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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS MARCH 1, 1999
----- -------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JANUARY 31, 1999
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1998 and
January 31, 1999..................... 3
Consolidated Statements of Operations
for the Three Months
and Nine Months Ended January 31,
1998 and 1999........................ 4
Consolidated Statement of
Shareholders' Equity for the Nine
Months Ended January 31, 1999........ 5
Consolidated Statements of Cash Flows
for the Nine Months Ended
January 31, 1998 and 1999............ 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 JANUARY 31, 1999
APRIL 30, JANUARY 31,
1998 1999
--------------- ------------
(UNAUDITED)
ASSETS
Receivables Held for Investment,
net................................ $ 139,598,675 $170,120,058
Receivables Acquired for Investment,
net................................ -- 47,849,014
Investment in Trust Certificates..... -- 13,030,613
Cash and Short-Term Investments,
including restricted cash of
$3,215,540 and $9,255,440.......... 3,698,121 12,865,549
Other Receivables:
Due from servicer............... 10,229,975 11,880,313
Accrued interest................ 2,057,346 2,764,833
Assets Held for Sale................. 1,219,885 1,942,028
Other Assets:
Funds held under reinsurance
agreement..................... 2,016,682 2,533,790
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $846,250 and $1,385,761.... 1,638,947 4,845,160
Deferred income tax asset,
net........................... 298,235 664,052
Federal income tax receivable... 495,280 --
--------------- ------------
Total assets............... $ 161,253,146 $268,495,410
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Secured credit facilities....... $ 130,813,078 $165,023,787
Unsecured credit facility....... 2,500,000 5,585,000
Acquisition term facility....... -- 65,449,331
Other Liabilities:
Due to dealers.................. 241,988 216,711
Accounts payable and accrued
liabilities................... 2,317,840 5,336,989
Current income taxes payable.... 219,770 434,543
--------------- ------------
Total liabilities.......... 136,092,676 242,046,361
--------------- ------------
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 7,978,564
--------------- ------------
Total shareholders'
equity................... 25,160,470 26,449,049
--------------- ------------
Total liabilities and
shareholders' equity..... $ 161,253,146 $268,495,410
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1999
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------- ------------------------------
1998 1999 1998 1999
------------ ------------ -------------- --------------
Interest Income...................... $ 5,073,243 $ 9,688,287 $ 14,878,206 $ 22,605,135
Interest Expense..................... 2,052,530 4,449,019 5,811,799 9,864,658
------------ ------------ -------------- --------------
Net interest income........ 3,020,713 5,239,268 9,066,407 12,740,477
Provision for Credit Losses.......... 1,070,000 1,115,000 2,409,276 3,265,000
------------ ------------ -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 1,950,713 4,124,268 6,657,131 9,475,477
------------ ------------ -------------- --------------
Other Income:
Servicing....................... -- 474,918 -- 720,922
Late fees and other............. 148,879 241,764 454,918 604,690
------------ ------------ -------------- --------------
Total other income......... 148,879 716,682 454,918 1,325,612
------------ ------------ -------------- --------------
Operating Expenses:
Servicing fees.................. 468,906 602,165 1,342,598 1,681,927
Salaries and benefits........... 616,341 1,908,905 1,882,242 3,893,930
Other........................... 617,959 1,409,064 1,735,332 3,195,974
------------ ------------ -------------- --------------
Total operating expenses... 1,703,206 3,920,134 4,960,172 8,771,831
------------ ------------ -------------- --------------
Income Before Provision for Income
Taxes.............................. 396,386 920,816 2,151,877 2,029,258
------------ ------------ -------------- --------------
Provision for Income Taxes:
Current......................... 204,724 548,012 837,512 1,106,496
Deferred........................ (60,043) (211,914) (52,077) (365,817)
------------ ------------ -------------- --------------
Total provision for income
taxes.................... 144,681 336,098 785,435 740,679
------------ ------------ -------------- --------------
Net Income........................... $ 251,705 $ 584,718 $ 1,366,442 $ 1,288,579
============ ============ ============== ==============
Basic and Diluted Net Income per
Common Share....................... $0.05 $0.11 $0.25 $0.23
============ ============ ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 1999
(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...................... -- -- 1,288,579 1,288,579
------- -------------- ------------ --------------
Balance, January 31, 1999............ $ 5,567 $ 18,464,918 $ 7,978,564 $ 26,449,049
======= ============== ============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1999
(UNAUDITED)
1998 1999
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 1,366,442 $ 1,288,579
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 1,725,386 2,387,142
Provision for credit
losses................... 2,409,276 3,265,000
Charge-offs, net of
recoveries............... (2,275,540) (3,048,492)
(Increase) decrease in, net of
effects from the acquisition
of a business:
Accrued interest
receivable............... (217,003) (707,487)
Restricted cash............ 575,015 (1,913,057)
Deferred financing costs
and other................ (349,234) (1,168,219)
Funds held under
reinsurance agreement.... 424,947 (517,108)
Due from servicer.......... (1,135,954) (1,650,338)
Deferred income tax asset,
net...................... (52,077) (365,817)
Federal income tax
receivable............... -- 495,280
Increase (decrease) in, net of
effects from the acquisition
of a business:
Due to dealers............. (84,683) (25,277)
Accounts payable and
accrued liabilities...... (714,778) 2,160,953
Current income taxes
payable.................. 73,556 214,773
--------------- ---------------
Net cash provided by
operating
activities.......... 1,745,353 415,932
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables held for
investment.................... (53,862,332) (80,651,221)
Principal payments from
receivables held for
investment.................... 38,365,894 47,309,013
Principal payments from
receivables acquired for
investment.................... -- 7,166,517
Principal payments from trust
certificates.................. -- 3,236,211
Acquisition of a business, net
of cash acquired.............. -- (76,887,410)
Purchase of furniture and
equipment..................... (59,577) (206,554)
--------------- ---------------
Net cash used in
investing
activities.......... (15,556,015) (100,033,444)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 47,413,736 74,144,320
Unsecured debt............. -- 14,535,000
Acquisition debt........... -- 75,000,000
Principal payments made on --
Secured Debt............... (35,101,643) (39,933,611)
Unsecured debt............. -- (11,450,000)
Acquisition debt........... -- (9,550,669)
--------------- ---------------
Net cash provided by
financing
activities.......... 12,312,093 102,745,040
--------------- ---------------
Increase (Decrease) in Cash and
Short-Term Investments............. (1,498,569) 3,127,528
Cash and Short-Term Investments at
Beginning of Period................ 2,416,967 482,581
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 918,398 $ 3,610,109
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period
for --
Interest................... $ 5,824,400 $ 8,509,052
Income taxes............... 763,956 396,443
The accompanying notes are an integral part of these consolidated financial
statements.
6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998 AND 1999
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) is principally involved in the business of acquiring
and holding for investment retail installment contracts secured by new and used
automobiles and light trucks (receivables) originated by factory authorized
franchised dealers. As of January 31, 1999, approximately 38 percent of
receivables held for investment were located in Texas. The Company currently
originates loans from dealerships located in 24 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 on its balance sheet
of receivables held 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 18 states on a Receivables Acquired for Investment and
Receivables Managed Portfolio of $124.2 million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of January 31, 1999, and the results of its
operations for the three months and nine months ended January 31, 1998 and 1999,
and its cash flows for the nine months ended January 31, 1998 and 1999.
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 1998 amounts to conform
with the 1999 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
7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments over its expected cash flows as an amount that should not be accreted.
The remaining 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 provision for
the loan. For any material increases in estimated cash flows, 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 CERTIFICATES. 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 at 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 value 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, JANUARY 31,
1998 1999
--------------- ---------------
Receivables.......................... $ 136,445,808 $ 166,769,092
Unamortized premium and deferred
fees............................... 4,351,412 4,766,019
Allowance for credit losses.......... (1,198,545) (1,415,053)
--------------- ---------------
Net receivables................. $ 139,598,675 $ 170,120,058
=============== ===============
8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 31, 1999, the Company had investments in receivables pursuant to
the core program with an aggregate principal balance of $166,076,340.
Activity in the allowance for credit losses for the nine months ended
January 31, 1999, was as follows:
Balance, beginning of period......... $ 1,198,545
Provision for credit losses.......... 3,265,000
Charge-offs, net of recoveries....... (3,048,492)
--------------
Balance, end of period............... $ 1,415,053
==============
At January 31, 1999, the Company had investments in receivables pursuant to
the dealer recourse program with an aggregate principal balance of $692,752 and
dealer reserves of $215,907.
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 January 31, 1999:
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality........................ $ 82,029,007
Nonaccretable difference................ (20,899,555)
Accretable yield........................ (13,280,438)
---------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................... $ 47,849,014
===============
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 April 30, 1998............... $ -- $ --
Additions.......................... 16,650,533 26,345,112
Accretion.......................... (3,370,095) --
Eliminations....................... -- (5,445,557)
------------ -------------
Balance at January 31, 1999............. $ 13,280,438 $ 20,899,555
============ =============
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
$58,200,000, $83,970,270 and $22,853,517, respectively, at January 31, 1999, and
had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 5.87
percent, 5.80 percent and 5.31 percent, respectively. The effect of the hedge
instrument on the weighted average interest rate is immaterial.
The primary source of initial acquisition financing for receivables has
been primarily provided through a $55 million warehouse credit facility agented
by NationsBank of Texas, N.A. As of January 25, 1999, the facility was increased
by $10 million to $65 million and the final maturity extended to October 15,
1999.
9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, through its wholly-owned subsidiary, First Investors Financial
Services, Inc. (FIFS), also maintains a working capital facility with
NationsBank of Texas, N.A. as agent for the banks party thereto. As of January
25, 1999, the working capital facility was increased from $6 million to $10
million. The purpose of the facility is to support the Company's working capital
needs and for other general corporate purposes including credit enhancement on
its commercial paper conduit facilities. Under the terms of the facility, the
Company may borrow, repay and reborrow up to the lesser of $10 million or a
borrowing base. The current term of the $10 million facility expires on October
15, 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 January
31, 1999, there was $5,585,000 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 three
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.
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
10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 nine months ended January
31, 1998 and 1999, are as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
------------------------ ------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
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...... -- -- 817 36
----------- ----------- ----------- -----------
Weighted average shares outstanding
for diluted earnings per share..... 5,566,669 5,566,669 5,567,486 5,566,705
=========== =========== =========== ===========
For the three months and nine months ended January 31, 1999, the Company
had 138,000 and 137,964, 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
11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 NINE MONTHS ENDED
JANUARY 31,
--------------------------------
1998 1999
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Interest Income......................... $ 37,925,677 $ 34,912,367
Net Loss................................ $ (1,832,410) $ (94,247)
Basic and Diluted Net Loss per common
share................................. $ (0.33) $ (0.02)
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Net income for the three months ended January 31, 1999, was $584,718, an
increase of 132% from that reported for the comparable period in the preceding
year of $251,705. Net income for the nine months ended January 31, 1999, was
$1,288,579, a decrease of 6% from that reported for the comparable period in the
preceding year of $1,366,442. Earnings per common share was $0.11 for the three
months ended January 31, 1999, compared to $0.05 per common share for the
comparable period in the preceding year. Earnings per common share was $0.23 for
the nine months ended January 31, 1999, compared to $0.25 per common share for
the comparable period in the preceding year.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio and effective management of
net interest income. The following table summarizes the Company's growth in
receivables and net interest income (dollars in thousands):
AS OF OR FOR THE
NINE MONTHS ENDED
JANUARY 31,
----------------------
1998 1999
---------- ----------
Receivables Held for Investment:
Number.......................... 11,840 14,990
Principal balance............... $ 128,250 $ 166,769
Average principal balance of
receivables outstanding during
the nine month period......... 121,755 149,827
Average principal balance of
receivables outstanding during
the three month period........ 125,546 161,438
Receivables Acquired for Investment:
Number.......................... -- 5,418
Principal balance............... -- $ 56,697
Receivables Managed:(1)
Number.......................... -- 7,119
Principal balance............... -- $ 67,481
- ------------
(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 NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1998 1999(2) 1998 1999(2)
--------- --------- --------- ---------
Interest income(1)................. $ 5,073 $ 9,688 $ 14,878 $ 22,605
Interest expense................... 2,052 4,449 5,812 9,865
--------- --------- --------- ---------
Net interest income........... $ 3,021 $ 5,239 $ 9,066 $ 12,740
========= ========= ========= =========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) The Receivables Acquired for Investment contributed $3,109 and $4,282 to
interest income, $1,841 and $2,639 to interest expense and $1,268 and $1,643
to net interest income, to the results for the three months and nine months
ended, respectively.
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 NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------- --------------------
1998 1999 1998 1999
--------- --------- --------- ---------
Receivables Held for Investment:
Effective yield on
receivables(1).............. 16.1% 16.3% 16.3% 16.3%
Average cost of debt(2)....... 6.7 6.5 6.5 6.6
--------- --------- --------- ---------
Net interest spread(3)........ 9.4% 9.8% 9.8% 9.7%
========= ========= ========= =========
Net interest margin(4)........ 9.6% 9.8% 9.9% 9.9%
========= ========= ========= =========
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased for the three
months and nine months ended January 31, 1999 to $5.2 and $12.7 million from
$3.0 and $9.1 million for the comparable periods in the preceding year. Net
interest income in 1999 represents increases of 73% and 41% from the same
periods in 1998.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1998 TO 1999 JANUARY 31, 1998 TO 1999
--------------------------------- ---------------------------------
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................. $ 1,450 $ 56 $ 1,506 $ 3,431 $ 14 $ 3,445
Interest expense................ 636 (80) 556 1,354 60 1,414
--------- ------- --------- --------- ------- ---------
Net interest income............. $ 814 $ 136 $ 950 $ 2,077 $ (46) $ 2,031
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1999 AND 1998 (DOLLARS IN
THOUSANDS)
INTEREST INCOME Interest income for the 1999 periods increased to $9,688
and $22,605 compared with $5,073 and $14,878 for the comparable periods in 1998
which reflects an increase of 91% and 52%. The increase in interest income is
due to (i) an increase in the average principal balance of receivables held for
investment of 29% and 23% from the 1998 to 1999 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 nine month
period, the effective yield remained flat. Management attributes the increase in
yield during the three month period to a decrease in the
14
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 1999 increased to $4,449 and $9,865
as compared to $2,052 and $5,812 in 1998. The increase of 117% and 70% was due
to (i) an increase of 31% and 23% 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 decreased .2% and increased .1% for
the three and nine month periods as a result of a higher level of facility
utilization which was partially offset by lower market rates.
NET INTEREST INCOME. Net interest income increased to $5,239 and $12,740,
an increase of 73% and 41%. 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 combined with the decrease in the average cost
of debt, increased net interest spread .4% over the 1998 period. During the nine
month period, a combination of a flat effective yield and an increase in the
average cost of debt resulted in a .1% decline in net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1999
increased to $1,115 and $3,265 as compared to $1,070 and $2,409 in 1998. 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. During the three month and nine month
periods, servicing income was $475 and $721.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $242
and $605 in 1999 from $149 and $455 in 1998 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 $602 and
$1,682 in 1999 from $469 and $1,343 in 1998. Servicing fees consist primarily of
fees paid by the Company to General Electric Credit Corporation with which the
Company has a servicing relationship on its receivables held for investment.
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 3,150 from
1998 to 1999.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs increased to
$1,909 and $3,894 in 1999 from $616 and $1,882 in 1998. 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
January 31, 1999, the Company had 147 employees as compared to 66 as of April
30, 1998.
OTHER EXPENSES. Other expenses increased to $1,409 and $3,196 in 1999 from
$618 and $1,735 in 1998. 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 1999 period
15
versus the comparable period; and, (ii) operating costs associated with the
acquired company which were not applicable to the prior year period.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1999, income before
provision for income taxes increased to $921 and decreased to $2,029 or an
increase of 132% and a decrease of 6% from the comparable periods in 1998. This
change was a result of the increase in net interest income after provision for
credit losses of $2,174 and $2,818 offset by an increase in operating expenses
of $2,217 and $3,812.
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 paid $28.2 million and $80.7 million for
receivables acquired for the three months and nine months ended January 31, 1999
compared to $18.6 million and $53.9 million paid in the comparable 1998 periods.
The Company funds the purchase price of the receivables through the use of
a $65 million warehouse credit facility provided to F.I.R.C., Inc. ("FIRC") a
wholly-owned special purpose financing subsidiary of the Company. The current
FIRC credit facility generally permits the Company to draw advances up to the
outstanding principal balance of qualified receivables. Receivables that have
accumulated in the FIRC credit facility may be transferred to a commercial paper
conduit facility at the option of the Company. The commercial paper facility
provides additional liquidity of up to $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 October 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
16
October 1992. The FIARC commercial paper facility was provided for a term of one
year and has been extended to March 18, 1999. Currently the Company is in
negotiations to extend the term of the facility for an additional year and
increase the maximum facility amount to $130 million to accommodate anticipated
receivables growth. Approval is subject only to completion of final
documentation and rating agency approval. Management believes that the increase
and extension will occur with no material change to the existing pricing and
structure. 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.
The Company also maintains a $25 million commercial paper conduit financing
through Variable Funding Capital Corporation ("VFCC"), a commercial paper
conduit administered by First Union National Bank. The financing was provided to
a special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Capital Corporation ("FIACC") to fund the acquisition of 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 current term of the FIACC commercial paper facility expires on December
31, 1999. If the facility is not extended, receivables pledged as collateral
would be allowed to amortize; however, no new receivables could be transferred
to the facility.
In addition to the $195 million in currently available debt facilities
utilized to fund the acquisition of receivables, the Company also maintains a
$10 million working capital facility to be used for working capital and general
corporate purposes. As of January 25, 1999, the working capital facility was
increased to $10 million and expires on October 15, 1999. If the lenders elect
not to renew, any outstandings will be amortized over a one year period. There
was $5.6 million outstanding under this facility at January 31, 1999.
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 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%. 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. The bridge facility expires on April 2, 1999. The Company is
currently negotiating a term loan facility with VFCC which will refinance the
bridge facility and amortize the remaining outstanding indebtedness over a
period corresponding to the remaining life of the underlying receivables and
trust certificates. The Company anticipates no material change in pricing or
repayment terms from those governing the bridge facility. It is anticipated
however, that under the terms of the refinancing, VFCC will be entitled to
receive a portion of any remaining cash flows generated by the pledged
receivables after repayment of all
17
outstanding indebtedness. To the extent that the facility is not finalized prior
to the expiration date, the Company intends to seek a short-term extension to
allow for the completion of the term financing. The Company has no reason to
believe that an agreement with VFCC will not grant such an extension or that an
agreement to refinance the bridge cannot be reached prior to the then final
maturity of the bridge facility. If the facility was not extended, the remaining
outstanding balance would be due at maturity.
Substantially all of the Company's receivables are pledged to collateralize
the credit facilities. Management considers its relationship with all of the
Company's lenders to be satisfactory and has no reason to believe that the
credit facilities will not be renewed.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolios. The Company received
such payments in the amount of $63.7 million and $53.3 million for the nine
months ended January 31, 1999 and 1998, 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 nine months ended, the Company required net cash flow
of $33.3 million in 1999 and $15.5 million in 1998 (cash required to acquire
receivables held for investment 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 January 31, 1999, 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
18
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
reserves in the event of losses and (iii) insurance against certain losses from
independent third party insurers. As a result of its recourse programs and third
party insurance, the Company is not exposed to credit losses on its entire
receivables portfolio. The following table summarizes the credit loss exposure
of the Company (dollars in thousands):
JANUARY 31,
-----------------------------------------------
1998 1999
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
Receivables Held for Investment:
Core Program:
Insured by third party
insurer....................... $ 980 $ -- $ 319 $ --
Other receivables(1)............ 125,278 1,316 (3) 165,757 1,415 (3)
Participating Program(2)............. 1,992 256 (4) 693 216 (4)
----------- -----------
$ 128,250 $ 166,769
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 1.1 % 0.9 %
Dealer reserves as a percentage of
participating program
receivables........................ 12.9 % 31.2 %
- ------------
(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 January 31, 1999, the nonaccretable
loss reserve as a percentage of Receivables Acquired for Investment was 25.5%.
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
19
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 $1,115,000 and $3,265,000
has been recorded for the three months and nine months ended January 31, 1999,
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 by the Company (dollars in thousands):
AS OF OR FOR THE NINE MONTHS ENDED JANUARY 31,
----------------------------------------------------
1998 1999
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................... 251 $ 3,687 390 $ 5,030
60 - 89 days.................... 96 1,400 104 1,346
90 days or more................. 169 2,627 98 1,482
--- --------- --- ---------
Total delinquencies.................. 516 $ 7,714 592 $ 7,858
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 4.2% 4.3% 3.6% 3.3%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)(3)............ -- 2.6% -- 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.
20
The total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Receivables Managed was 5.9% as of
January 31, 1999.
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 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 analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
10.55 -- Third Amendment to the Amended and Restated Credit Agreement
dated January 25, 1999 by and among F.I.R.C., Inc. and
NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.56 -- Second Amendment to the Credit Agreement dated January 25,
1999 between First Investors Financial Services, Inc. and
NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: March 16, 1999 By: /s/ TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 16, 1999 By: /s/ BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
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