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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 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 NOVEMBER 30, 1998
---------- ----------------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
OCTOBER 31, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1998 and
October 31, 1998..................... 3
Consolidated Statements of Operations
for the Three Months
and Six Months Ended October 31, 1997
and 1998............................. 4
Consolidated Statement of
Shareholders' Equity for the Six
Months Ended October 31, 1998........ 5
Consolidated Statements of Cash Flows
for the Six Months Ended
October 31, 1997 and 1998............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 13
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 22
SIGNATURES................................... 22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1998 AND OCTOBER 31, 1998
APRIL 30, OCTOBER 31,
1998 1998
--------------- ------------
(UNAUDITED)
ASSETS
----------
Receivables Held for Investment,
net................................ $ 139,598,675 $159,169,248
Receivables Acquired for Investment,
net................................ -- 53,184,766
Investment in Trust Certificates..... -- 13,522,314
Cash and Short-Term Investments,
including restricted cash of
$3,215,540 and $6,834,004.......... 3,698,121 12,381,743
Other Receivables:
Due from servicer............... 10,229,975 12,632,862
Accrued interest................ 2,057,346 2,594,189
Assets Held for Sale................. 1,219,885 1,992,394
Other Assets:
Funds held under reinsurance
agreement..................... 2,016,682 2,155,463
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $846,250 and $1,204,285.... 1,638,947 4,751,887
Deferred income tax asset,
net........................... 298,235 452,138
Federal income tax receivable... 495,280 --
--------------- ------------
Total assets............... $ 161,253,146 $262,837,004
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 130,813,078 $154,139,443
Unsecured credit facility....... 2,500,000 4,500,000
Acquisition term facility....... -- 74,420,743
Other Liabilities:
Due to dealers.................. 241,988 216,501
Accounts payable and accrued
liabilities................... 2,317,840 3,497,503
Current income taxes payable.... 219,770 198,483
--------------- ------------
Total liabilities.......... 136,092,676 236,972,673
--------------- ------------
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 7,393,846
--------------- ------------
Total shareholders'
equity..................... 25,160,470 25,864,331
--------------- ------------
Total liabilities and
shareholders' equity....... $ 161,253,146 $262,837,004
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1997 AND 1998
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ --------------
Interest Income...................... $ 4,951,665 $ 7,258,254 $ 9,804,962 $ 12,916,847
Interest Expense..................... 1,940,003 3,191,169 3,759,268 5,415,639
------------ ------------ ------------ --------------
Net interest income........ 3,011,662 4,067,085 6,045,694 7,501,208
Provision for Credit Losses.......... 628,276 1,200,000 1,339,276 2,150,000
------------ ------------ ------------ --------------
Net Interest Income After Provision
for Credit Losses.................. 2,383,386 2,867,085 4,706,418 5,351,208
------------ ------------ ------------ --------------
Other Income:
Servicing....................... -- 246,005 -- 246,005
Late fees and other............. 126,412 203,322 306,039 362,925
------------ ------------ ------------ --------------
Total other income......... 126,412 449,327 306,039 608,930
------------ ------------ ------------ --------------
Operating Expenses:
Servicing fees.................. 446,997 573,844 873,692 1,079,762
Salaries and benefits........... 609,743 1,129,191 1,265,902 1,985,025
Other........................... 618,744 1,000,971 1,117,373 1,786,909
------------ ------------ ------------ --------------
Total operating expenses... 1,675,484 2,704,006 3,256,967 4,851,696
------------ ------------ ------------ --------------
Income Before Provision for Income
Taxes.............................. 834,314 612,406 1,755,490 1,108,442
------------ ------------ ------------ --------------
Provision for Income Taxes:
Current......................... 211,522 322,735 632,788 558,484
Deferred........................ 93,003 (99,207) 7,966 (153,903)
------------ ------------ ------------ --------------
Total provision for income
taxes.................... 304,525 223,528 640,754 404,581
------------ ------------ ------------ --------------
Net Income........................... $ 529,789 $ 388,878 $ 1,114,736 $ 703,861
============ ============ ============ ==============
Basic and Diluted Net Income per
Common Share....................... $0.10 $0.07 $0.20 $0.13
============ ============ ============ ==============
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 SIX MONTHS ENDED OCTOBER 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...................... -- -- 703,861 703,861
------- -------------- ------------ --------------
Balance, October 31, 1998............ $5,567 $ 18,464,918 $ 7,393,846 $ 25,864,331
======= ============== ============ ==============
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 SIX MONTHS ENDED OCTOBER 31, 1997 AND 1998
(UNAUDITED)
1997 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 1,114,736 $ 703,861
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 1,125,270 1,561,095
Provision for credit
losses................... 1,339,276 2,150,000
Charge-offs, net of
recoveries............... (1,266,424) (2,036,247)
(Increase) decrease in, net of
effects from the acquisition
of a business:
Accrued interest
receivable............... (138,448) (536,843)
Restricted cash............ 73,884 508,380
Deferred financing costs
and other................ (176,054) (1,076,152)
Funds held under
reinsurance agreement.... 907,474 (138,781)
Due from servicer.......... 1,305,129 (2,402,887)
Deferred income tax asset,
net...................... 7,966 (153,903)
Federal income tax
receivable............... -- 495,280
Increase (decrease) in, net of
effects from the acquisition
of a business:
Due to dealers............. (71,262) (25,487)
Accounts payable and
accrued liabilities...... (919,124) 321,467
Current income taxes
payable.................. (91,168) (21,287)
--------------- ---------------
Net cash provided by
(used in) operating
activities.......... 3,211,255 (651,504)
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables held for
investment.................... (35,214,648) (52,489,514)
Principal payments from
receivables held for
investment.................... 23,825,530 30,806,592
Principal payments from
receivables acquired for
investment.................... -- 1,830,764
Principal payments from trust
certificates.................. -- 2,744,510
Acquisition of a business, net
of cash acquired.............. -- (76,887,410)
Purchase of furniture and
equipment..................... (47,885) (35,387)
--------------- ---------------
Net cash used in
investing
activities.......... (11,437,003) (94,030,445)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 29,430,783 47,802,788
Unsecured debt............. -- 6,500,000
Acquisition debt........... -- 75,000,000
Principal payments made on --
Secured Debt............... (22,969,710) (24,476,423)
Unsecured debt............. -- (4,500,000)
Acquisition debt........... -- (579,257)
--------------- ---------------
Net cash provided by
financing
activities.......... 6,461,073 99,747,108
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. (1,764,675) 5,065,159
Cash and Short-Term Investments at
Beginning of Period................ 2,416,967 482,580
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 652,292 $ 5,547,739
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 3,754,048 $ 4,328,251
Income taxes............... 723,048 84,491
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
OCTOBER 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 October 31, 1998, approximately 41 percent of
receivables held for investment were located in Texas. The Company currently
originates loans from dealerships located in 23 states.
On October 2, 1998, the Company completed the acquisition of Auto Lenders
Acceptance Corporation (ALAC) from Fortis, Inc. Headquartered in Atlanta,
Georgia, ALAC is engaged in essentially the same business as the Company and
additionally performs servicing and collection activities on a portfolio of
receivables acquired for investment as well as on a portfolio of receivables
acquired and sold pursuant to two asset securitizations. As a result of the
acquisition, the Company increased the total dollar value of receivables held on
its balance sheet for investment, acquired an interest in certain trust
certificates related to the asset securitizations and acquired certain servicing
rights along with furniture, fixtures, equipment and technology to perform the
servicing and collection functions for the portfolio of receivables under
management. The Company performs servicing and collection functions on loans
originated from 30 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 October 31, 1998, and the results of its
operations for the three months and six months ended October 31, 1997 and 1998,
and its cash flows for the six months ended October 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.
RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were
acquired in a portfolio purchase or in connection with the acquisition
activities of loan originators, the Company estimates the amount and timing of
undiscounted expected future principal and interest cash flows. For certain
purchased loans, the amount paid for a loan reflects the Company's determination
that it is probable the Company will be unable to collect all amounts due
according to the loan's contractual terms. Accordingly, at acquisition, the
Company recognizes the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows as an amount that
should not be accreted. The remaining
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount, representing the excess of the loan's expected cash flows over the
amount paid, is accreted into interest income over the remaining life of the
loan.
Over the life of the loan, the Company continues to estimate expected cash
flows. The Company evaluates whether the present value of any decrease in the
loan's actual or expected cash flows should be recorded as a loss contingency
for the loan. For any material increases, the Company adjusts the amount of
accretable yield by reclassification from nonaccretable difference. The Company
then adjusts the amount of periodic accretion over the loan's remaining life.
INVESTMENT IN TRUST CERTIFICATE. Through the acquisition of ALAC, the
Company obtained interests in two securitizations of automobile receivables.
Automobile receivables were transferred to a trust (ALAC Automobile Receivables
Trust), which issued notes and certificates representing undivided ownership
interests in the trusts. The Company owns trust certificates and interest-only
residuals from each of these trusts which are classified as Investment in Trust
Certificates. Additionally, the Company owns spread accounts held by the trustee
for the benefit of the trust's noteholders. Such amounts are classified as
Restricted Cash.
Trust certificates are interests in the securitized receivables which are
subordinated to the noteholders interests. These certificates represent a credit
enhancement in order for the securitization to achieve a specific rating from
the credit rating agencies.
Interest-only residuals result from excess cash flows of the
securitizations. Interest-only residuals are computed as the differential
between the weighted average interest rate earned on the automobile receivables
securitized and the rate paid to the noteholders and certificateholders, net of
contractual servicing fees to be paid to the Company. The resulting differential
represents an asset in the period in which the automobile receivables are
securitized equal to the present value of estimated future excess interest cash
flows adjusted for anticipated prepayments and losses.
Trust certificates and interest-only residuals are valued as the present
value of expected future cash flows using discount rates that the Company
expects to yield. These discount rates are the result of the purchase price of
the interests and the expected future cash flows. Interests are recorded at
amortized cost. If actual cash flows are less than expected cash flows, the
Company will write down the values of the interests. If actual cash flows exceed
expected cash flows, additional yield will be recognized on a prospective basis.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of common shares outstanding. See Note 6.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, OCTOBER 31,
1998 1998
--------------- ------------
Receivables.......................... $ 136,445,808 $155,871,135
Unamortized premium and deferred
fees............................... 4,351,412 4,610,411
Allowance for credit losses.......... (1,198,545) (1,312,298)
--------------- ------------
Net receivables................. $ 139,598,675 $159,169,248
=============== ============
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At October 31, 1998, the Company had investments in receivables pursuant to
the core program with an aggregate principal balance of $154,939,635.
Activity in the allowance for credit losses for the six months ended
October 31, 1998, was as follows:
Balance, beginning of period......... $ 1,198,545
Provision for credit losses.......... 2,150,000
Charge-offs, net of recoveries....... (2,036,247)
--------------
Balance, end of period............... $ 1,312,298
==============
At October 31, 1998, the Company had investments in receivables pursuant to
the dealer recourse program with an aggregate principal balance of $931,500 and
dealer reserves of $215,621.
4. RECEIVABLES ACQUIRED FOR INVESTMENT
Loans purchased at a discount relating to credit quality were included in
the balance sheet amounts of Receivables Acquired for Investment as follows as
of October 31, 1998:
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality........................ $ 90,042,146
Nonaccretable difference................ (22,879,052)
Accretable yield........................ (13,978,328)
---------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................... $ 53,184,766
===============
The carrying amount of Receivables Acquired for Investment are net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
determined that it would be unable to collect.
ACCRETABLE NONACCRETABLE
YIELD DIFFERENCE
------------ -------------
Balance at July 31, 1998................ $ -- $ --
Additions.......................... 14,804,026 24,680,631
Accretion.......................... (825,698) --
Eliminations....................... -- (1,801,579)
------------ -------------
Balance at October 31, 1998............. $ 13,978,328 $ 22,879,052
============ =============
5. 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
$53,900,000, $84,553,421 and $15,686,022, respectively, at October 31, 1998, and
had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.25
percent, 6.23 percent and 5.84 percent, respectively. The effect of the hedge
instrument on the weighted average interest rate is immaterial.
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,
9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company may borrow, repay and reborrow up to the lesser of $6 million or a
borrowing base. The current term of the facility expires on February 5, 1999,
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 October 31, 1998, there
was $4,500,000 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.
On October 2, 1998, the Company, through its indirect, wholly-owned
subsidiary, FIFS Acquisition Funding Company LLC (FIFS Acquisition), entered
into a $75 million bridge financing facility with Variable Funding Capital
Corporation (VFCC), an affiliate of First Union National Bank, to finance the
Company's acquisition of ALAC. Contemporaneously with the Company's purchase of
ALAC, ALAC transferred certain assets to FIFS Acquisition, consisting primarily
of (i) all receivables owned by ALAC as of the acquisition date, (ii) ALAC's
ownership interest in certain trust certificates and subordinated spread or cash
reserve accounts related to two asset securitizations previously conducted by
ALAC; and, (iii) certain other financial assets, including charged-off accounts
owned by ALAC as of the acquisition date. These assets, along with a $1 million
cash reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus 2.35
percent and expires on April 2, 1999. Under the terms of the facility, all cash
collections from the receivables or cash distributions to the certificate holder
under the securitizations are first applied to pay ALAC a servicing fee in the
amount of 3 percent on the outstanding balance of all owned or managed
receivables and then to pay interest on the facility. Excess cash flow available
after servicing fees and interest payments are utilized to reduce the
outstanding principal balance on the indebtedness. In addition, 1 percent of the
servicing fee paid to ALAC is also utilized to reduce principal outstanding on
the indebtedness. Following the repayment of all outstanding indebtedness,
additional terms of the financing contemplate that VFCC will be entitled to a
portion of any remaining cash flow generated by the remaining receivables with
the remaining net cash flow being retained by the Company.
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 change 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.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's
10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate is fixed at 4.81 percent; and, the second in the initial notional
amount of $24.9 million (Swap B) pursuant to which the Company's interest rate
is fixed at 5.50 percent. The notional amount outstanding under each swap
agreement amortizes based on an implied amortization of the hedged indebtedness.
Swap A has a final maturity of December 30, 2002 while Swap B has a final
maturity of February 20, 2000. The Company also purchased two interest rate caps
which protect the Company and the lender against any material increases in
interest rates which may adversely affect any outstanding indebtedness which is
not fully covered by the aggregate notional amount outstanding under the swaps.
The first cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 4.81
percent on a notional amount that increases initially and then amortizes based
on the expected difference between the outstanding notional amount under Swap A
and the underlying indebtedness. The interest rate cap expires December 20, 2002
and the cost of the cap is amortized in interest expense for the period. The
second cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 6
percent on a notional amount that increases initially and then amortizes based
on the expected difference between the outstanding notional amount under Swap B
and the underlying indebtedness. The interest rate cap expires February 20, 2002
and the cost of the cap is imbedded in the fixed rate applicable to Swap B.
6. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the three months and six months ended October 31,
1997 and 1998, are as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED OCTOBER 31, OCTOBER 31,
------------------------ ------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share....... 5,566,669 5,566,669 5,566,669 5,566,669
Effect of dilutive stock options...... 2,450 -- 1,225 54
----------- ----------- ----------- -----------
Weighted average shares outstanding
for diluted earnings per share..... 5,569,119 5,566,669 5,567,894 5,566,723
=========== =========== =========== ===========
For the three months and six months ended October 31, 1998, the Company had
138,000 and 137,946, respectively, of stock options which were not included in
the computation of diluted earnings per share because to do so would have been
antidilutive for the period presented.
7. BUSINESS COMBINATIONS
On October 2, 1998, the Company acquired all of the outstanding stock of
ALAC, a Delaware corporation and wholly-owned subsidiary of Fortis, Inc., for an
approximate purchase price of $74.8 million. ALAC's principal business activity
is the purchasing and servicing of retail automobile sales contracts. The
transaction was treated as a purchase for accounting purposes and results of
operations are included in the financial statements beginning on October 2,
1998. The book value of the assets exceeded the purchase price by $8.5 million
and as such a discount has been recorded in the Receivables Acquired for
Investment. The resulting discount, net of expenses, is being accreted over the
remaining life of the portfolio. The allocation of the purchase price is based
on preliminary estimates of fair values and may be revised at a later date.
11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the acquisition, liabilities were assumed as follows:
Receivables acquired for
investment........................... $ 55,015,531
Investment in trust certificates..... 16,266,824
Fixed assets and other............... 7,463,251
Cash paid, net of cash acquired...... (76,887,410)
---------------
Liabilities assumed.................. $ 1,858,196
===============
The following unaudited pro forma summary presents information as if the
acquisition had occurred at the beginning of each fiscal year. The pro forma
information is provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined business. In preparing the pro forma data, adjustments have been made
to (a) increase the yield on Receivables Acquired for Investment based on
discounted purchase price, (b) increase interest expense for the financing of
the acquisition, (c) eliminate intercompany costs, (d) eliminate costs incurred
in preparation of the sale of ALAC and (e) adjust the federal and state income
tax provisions based on the combined operations.
FOR THE SIX MONTHS ENDED OCTOBER
31,
--------------------------------
1998 1997
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Interest Income......................... $ 25,561,595 $ 24,640,581
Net Loss................................ $ (464,758) $ (399,850)
Basic and Diluted Net Loss per common
share................................. $ (0.08) $ (0.07)
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended October 31, 1998, was $388,878, a
decrease of 27% from that reported for the comparable period in the preceding
year of $529,789. Net income for the six months ended October 31, 1998, was
$703,861, a decrease of 37% from that reported for the comparable period in the
preceding year of $1,114,736. Earnings per common share was $0.07 for the three
months ended October 31, 1998, compared to $0.10 per common share for the prior
period. Earnings per common share was $0.13 for the six months ended October 31,
1998, compared to $0.20 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
SIX MONTHS ENDED
OCTOBER 31,
----------------------
1997 1998
---------- ----------
Receivables Held for Investment:
Number.......................... 11,338 14,089
Principal balance............... $ 123,299 $ 155,871
Average principal balance of
receivables outstanding during
the six month period.......... 119,796 144,014
Average principal balance of
receivables outstanding during
the three month period........ 121,898 148,337
Receivables Acquired for Investment:
Number.......................... -- 5,877
Principal balance............... -- $ 63,990
Receivables Managed:(1)
Number.......................... -- 7,729
Principal balance............... -- $ 77,283
- ------------
(1) Represents receivables previously owned by ALAC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables.
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1997 1998(2) 1997 1998(2)
--------- --------- --------- ---------
Interest income(1)............. $ 4,952 $ 7,258 $ 9,805 $ 12,917
Interest expense............... 1,940 3,191 3,759 5,416
--------- --------- --------- ---------
Net interest income....... $ 3,012 $ 4,067 $ 6,046 $ 7,501
========= ========= ========= =========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) The Receivables Acquired for Investment contributed $1,173 to interest
income, $798 to interest expense and $375 to net interest income to the
results for the three months and six months period.
13
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 SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
Receivables Held for Investment:
Effective yield on
receivables(1)............. 16.2% 16.4% 16.4% 16.3%
Average cost of debt(2)...... 6.5 6.7 6.5 6.6
--------- --------- --------- ---------
Net interest spread(3)....... 9.7% 9.7% 9.9% 9.7%
========= ========= ========= =========
Net interest margin(4)....... 9.9% 10.0% 10.1% 9.9%
========= ========= ========= =========
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased for the three
months and six months ended October 31, 1998 to $4.1 and $7.5 million from $3.0
and $6.0 million for the comparable periods in the preceding year. Net interest
income in 1998 represents increases of 35% and 24% from the same periods in
1997.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, 1997 TO 1998 OCTOBER 31, 1997 TO 1998
--------------------------------- ---------------------------------
INCREASE DUE TO INCREASE DUE TO
CHANGE IN CHANGE IN
-------------------- --------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
Receivables Held for Investment:
Interest income................. $ 1,074 $ 59 $ 1,133 $ 1,982 $ (44 ) $ 1,938
Interest expense................ 413 40 453 734 124 858
--------- ------- --------- --------- ------- ---------
Net interest income............. $ 661 $ 19 $ 680 $ 1,248 $ (168 ) $ 1,080
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1998 AND 1997 (DOLLARS IN
THOUSANDS)
INTEREST INCOME Interest income for the 1998 periods increased to $7,258
and $12,917 compared with $4,952 and $9,805 for the comparable periods in 1997
which reflects an increase of 47% and 32%. The increase in interest income is
due to (i) an increase in the average principal balance of receivables held for
investment of 22% and 20% from the 1997 to 1998 comparable periods; and, (ii)
the contribution to interest income made by the receivables acquired for
investment and the trust certificates acquired pursuant to the ALAC acquisition.
In addition, the interest income during the three month period was positively
influenced by a .2% increase in the effective yield. During the six month
period, the effective yield declined by .1%, which partially offset the increase
in average receivables held for investment. Management attributes the
14
increase in yield during the three month period to a decrease 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 $3,191 and $5,416
as compared to $1,940 and $3,759 in 1997. The increase of 64% and 44% was due to
(i) an increse of 21% and 20% in the weighted average borrowings outstanding
under secured credit facilities; and, (ii) interest expense associated with the
$75 million acquisition facility including projected deferred financing costs
related to the excess cash flow sharing arrangement with VFCC. Weighted average
cost of debt for secured credit facilities increased .2% and .1% for the three
and six month periods and a result of a higher level of facility utilization.
NET INTEREST INCOME. Net interest income increased to $4,067 and $7,501, an
increase of 35% and 24%. The increase resulted primarily from (i) the growth in
receivables held for investment and, (ii) contributions to interest income from
the receivables acquired for investment and trust certificates. In addition,
during the three month period, an increase in effective yield on receivables
held for investment offset the increase in the average cost of debt, thereby
maintaining a net interest spread of 9.7% over the 1998 and 1997 periods. During
the six month period, a combination of a .1% decline in effective yield and an
increase in the average cost of debt resulted in a .2% decline in net interest
spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased to $1,200 and $2,150 as compared to $628 and $1,339 in 1997. The
increase was the result of the growth of the Company's Receivables Held for
Investment portfolio and the related increase in net charge-offs.
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by ALAC in connection with two asset securitization
transactions. Under these transactions, ALAC, as servicer, is entitled to
receive a fee of 3% on the outstanding balance of the principal balance of
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Under the terms of the
securitizations, the servicer may be removed upon breach of its obligations
under the servicing agreements, the deterioration of the underlying receivables
portfolios in violation of certain performance triggers or the deteriorating
financial condition of the servicer. For the period from October 2, 1998 to
October 31, 1998, servicing income totaled $246.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $203
and $363 in 1998 from $126 and $306 in 1997 which primarily represents late fees
collected from customers on past due accounts and interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $574 and
$1,080 in 1998 from $447 and $874 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 in the Receivables Held for
Investment portfolio, which increased by 2,751 from 1997 to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs increased to
$1,129 and $1,985 in 1998 from $610 and $1,266 in 1997. The increase is a result
of (i) expansion of the Company's operation as a result of an increase in its
receivables portfolio and expansion of its geographic territory; and, (ii) an
increase in staffing levels as a result of the acquisition of ALAC. As of
October 31, the Company had 139 employees as compared to 66 as of April 30,
1998.
OTHER EXPENSES. Other expenses increased to $1,001 and $1,787 in 1998 from
$619 and $1,117 in 1997. The increase is a result of (i) an 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; and,
(ii) operating costs associated with the acquired company which were not
applicable to the prior year period.
15
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased to $612 and $1,108 or 27% and 37% from the
comparable period in 1997. This change was a result of the increase in net
interest income after provision for credit losses of $484 and $645 offset by an
increase in operating expenses of $1,029 and $1,595.
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 $30.1 million and $52.5 million for receivables
acquired for the three months and six months ended October 31, 1998, compared to
$16.9 million and $35.2 million paid in the comparable 1997 periods. 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. Credit enhancement for the
warehouse lenders is provided by an Auto Loan Protection ("ALPI") policy
issued by National Union Fire Insurance Company of Pittsburgh and reinsured by
the Company's captive insurance subsidiary.
The Company utilizes a $105 million commercial paper conduit financing
through Enterprise Funding Corporation, a commercial paper conduit administered
by NationsBank, N.A. as its primary source of permanent financing for
receivables held for investment. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). Credit enhancement for the $105 million
facility is provided to the commercial paper investors by a surety bond issued
by MBIA Insurance Corporation.
Receivables originally purchased by the Company are financed with
borrowings under the FIRC credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the FIARC commercial paper facility used to repay
borrowings under the FIRC credit facility. Once receivables are transferred to
the FIARC subsidiary and pledged as collateral for commercial paper borrowings,
the ALPI policy with respect to the transferred receivables is cancelled with
any unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the FIARC commercial paper facility
must be maintained in a reserve account for the benefit of the creditors and
surety bond provider.
The current term of the FIRC credit facility expires on April 15, 1999, at
which time the outstanding balance will be payable in full, subject to certain
notification provisions allowing the Company a period of six months in order to
endeavor to refinance the facility in the event of termination. The term of the
facility has been extended on eight 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 February 18, 1999. 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
16
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 expires on February 5, 1999. If the
lenders elect not to renew, any outstandings will be amortized over a one year
period. There was $4.5 million outstanding under this facility at October 31,
1998.
On October 2, 1998, the Company, through its indirect, wholly-owned
subsidiary, FIFS Acquisition Funding Company LLC (FIFS Acquisition), entered
into a $75 million bridge financing facility with Variable Funding Capital
Corporation (VFCC), an affiliate of First Union National Bank, to finance the
Company's acquisition of ALAC. Contemporaneously with the Company's purchase of
ALAC, ALAC transferred certain assets to FIFS Acquisition, consisting primarily
of (i) all receivables owned by ALAC as of the acquisition date, (ii) ALAC's
ownership interest in certain trust certificates and subordinated spread or cash
reserve accounts related to two asset securitizations previously conducted by
ALAC; and, (iii) certain other financial assets, including charged-off accounts
owned by ALAC as of the acquisition date. These assets, along with a $1 million
cash reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus 2.35%
and expires on April 2, 1999. Under the terms of the facility, all cash
collections from the receivables or cash distributions to the certificate holder
under the securitizations are first applied to pay ALAC a servicing fee in the
amount of 3% on the outstanding balance of all owned or managed receivables and
then to pay interest on the facility. Excess cash flow available after servicing
fees and interest payments are utilized to reduce the outstanding principal
balance on the indebtedness. In addition, 1% of the servicing fee paid to ALAC
is also utilized to reduce principal outstanding on the indebtedness. Following
the repayment of all outstanding indebtedness, additional terms of the financing
contemplate that VFCC will be entitled to a portion of any remaining cash flow
generated by the remaining receivables with the remaining net cash flow being
retained by the Company.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolios. The Company received
such payments in the amount of $41.9 million and $35.8 million for the six
months ended October 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
17
custodial fees. During the six months ended, the Company required net cash flow
of $21.7 million in 1998 and $11.4 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 October 31, 1998 the
Company was party to a swap agreement with NationsBank of Texas, N.A. pursuant
to which the Company's interest rate is fixed at 5.565% on a notional amount of
$120 million. The swap agreement expires on January 12, 2000 and may be extended
to January 14, 2002 at the option of NationsBank. This swap was entered into on
January 12, 1998 and replaced three existing swaps having an aggregate notional
amount of $120 million and fixing the Company's weighted average interest rate
at 5.63%. Two of these swap agreements having a notional amount of $90 million
were set to expire in September, 1998; while the remaining swap, having a
notional amount of $30 million, was scheduled to expire in October, 1998. The
expiration of each swap could have been extended for an additional two years
from the initial expiration date at the option of NationsBank.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81%; and, the second in the initial
notional amount of $24.9 million (Swap B) pursuant to which the Company's
interest rate is fixed at 5.50%. The notional amount outstanding under each swap
agreement amortizes based on an implied amortization of the hedged indebtedness.
Swap A has a final maturity of December 20, 2002 while Swap B has a final
maturity of February 20, 2000. The Company also purchased two interest rate caps
which protect the Company and the lender against any material increases in
interest rates which may adversely affect any outstanding indebtedness which is
not fully covered by the aggregate notional amount outstanding under the swaps.
The first cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 4.81%
on a notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Swap A and the
underlying indebtedness. The interest rate cap expires December 20, 2002 and the
cost of the cap is amortized in interest expense for the period. The second cap
agreement enables the Company to receive payments from the counterparty in the
event that the one-month commercial paper rate exceeds 6% on a notional amount
that increases initially and then amortizes based on the expected difference
between the outstanding notional amount under Swap B and the underlying
indebtedness. The interest rate cap expires February 20, 2002 and the cost of
the cap is imbedded in the fixed rate applicable to Swap B.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations and effective
collection procedures, (ii) providing recourse to dealers under its
participating program for a period of time and thereafter secured by cash
18
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):
OCTOBER 31,
-----------------------------------------------
1997 1998
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Receivables Held for Investment:
Core Program:
Insured by third party
insurer....................... $ 1,202 $ -- $ 333 $ --
Other receivables(1)............ 119,518 1,255 (3) 154,607 1,312 (3)
Participating Program(2)............. 2,579 267 (4) 931 216 (4)
----------- -----------
$ 123,299 $ 155,871
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 1.1 % 0.9 %
Dealer reserves as a percentage of
participating program
receivables........................ 10.4 % 23.1 %
- ------------
(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.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of October 31, 1998, the nonaccretable
loss reserve as a percentage of Receivables Acquired for Investment was 25.4%.
The nonaccretable portion represents, at acquisition, the excess of the loan's
scheduled contractual principal and contractual interest payments over its
expected cash flows.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 60 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
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 $1,200,000 and $2,150,000
has been recorded for the three months and six months ended October 31, 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
19
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 by the Company (dollars in thousands):
AS OF OR FOR THE SIX MONTHS ENDED OCTOBER 31,
----------------------------------------------------
1997 1998
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................... 247 $ 3,557 255 $ 3,363
60 - 89 days.................... 79 1,229 57 932
90 days or more................. 129 1,932 100 1,501
--- --------- --- ---------
Total delinquencies.................. 455 $ 6,718 412 $ 5,796
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 3.8% 3.9% 2.7% 2.6%
Net charge-offs as a percentage of
average receivables outstanding
during the
period(2)(3)....................... -- 2.2% -- 2.8%
- ------------
(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.
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment was 4.0% as of October 31, 1998.
YEAR 2000 ISSUE
The "Year 2000" issues involves computer programs and applications that
were written using two digits (instead of four) to describe the applicable year.
As the century date approaches, date-sensitive systems may recognize the Year
2000 as the year 1900, or not at all. The inability to recognize or properly
treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. Failure to successfully modify such
programs and applications to be Year 2000 compliant may have a material adverse
impact on the Company. Exposure arises not only from potential consequences
(e.g., business interruption) of certain of the Company's own applications not
being Year 2000 compliant, but also from non-compliance by significant
customers, vendors or other significant parties the Company does business with
(counterparties). Management has made inquiries of the software vendors of the
major applications the Company uses in-house and has received assertions, and in
some cases contractual representations, from each that such programs are
currently Year 2000 compliant. Management has also made inquiries of significant
counterparties with which the Company does business as to
20
their state of readiness in addressing the Year 2000 issue. In the case of the
Company, these counterparties consist primarily of (i) a group of financial
institutions upon which the Company relies on for receipt and distribution of
cash collections on its receivables portfolios and certain other cash management
and treasury functions; and, (ii) GE Capital, which serves as servicing and
collection agent on the Company's portfolio of receivables held for investment.
At present, the Company does not believe these counterparties to be Year 2000
compliant, but has received assurances from each that significant resources have
been dedicated to insuring that their systems will be modified or replaced prior
to the Year 2000 in order to address any exposure areas. There can be no
assurance, however, that such systems are or will be Year 2000 compliant or that
such counterparties would not have a material adverse affect from other systems
upon which they rely. The Company's contingency plans regarding the Year 2000
issue include continuing to communicate with its significant counterparties and
software vendors and assessing the potential impact upon the Company of the Year
2000 issue in the event that the counterparties' operations are adversely
affected and taking the necessary steps as deemed appropriate to successfully
address any exposure areas. In addition, the Company intends to test its most
critical applications to assure Year 2000 readiness beyond the assurances given
by the software vendors. For each primary counterparty upon which the Company
relies, there are alternative providers of such services in the marketplace
including, in certain instances, the capability for the Company to perform those
functions in-house on systems that are Year 2000 compliant. At this point,
management does not believe that the cost to the Company to address any Year
2000 issue is material in that the majority of the compliance cost will be the
responsibility of its significant counterparties.
FORWARD LOOKING INFORMATION
Statements and financial discussion and anlysis 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.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10.51 -- Loan and Security Agreement dated as of October 2, 1998
between Variable Funding Capital Corporation, Auto Lenders
Acceptance Corporation, ALAC Receivables Corp. and FIFS
Acquisition Funding Company, L.L.C.
10.52 -- Custodial Agreement dated as of October 2, 1998 among
Variable Funding Capital Corporation, Norwest Bank
Minnesota, NA, and Auto Lenders Acceptance Corporation.
10.53 -- Contract Purchase Agreement dated as of October 2, 1998 by
and between Auto Lenders Acceptance Corporation and FIFS
Acquisition Funding Company, L.L.C.
10.54 -- NIM Collateral Purchase Agreement dated as of
October 2, 1998 by and between Auto Lenders Acceptance
Corporation, ALAC Receivables Corporation and FIFS
Acquisition Funding Company, L.L.C.
(b) Current Report on Form 8-K dated October 2, 1998, reporting the Company's
acquisition of all of the outstanding common stock of Auto Lenders
Acceptance Corporation, was filed on October 19, 1998. Amendment No. 1 to
Current Report on Form 8-K was filed on December 14, 1998.
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: December 15, 1998 By: /s/ TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 15, 1998 By: /s/ BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
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