) providing recourse to dealers under its
participating program for a period of time and thereafter secured by cash
reserves in the event of losses and (iii) insurance against certain losses from
independent third party insurers. As a result of its recourse programs and third
party insurance, the Company is not exposed to credit losses on its entire
receivables portfolio. The following table summarizes the credit loss exposure
of the Company (dollars in thousands):
JULY 31,
-----------------------------------------------
1997 1998
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Core Program:
Insured by third party
insurer....................... $ 1,685 $ -- $ 534 $ --
Other receivables(1)............ 115,201 1,264 (3) 141,313 1,201 (3)
Participating Program(2)............. 3,259 280 (4) 1,128 215 (4)
----------- -----------
$ 120,145 $ 142,975
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 1.1 % 0.9 %
Dealer reserves as a percentage of
participating program
receivables........................ 8.6 % 19.1 %
- ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables on which no credit loss insurance exists.
(2) The dealer retains credit risk for a period of time. When the dealer's
participation is terminated, a portion of the reserve account is released to
the dealer and the balance is retained to fund credit losses until all
receivables are paid in full.
(3) Represents the balance of the Company's allowance for credit losses.
(4) 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.
Under the core program, the Company retains the credit risk associated with
the receivables acquired. The Company purchases credit enhancement insurance
from third party insurers which covers the risk of loss upon default and certain
other risks. Until March 1994, such insurance absorbed substantially all credit
losses. In April 1994, the Company established a captive insurance subsidiary to
reinsure certain risks under the credit enhancement insurance coverage for all
receivables acquired in March 1994 and thereafter. In addition, receivables
financed under the FIARC and FIACC commercial paper facilities do not carry
default insurance. A provision for credit losses of $950,000 has been recorded
for the three months ended July 31,
14
1998, for losses on receivables which are either uninsured or which are
reinsured by the Company's captive insurance subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that may become uncollectable. In making this estimate,
management analyzes portfolio characteristics in the light of its underwriting
criteria, delinquency and repossession statistics, historical loss experience,
and size, quality and concentration of the receivables, as well as external
factors such as future economic outlooks. The allowance for credit losses is
based on estimates and qualitative evaluations and ultimate losses will vary
from current estimates. These estimates are reviewed periodically and as
adjustments, either positive or negative, become necessary, are reported in
earnings in the period they become known.
The following table summarizes the status and collection experience of
receivables acquired by the Company (dollars in thousands):
AS OF OR FOR THE THREE MONTHS ENDED JULY 31,
----------------------------------------------------
1997 1998
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Delinquent amount outstanding:
30 - 59 days.................... 216 $ 3,134 223 $ 3,081
60 - 89 days.................... 66 975 67 930
90 days or more................. 115 1,872 107 1,708
--- --------- --- ---------
Total delinquencies.................. 397 $ 5,981 397 $ 5,719
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 3.5% 3.6% 2.9% 2.8%
Net charge-offs as a percentage of
average receivables outstanding
during the
period(2)(3)....................... -- 2.2% -- 2.7%
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables are based on gross receivables balances,
which include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed by third-party insurers. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
(3) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
SUBSEQUENT EVENT
On September 9, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding stock and to repay all intercompany indebtedness
of Auto Lenders Acceptance Corporation, a wholly-owned subsidiary of Fortis,
Inc. The total value of the transaction is approximately $77.4 million and will
be treated as a purchase for accounting purposes. First Union Capital Markets
has provided a commitment to finance the acquisition. The transaction is
scheduled to be completed in October 1998, subject to customary closing
conditions and requisite regulatory approvals.
15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: September 9, 1998 By: /s/ TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: September 9, 1998 By: /s/ BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF
FINANCIAL OFFICER
16