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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock - $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of June 30, 2001, based on the closing
price of the Common Stock on the NASDAQ National Market on said date, was
$13,454,375.
There were 5,566,669 shares of Common Stock of the registrant
outstanding as of June 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held September 6, 2001, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 2001.
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 2001
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 16
Item 3. Legal Proceedings............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................................... 16
PART II
Item 5. Market for Registrants' Common Equity and Related Shareholder Matters......................... 17
Item 6. Selected Consolidated Financial Data.......................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................. 19
Item 8. Financial Statements and Supplementary Data................................................... 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................ 32
PART III
Item 10. Directors and Executive Officers.............................................................. 33
Item 11. Executive Compensation........................................................................ 33
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 33
Item 13. Certain Relationships and Related Transactions................................................ 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 33
PART I
ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a
consumer finance company engaged in both the purchase of receivables originated
by franchised automobile dealers and originating loans directly to consumers in
connection with the sale of new and late-model used vehicles. The Company
specializes in lending to consumers with impaired credit profiles. The Company
does not utilize off-balance sheet securitization to finance its Receivables
Held for Investment. As of April 30, 2001, the Company had Receivables Held for
Investment in the aggregate principal amount of $244,684,343, having an
effective yield of 16.1 percent and a net interest spread to the Company of 8.5
percent (net of cost of funds and other carrying costs).
HISTORY
The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A.
Stockard to conduct an automobile finance business, with Mr. Moore providing the
operating expertise and Mr. Stockard and members of his family furnishing the
initial financial support. During the first three years of the Company's
existence, its operations consisted primarily of purchasing and pooling
receivables for resale to financial institutions and others. In March 1992, the
Company obtained additional capital from a group of private investors and
decided to expand its operations and reorient its business. Instead of acquiring
receivables for resale, the Company adopted a strategy of purchasing receivables
for retention.
On October 2, 1998, the Company completed the acquisition of First
Investors Servicing Corporation ("FISC"), formally known as Auto Lenders
Acceptance Corporation, from Fortis, Inc. Headquartered in Atlanta, Georgia,
FISC was 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, 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.
INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States. Most automobile financing is provided by captive
finance subsidiaries of major automobile manufacturers, banks, thrifts, credit
unions and independent finance companies such as the Company. The overall
industry is generally segmented according to the type of vehicle sold (new vs.
used), the nature of the dealership (franchised vs. independent) and the credit
characteristics of the borrower (prime vs. non-prime). The non-prime market is
comprised of individuals who are relatively high credit risks and who have
limited access to traditional financing sources, generally due to unfavorable
past credit experience, low income or limited financial resources and/or the
absence or limited extent of prior credit history.
ORIGINATING DEALER BASE
GENERAL. The Company primarily purchases receivables from the new and used
car departments of dealers operating under franchises from the major automobile
manufacturers. The Company does not generally do business with "independent"
dealers who operate used car lots with no manufacturer affiliation. No dealer or
group of dealers (who are affiliated with each other through common ownership)
accounted for more than 5 percent of the receivables owned by the Company at
April 30, 2001, and no dealer or group of related dealers originated more than 5
percent of the receivables held by the Company at that date. The volume and
frequency of receivable purchases from particular dealers vary widely with the
size of the dealerships as well as market and competitive factors in the various
dealership locations.
1
LOCATION OF DEALERS. Approximately 19 percent of the dealers with whom the
Company has agreements are located in Texas, where the Company has operated
since 1989. The Company's expansion beyond Texas began in 1992 and today the
Company operates in 26 states.
The following table summarizes, with respect to each state in which the
Company operates, the number of receivables (and percentage of total
receivables), outstanding which were originated by the Company from dealers in
such state during the last two fiscal years:
RECEIVABLES HELD FOR INVESTMENT
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YEAR ENDED YEAR ENDED
APRIL 30, 2000 APRIL 30, 2001
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STATE LOAN COUNT % LOAN COUNT %
--------------------------------- ---------- ------- ---------- -------
Texas............................ 5,684 29.3% 5,444 26.6%
Georgia.......................... 2,998 15.5% 3,512 17.1%
Ohio............................. 3,472 17.9% 3,373 16.5%
Oklahoma......................... 2,195 11.3% 2,512 12.3%
Missouri......................... 960 5.0% 1,029 5.0%
North Carolina................... 455 2.3% 643 3.1%
Michigan......................... 665 3.4% 589 2.9%
Virginia......................... 557 2.9% 515 2.5%
Tennessee........................ 291 1.5% 506 2.5%
Colorado......................... 330 1.7% 503 2.5%
Kansas........................... 385 2.0% 303 1.5%
New Jersey....................... 111 0.6% 254 1.2%
Washington....................... 149 0.8% 220 1.1%
Indiana.......................... 89 0.5% 133 0.6%
Pennsylvania..................... 156 0.8% 131 0.6%
All others(1).................... 877 4.5% 835 4.0%
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19,374 100.0% 20,502 100.0%
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(1) Includes dealers located in Arizona, California, Connecticut,
Florida, Iowa, Idaho, Illinois, Kentucky, Nebraska, South
Carolina and Utah.
MARKETING REPRESENTATIVES. The Company utilizes a system of regional
marketing representatives to recruit, enroll and to provide new dealers with the
Company's underwriting guidelines and credit policies as well as to maintain
relationships with the Company's existing dealers. The representatives are
full-time employees who reside in the region for which they are responsible.
In addition to soliciting and enrolling new dealers, the regional
representatives assist new dealers in assimilating the Company's system of
credit application submission, review, acceptance and funding, as well as
dealing with routine dealer relations on a daily basis. The role of the regional
representatives is generally limited to marketing the Company's core finance
programs and maintaining relationships with the Company's originating dealer
base. The representatives do not enter into or modify dealer agreements on
behalf of the Company, do not participate in credit evaluation or loan funding
decisions and do not handle funds belonging to the Company or its dealers. Each
representative reports to, and is supervised by, the Company's sales and
marketing manager in Houston.
In 1997, the Company established a telemarketing department to supplement
the efforts of its marketing representatives in the field. The telemarketing
staff (dealer sales representatives) is located in Houston and is primarily
responsible for new loan volume in rural areas or states in which the Company
cannot justify a field marketing representative.
2
It has been the policy of the Company to avoid the establishment of branch
offices because it believes that the expenses and administrative burden of such
offices are generally unjustified. Moreover, in view of the availability of
modern data transmission technology, the Company has concluded that the critical
functions of credit evaluation and loan origination are best performed and
controlled on a centralized basis from its Houston facility. Accordingly, as the
marketing representative system has operated satisfactorily, the Company does
not plan to create branch offices in the future.
FINANCING PROGRAMS
The Company originates loans from two sources: (i) dealer indirect (the
"core program"), and (ii) consumer direct utilizing the Internet and direct
marketing. The core program generates approximately 90 percent of the Company's
current volume and consists of loans purchased directly from dealerships in
states in which the Company operates. Consumer direct originations contribute
approximately 10 percent of originations and involve applications for credit
obtained through either direct marketing efforts or through the Company's
Internet initiative from consumers who are seeking to acquire a vehicle or
refinance an existing automobile loan.
Credit applications generated by each of the above sources are forwarded to
the Company's centralized credit department in Houston with decisions made based
on the Company's standard underwriting guidelines and credit scoring model. The
internal credit decision and acceptance process is essentially the same
regardless of the origination source. Third party originators have no credit
approval authority and are subject to individual contracts that specify the
obligations of the parties. Essentially all of the Company's receivables are
acquired on a non-recourse basis.
In addition to purchasing receivables from dealers under the core program
as they are originated or making loans directly to consumers, the Company has
also acquired seasoned receivables in bulk portfolio acquisitions or from other
third party originators and may continue to do so from time to time.
The Company had active dealership agreements with 1,443 dealers at April
30, 2001. These are non-exclusive agreements terminable at any time by either
party and they require no specific volume levels. The agreements with the core
program dealers contain customary representations and warranties concerning
title to the receivables sold, validity of the liens on the underlying vehicles,
compliance with applicable laws and related matters. Although the dealers are
obligated to repurchase receivables that do not conform to these warranties, the
dealers do not guarantee collectability or obligate themselves to repurchase
receivables solely because of payment default. The receivables are purchased at
par or at prices that may reflect a discount or premium depending on the annual
percentage rates of particular receivables and the Company's assessment of
relative credit risk. The pricing and credit terms upon which the Company agrees
to acquire receivables is governed by the Company's credit policy and a credit
score generated by the Company's proprietary, empirical based scoring model.
CREDIT EVALUATION
GENERAL. In connection with the origination of a receivable for purchase by
the Company, the Company follows systematic procedures designed to eliminate
unacceptable risks. This involves a three-step process whereby (i) the
creditworthiness of the borrower and the terms of the proposed transaction are
evaluated and either approved, declined or modified by the Company's credit
verification department, (ii) the loan documentation and collateralization is
reviewed by the Company's funding department, and (iii) additional collateral
verification procedures and customer interviews are conducted by the Company.
During the course of this process, the Company's credit verification and funding
personnel coordinate closely with the finance and insurance departments of the
dealers tendering receivables or with individuals to whom the Company lends
directly. The Company has developed various financing programs under which it
approves loans that vary in pricing and loan terms depending on the relative
credit risk determined for each loan. Credit or default risk is evaluated by the
Company's loan officers in conjunction with a proprietary, empirical based
credit scoring model developed based on the Company's 12 year database of
non-prime lending results.
3
COLLATERAL VERIFICATION. As a condition to the purchase of each
receivable originated by the Company, the Company performs an individual
audit evaluation consisting of personal telephonic interviews with each
vehicle purchaser to verify the details of the credit application and to
confirm that the material terms of the sale conform to the purchaser's
understanding of the transaction. The Company will purchase a receivable
under its core program only after receipt and review of a satisfactory audit
report.
SERVICING
The Company believes that competent, attentive and efficient loan
servicing is as important as sound credit evaluation for purposes of assuring
the integrity of a receivable.
Since its inception in 1989 until July 1999, the Company had a
servicing relationship with General Electric Capital Corporation ("GECC") an
affiliate of General Electric Corporation. The division of GECC which
serviced the Company's receivables operates primarily as a servicer of
automobile installment loans and is one of the largest such servicers in the
United States. The Company's relationship with GECC was governed by a
servicing agreement entered into in October 1992 although the Company had
done business with GECC under previous agreements since 1989. Under the
agreement, GECC was responsible for all aspects of loan servicing and
collections with the exception of the disposition of repossessed vehicles,
which was the responsibility of the Company.
Servicing fees paid by the Company to GECC represented a variable
cost that increased in proportion to the volume of receivables carried.
During its two fiscal years ended April 30, 2000 and 2001, the Company
incurred servicing and related fees in the amount of $434,572 and $0,
respectively. In July 1999, the Company elected to terminate the servicing
agreement with GECC in connection with the transfer of the servicing and
collection activities on the receivables to the Company's internal servicing
and collection platform.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify potential borrowers whom it regards as creditworthy
despite credit histories that limit their access to traditional sources of
consumer credit. In addition to personal credit qualifications, the Company
attempts to assure that the characteristics of the automobile sold and the terms
of the sale are likely to result in a consistently performing receivable. These
considerations include amount financed, monthly payments required, duration of
the loan, age of the automobile, mileage on the automobile and other factors.
CUSTOMER PROFILE. The Company's primary goal in credit evaluation is
to make loans to customers having stable personal situations, predictable
incomes and the ability and inclination to perform their obligations in a
timely manner. Many of the Company's customers are persons who have
experienced credit difficulties in the past by reason of illness, divorce,
job loss, reduction in pay or other adversities, but who appear to the
Company to have the capability and commitment to meet their obligations.
Through its credit evaluation process, the Company seeks to distinguish these
persons from those applicants who are chronically poor credit risks. Certain
information concerning the Company's obligors for the past two fiscal years
(based on credit information compiled at the time of the loan origination) is
set forth in the following table:
4
APRIL 30,
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2000 2001
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Average monthly gross income....................... $4,030 $3,975
Average ratio of consumer debt to gross income..... 33% 34%
Average years in current employment................ 6 6
Average years in current residence................. 5 5
Residence owned.................................... 42% 41%
Residence rented................................... 53% 53%
Other residence arrangements(1).................... 5% 6%
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(1) Includes military personnel and persons residing with relatives.
PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the non- prime market, the Company endeavors
to maintain a receivables portfolio having characteristics that, in its
judgment, reflect an optimal balance between achievable yield and acceptable
risk. The following table sets forth certain information concerning the
composition of the Company's portfolio as of the end of the past two fiscal
years:
APRIL 30,
------------------
2000 2001
------- -------
New Vehicles:
Percentage of portfolio(1)............................... 23% 19%
Number of receivables outstanding........................ 4,052 3,858
Average amount at date of acquisition.................... $17,601 $18,369
Average term (months) at date of acquisition(2).......... 60 61
Average remaining term (months)(2)....................... 45 38
Average monthly payment.................................. $ 471 457
Average annual percentage rate........................... 17.0% 17.1%
Used Vehicles:
Percentage of portfolio(1)............................... 77% 81%
Number of receivables outstanding........................ 15,322 16,644
Average age of vehicle at date of acquisition (years).... 1.9 2.0
Average amount at date of acquisition.................... $14,665 $15,279
Average term (months) at date of acquisition(2).......... 57 58
Average remaining term (months)(2)....................... 46 39
Average monthly payment.................................. $ 413 $ 398
Average annual percentage rate........................... 17.6% 17.8%
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(1) Calculated on the basis of number of receivables outstanding as of the
date indicated.
(2) Because the actual life of many receivables will differ from the stated
term by reason of prepayments and defaults, data reflecting the average
stated term of receivables included in a portfolio will not correspond with
actual average life.
FINANCING ARRANGEMENTS
GENERAL. At the time the Company acquires receivables, they are
financed by transferring them, at an amount equal to the outstanding principal
balance, to a wholly-owned special-purpose financing subsidiary, F.I.R.C., Inc.
("FIRC"). FIRC maintains a $50 million revolving bank facility with Bank of
America and First Union National Bank, (the "FIRC credit facility"). In
addition, a wholly-owned special-purpose financing subsidiary, First Investors
Auto Receivables Corporation ("FIARC") has a $150 million conduit finance
facility with Enterprise Funding Corporation ("Enterprise"), a commercial paper
conduit administered by Bank of America, (the "FIARC commercial paper facility")
which allows the Company to refinance borrowings under the FIRC credit facility
in
5
order to maintain sufficient capacity to acquire new receivables. Together,
these warehouse credit facilities provide $200 million in financing capacity
to fund the purchase and long-term financing of receivables. When necessary,
the Company will transfer receivables from the warehouse credit facilities
and issue additional term notes.
FIRC CREDIT FACILITY. As designated receivables are originated by the
Company and transferred to FIRC, they are immediately pledged to a commercial
bank that serves as the collateral agent for the bank lenders. The FIRC credit
facility has a borrowing base that, subject to certain adjustments, permits FIRC
to draw advances up to the outstanding principal balance of qualified
receivables but not in excess of the present facility limit of $50 million.
Uninsured losses on receivables, or certain other events adversely affecting the
collectability of receivables, can result in their ineligibility for inclusion
in the borrowing base, and in the event that the Company's advances exceed the
borrowing base the Company must prepay the credit line until the imbalance is
corrected.
Under the FIRC credit facility the Company has three interest rate
options: (i) the Bank of America prime rate in effect from time to time, (ii) a
rate equal to .5 percent above the "LIBOR" rate (the average U.S. dollar deposit
rate prevailing from time to time in the London interbank market) for selected
advance terms, or (iii) any other short-term fixed interest rate agreed upon by
the Company and the lenders. The Company is also required to pay periodic
facility fees as well as an annual agency fee, and to maintain certain
collection reserves. The pledge of all of the receivables financed, a cash
reserve account and all of the capital stock of FIRC secure this facility.
Collections of principal and interest on the Company's receivables are remitted
directly to the collateral agent for application to the payment of interest due
on the credit facility and certain other charges, with the balance of
collections then being distributed to the Company.
The current term of the FIRC credit facility expires on November 14,
2001, at which time, should the facility not be renewed, the outstanding
borrowings would be converted to a term loan facility that would mature six
months thereafter and amortize monthly in accordance with the borrowing base
with any remaining balance due at maturity. The Company presently intends to
seek a renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no reason
to believe that this credit facility will not be renewed. If the facility were
not renewed however, or if material changes were made to its terms and
conditions, it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. When a sufficient number of
receivables have been accumulated under the FIRC credit facility, they may be
refinanced under the FIARC commercial paper facility through a transfer of a
group of specified receivables from FIRC to FIARC. FIARC's purchase is funded
through borrowings under the commercial paper facility equal to 94 percent of
the aggregate principal balance of the receivables transferred. The remaining 6
percent of funds required to repay borrowings under the FIARC credit facility
are advanced by the Company in the form of an equity contribution to FIARC.
Enterprise funds the advance to FIARC through the issuance, by an affiliate of
Enterprise, of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 2001, the maximum
borrowings available under the commercial paper facility were $150 million. The
Company's interest cost is based on Enterprise's commercial paper rates for
specific maturities plus .30 percent. In addition, the Company is required to
pay periodic facility fees and other costs related to the issuance of commercial
paper.
As collections are received on the transferred receivables they are
remitted directly to a collection account maintained by the collateral agent for
the FIARC commercial paper facility. From that account, a portion of the
collected funds are distributed to Enterprise in an amount equal to the
principal reduction required to maintain the 94 percent advance rate and to pay
carrying costs and related expenses, with the balance released to the Company.
In addition to the 94 percent advance rate, FIARC must maintain a 1 percent cash
reserve as additional credit support for the facility.
In November 2000, the Company increased its commercial paper facility,
with Enterprise, which is credit enhanced by a surety bond issued by MBIA
Insurance Corporation from $135 million to $150 million. The new facility
expires on November 29, 2001. If the facility were terminated, no new
receivables could be transferred to FIARC from FIRC and the receivables financed
under the commercial paper facility would be allowed to amortize. The Company
presently intends to seek a renewal of the facility from its lenders prior to
maturity. Management
6
considers its relationship with its lenders to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the
facility were not renewed however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, a wholly-owned
special-purpose financing subsidiary, First Investors Auto Capital Corporation
("FIACC"), entered into a $25 million commercial paper conduit facility with
Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit
administered by First Union National Bank (the "FIACC commercial paper
facility"), 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 percent of the face amount of receivables, which
are pledged as collateral for the commercial paper borrowings. VFCC funds the
advance to FIACC through the issuance of commercial paper (indirectly secured by
the receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. The Company's
interest cost is based on VFCC's commercial paper rates for specific maturities
plus .30 percent.
At April 30, 2001, borrowings were $10,400,901 under the FIACC
commercial paper facility, and had a weighted average interest rate of 5.56
percent, including the effects of program fees and hedge instruments. There
were no outstanding borrowings at April 30, 2000. The current term of the
FIACC commercial paper facility expires on November 14, 2001. If the facility
were not renewed on or prior to the maturity date, the outstanding balance
under the facility would continue to amortize utilizing cash collections from
the receivables pledged as collateral. The Company presently intends to seek
a renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the
facility were not renewed however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1 (the "ALAC 97-1 Securitization"). Accordingly,
the Company acquired $8,110,849 in outstanding receivables from the trust and
borrowed $6,408,150 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding balance in a cash reserve
account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456
of the trust certificates. On March 15, 2001, the Company elected to exercise
its right to repurchase the senior notes issued in connection with the ALAC
Automobile Receivables Owner Trust 1998-1 (the "ALAC 98-1 Securitization").
Accordingly, the Company acquired $9,257,612 in outstanding receivables from the
trust and borrowed $7,174,509 under the FIACC facility which, combined with
amounts on deposit in the collection account and the outstanding balance in a
cash reserve account, was utilized to repay $7,997,615 in senior notes and
redeem $1,946,178 of the Trust Certificates. The receivables purchased were used
as collateral to secure the FIACC borrowing with any residual cash flow
generated by the receivables pledged to the partnership. As a result of
utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company
has elected to utilize the FIACC commercial paper facility solely as the
financing source for the repurchases and does not expect to utilize the facility
to finance Receivables Held for Investment. Accordingly, the borrowing capacity
was reduced from $25 million to $11,627,308 effective March 15, 2001.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed notes
("Term Notes"). A pool of automobile receivables totaling $174,968,641, which
were previously owned by FIRC, FIARC and FIACC, secures the Term Notes. Proceeds
from the issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Term Note issuance and to fund a cash reserve account of 2
percent or $3,499,373 which will serve as a portion of the credit enhancement
for the transaction. The Term Notes bear interest at 7.174 percent and require
monthly principal reductions sufficient to reduce the balance of the Term Notes
to 96 percent of the outstanding balance of the underlying receivables pool. The
final maturity of the Term Notes is February 15, 2006. As of April 30, 2000 and
2001, the outstanding principal balances on the Term Notes were $151,104,279 and
$84,925,871, respectively. A surety bond
7
issued by MBIA Insurance Corporation provides credit enhancement for the Term
Note holders. Additional credit support is provided by the cash reserve
account, which equals 2 percent of the original balance of the receivables
pool and a 4 percent over-collateralization requirement. In the event that
certain asset quality covenants are not met, the reserve account target level
will increase to 6 percent of the then current principal balance of the
receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC ("FIFS
Acquisition"), entered into a $75 million non-recourse bridge financing facility
with VFCC to finance the Company's acquisition of FISC. Contemporaneously with
the Company's purchase of FISC, FISC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by FISC as of the
acquisition date, (ii) FISC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by FISC, and (iii) certain other financial
assets, including charged-off accounts owned by FISC 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 bore interest at
VFCC's commercial paper rate plus 2.35 percent and expired August 14, 2000.
Under the terms of the facility, all cash collections from the acquired
receivables or cash distributions to the certificate holder under the
securitizations are applied to pay FISC 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.
On August 8, 2000, the Company entered into an agreement with First
Union to refinance the acquisition facility. Under the agreement, a
partnership was created in which FIFS Acquisition serves as the general
partner and contributed its assets for a 70 percent interest in the
partnership and First Union Investors, Inc., an affiliate of First Union,
serves as the limited partner with a 30 percent interest in the partnership
(the "Partnership"). Pursuant to the refinancing, the Partnership issued
Class A Notes in the amount of $19,204,362 and Class B Notes in the amount of
$979,453 to VFCC, the proceeds of which were used to retire the acquisition
debt. The Class A Notes bear interest at VFCC's commercial paper rate plus
0.95 percent per annum and amortize on a monthly basis by an amount necessary
to reduce the Class A Note balance as of the payment date to 75 percent of
the outstanding principal balance of Receivables Acquired for Investment,
excluding Receivables Acquired for Investment that are applicable to FIACC,
as of the previous month end. The Class B Notes bear interest at VFCC's
commercial paper rate plus 5.38 percent per annum and amortize on a monthly
basis by an amount which varied based on excess cash flows received from
Receivables Acquired for Investment after payment of servicing fees, trustee
and back-up servicer fees, Class A Note interest and Class A Note principal,
plus collections received on the Trust Certificates. The outstanding balance
of the Class A Notes was $11,126,050 as of April 30, 2001 and had a weighted
average interest rate of 6.26 percent, including the effects of program fees
and hedge instruments. The Class B Notes were paid in full on September 15,
2000. After the Class B Notes were paid in full, all cash flows received
after payment of Class A Note principal and interest, servicing fees and
other costs, are distributed to the Partnership for subsequent distribution
to the partners based upon the respective partnership interests. The amount
of the partners' cash flow will vary depending on the timing and amount of
residual cash flows. The Company is accounting for First Union's limited
partnership interest in the Partnership as a minority interest.
The Class A Notes mature on July 31, 2001. If the Class A Notes are
not renewed on or prior to the maturity date, the outstanding balance under
the notes would continue to amortize utilizing cash collections from the
receivables pledged as collateral. The Company presently intends to seek a
renewal of the notes from the lender prior to maturity. Management considers
its relationship with the lender to be satisfactory and has no reason to
believe that the notes will not be renewed. If the notes were not renewed
however, or if material changes were made to the terms and conditions, it
could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that was utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December 1999 and
was scheduled to mature on December 22, 2000. Effective December 22, 2000, the
$13.5 million in outstandings were refinanced through the issuance of a $13.5
million term loan. Under the terms of the facility, provided by Bank of America
and First Union, the term loan would be repaid in quarterly installments of
$675,000 beginning on March 31, 2001. In
8
addition to the scheduled principal payments, the term loan also requires an
additional principal payment of $300,000 on June 30, 2001 under certain
conditions relating to the size of Bank of America's portion of the
outstanding balance. Pursuant to this requirement, the Company paid $300,000
to Bank of America effective June 30, 2001. The remaining unpaid balance of
the term loan is due at maturity on December 22, 2002. Pricing under the
facility is based on the LIBOR rate plus 3 percent. The term loan is secured
by all unencumbered assets of the Company, excluding receivables owned and
financed by wholly-owned, special-purpose subsidiaries of the Company and is
guaranteed by First Investors Financial Services Group, Inc. and all
subsidiaries that are not special-purpose subsidiaries. In consideration for
refinancing the working capital facility, the Company paid each lender an
upfront fee and issued warrants to each lender to purchase, in aggregate,
167,001 shares of the Company's common stock at a strike price of $3.81 per
share. The warrants expire on December 22, 2010. On December 22, 2000, the
warrant value of $175,000 was estimated based on the expected difference
between financing costs with and without the warrants. These costs are
included as deferred financing costs and will be amortized through the
maturity date of the debt. In addition, if certain conditions were met, the
Company agreed to issue additional warrants to Bank of America to acquire up
to a maximum of 47,945 additional shares of stock at a price equal to the
average closing price for the immediately preceding 30 trading days prior to
each grant date which is June 30, 2001 and December 31, 2001. Pursuant to
this requirement, the Company issued 36,986 warrants to Bank of America at a
strike price of $3.56 per share on June 30, 2001. All other terms and
conditions of the warrants were identical to the warrants issued in December
2000. The amount of warrants if any, to be issued on December 31, 2001 will
be determined by the outstanding balance owing to Bank of America under of
the term loan. In no event, however, can the additional warrants issued on
December 31, 2001 exceed 10,959. The fair value of the warrants issued on
June 30, 2001 will be included as deferred financing costs and amortized
through the maturity date of the debt.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under the
increased working capital facility.
LOAN COVENANTS. The documentation governing each of the Company's
financing arrangements contains numerous covenants relating to the Company's
business, the maintenance of credit enhancement insurance covering the
receivables (if applicable), the observance of certain financial covenants,
the avoidance of certain levels of delinquency experience, and other matters.
The breach of these covenants, if not cured within the time limits specified,
could precipitate events of default that might result in the acceleration of
the FIRC credit facility and working capital facility or the termination of
the commercial paper facilities. Through the operation of the collateral
agency arrangements described above, which are in the nature of a "lock-box"
security device covering the collection of principal and interest on almost
all of the Company's receivables, such a default could cause the immediate
termination of the Company's primary sources of liquidity. The Company is not
currently in default with any covenants governing these financing
arrangements at April 30, 2001.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities
bear interest at floating interest rates which are reset on a short-term basis
while the secured Term Notes bear interest at a fixed rate of interest. The
Company's receivables bear interest at fixed rates that do not generally vary
with the change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of
America pursuant to which the Company's interest rate was fixed at 5.565 percent
on a notional amount of $120 million. The swap agreement expired on January 12,
2000. In connection with the issuance of the Term Notes, the Company entered
into a swap agreement with Bank of America pursuant to which the Company pays a
floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent
and receives a fixed rate of 7.174 percent from the counterparty. The initial
9
notional amount of the swap was $167,969,000, which amortizes in accordance with
the expected amortization of the Term Notes. Final maturity of the swap is
August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating
swap at no material gain or loss and enter into a new swap under which the
Company would pay a fixed rate of 6.30 percent on a notional amount of $100
million. Under the terms of the swap, the counterparty had the option of
extending the swap for an additional three years to mature on April 15, 2004 at
a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised its
extension option.
On June 1, 2001, the Company entered into interest rate swaps with an
aggregate notional amount of $100 million and a maturity date of April 15, 2004.
Under the terms of these swaps, the Company will pay a floating rate based on
one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to
enter into these swap agreements to offset the uneconomical position of the
existing pay fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization
and the financing of the repurchase through the FIACC facility on September
15, 2000, the Company entered into an interest rate swap agreement with First
Union under which the Company pays a fixed rate of 6.76 percent as compared
to the one month commercial paper index rate. The initial notional amount of
the swap was $6,408,150, which amortizes monthly in accordance with the
expected amortization of the commercial paper borrowings and matures on
December 15, 2001. On March 15, 2001, in connection with the repurchase of
the ALAC 1998-1 Securitization and the financing of that purchase through the
FIACC subsidiary, the Company and the counterparty modified the existing
interest rate swap increasing the notional amount initially to $11,238,710
and reducing the fixed rate from 6.76 percent to 5.12 percent. The new
notional amount is scheduled to amortize monthly in accordance with the
expected principal amortization of the underlying borrowings. The expiration
date of the swap was changed from December 15, 2001 to September 1, 2002.
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 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 20, 2002
while Swap B matured on 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 that 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. Pursuant to the refinance of the
acquisition facility on August 8, 2000, the Class B cap was terminated and the
notional amounts of the Class A swap and Class A cap were adjusted downward to
reflect the lower outstanding balance of the Class A Notes. The amendment or
cancellation of these instruments resulted in a gain of $418,609. This
derivative net gain is being amortized over the life of the initial derivative
instrument. In addition, the two remaining hedge instruments were assigned by
FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated three interest rate swaps
and one interest rate cap with an aggregate notional value of $130,165,759 as
cash flow hedges as defined under SFAS No. 133. Accordingly, any
10
changes in the fair value of these instruments resulting from the
mark-to-market process will be recorded as unrealized gains or losses and be
reflected as an increase or reduction in stockholders' equity through other
comprehensive income. In connection with the decision to enter into the $100
million floating rate swaps on June 1, 2001, the Company elected to change
the designation of the $100 million fixed rate swap and not account for the
instrument as a hedge under SFAS No. 133. As a result, the change in fair
value of both swaps will be reflected as a gain or loss in net income for the
appropriate measurement period. Management believes that since these two
positions effectively offset, any net gains or losses will be immaterial to
income.
CREDIT ENHANCEMENT -- FIRC CREDIT FACILITY. In order to obtain a
lower cost of funding, the Company has agreed under the FIRC credit facility
to maintain credit enhancement insurance covering all of its receivables
pledged as collateral under this facility. The facility lenders are named as
additional insureds under these policies. The coverages are obtained on each
receivable at the time it is purchased by the Company and the applicable
premiums are prepaid for the life of the receivable. Each receivable is
covered by three separate credit insurance policies, consisting of basic
default insurance under a standard auto loan protection policy (known as
"ALPI" insurance) together with certain supplemental coverages relating to
physical damage and other risks. Solely the Company at its expense carries
these coverages and neither the vehicle purchasers nor the dealers are
charged for the coverages and they are usually unaware of their existence.
The Company's ALPI insurance policy is written by National Union Fire
Insurance Company of Pittsburgh ("National Union"), which is a wholly-owned
subsidiary of American International Group. As of April 30, 2001, National
Union had been assigned a rating of A+ + by A.M. Best Company, Inc.
The premiums that the Company paid during its past fiscal year for its
three credit enhancement insurance coverages, which consist primarily of the
basic ALPI insurance, represented approximately 3.9 percent of the principal
amount of the receivables acquired during the year. Aggregate premiums paid for
ALPI coverage alone during the three fiscal years ended April 30, 2001 were
$3,537,416, $5,344,975 and $3,413,186, respectively, and accounted for 3.2
percent, 3.8 percent and 3.0 percent of the aggregate principal balance of the
receivables acquired during such respective periods.
Prior to establishing its relationship with National Union in March
1994, the Company's ALPI policy was provided by another third-party insurer. In
April 1994 the Company organized First Investors Insurance Company (the
"Insurance Affiliate") under the captive insurance company laws of the State of
Vermont. The Insurance Affiliate is an indirect wholly-owned subsidiary of the
Company and is a party to a reinsurance agreement whereby the Insurance
Affiliate reinsures 100 percent of the risk under the Company's ALPI insurance
policy. At the time each receivable is insured by National Union, the risk is
automatically reinsured to its full extent and approximately 96 percent of the
premium paid by the Company to National Union with respect to such receivable is
ceded to the Insurance Affiliate. When a loss covered by the ALPI policy occurs,
National Union pays it after the claim is processed, and National Union is then
reimbursed in full by the Insurance Affiliate. As of April 30, 2001, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $21,963,429 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$6,210,971. In addition to the monthly premiums and liquidity reserves of the
Insurance Affiliate, a trust account is maintained by National Union to secure
the Insurance Affiliates obligations for losses it has reinsured.
The result of the foregoing reinsurance structure is that National
Union, as the "fronting" insurer under the captive arrangement, is
unconditionally obligated to the Company's credit facility lenders for all
losses covered by the ALPI policy, and the Company, through its Insurance
Affiliate, is obligated to indemnify National Union for all such losses. As of
April 30, 2001, the Insurance Affiliate had capital and surplus of $1,633,013
and unencumbered cash reserves of $919,639 in addition to the $2,533,058 trust
account.
The ALPI coverage as well as the Insurance Affiliate's liability under
the Reinsurance Agreement, remains in effect for each receivable that is pledged
as collateral under the warehouse credit facility. Once receivables are
transferred from FIRC to FIARC and financed under the commercial paper facility,
ALPI coverage and the Insurance Affiliate's liability under the Reinsurance
Agreement is cancelled with respect to the transferred receivables. Any unearned
premium associated with the transferred receivables is returned to the Company.
The
11
Company believes the losses its Insurance Affiliate will be required to
indemnify will be less than the premiums ceded to it. However, there can be
no assurance that losses will not exceed the premiums ceded and the capital
and surplus of the Insurance Affiliate.
CREDIT ENHANCEMENT -- FIARC COMMERCIAL PAPER FACILITY. Prior to October
1996, the ALPI Policy, through the structure outlined above, served as credit
enhancement for both the FIRC credit facility and the commercial paper facility.
In October 1996, in connection with the increase in the FIARC commercial paper
facility to $105 million, the Company elected to diversify its credit
enhancement mechanisms, obtaining a surety bond from MBIA Insurance Corporation
to enhance the FIARC commercial paper facility and retaining the ALPI Policy to
enhance the FIRC credit facility. The surety bond provides payment of principal
and interest to Enterprise in the event of payment default by FIARC. MBIA is
paid a surety premium equal to 0.35 percent per annum on the average outstanding
borrowings under the facility. The surety bond was issued for an initial term of
two years and has been extended to November 29, 2001. Termination of the surety
bond would result in default under the FIARC commercial paper facility.
CREDIT ENHANCEMENT -- FIACC COMMERCIAL PAPER FACILITY. Under the
structure of the FIACC commercial paper facility, no third-party credit
insurance or surety bond is required. Credit enhancement is provided in the form
of the 88 percent advance rate against eligible receivables and 2 percent cash
reserve requirement.
CREDIT ENHANCEMENT -- TERM NOTES. A surety bond issued by MBIA
Insurance Corporation enhances the Term Notes issued in January 2000. The surety
bond provides payment of principal and interest to the noteholders in the event
of payment default by the 2000-A Trust. MBIA is paid a surety premium equal to
0.35 percent per annum on the outstanding balance of the Term Notes. The surety
bond was issued for the term of the underlying notes, which mature on February
15, 2006.
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, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. The allowance for credit losses of
$2,688,777 as of April 30, 2001 and $2,133,994 as of April 30, 2000 as a
percentage of Receivables Held for Investment of $244,684,343 as of April 30,
2001 and $231,696,539 as of April 30, 2000 was 1.1 percent at April 30, 2001 and
.9 percent at April 30, 2000.
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 April 30, 2001 and 2000, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 8.6 percent and 17.3 percent, respectively. The nonaccretable
portion represents the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows.
The following table sets forth certain information regarding the
Company's delinquency and charge-off experience over its last two fiscal years
(dollars in thousands):
12
AS OF OR FOR THE YEARS ENDED APRIL 30,
-----------------------------------------
2000 2001
------------------- ------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days........................ 469 $5,308 396 $4,774
60 - 89 days........................ 157 1,778 141 1,688
90 days or more..................... 162 1,799 199 2,409
-------- ------ -------- ------
Total delinquencies..................... 788 $8,885 736 $8,871
======== ====== ======== ======
Total delinquencies as a percentage
of outstanding receivables............ 4.1% 3.8% 3.6% 3.6%
Net charge-offs as a percentage of
average receivables outstanding
during the period..................... 2.8% 3.2%
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 Securitized Receivables
was 6.0 percent and 8.7 percent as of April 30, 2001, and 2000, respectively.
The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Company personnel (described above under "Credit Evaluation")
and attentive servicing of receivables. In addition, based on its experience,
the Company believes that delinquency risk can be reduced to some degree by more
conservative loan structures which limit loan terms and loan-to-value ratios and
by managing the composition of its portfolio to include a relatively large
proportion of receivables arising from the sale of new or late-model used cars.
These vehicles are less likely to experience mechanical problems during the
initial 24 months of the loan (which is the period of highest delinquency risk)
and the purchasers of such vehicles appear to have a relatively higher
commitment to loan performance than the purchasers of older used automobiles.
Therefore, the Company (unlike many of its competitors in the sub-prime market)
concentrates on financing new and late-model used cars to the extent
practicable. In view of the popularity in recent years of new automobile leasing
programs sponsored by manufacturers and franchised dealers, the Company believes
that large numbers of late-model used automobiles will be available for sale
over the near term as these vehicles come "off lease". As of April 30, 2001,
approximately 19 percent of the receivables that had been acquired by the
Company related to new vehicles and approximately 81 percent of the receivables
arose from the sale of used vehicles. Of the Company's Receivables Held for
Investment at that date, approximately 77 percent originated from the sale of
vehicles that were either new or no more than two model years old at the time of
sale.
SECURITIZATION
Many finance companies similar to the Company engage in
"securitization" transactions whereby receivables are pooled and conveyed to
a trust or other special purpose entity, with interests in the entity being
sold to investors. As the pooled receivables amortize, finance charge
collections are passed through to the investors at a specified rate for the
life of the pool and an interest in collections exceeding the specified rate
is retained by the sponsoring finance company. For accounting purposes, the
sponsor often recognizes as revenue the discounted present value of this
excess interest as estimated over the life of the pool. This revenue, or
"gain on sale", is recognized for the period in which the transaction occurs.
The Company does not use off-balance sheet financing structures for
receivables originated by the Company and therefore, recognizes interest income
on the accrual method over the life of the receivables rather than recording
13
gains when those receivables are sold. The Company does not currently intend to
engage in off-balance sheet securitization transactions resulting in gains on
sale of receivables.
In connection with the acquisition of FISC in October 1998, the
Company obtained interests in two securitizations of automobile receivables
(as further described in Note 2 in the Notes to Consolidated Financial
Statements). The outstanding balance of the receivables sold pursuant to
these two securitizations were repurchased by the Company in September 2000
and March 2001, respectively, and are now reflected in Receivables Acquired
for Investment.
EMPLOYEES
The Company had 167 employees as of April 30, 2001, including 49
located at its headquarters in Houston, 113 located at its loan servicing
center in Atlanta and 5 regional marketing representatives. The Company's
employees are covered by group health insurance, but the Company has no
pension, profit-sharing or other material benefit programs. Effective May 1,
1994, the Company adopted a participant-directed 401(k) retirement plan for
its employees. An employee becomes eligible to participate in the plan
immediately upon employment. The Company pays the administrative expenses of
the 401(k) plan. The Company also matches a percentage of each participant's
voluntary contributions up to a maximum voluntary contribution of 3 percent
of the participant's compensation. In fiscal years 2001 and 2000, the Company
made matching contributions to the 401(k) plan of $32,932 and $31,954,
respectively. Prior to fiscal year 2000, no matching contributions were made.
Effective April 28, 1998, the Company established a participant-directed
Deferred Compensation Plan for certain executive officers of the Company.
Under the terms of the Deferred Compensation Plan, the participants may elect
to make contributions to the plan that exceeds amounts allowed under the
Company's 401(k) plan. The Company pays the administrative expenses of the
Deferred Compensation Plan. As of April 30, 2001 and 2000, the amounts
invested under the Deferred Compensation Plan totaled $527,958 and $258,521,
respectively. The Company has no collective bargaining agreements and
considers its employee relations to be satisfactory.
INFORMATION SYSTEMS
The Company utilizes advanced information management systems including
a fully integrated software program designed to expedite each element in the
receivables acquisition process, including the entry and verification of credit
application data, credit analysis and the communication of credit decisions to
originating dealers. The Company also utilizes a number of analytical tools in
managing credit risk including an empirical scoring model, trend and
discriminant analysis and pricing models which are designed to optimize yield
given an expected default rate.
The servicing and collection platform is provided by a third party
application service provider through which the Company accesses a mainframe
system which is designed to provide support for all collections and servicing
activities including billing, collection process management, account activity
history, repossession management, loan accounting information and payment
posting. The Company pays a monthly usage fee to the service provider based on
the number of accounts serviced. The Company also utilizes auto dialer software
that interfaces with the system and serves as an efficiency tool in the
collection process.
Both the front-end and back-end platforms are highly compatible from an
integration standpoint with all loans boarded electronically following funding
from the origination system to the collection system.
In addition to its two primary operating systems, the Company also
utilizes third-party software in its accounting, human resources, and data
management functions, all of which are products well known in the marketplace.
The Company believes that its data processing and information
management capacity is sufficient to accommodate significantly increased
volumes of receivables without material additional capital expenditures for
this purpose.
14
COMPETITION
The business of direct and indirect lending for the purchase of new
and used automobiles is intensely competitive in the United States. Such
financing is provided by commercial banks, thrifts, credit unions, the large
captive finance companies affiliated with automobile manufacturers, and many
independent finance companies such as the Company. Many of these competitors
and potential competitors have significantly greater financial resources than
the Company and, particularly in the case of the captive finance companies,
enjoy ready access to large numbers of dealers. The Company believes that a
number of factors including historical market orientations, traditional
risk-aversion preferences and in some cases regulatory constraints, have
discouraged many of these entities from entering the non-prime sector of the
market where the Company operates. However, as competition intensifies, these
well-capitalized concerns could enter the market, and the Company could find
itself at a competitive disadvantage.
The non-prime market in which the Company operates also consists of a
number of both large and mid-sized independent finance companies doing business
on a local, regional or national basis including some which are affiliated with
captive finance companies or large insurance groups. Reliable data regarding the
number of such companies and their market shares is unavailable; however, the
market is highly fragmented and intensely competitive.
REGULATION
The operations of the Company are subject to regulation, supervision
and licensing under various federal and state laws and regulations. State
consumer protection laws, motor vehicle installment sales acts and usury laws
impose ceilings on permissible finance charges, require licensing of finance
companies as consumer lenders, and prescribe many of the substantive provisions
of the retail installment sales contracts that the Company purchases. Federal
consumer credit statutes and regulations primarily require disclosure of credit
terms in consumer finance transactions, although rules adopted by the Federal
Trade Commission (including the so-called holder-in-due-course rule) also affect
the substantive rights and remedies of finance companies purchasing automobile
installment sales contracts.
The Company's business requires it to hold consumer lending licenses
issued by individual states, under which the Company is subject to periodic
examinations. State consumer credit regulatory authorities generally enjoy broad
discretion in the revocation and renewal of such licenses and the loss of one or
more of these in states in which the Company conducts material business could
adversely affect the Company's operations.
In addition to specific licensing and consumer regulations applicable
to the Company's business, the Company's ability to enforce and collect its
receivables is limited by several laws of general application including the Fair
Debt Collection Practices Act, Federal bankruptcy laws and the Uniform
Commercial Codes of the various states. These and similar statutes govern the
procedures, and in many instances limit the rights of creditors, in connection
with asserting defaults, repossessing and selling collateral, realizing on the
proceeds thereof, and enforcing deficiencies.
The Company's insurance subsidiary is subject to regulation by the
Department of Banking, Insurance and Securities of the State of Vermont. The
plan of operation of the subsidiary, described above under "Financing
Arrangements" and "Credit Enhancement", was approved by the Department and any
material changes in those operations would likewise require the Department's
approval. The subsidiary is subject to minimum capital and surplus requirements,
restrictions on dividend payments, annual reporting, and periodic examination
requirements.
The Company believes that its operations comply in all material
respects with the requirements of laws and regulations applicable to its
business. These requirements and the interpretations thereof, change from time
to time and are not uniform among the states in which the Company operates. The
Company retains a specialized consumer credit legal counsel that engages and
supervises local legal counsel in each state where the Company does business, to
monitor compliance on an ongoing basis and to respond to changes in applicable
requirements as they occur.
15
ITEM 2. PROPERTIES
The Company's principal physical properties are its data processing and
communications equipment and furniture and fixtures, all of which the Company
believes to be adequate for its intended use.
The Company's offices in suburban Houston consist of approximately
12,369 square feet on the seventh floor of an eight-story office building. This
space is held under a lease requiring average annual rentals of approximately
$177,000 and expiring on February 28, 2003, with an option to renew for five
years at the market rate then prevailing.
The Company's offices in suburban Atlanta consist of approximately
27,467 square feet on the third and fourth floor of a four-story office
building. This space is held under a lease requiring average annual rentals of
approximately $557,000 and expiring on June 30, 2007, with an option to renew
for two consecutive five-year periods at the market rate then prevailing.
The Company owns no real property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is currently
not aware of any threatened litigation that could have a material adverse effect
on the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders
during the fourth quarter of the past fiscal year.
16
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on the NASDAQ National
Market System, under the symbol FIFS since the completion of the Company's
initial public offering on October 4, 1995. High and low bid prices of the
common stock are set forth below for the periods indicated.
THREE MONTHS ENDED HIGH LOW
------------------------------------------- ----- -----
April 30, 2001............................. $4.50 $3.39
January 31, 2001........................... 4.44 3.00
October 31, 2000........................... 4.94 3.12
July 31, 2000.............................. 5.25 4.69
April 30, 2000............................. 5.50 4.50
January 31, 2000........................... 6.03 4.75
October 31, 1999........................... 6.44 5.00
July 31, 1999.............................. $6.50 $5.20
As of June 30, 2001, there were approximately 40 shareholders of record
of the Company's common stock. The number of beneficial owners is unknown to the
Company at this time.
The Company has not declared or paid any cash dividends on its common
stock since its inception. The payment of cash dividends in the future will
depend on the Company's earnings; financial condition and capital needs and on
other factors deemed pertinent by the Company's Board of Directors. It is
currently the policy of the Board of Directors to retain earnings to finance the
operation and expansion of the Company's business and the Company has no plans
to pay any cash dividends on the common stock in the foreseeable future.
17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for
the five fiscal years ended April 30, 2001, has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with such statements (dollars in thousands, except share data).
YEARS ENDED APRIL 30,
--------------------------------------------------------
1997 1998 1999(1) 2000 2001
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS:
Interest income...................................... $ 18,151 $ 20,049 $ 31,076 $ 40,276 $ 44,365
Interest expense..................................... 6,706 7,834 12,782 16,510 20,141
-------- -------- -------- -------- --------
Net interest income.............................. 11,445 12,215 18,294 23,766 24,224
Provision for credit losses......................... 2,520 3,901 4,661 6,414 8,351
Loss on Trust Certificates........................... -- -- -- -- 400
-------- -------- -------- -------- --------
Net interest income after provision for
credit losses and loss on Trust Certificates.. 8,925 8,314 13,633 17,352 15,473
-------- -------- -------- -------- --------
Servicing............................................ -- -- 1,200 1,293 457
Late fees and other.................................. 693 617 1,594 2,728 2,563
-------- -------- -------- -------- --------
Total other income............................... 693 617 2,794 4,021 3,020
-------- -------- -------- -------- --------
Servicing fees....................................... 1,536 1,838 2,350 435 --
Salaries and benefits................................ 2,351 2,639 6,030 9,413 9,389
Other interest expense............................... -- 111 540 1,153 1,311
Other................................................ 2,356 2,415 4,354 5,705 6,897
-------- -------- -------- -------- --------
Total operating expenses......................... 6,243 7,003 13,274 16,706 17,597
-------- -------- -------- -------- --------
Income before provision for income taxes and
Minority Interest................................ 3,375 1,928 3,153 4,667 896
Provision for income taxes........................... 1,232 704 1,151 1,703 327
Minority Interest.................................... -- -- -- -- 517
-------- -------- -------- -------- --------
Net Income........................................... $ 2,143 $ 1,224 $ 2,002 $ 2,964 $ 52
======== ======== ======== ======== ========
Basic and Diluted net income per
Common Share.................................... $ 0.39 $ 0.22 $ 0.36 $ 0.53 $ 0.01
======== ======== ======== ======== ========
AS OF APRIL 30,
--------------------------------------------------------
1997 1998 1999(1) 2000 2001
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Receivables Held for Investment, net................. $118,299 $139,599 $183,319 $235,955 $248,186
Receivables Acquired for Investment, net............. -- -- 41,024 21,888 26,121
Investment in Trust Certificates..................... -- -- 10,755 5,849 --
Other assets......................................... 21,444 21,654 37,711 39,567 38,562
-------- -------- -------- -------- --------
Total assets..................................... $139,743 $161,253 $272,809 $303,259 $312,869
======== ======== ======== ======== ========
Debt:
Term Notes....................................... $ -- $ -- $ -- $151,104 $ 84,926
Acquisition term facility........................ -- -- 55,737 26,212 11,126
Warehouse credit facilities...................... 112,894 130,813 176,549 77,545 168,250
Working capital facility......................... -- 2,500 7,235 13,300 12,825
Other liabilities.................................... 2,913 2,780 6,126 4,972 3,803
Minority Interest.................................... -- -- -- -- 1,587
Shareholders' equity................................. 23,936 25,160 27,162 30,126 30,352
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity..... $139,743 $161,253 $272,809 $303,259 $312,869
======== ======== ======== ======== ========
- -----------------
(1) On October 2, 1998, the Company completed the acquisition of FISC. FISC was
engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables for
investment as well as on a portfolio of receivables acquired and sold pursuant
to two asset securitizations. The transaction was treated as a purchase for
accounting purposes and results of operations are included in the Company's
consolidated financial statements beginning on October 2, 1998.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Net income for the year ended April 30, 2001, was $51,646 or $0.01 per
common share. Net income for the year ended April 30, 2000, was $2,963,535 or
$0.53 per common share. The results for fiscal 2001 include the effects of $1.6
million in pre-tax, non-cash charges in the fourth quarter. See Results of
Operations.
OVERVIEW
The Company is a consumer finance company engaged in both the purchase
of receivables originated by franchised automobile dealers and originating loans
directly to consumers in connection with the sale of new and late-model used
vehicles. The Company specializes in lending to consumers with impaired credit
profiles. At April 30, 2001, the Company had a network of 1,443 franchised
dealers in 26 states from which it regularly purchases receivables at the time
of origination. The Company also originates loans directly through consumers
utilizing the Internet and direct marketing. While the Company intends to
continue to geographically diversify its receivables portfolio, approximately 27
percent of Receivables Held for Investment at April 30, 2001 represent
receivables acquired from dealers or originated to consumers located in Texas.
The primary source of the Company's revenues is interest income from
receivables retained as investments, while its primary cost has been interest
expense arising from the financing of the Company's investment in such
receivables. The profitability of the Company during this period has been
determined by the growth of the receivables portfolio and effective management
of net interest income and fixed operating expenses. In addition, on October 2,
1998, the Company completed the acquisition of First Investors Financial
Servicing Corporation ("FISC") formally known as Auto Lenders Acceptance
Corporation, from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC was
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,
acquired an interest in certain trust certificates and interest strips 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. FISC
performs servicing and collection functions on a $270 million portfolio of loans
originated in 31 states.
19
The following table summarizes the Company's growth in receivables and
net interest income for the last two fiscal years (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED APRIL 30,
---------------------------
2000 2001
---------- ----------
Receivables Held for Investment:
Number................................... 19,374 20,502
Principal balance........................ $231,697 $244,684
Average principal balance of
Receivables outstanding during
the twelve-month period.............. $208,160 $247,434
Average principal balance of
Receivables outstanding during
the three-month period............... $224,286 $248,987
Receivables Acquired for Investment:
Number................................... 3,375 4,721
Principal balance........................ $ 28,097 $ 25,397
Securitized Receivables(1):
Number................................... 4,281 --
Principal balance........................ $ 29,337 --
Total Managed Receivables Portfolio:
Number................................... 27,030 25,223
Principal Balance........................ $289,131 $270,081
- ----------------------
(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables. Both securitizations were
liquidated during the year ended April 30, 2001 and the receivables were
repurchased. These receivables are included in Receivables Acquired for
Investment.
YEARS ENDED APRIL 30,
---------------------
2000 2001
--------- ---------
Interest income(1):
Receivables Held for Investment..................... $33,333 $39,915
Receivables Acquired for Investment, Investment
in Trust Certificates and Minority Interest (2).. 6,943 4,450
--------- ---------
40,276 44,365
Interest expense:
Receivables Held for Investment(3).................. 13,573 19,068
Receivables Acquired for Investment and Investment
in Trust Certificates ........................... 2,937 1,073
--------- ---------
16,510 20,141
--------- ---------
Net interest income ............................. $23,766 $24,224
========= =========
- ----------------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the year ended April 30, 2001 reflect $1,215 in interest
income related to minority interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.
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 Held for Investment and the Company's average
cost of debt utilized to fund these receivables, and its net interest margin
(averages based on month-end balances):
20
YEARS ENDED
APRIL 30,
---------------
2000 2001
------ -----
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1).............. 16.0% 16.1%
Average cost of debt(2)................ 6.7 7.6
------ -----
Net interest spread(3)................. 9.3% 8.5%
====== =====
Net interest margin(4)................. 9.5% 8.4%
====== =====
- --------------------------
(1) Represents interest income as a percentage of average Receivables Held
for Investment outstanding.
(2) Represents interest expense as a percentage of average debt
outstanding.
(3) Represents yield on Receivables Held for Investment less average cost
of debt.
(4) Represents net interest income as a percentage of average Receivables
Held for Investment outstanding.
The Company intends to increase its acquisition of receivables by
expanding its dealer base in existing states served, by expanding its dealer
base into new states and by generating additional loan volume by increasing
direct to consumer lending. To the extent that the Company's receivables
acquisitions exceed the extinguishment of receivables through principal
payments, payoffs or defaults, its receivables portfolio and interest income
will continue to increase. The following table summarizes the activity in the
Company's receivables portfolio (dollars in thousands):
YEARS ENDED
APRIL 30,
--------------------
2000 2001
--------- ---------
Receivables Held for Investment:
Principal balance, beginning of period......... $179,808 $231,697
Originations................................... 141,306 115,042
Principal payments and payoffs................. (77,602) (90,143)
Defaults prior to liquidations and recoveries.. (11,815) (11,912)
-------- --------
Principal balance, end of period............... $231,697 $244,684
======== ========
Receivables may be paid earlier than their contractual term,
primarily due to prepayments and liquidation of collateral after defaults. See
"Delinquency and Credit Loss Experience".
ANALYSIS OF NET INTEREST INCOME
Net interest income is the difference between interest earned from
the receivables portfolio and interest expense incurred on the credit
facilities used to acquire the receivables. Net interest income was $24.2
million in 2001, an increase of 2 percent and 30 percent, when compared to
amounts reported in 2000 and 1999, respectively. The increase resulted
primarily from the growth of the receivables held for investment offset by
lower contributions to interest income from the receivables acquired for
investment and trust certificates due to the liquidating nature of these
assets.
The amount of net interest income is the result of the relationship
between the average principal amount of receivables held and average rate
earned thereon and the average principal amount of debt incurred to finance
such receivables and the average rates paid thereon. Changes in the principal
amount and rate components associated with the receivables and debt can be
segregated to analyze 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):
21
YEARS ENDED APRIL 30,
---------------------------------------------------------------
1999 TO 2000 2000 TO 2001
---------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------ -------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
Receivables Held for Investment:
Interest income.......................... $ 8,531 $ (345) $ 8,186 $ 6,289 $ 293 $ 6,582
Interest expense......................... 3,278 488 3,766 3,174 2,321 5,495
--------- ------- --------- --------- ------- ---------
Net interest income...................... $ 5,253 $ (833) $ 4,420 $ 3,115 $(2,028) $ 1,087
========= ======= ========= ========= ======= =========
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 2001, COMPARED TO FISCAL YEAR ENDED APRIL
30, 2000 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 2001 increased by $4,089, or 10
percent over 2000, primarily as a result of an increase in the average
principal balance of Receivables Held for Investment of 19 percent from 2000
to 2001 offset by the decrease in interest income on Receivables Acquired for
Investment and Investment in Trust Certificates of 36 percent. The decrease in
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates is attributable to a 52 percent decline in the average principal
balances of the Receivables Acquired for Investment and Investment in Trust
Certificates for 2001 as compared to 2000.
INTEREST EXPENSE. Interest expense for 2001 increased by $3,631, or 22
percent, over 2000. An increase in the weighted average borrowings outstanding
under credit and term facilities of 23 percent resulted in $3,174 of this
difference. These facilities are used to fund Receivables Held for Investment.
The weighted average cost of debt to fund Receivables Held for Investment
increased to 7.6 percent for the year ended April 30, 2001 compared to 6.7
percent for the year ended April 30, 2000 accounting for $2,321 of the
difference. Contributing to this increase is the write off of $230 of deferred
financing costs related to a reduction in the FIACC borrowing capacity.
Conversely, the interest expense on the Receivables Acquired for Investment
decreased $1,864 primarily resulting from a decrease in the weighted average
borrowings outstanding of 49 percent.
NET INTEREST INCOME. Net interest income increased by $458 in 2001, an
increase of 2 percent over 2000. Increases in net interest income from the
Receivables Held for Investment were offset by decreases in the Receivables
Acquired for Investment and Investment in Trust Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2001
increased by $1,937, or 30 percent, over 2000, as a result in the growth of
Receivables Held for Investment and the increase in the allowance for credit
losses to 1.1 percent of outstanding receivables in 2001 compared to .9
percent of outstanding receivables for 2000. The increase of $430 was made in
light of the recent slowdown in economic growth and softness in the employment
rate. Net charge-offs increased from $5,810 in fiscal 2000 to $7,796 in fiscal
2001, due to the increase in Receivables Held for Investment and a higher
charge-off rate due to a slight increase in the repossession rate and lower
repossession recoveries.
LOSS ON TRUST CERTIFICATES. During the fourth quarter of fiscal 2001 a
loss of $400,000 was recorded on the ALAC Automobile Receivables Trust 1998-1.
The writedown is attributable to weakening economic conditions and the impact
of these factors on the value of the certificates. The loss to the Company,
net of the minority interest, is $280,000.
SERVICING INCOME. Servicing income represents amounts received on loan
receivables previously sold by FISC in connection with two asset
securitization transactions. Under these transactions, FISC, as servicer, is
entitled to receive a fee of 3 percent on the outstanding principal balance of
the securitized receivables plus reimbursement for
22
certain costs and expenses incurred as a result of its collection activities.
Servicing income decreased 65 percent for fiscal 2001 as compared to fiscal
2000. This decrease results from the declining principal balance of the
securitized receivables as well as liquidation of the securitizations. One
securitization was called September 15, 2000 and the other was called March
15, 2001, when the underlying receivables were repurchased. Subsequent to the
call date, no further servicing income is earned.
LATE FEES AND OTHER INCOME. Late fees and other income primarily
represents late fees collected from customers on past due accounts,
collections on certain FISC assets which had previously been charged off by
the Company, and interest income earned on short-term marketable securities
and money market instruments. Late fees and other income decreased to $2,563
in 2001 from $2,728 in 2000 mainly attributable to lower late fees as a result
of the call of the two securitizations. Under the servicing agreement, fees
collected were paid to the Company as additional servicing compensation. After
the call, fees collected are recorded as part of accretable yield in the
Receivables Acquired for Investment.
SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the
Company to General Electric Credit Corporation with which the Company had a
servicing relationship on its Receivables Held for Investment. Effective July
6, 1999, the Company began servicing its portfolio in-house and terminated the
General Electric arrangement. Thus, beginning in July 1999, the Company
incurred no third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits decreased from
$9,413 in 2000 to $9,389 in 2001. The decrease is a result of decreasing staff
levels in light of the decline in the Company's managed receivables portfolio.
The majority of the decrease occurred in the fourth quarter 2001.
OTHER INTEREST EXPENSE. Other interest expense increased $157, or 14
percent, for the year ended April 30, 2001 over the year ended April 30, 2000.
The increase is principally related to an increase in the average borrowings
outstanding under the working capital facility of 23 percent.
OTHER EXPENSES. Other expenses increased $1,192 or 21 percent in fiscal
2001. The increase is largely due to $696 in non-recurring charges primarily
related to the write-off of certain unamortized software costs, professional
fees that were incurred during the period, and other non-cash costs. Expenses
for fiscal 2001 were also reflective of a full year of servicing costs related
to Receivables Held for Investment, which were converted from a third-party
servicer in July 1999.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During
2001, income before provision for income taxes and minority interest decreased
by $3,771, or 81 percent from 2000 as a result of the factors discussed above.
FISCAL YEAR ENDED APRIL 30, 2000, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1999
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 2000 increased by $9,200, or 30
percent over 1999, primarily as a result of an increase in the average
principal balance of Receivables Held for Investment of 34 percent from 1999
to 2000 and the increase in interest income on Receivables Acquired for
Investment and Investment in Trust Certificates of 17 percent. The increase in
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates is attributable to a full twelve-month period for fiscal 2000 as
compared to a seven-month period for fiscal 1999 from the FISC acquisition in
October 1998. This is offset by a 41 percent decline in the average principal
balances of the Receivables Acquired for Investment and Investment in Trust
Certificates for 2000 as compared to 1999.
INTEREST EXPENSE. Interest expense for 2000 increased by $3,728, or 29
percent, over 1999. An increase in the weighted average borrowings outstanding
under credit and term facilities of 33 percent resulted in $3,766 of this
difference. The remaining difference is primarily due to a 33 percent decrease
in the average outstanding borrowings for the FISC acquisition facility. This
decrease is offset by a full twelve-month period for the acquisition facility
in fiscal 2000 compared to seven months for fiscal 1999. Lastly, the weighted
average cost of debt to fund
23
Receivables Held for Investment increased to 6.7 percent for the year ended
April 30, 2000 compared to 6.5 percent for the year ended April 30, 1999.
NET INTEREST INCOME. Net interest income increased by $5,472 in 2000,
an increase of 30 percent over 1999. The increase resulted primarily from the
growth in Receivables Held for Investment and the contributions to interest
income from the Receivables Acquired for Investment and Investment in Trust
Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2000
increased by $1,753, or 38 percent, over 1999, as a result in the growth of
Receivables Held for Investment and the maintenance of an allowance for credit
losses of .9 percent of outstanding receivables. Net charge-offs increased
from $4,330 in fiscal 1999 to $5,810 in fiscal 2000, also as a result of the
increase in Receivables Held for Investment.
SERVICING INCOME. Servicing income represents amounts received on loan
receivables previously sold by FISC in connection with two asset
securitization transactions. Under these transactions, FISC, as servicer, is
entitled to receive a fee of 3 percent on the outstanding principal balance of
the securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Servicing income increased
8 percent for fiscal 2000 as compared to fiscal 1999. This increase is a
result of a full twelve months of activity for 2000 compared to seven months
from the acquisition date of October 1998 to April 1999 for fiscal 1999. This
increase is offset by a 46 percent decline in the average outstanding
principal balance of the securitized loans during 2000 as compared to 1999.
LATE FEES AND OTHER INCOME. Late fees and other income primarily
represents late fees collected from customers on past due accounts,
collections on certain FISC assets which had previously been charged off by
the Company, and interest income earned on short-term marketable securities
and money market instruments. Late fees and other income increased to $2,728
in 2000 from $1,594 in 1999 mainly attributable to the growth in Receivables
Held for Investment and an increased emphasis on collection of late fees since
the Company began servicing its own loans in July 1999.
SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the
Company to General Electric Credit Corporation with which the Company had a
servicing relationship on its Receivables Held for Investment. Effective July
6, 1999, the Company began servicing its portfolio in-house and terminated the
General Electric arrangement. Thus, beginning in July 1999, the Company
incurred no third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from
$6,030 in 1999 to $9,413 in 2000, an increase of $3,383 or 56 percent. The
increase is a result of increasing staff levels to support an increase in the
Company's managed receivables portfolio, an expansion of its geographic
territory and an increase in staffing levels as a result of the acquisition of
FISC and the resulting assumption of loan servicing activities. Contributing
to the increase is the inclusion of a full twelve-month period for FISC in
fiscal 2000 as compared to only seven months for fiscal 1999. As of April 30,
2000, the Company had 177 employees compared to 148 as of April 30, 1999.
OTHER INTEREST EXPENSE. Other interest expense increased $613, or 114
percent, for the year ended April 30, 2000 over the year ended April 30, 1999.
The increase is related to an increase in the average borrowings outstanding
under the working capital facility of 130 percent and an increase in the
average borrowing rate.
OTHER EXPENSES. Other expenses increased 31 percent in fiscal 2000. The
increase is primarily due to including a full twelve-month period for FISC in
fiscal 2000 compared to only seven months in 1999.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 2000, income before
provision for income taxes increased by $1,514, or 48 percent from 1999 as a
result of the positive factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from
24
dealers and fund required reserve accounts, (ii) amounts necessary to fund
premiums for credit enhancement insurance or other credit enhancement required
by the Company's financing programs, and (iii) amounts necessary to fund costs
to retain receivables, primarily interest expense and servicing fees. The
Company also requires a significant amount of cash flow for working capital to
fund fixed operating expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition
of receivables. The Company paid $115.0 million for receivables acquired to be
held for investment for 2001 compared to $141.3 million in 2000.
The Company funds the purchase price of receivables through a
combination of two warehouse facilities. The FIRC credit facility generally
permits the Company to borrow up to the outstanding principal balance of
qualified receivables, but not to exceed $50 million. Receivables that have
accumulated in the FIRC credit facility may be transferred to the FIARC
commercial paper facility at the option of the Company. The FIARC commercial
paper facility provides an additional financing source up to $150 million.
Additionally, the Company has transferred receivables from the warehouse
credit facilities and issued Term Notes. Substantially all of the Company's
receivables are pledged to collateralize these credit facilities and Term
Notes.
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 $130.1 million in 2001 and $110.0
million in 2000. 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 fiscal years 2001
and 2000, the Company required net cash flow, respectively, of $24.9 million
and $63.7 million (cash required to acquire receivables held for investment
net of principal payments on receivables) to fund the growth of its
receivables portfolio. The Company has relied on borrowed funds to provide the
source of cash flow to fund such growth.
CAPITALIZATION. The Company has financed its acquisition of such
receivables primarily through these types of credit facilities since 1992. The
Company's equity was not a significant factor in its capitalization until the
completion of the Company's initial public offering of common stock in October
1995, resulting in net proceeds of $18.5 million. However, the Company expects
to continue to rely primarily on its credit facilities and the issuance of
secured term notes to acquire and retain receivables. The Company believes its
existing credit facilities have adequate capacity to fund the increase of the
receivables portfolio expected in the foreseeable future. While the Company
has no reason to believe that these facilities will not continue to be
available, their termination could have a material adverse effect on the
Company's operations if substitute financing on comparable terms was not
obtained.
FIRC CREDIT FACILITY. The primary source of acquisition financing for
Receivables Held for Investment has been through a syndicated warehouse credit
facility agented by Bank of America. The FIRC credit facility currently
provides for maximum borrowings, subject to certain adjustments, up to the
outstanding principal balance of qualified receivables, but not to exceed the
facility limit of $50 million as of April 30, 2001 and $65 million as of April
30, 2000. Borrowings under the FIRC credit facility bear interest pursuant to
certain indexed variable rate options at the election of the Company or any
other short-term fixed interest rate agreed upon by the Company and the
lenders. The Company bases its selection of the interest rate option primarily
on its expectations of market interest rate fluctuations, the timing and the
amount of the required funding and the period of time it anticipates requiring
the funding prior to transfer to the FIARC commercial paper facility. The FIRC
credit facility provides for a term of one year, matures November 14, 2001 at
which time, should the facility not be renewed, the outstanding borrowings
would be converted to a term loan facility that would mature six months
thereafter and amortize monthly in accordance with the borrowing base with any
remaining balance due at maturity. Borrowings under the FIRC credit facility
were $59,540,000 and $36,040,000 at April 30, 2000 and 2001, respectively. The
Company presently intends to seek a renewal of the facility from its lenders
prior to maturity. Management considers its relationship with its lenders to
be satisfactory and has no reason to believe that this credit facility will
not be renewed. If the facility were not renewed however, or if material
changes were made to its terms and conditions, it could have a material
adverse effect on the Company.
25
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a $150 million commercial paper conduit
facility with Enterprise Funding Corporation ("Enterprise"), a commercial
paper conduit managed by Bank of America. Receivables that have accumulated in
the FIRC credit facility may be transferred to the FIARC commercial paper
facility by transferring a specific group of receivables to a discrete
special-purpose financing subsidiary and pledging those receivables as
collateral. Receivables are generally transferred from the FIRC credit
facility to the FIARC commercial paper facility to refinance them on a longer
term basis at interest rates based on commercial paper rates and to provide
additional borrowing capacity under the FIRC credit facility. Borrowings under
this commercial paper facility bear interest at the commercial paper rate plus
.30 percent. The current term of the FIARC commercial paper facility expires
on November 29, 2001. If the FIARC commercial paper facility were terminated,
no new receivables could be transferred from the FIRC credit facility to
Enterprise; however, the then outstanding receivables would continue to be
financed until fully amortized. At April 30, 2000 and 2001, the Company had
borrowings of $18,004,889 and $121,808,808, respectively, outstanding under
the commercial paper facility. The Company presently intends to seek a renewal
of the facility from its lenders prior to maturity. Management considers its
relationship with its lenders to be satisfactory and has no reason to believe
that this credit facility will not be renewed. If the facility were not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into
a $25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88
percent of the face amount of receivables, which are pledged as collateral for
the commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. The Company's interest cost is
based on VFCC's commercial paper rates for specific maturities plus 0.30
percent.
At April 30, 2001, borrowings were $10,400,901 under the FIACC
commercial paper facility, and had a weighted average interest rate of 5.56
percent, including the effects of program fees and hedge instruments. There
were no outstanding borrowings at April 30, 2000. The current term of the
FIACC commercial paper facility expires on November 14, 2001. If the facility
were not renewed on or prior to the maturity date, the outstanding balance
under the facility would continue to amortize utilizing cash collections from
the receivables pledged as collateral. The Company presently intends to seek a
renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the
facility were not renewed however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1. Accordingly, the Company acquired $8,110,849
in outstanding receivables from the trust and borrowed $6,408,150 under the
FIACC facility which, combined with amounts on deposit in the collection
account and the outstanding balance in a cash reserve account, was utilized to
repay $7,874,689 in senior notes and redeem $1,033,456 of the trust
certificates. On March 15, 2001, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1998-1. Accordingly, the Company acquired $9,257,612
in outstanding receivables from the trust and borrowed $7,174,509 under the
FIACC facility which, combined with amounts on deposit in the collection
account and the outstanding balance in a cash reserve account, was utilized to
repay $7,997,615 in senior notes and redeem $1,946,178 of the trust
certificates. The receivables purchased were used as collateral to secure the
FIACC borrowing with any residual cash flow generated by the receivables
pledged to the Partnership. As a result of utilizing FIACC to fund the
repurchase of the ALAC securitization, the Company has elected to utilize the
FIACC commercial paper facility solely as the financing source for this
repurchase and does not expect to utilize the facility to finance Receivables
Held for Investment. Accordingly, the borrowing capacity was reduced from $25
million to $11,627,308 effective March 15, 2001.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed
26
notes ("Term Notes"). A pool of automobile receivables totaling $174,968,641,
which were previously owned by FIRC, FIARC and FIACC, secures the Term Notes.
Proceeds from the issuance, which totaled $167,967,690 were used to repay all
outstanding borrowings under the FIARC and FIACC commercial paper facilities,
to reduce the outstanding borrowings under the FIRC credit facility, to pay
transaction fees related to the Term Note issuance and to fund a cash reserve
account of 2 percent or $3,499,373 which will serve as a portion of the credit
enhancement for the transaction. The Term Notes bear interest at 7.174 percent
and require monthly principal reductions sufficient to reduce the balance of
the Term Notes to 96 percent of the outstanding balance of the underlying
receivables pool. The final maturity of the Term Notes is February 15, 2006.
As of April 30, 2000 and 2001, the outstanding principal balance on the Term
Notes was $151,104,279 and $84,925,871, respectively. A surety bond issued by
MBIA Insurance Corporation provides credit enhancement for the Term Note
holders. Additional credit support is provided by the cash reserve account,
which equals 2 percent of the original balance of the receivables pool and a 4
percent over-collateralization requirement. In the event that certain asset
quality covenants are not met, the reserve account target level will increase
to 6 percent of the then current principal balance of the receivables pool.
The following table summarizes borrowings under the warehouse credit
facility, the FIARC and FIACC commercial paper facilities and the Term Notes
(dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
-------------------------
2000 2001(3)
---------- -------------
At period-end:
Balance outstanding..................... $228,649 $242,774
Weighted average interest rate(1)....... 6.91% 7.0%
During period(2):
Maximum borrowings outstanding......... $228,649 $261,613
Weighted average balance outstanding.... 202,405 249,763
Weighted average interest rate......... 6.7% 7.6%
- --------------------
(1) Based on interest rates, facility fees, surety bond fees and hedge
instruments applied to borrowings outstanding at period-end.
(2) Based on month-end balances.
(3) Includes borrowings under the FIACC commercial paper facility for the
period from May 1, 2000 until September 15, 2000. See FIACC Commercial
Paper Facility.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC ("FIFS
Acquisition"), entered into a $75 million non-recourse bridge financing
facility with VFCC, an affiliate of First Union National Bank, to finance the
Company's acquisition of FISC. Contemporaneously with the Company's purchase
of FISC, FISC transferred certain assets to FIFS Acquisition, consisting
primarily of (i) all receivables owned by FISC as of the acquisition date,
(ii) FISC's ownership interest in certain trust certificates and subordinated
spread or cash reserve accounts related to two asset securitizations
previously conducted by FISC, and (iii) certain other financial assets,
including charged-off accounts owned by FISC 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 bore interest at
VFCC's commercial paper rate plus 2.35 percent and expired August 14, 2000.
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 FISC 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, one-third of the servicing fee paid to FISC is
also utilized to reduce principal outstanding on the indebtedness.
27
On August 8, 2000, the Company entered into an agreement with First
Union to refinance the acquisition facility. Under the agreement, a
partnership was created in which FIFS Acquisition serves as the general
partner and contributed its assets for a 70 percent interest in the
partnership and First Union Investors, Inc., an affiliate of First Union,
serves as the limited partner with a 30 percent interest in the partnership
(the "Partnership"). Pursuant to the refinancing, the Partnership issued Class
A Notes in the amount of $19,204,362 and Class B Notes in the amount of
$979,453 to VFCC, the proceeds of which were used to retire the acquisition
debt. The Class A Notes bear interest at VFCC's commercial paper rate plus
0.95 percent per annum and amortize on a monthly basis by an amount necessary
to reduce the Class A Note balance as of the payment date to 75 percent of the
outstanding principal balance of Receivables Acquired for Investment,
excluding Receivables Held for Investment that are applicable to FIACC, as of
the previous month end. The Class B Notes bear interest at VFCC's commercial
paper rate plus 5.38 percent per annum and amortize on a monthly basis by an
amount which varied based on excess cash flows received from Receivables
Acquired for Investment after payment of servicing fees, trustee and back-up
servicer fees, Class A Note interest and Class A Note principal, plus
collections received on the Trust Certificates. The outstanding balance of the
Class A Notes was $11,126,050 as of April 30, 2001 and had a weighted average
interest rate of 6.26 percent, including the effects of program fees and hedge
instruments. The Class B Notes were paid in full on September 15, 2000. After
the Class B Notes were paid in full, all cash flows received after payment of
Class A Note principal and interest, servicing fees and other costs, are
distributed to the Partnership for subsequent distribution to the partners
based upon the respective partnership interests. During fiscal 2001,
$3,084,494 was distributed to the limited partner. The amount of the partners'
cash flow will vary depending on the timing and amount of residual cash flows.
The Company is accounting for First Union's limited partnership interest in
the Partnership as a minority interest.
The Class A Notes mature on July 31, 2001. If the Class A Notes are
not renewed on or prior to the maturity date, the outstanding balance under
the notes would continue to amortize utilizing cash collections from the
receivables pledged as collateral. The Company presently intends to seek a
renewal of the notes from the lender prior to maturity. Management considers
its relationship with the lender to be satisfactory and has no reason to
believe that the notes will not be renewed. If the notes were not renewed
however, or if material changes were made to the terms and conditions, it
could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that was utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December 1999 and
was scheduled to mature on December 22, 2000. Effective December 22, 2000, the
$13.5 million in outstandings were refinanced through the issuance of a $13.5
million term loan. Under the terms of the facility, provided by Bank of
America and First Union, the term loan would be repaid in quarterly
installments of $675,000 beginning on March 31, 2001. In addition to the
scheduled principal payments, the term loan also requires an additional
principal payment of $300,000 on June 30, 2001 under certain conditions
relating to the size of Bank of America's portion of the outstanding balance.
Pursuant to this requirement, the Company paid $300,000 to Bank of America
effective June 30, 2001. The remaining unpaid balance of the term loan is due
at maturity on December 22, 2002. Pricing under the facility is based on the
LIBOR rate plus 3 percent. The term loan is secured by all unencumbered assets
of the Company, excluding receivables owned and financed by wholly-owned,
special purpose subsidiaries of the Company and is guaranteed by First
Investors Financial Services Group, Inc. and all subsidiaries that are not
special purpose subsidiaries. In consideration for refinancing the working
capital facility, the Company paid each lender an upfront fee and issued
warrants to each lender to purchase, in aggregate, 167,001 shares of the
Company's common stock at a strike price of $3.81 per share. The warrants
expire on December 22, 2010. On December 20, 2000, the warrant value of
$175,000 was estimated based on the expected difference between financing
costs with and without the warrants. These costs are included as deferred
financing costs and will be amortized through the maturity date of the debt.
In addition, the Company agreed to issue additional warrants to Bank of
America to acquire up to a maximum of 47,945 additional shares of stock at a
price equal to the average closing price for the immediately preceding 30
trading days prior to each grant date which is June 30, 2001 and December 31,
2001. Pursuant to this requirement, the Company issued 36,986 warrants to Bank
of America at a strike price of $3.56 per share. All other terms and
conditions of the warrants were identical to the warrants issued in December
2000. The amount of warrants if any, to be issued on December 31, 2001 will be
determined by the outstanding balances owing to Bank of America under of the
term loan. In no event, however, can the additional warrants issued on
28
December 31, 2001 exceed 10,959. The fair value of the warrants issued on June
30, 2001 will be included as deferred financing costs and amortized through
the maturity date of the debt.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under the
increased working capital facility.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities
bear interest at floating interest rates which are reset on a short-term basis
while the secured Term Notes bear interest at a fixed rate of interest. The
Company's receivables bear interest at fixed rates that do not generally vary
with the change in interest rates. Since a primary contributor to the
Company's profitability is its ability to manage its net interest spread, the
Company seeks to maximize the net interest spread while minimizing exposure to
changes in interest rates. In connection with managing the net interest
spread, the Company may periodically enter into interest rate swaps or caps to
minimize the effects of market interest rate fluctuations on the net interest
spread. To the extent that the Company has outstanding floating rate
borrowings or has elected to convert a portion of its borrowings from fixed
rates to floating rates, the Company will be exposed to fluctuations in
short-term interest rates.
The Company was previously a party to a swap agreement with Bank of
America pursuant to which the company's interest rate was fixed at 5.565 percent
on a notional amount of $120 million. The swap agreement expired on January 12,
2000. In connection with the issuance of the Notes, the Company entered into a
swap agreement with Bank of America pursuant to which the Company pays a
floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent
and receives a fixed rate of 7.174 percent from the counterparty. The initial
notional amount of the swap was $167,969,000, which amortizes in accordance with
the expected amortization of the Notes. Final maturity of the swap is August 15,
2002.
On September 27, 2000, the Company elected to terminate the floating
swap at no material gain or loss and enter into a new swap under which the
Company would pay a fixed rate of 6.30 percent on a notional amount of $100
million. Under the terms of the swap, the counterparty had the option of
extending the swap for an additional three years to mature on April 15, 2004
at a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised
its extension option.
On June 1, 2001, the Company entered into interest rate swaps with an
aggregate notional amount of $100 million and a maturity date of April 15,
2004. Under the terms of these swaps, the Company will pay a floating rate
based on one-month LIBOR and receive a fixed rate of 5.025 percent. Management
elected to enter into these swap agreements to offset the uneconomical
position of the existing pay fixed swap created by rapidly declining market
interest rates.
During the years ended April 30, 2001, 2000 and 1999 amounts paid
pursuant to the Company's interest rate management products were not material
in relation to interest expense in the aggregate nor did they have a material
impact on the Company's weighted average costs of funds during such periods.
In connection with the repurchase of the ALAC 97-1 Securitization and
the financing of the repurchase through the FIACC facility on September 15,
2000, the Company entered into an interest rate swap agreement with First Union
under which the Company pays a fixed rate of 6.76 percent as compared to the one
month commercial paper index rate. The initial notional amount of the swap was
$6,408,150, which amortizes monthly in accordance with the expected amortization
of the commercial paper borrowings and matures on December 15, 2001. On March
15, 2001, in connection with the repurchase of the ALAC 1998-1 Securitization
and the financing of that purchase through the FIACC subsidiary, the Company and
the counterparty modified the existing interest rate swap increasing the
notional amount initially to $11,238,710 and reducing the fixed rate from 6.76
percent to 5.12 percent. The new notional amount is scheduled to amortize
monthly in accordance with the expected principal amortization of the underlying
borrowings. The expiration date of the swap was changed from December 15, 2001
to September 1, 2002.
29
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 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 20, 2002 while Swap B matured on 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 that 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.
Pursuant to the refinance of the aqauisition facility on August 8, 2000, the
Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $418,609. This derivative net gain is being amortized over the
life of the initial derivative instrument. In addition, the two remaining
hedge instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated three interest rate
swaps and one interest rate cap with an aggregate notional value of
$130,165,759 as cash flow hedges as defined under SFAS No. 133. Accordingly,
any changes in the fair value of these instruments resulting from the
mark-to-market process will be recorded as unrealized gains or losses and be
reflected as an increase or reduction in stockholders' equity through other
comprehensive income. In connection with the decision to enter into the $100
million floating rate swaps on June 1, 2001, the Company elected to change the
designation of the $100 million fixed rate swap and not account for the
instrument as a hedge under SFAS No. 133. As a result, the change in fair
value of both swaps will be reflected as a gain or loss in net income for the
appropriate measurement period. Management believes that since these two
positions effectively offset, any net gains or losses will be immaterial to
income.
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, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. An allowance for credit losses of
$2,688,777 as of April 30, 2001 and $2,133,994 as of April 30, 2000 as a
percentage of the Receivables Held for Investment of $244,684,343 as of April
30, 2001 and $231,696,539 as of April 30, 2000 was 1.1 percent at April 30, 2001
and .9 percent at April 30, 2000.
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 April 30, 2001 and 2000, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 8.6 percent and 17.3 percent, respectively. The nonaccretable
portion represents 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 90 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
30
Under its financing programs, the Company retains the credit risk
associated with the receivables acquired. Historically, the Company has
purchased credit enhancement insurance from third party insurers, which covers
the risk of loss upon default and certain other risks. Until March 1994, such
insurance absorbed substantially all credit losses. In April 1994, the Company
established a captive insurance subsidiary to reinsure certain risks under the
credit enhancement insurance coverage for all receivables acquired in March 1994
and thereafter. In addition, receivables financed under the FIARC and FIACC
commercial paper facilities and receivables financed under the FIAIC Term Notes
do not carry default insurance. Provisions for credit losses of $8,351,234 and
$6,414,572 have been recorded for the years ended April 30, 2001 and 2000,
respectively for losses on receivables which are either uninsured or which are
reinsured by the Company's captive insurance subsidiary.
The allowance for credit losses represents management's estimate of
losses for receivables that have become impaired. 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 current economic conditions. 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 sets forth certain information regarding the
Company's delinquency and charge-off experience over its last two fiscal years
(dollars in thousands):
AS OF OR FOR THE YEARS ENDED APRIL 30,
----------------------------------------------------
2000 2001
------------------------ -----------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
---------- -------- ---------- --------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................................. 469 $5,308 396 $4,774
60 - 89 days.................................. 157 1,778 141 1,688
90 days or more............................... 162 1,799 199 2,409
---------- -------- ---------- --------
Total delinquencies..................................... 788 $8,885 736 $8,871
========== ======== ========== ========
Total delinquencies as a percentage
of outstanding receivables.......................... 4.1% 3.8% 3.6% 3.6%
Net charge-offs as a percentage of average receivables
outstanding during the period....................... 2.8% 3.2%
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 Securitized Receivables was 6.0
percent and 8.7 percent as of April 30, 2001, and 2000, respectively.
MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's credit facilities bear interest at floating rates
which are reset on a short-term basis, whereas its receivables bear interest at
fixed rates which do not generally vary with changes in interest rates. The
Company is therefore exposed primarily to market risks associated with movements
in interest rates on its credit
31
facilities. The Company believes that it takes the necessary steps to
appropriately reduce the potential impact of interest rate increases on the
Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.
As of April 30, 2001, the Company had $62 million of floating rate
secured debt outstanding considering the effect of swap and cap agreements. For
every 1 percent increase in commercial paper rates or LIBOR, annual after-tax
earnings would decrease by approximately $394,000, assuming the Company
maintains a level amount of floating rate debt and assuming an immediate
increase in rates. As of June 1, 2001, the Company increased the floating rate
exposure in conjunction with the $100 million floating rate swaps. For every 1
percent increase in LIBOR, annual after-tax earnings would decrease by
approximately $635,000 related to these swaps.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this
report that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in this
Form 10-K are listed under Item 14(a). The Company is not required to file any
supplementary financial data under this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information responsive to this item appears under the caption "Election
of Directors" in the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders expected to be held September 6, 2001, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this item appears under the caption "Summary
Compensation Table" in the Company's Proxy Statement for the 2001 Annual Meeting
of Shareholders expected to be held September 6, 2001, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this item appears under the caption "Security
Ownership of Management and Certain Beneficial Owners" in the Company's Proxy
Statement for the 2001 Annual Meeting of Shareholders expected to be held
September 6, 2001, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item appears under the caption "Certain
Transactions" in the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders expected to be held September 6, 2001, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page F-1.
(3) EXHIBITS
2.1(j) -- Stock Purchase Agreement, dated as of September 9, 1998, between
First Investors Financial Services Group, Inc. and Fortis, Inc.
to purchase Auto Lenders Acceptance Corporation, a wholly-owned
subsidiary of Fortis, Inc.
3.1(a) -- Articles of Incorporation, as amended
3.2(a) -- Bylaws, as amended
4.1(a) -- Excerpts from the Articles of Incorporation, as amended
(included in Exhibit 3.1).
4.3(a) -- Specimen Stock Certificate
10.5(a) -- Credit Agreement dated as of October 16, 1992 among F.I.R.C.,
Inc. ("FIRC") and NationsBank of Texas, N.A., individually and as
agent for the banks party thereto, as amended by First Amendment
to Credit Agreement and Loan Documents dated as of November 5,
1993, Second Amendment to Credit Agreement and Loan Documents
dated as of March 3, 1994, Third Amendment to Credit Agreement and
Loan Documents dated as of March 17, 1995 and Fourth Amendment to
Credit Agreement and Loan Documents dated as of July 7, 1995.
10.6(a) -- Collateral Security Agreement dated as of October 16, 1992
between FIRC and Texas Commerce Bank National Association as
collateral agent for the ratable benefit of NationsBank of Texas,
N.A., as agent, and the banks party to the Credit Agreement filed
as Exhibit 10.5.
33
10.7(a) -- Escrow Agreement dated as of October 16, 1992 among FIRC,
NationsBank of Texas, N.A. as agent for the banks party to the
Credit Agreement filed as Exhibit 10.5, and Texas Commerce Bank
National Association as Escrow Agent.
10.8(a) -- Transfer and Administration Agreement dated as of March 3,
1994 among FIRC, Enterprise Funding Corporation, Texas Commerce
Bank National Association and NationsBank N.A. (Carolinas)
(formerly NationsBank of North Carolina, N.A.), as amended by
Amendment Number 1 dated August 1, 1994, Amendment Number 2 dated
February 28, 1995 and Amendment No. 3 dated March 21, 1995.
10.9(a) -- Servicing Agreement dated as of October 16, 1992 between FIRC
and General Electric Capital Corporation, as amended by First
Amendment to Servicing Agreement dated as of November 4, 1993,
Second Amendment to Servicing Agreement dated as of March 1, 1994
and Third Amendment to Servicing Agreement dated as of June 1,
1995.
10.10(a) -- Purchase Agreement between FIRC and First Investors Financial
Services, Inc. ("First Investors") dated October 16, 1992, as
amended by First Amendment to Purchase Agreement dated as of
November 5, 1993 and Second Amendment to Purchase Agreement dated
as of March 3, 1994.
10.11(a) -- Auto Loan Protection Insurance Policy dated October 13, 1992
issued by Agricultural Excess & Surplus Insurance Company to FIRC
as insured.
10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994
issued by National Union Fire Insurance Company of Pittsburgh to
FIRC as insured.
10.13(a) -- Facultative Reinsurance Agreement between National Fire
Insurance Company of Pittsburgh and First Investors Insurance
Company, as reinsurer, dated as of May 26, 1995.
10.14(a) -- Blanket Collateral Protection Insurance Policy dated October
5, 1992 issued by Agricultural Excess & Surplus Insurance Company
to FIRC as insured.
10.15(a) -- ISDA Master Agreement dated August 12, 1994 between FIRC and
NationsBank of Texas, N.A. together with Confirmation of U.S.
Dollar Rate Swap Transaction dated June 14, 1995 and Confirmation
for U.S. Dollar Rate Swap Transaction dated May 16, 1995.
10.16(a) -- Employment Agreement dated as of March 20, 1992 between the
Registrant and Tommy A. Moore, Jr., as amended by First Amendment
dated as of March 15, 1995 and Second Amendment dated as of July
1, 1995.
10.17(a) -- Lease Agreement between A.I.G. Realty, Inc. and First
Investors dated as of June 1, 1992, as amended by Amendment One
dated October 29, 1993 and Amendment Two dated October 26, 1994.
10.18(a) -- Redemption Agreement dated as of June 8, 1995 among the
Registrant and all holders of its class of 1993 Preferred Stock.
10.21(a) -- 1995 Employee Stock Option Plan of the Registrant.
10.22(a) -- Form of Stock Option Agreement between the Registrant and
Robert L. Clarke dated August 25, 1995. 10.23(b) -- Amendment No.
4 dated November 20, 1995 to the Transfer and Administration
Agreement dated as of March 3, 1994 filed as Exhibit 10.8.
10.24(b) -- Employment Agreement dated as of May 1, 1996 between the
Registrant and Bennie H. Duck.
10.25(b) -- Amendment Three dated October 10, 1995 to the Lease Agreement
between A.I.G. Realty, Inc. and the Registrant, filed as Exhibit
10.17.
10.26(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated
November 16, 1995.
10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise
Funding Corporation and FIRC, Inc.
10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated
August 7, 1996.
10.29(d) -- Security Agreement dated as of October 22, 1996 among First
Investors Auto Receivables Corporation, Enterprise Funding
Corporation, Texas Commerce Bank National Association, MBIA
Insurance Corporation, NationsBank N.A., and First Investors
Financial Services, Inc.
10.30(d) -- Note Purchase Agreement dated as of October 22, 1996 between
First Investors Auto Receivables Corporation and Enterprise
Funding Corporation.
10.31(d) -- Purchase Agreement dated as of October 22, 1996 between First
Investors Financial Services, Inc. and First Investors Auto
Receivables Corporation.
10.32(d) -- Insurance Agreement dated as of October 1, 1996 among First
Investors Auto Receivables Corporation, MBIA Insurance
Corporation, First Investors Financial Services, Inc., Texas
Commerce Bank National Association, and NationsBank N.A.
34
10.33(d) -- Servicing Agreement dated as of October 22, 1996 between
First Investors Auto Receivables Corporation and General Electric
Capital Corporation.
10.34(d) -- Amended and Restated Credit Agreement dated as of October 30,
1996 among F.I.R.C., Inc. and NationsBank of Texas, N.A.,
individually and as Agent for the financial institutions party
thereto.
10.35(d) -- Amended and Restated Collateral Security Agreement dated as
of October 30, 1996 between F.I.R.C., Inc. and Texas Commerce Bank
National Association as collateral agent for the ratable benefit
of NationsBank of Texas, N.A. individually and as agent for the
financial institutions party to the Amended and Restated Credit
Agreement filed as Exhibit 10.34. 10.36(d) -- Amended and Restated
Purchase Agreement dated as of October 30, 1996 between First
Investors Financial Services, Inc. and F.I.R.C., Inc.
10.37(d) -- Amended and Restated Servicing Agreement between F.I.R.C.,
Inc. and General Electric Capital Corporation.
10.38(e) -- Third Amendment dated January 20, 1997 to the Employment
Agreement dated as of March 20, 1992 between the Registrant and
Tommy A. Moore, Jr.
10.39(f) -- First Amendment to the Amended and Restated Credit Agreement
dated January 31, 1997 by and among F.I.R.C., Inc. and NationsBank
of Texas, N.A., individually and as agent for the banks party
thereto.
10.40(f) -- Second Amendment to the Amended and Restated Credit Agreement
dated May 15, 1997 by and among F.I.R.C., Inc. and NationsBank of
Texas, N.A., individually and as agent for the banks party
thereto.
10.41(f) -- Employment Agreement dated July 16, 1997 between First
Investors Financial Services, Inc. and Tommy A. Moore, Jr.
10.42(f) -- Credit Agreement dated as of July 18, 1997 between First
Investors Financial Services, Inc. and NationsBank of Texas, N.A.,
individually and as agent for the banks party thereto.
10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997 by
and among First Investors (Vermont) Holdings, Inc. and NationsBank
of Texas, N.A., as agent for the banks party thereto.
10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among First
Investors Financial Services, Inc. and NationsBank of Texas, N.A.,
as agent for the banks party thereto.
10.45(g) -- Security Agreement dated as of January 1, 1998 among First
Investors Auto Capital Corporation, First Union Capital Markets
Corp., and First Investors Financial Services, Inc.
10.46(g) -- Note Purchase Agreement dated as of January 1, 1998 between
First Investors Auto Capital Corporation, First Union Capital
Markets Corp., the Investors, First Union National Bank, and
Variable Funding Capital Corporation.
10.47(g) -- Purchase Agreement dated as of January 1, 1998 between First
Investors Financial Services, Inc. and First Investors Auto
Capital Corporation.
10.48(g) -- Servicing Agreement dated as of January 1, 1998 between First
Investors Auto Capital Corporation and General Electric Capital
Corporation.
10.49(h) -- Employment Agreement dated as of May 1, 1998 between the
Registrant and Bennie H. Duck.
10.50(h) -- Employment Agreement dated as of May 1, 1998 between the
Registrant and Joseph A. Pisano.
10.51(i) -- 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(i) -- Custodial Agreement dated as of October 2, 1998 among
Variable Funding Capital Corporation, Norwest Bank Minnesota, NA,
and Auto Lenders Acceptance Corporation.
10.53(i) -- 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(i) -- 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.
10.55(k) -- 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(k) -- Second Amendment to the Credit Agreement dated January 25,
1999 between First Investors
35
Financial Services, Inc. and NationsBank of Texas, N.A.,
individually and as agent for the banks party thereto.
10.57(l) -- Amendment Number 2 to Security Agreement dated March 31, 1999
among First Investors Auto Receivables Corporation, Enterprise
Funding Corporation, Chase Bank of Texas, National Association,
Norwest Bank Minnesota, National Association, MBIA Insurance
Corporation, NationsBank N.A., and First Investors Financial
Services, Inc.
10.58(l) -- Amendment Number 1 to Note Purchase Agreement dated as of
March 31, 1999 among First Investors Auto Receivables Corporation
and Enterprise Funding Corporation.
10.59(l) -- Amendment Number 1 to Insurance Agreement dated March 31,
1999 among First Investors Auto Receivables Corporation, MBIA
Insurance Corporation, First Investors Financial Services, Inc.,
Auto Lenders Acceptance Corporation, Norwest Bank Minnesota,
National Association and NationsBank, N.A.
10.60(l) -- Servicing Agreement dated March 31, 1999 among First
Investors Auto Receivables Corporation, Norwest Bank Minnesota,
National Association and Auto Lenders Acceptance Corporation.
10.61(l) -- Guaranty dated March 31, 1999 by First Investors Financial
Services, Inc., First Investors Auto Receivables Corporation, Auto
Lenders Acceptance Corporation and Norwest Bank Minnesota,
National Association.
10.62(m) -- Sale and Allocation Agreement dated January 1, 2000 among
First Investors Financial Services, Inc., First Investors
Servicing Corporation, First Investors Auto Investment Corp.,
Norwest Bank Minnesota, National Association and First Investors
Auto Owner Trust 2000-A.
10.63(m) -- Indenture dated as of January 1, 2000 $167,969,000 7.174%
Asset-Backed Notes among First Investors Auto Owner Trust 2000-A,
First Investors Financial Services, Inc. and Norwest Bank
Minnesota, National Association.
10.64(m) -- Amended and Restated Trust Agreement dated as of January 24,
2000 among First Investors Auto Investment Corp. and Bankers Trust
(Delaware).
10.65(m) -- Servicing Agreement dated as of January 1, 2000 by and among
First Investors Auto Owner Trust 2000-A, Norwest Bank Minnesota,
National Association, First Investors Auto Investment Corp. and
First Investors Servicing Corporation.
10.66(m) -- Insurance Agreement dated as of January 1, 2000 among MBIA
Insurance Corporation, First Investors Servicing Corporation,
First Investors Financial Services, Inc., First Investors Auto
Investment Corp., First Investors Auto Owner Trust 2000-A, Bankers
Trust (Delaware) and Norwest Bank Minnesota, National Association.
10.67(m) -- Indemnification Agreement dated as of January 12, 2000 among
MBIA Insurance Corporation, First Investors Financial Services,
Inc. and Banc of America Securities LLC.
10.68(n) -- Administrative Services Agreement dated as of August 8, 2000
between Project Brave Limited Partnership and First Union
Securities, Inc.
10.69(n) -- Project Brave Limited Partnership Agreement of Limited
Partnership dated as of July 1, 2000.
10.70(n) -- Amended and Restated NIM Collateral Purchase Agreement
dated as of August 8, 2000.
10.71(n) -- Amended and Restated Contract Purchase Agreement dated as
of August 8, 2000.
10.72(n) -- First Amendment to Amended and Restated NIM Collateral
Purchase Agreement dated as of September 15, 2000.
10.73(n) -- First Amendment to Servicing Agreement dated as of
September 13, 2000.
10.74(n) -- First Amendment to Transfer and Servicing Agreement dated
as of September 15, 2000.
10.75(n) -- Project Brave Limited Partnership Asset-Backed Notes
Indenture dated as of August 8, 2000.
10.76(n) -- Note Purchase Agreement between Project Brave Limited
Partnership as Issuer, First Union Securities, Inc., as Deal
Agent, the Note Investors named herein, First Union National Bank
as Liquidity Agent and Variable Funding Capital Corporation, as an
Initial Note Investor, dated as of August 8, 2000.
10.77(n) -- Supplemental Indenture No. 1 (Project Brave Limited
Partnership) dated as of September 15, 2000.
10.78(n) -- Third Amendment to Security Agreement dated as of September
13, 2000.
10.79(n) -- Transfer and Servicing Agreement among Project Brave
Limited Partnership, Issuer, FIFS Acquisition Funding Company,
L.L.C., as Transferor, First Investors Servicing Corporation as
Servicer and a Transferor Party, ALAC Receivables Corp., as a
Transferor Party, First Union Securities, Inc., as Deal Agent and
Collateral Agent and Wells Fargo Bank Minnesota, National
36
Association as Backup Servicer, Collateral Custodian and Indenture
Trustee dated as of August 8, 2000.
10.80(o) -- Second Amended and Restated Credit Agreement dated as of
November 15, 2000 Among F.I.R.C., Inc. as Borrower and the
Financial Institutions Now or Hereafter Parties Hereto as Banks
and Bank of America, N. A. as Agent.
10.81(o) -- Third Amended and Restated Collateral Security Agreement
dated as of November 15, 2000.
10.82(o) -- Fourth Amendment to Amended and Restated Purchase Agreement
dated as of November 15, 2000.
10.83(o) -- First Amendment to Servicing Agreement dated as of November
15, 2000.
10.84(o) -- Credit Agreement among First Investors Financial Services,
Inc., as Borrower, Bank of America, N. A., as the Administrative
Agent, Banc of America Securities LLC, as sole lead arranger and
sole book manager and the lenders named herein dated as of
December 22, 2000.
10.85(o) -- Pledge and Security Agreement (Borrower) dated as of
December 22, 2000.
10.86(o) -- Pledge and Security Agreement (Subsidiaries) dated as of
December 22, 2000.
10.87(o) -- Pledge and Security Agreement (First Investors (Vermont)
Holdings, Inc.) dated as of December 22, 2000.
10.88(o) -- Pledge and Security Agreement (First Investors Financial
Services Group, Inc.) dated as of December 22, 2000.
10.89(o) -- Guaranty (Subsidiary) dated as of December 22, 2000.
10.90(o) -- Guaranty (First Investors (Vermont) Holdings, Inc.) dated
as of December 22, 2000.
10.91(o) -- Guaranty (First Investors Financial Services Group, Inc.)
dated as of December 22, 2000.
10.92(o) -- Amendment No. 2 To Insurance Agreement for First Investors
Auto Receivables Corporation Revolving Automobile Receivables
Financing Facility dated as of November 29, 2000.
10.93(o) -- Amendment Number 3 To Security Agreement dated as of
November 29, 2000.
10.94(o) -- Warrant No. 1 to Purchase 111,334 Shares of Common Stock,
$.01 par value.
10.95(o) -- Warrant No. 2 to Purchase 55,667 Shares of Common Stock,
$.01 par value.
10.96(o) -- Amendment Number 3 To Purchase Agreement dated as of
November 29, 2000.
10.97(o) -- Amendment Number 1 To Servicing Agreement dated as of
November 29, 2000.
21.1(j) -- Subsidiaries of the Registrant.
- --------------
(a) -- Exhibit previously filed with the Company's Registration
Statement on Form S-1, Registration No. 33-94336 and
incorporated herein by reference.
(b) -- Exhibit previously filed on 1996 Form 10-K and
incorporated herein by reference.
(c) -- Exhibit previously filed on July 31, 1996 First Quarter
Form 10-Q and incorporated herein by reference.
(d) -- Exhibit previously filed on October 31, 1996 Second
Quarter Form 10-Q and incorporated herein by reference.
(e) -- Exhibit previously filed on January 31, 1997 Third
Quarter Form 10-Q and incorporated herein by reference.
(f) -- Exhibit previously filed on July 31, 1997 First Quarter
Form 10-Q and incorporated herein by reference.
(g) -- Exhibit previously filed on January 31, 1998 Third
Quarter Form 10-Q and incorporated herein by reference.
(h) -- Exhibit previously filed on 1998 Form 10-K and
incorporated herein by reference.
(i) -- Exhibit previously filed on October 31, 1998 Second
Quarter Form 10-Q and incorporated herein by reference.
(j) -- Exhibit previously filed on October 2, 1998 Form 8-K and
incorporated herein by reference.
(k) -- Exhibit previously filed on January 31, 1999 Third
Quarter Form 10-Q and incorporated herein by reference.
(l) -- Exhibit previously filed on 1999 Form 10-K and
incorporated herein by reference.
(m) -- Exhibit previously filed on March 21, 2000 Third Quarter
Form 10-Q/A and incorporated herein by reference.
(n) -- Exhibit previously filed on October 31, 2000 Second
Quarter Form 10-Q and incorporated
37
herein by reference.
(o) -- Exhibit previously filed on January 31, 2001 Third
Quarter Form 10-Q and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
38
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: July 20, 2001 By: /s/ Tommy A. Moore, Jr.
---------------------------------------------------
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of First
Investors Financial Services Group, Inc. and in the capacities and on the date
indicated.
SIGNATURE TITLE
- --------------------------------- --------------------------------------------------
/s/ Tommy A. Moore, Jr. President and Chief Executive Officer, Director
- --------------------------------- (Principal Executive Officer)
TOMMY A. MOORE, JR.
/s/ Bennie H. Duck Vice President and Chief Financial Officer
- --------------------------------- (Principal Financial and Accounting Officer)
BENNIE H. DUCK
/s/ Robert L. Clarke Director
- ---------------------------------
ROBERT L. CLARKE
/s/ Seymour M. Jacobs Director
- ---------------------------------
SEYMOUR M. JACOBS
/s/ Roberto Marchesini Director
- ---------------------------------
ROBERTO MARCHESINI
/s/ Walter A. Stockard Director
- ---------------------------------
WALTER A. STOCKARD
/s/ Walter A. Stockard, Jr. Director
- ---------------------------------
WALTER A. STOCKARD, JR.
Date: July 20, 2001
39
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Report of Independent Public Accountants............................. F-2
Consolidated Balance Sheets as of April 30, 2000 and 2001............ F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1999, 2000 and 2001........................................ F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended April 30, 1999, 2000 and 2001............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
April 30, 1999, 2000 and 2001........................................ F-6
Notes to Consolidated Financial Statements........................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:
We have audited the accompanying consolidated balance sheets of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 2000 and 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2001, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
July 9, 2001
F-2
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2000 AND 2001
2000 2001
-------------- --------------
ASSETS
------
Receivables Held for Investment, net.......................................... $235,954,788 $248,185,744
Receivables Acquired for Investment, net...................................... 21,888,454 26,121,344
Investment in Trust Certificates.............................................. 5,848,688 --
Cash and Short-Term Investments, including restricted cash of
$23,411,293 and $24,089,763, respectively................................... 25,520,158 25,101,012
Accrued Interest Receivable................................................... 3,313,630 3,277,066
Assets Held for Sale.......................................................... 1,007,256 1,501,760
Other Assets:
Funds held under reinsurance agreement................................... 3,842,641 3,192,755
Deferred financing costs and other assets, net of accumulated
amortization and depreciation of $3,133,823 and $4,827,936,
respectively.......................................................... 5,818,338 4,895,204
Current income taxes receivable, net..................................... -- 594,360
Deferred income taxes receivable, net.................................... 64,875 --
-------------- --------------
Total assets........................................................ $303,258,828 $312,869,245
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt:
Term Notes............................................................... $151,104,279 $ 84,925,871
Acquisition term facility................................................ 26,211,787 11,126,050
Warehouse credit facilities.............................................. 77,544,889 168,249,709
Working capital facility................................................. 13,300,000 12,825,000
Other Liabilities:
Accounts payable and accrued liabilities................................. 4,444,984 3,607,677
Current income taxes payable, net........................................ 527,042 --
Deferred income taxes payable, net....................................... -- 195,486
-------------- --------------
Total liabilities................................................... 273,132,981 280,929,793
-------------- --------------
Commitments and Contingencies
Minority Interest............................................................. -- 1,586,959
Shareholders' Equity:
Common stock, $0.001 par value, 10,000,000 shares
authorized, 5,566,669 shares issued and outstanding.................... 5,567 5,567
Additional paid-in capital............................................... 18,464,918 18,639,918
Retained earnings........................................................ 11,655,362 11,707,008
-------------- --------------
Total shareholders' equity.......................................... 30,125,847 30,352,493
-------------- --------------
Total liabilities and shareholders' equity.......................... $303,258,828 $312,869,245
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1999, 2000 AND 2001
1999 2000 2001
------------- ------------- -------------
Interest Income........................................................ $31,076,003 $40,276,227 $44,364,584
Interest Expense....................................................... 12,781,725 16,509,757 20,141,109
------------- ------------- -------------
Net interest income.......................................... 18,294,278 23,766,470 24,223,475
Provision for Credit Losses............................................ 4,661,000 6,414,572 8,351,234
Loss on Trust Certificates............................................. -- -- 400,000
------------- ------------- -------------
Net Interest Income After Provision for Credit Losses and Loss on
Trust Certificates................................................ 13,633,278 17,351,898 15,472,241
------------- ------------- -------------
Other Income:
Servicing......................................................... 1,199,628 1,293,502 457,475
Late fees and other............................................... 1,594,149 2,727,848 2,562,524
------------- ------------- -------------
Total other income........................................... 2,793,777 4,021,350 3,019,999
------------- ------------- -------------
Operating Expenses:
Servicing fees.................................................... 2,350,741 434,572 --
Salaries and benefits............................................. 6,030,007 9,413,424 9,388,866
Other interest expense............................................ 539,927 1,153,326 1,310,746
Other............................................................. 4,353,873 5,704,942 6,896,572
------------- ------------- -------------
Total operating expenses..................................... 13,274,548 16,706,264 17,596,184
------------- ------------- -------------
Income Before Provision for Income Taxes and Minority Interest......... 3,152,507 4,666,984 896,056
------------- ------------- -------------
Provision (Benefit) for Income Taxes:
Current........................................................... 1,406,211 1,214,543 66,699
Deferred.......................................................... (255,546) 488,906 260,361
------------- ------------- -------------
Total provision for income taxes............................. 1,150,665 1,703,449 327,060
Minority Interest...................................................... -- -- 517,350
------------- ------------- -------------
Net Income............................................................. $ 2,001,842 $ 2,963,535 $ 51,646
============= ============= =============
Basic and Diluted Net Income Per Common Share.......................... $0.36 $0.53 $0.01
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1999, 2000 AND 2001
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............. -- -- 2,001,842 2,001,842
-------- ------------- ------------- -------------
Balance, April 30, 1999..... 5,567 18,464,918 8,691,827 27,162,312
Net income............. -- -- 2,963,535 2,963,535
-------- ------------- ------------- -------------
Balance, April 30, 2000..... 5,567 18,464,918 11,655,362 30,125,847
Net income............. -- -- 51,646 51,646
Warrants issued........ -- 175,000 -- 175,000
-------- ------------- ------------- -------------
Balance, April 30, 2001..... $5,567 $18,639,918 $11,707,008 $30,352,493
======== ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1999, 2000 AND 2001
1999 2000 2001
-------------- -------------- -------------
Cash Flows From Operating Activities:
Net income..................................................... $ 2,001,842 $ 2,963,535 $ 51,646
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization expense................. 3,363,379 4,455,762 5,508,778
Provision for credit losses........................... 4,661,000 6,414,572 8,351,234
Charge-offs, net of recoveries........................ (4,329,894) (5,810,229) (7,796,451)
Loss on Trust Certificates............................ -- -- 400,000
Minority Interest..................................... -- -- 517,350
(Increase) decrease in:
Accrued interest receivable........................... (307,885) (948,399) 36,564
Restricted cash....................................... (145,253) (15,923,657) (678,470)
Deferred financing costs and other assets............. (1,210,261) (2,317,067) (907,546)
Funds held under reinsurance agreement................ (603,614) (1,222,345) 649,886
Due from servicer..................................... (3,835,982) 14,065,957 --
Deferred income taxes receivable, net................. (255,546) 488,906 64,875
Current income taxes receivable, net.................. 495,280 -- (594,360)
Increase (decrease) in:
Accounts payable and accrued liabilities............... 1,702,905 (1,350,401) (837,307)
Current income taxes payable, net...................... 109,994 197,278 (527,042)
Deferred income taxes payable, net..................... -- -- 195,486
------------- ------------- -------------
Net cash provided by operating activities..... 1,645,965 1,013,912 4,434,643
------------- ------------- -------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for Investment.................... (114,309,752) (141,305,830) (115,042,250)
Purchase of Receivables Acquired for Investment................ -- -- (17,368,461)
Principal payments from Receivables Held for Investment........ 58,758,462 77,601,820 90,142,945
Principal payments from Receivables Acquired for Investment.... 14,652,354 19,135,314 14,205,180
Principal payments from Trust Certificates..................... 4,519,183 4,905,824 5,448,688
Payments received on Assets Held for Sale...................... 8,465,860 8,192,710 8,588,489
Acquisition of a business, net of cash acquired................ (76,052,178) -- --
Purchase of furniture and equipment............................ (342,949) (102,288) (472,525)
------------- ------------- -------------
Net cash used in investing activities........ (104,309,020) (31,572,450) (14,497,934)
------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Term Notes............................................. -- 167,969,000 --
Warehouse credit facilities........................... 104,853,807 125,652,886 121,811,628
Working capital facility.............................. 20,435,000 14,865,000 200,000
Acquisition term facility............................. 75,000,000 -- --
Principal payments made on --
Term Notes............................................. -- (16,864,721) (66,178,408)
Warehouse credit facilities........................... (59,117,468) (224,657,414) (31,106,808)
Working capital facility.............................. (15,700,000) (8,800,000) (675,000)
Acquisition term facility............................. (19,262,629) (29,525,584) (15,085,737)
------------- ------------- -------------
Net cash provided by financing activities.... 106,208,710 28,639,167 8,965,675
------------- ------------- -------------
Increase (Decrease) in Cash and Short-Term Investments.................. 3,545,655 (1,919,371) (1,097,616)
Cash and Short-Term Investments at Beginning of Year.................... 482,581 4,028,236 2,108,865
------------- ------------- -------------
Cash and Short-Term Investments at End of Year.......................... $ 4,028,236 $ 2,108,865 $ 1,011,249
============= ============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for --
Interest.............................................. $ 12,196,708 $ 15,815,121 $ 19,517,326
Income taxes.......................................... 800,937 1,017,265 890,727
Non-cash financing activities --
Exchange of 167,001 warrants for financing fees....... $ -- $ -- $ 175,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999, 2000 AND 2001
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors or the Company) was established to serve as a holding company for
First Investors Financial Services, Inc. (FIFS) and FIFS's wholly-owned
subsidiaries, First Investors Insurance Company (FIIC), First Investors Auto
Receivables Corporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors Auto
Capital Corporation (FIACC), First Investors Servicing Corporation (FISC)
formerly known as, Auto Lenders Acceptance Corporation (ALAC), First Investors
Auto Investment Corp. and FIFS Acquisition Funding Corp. LLC. First Investors,
together with its wholly- and majority-owned subsidiaries, is hereinafter
referred to as the Company.
FIFS began operations in May 1989 and is principally involved in the
business of acquiring and holding for investment retail installment contracts
and promissory notes secured by new and used automobiles and light trucks
(receivables) originated by factory authorized franchised dealers or directly
through consumers. As of April 30, 2001, approximately 27 percent of
receivables held for investment had been originated in Texas. The Company
currently operates in 26 states.
FIIC was organized under the captive insurance company laws of the state
of Vermont for the purpose of reinsuring certain credit enhancement insurance
policies that have been written by unrelated third party insurance companies.
On October 2, 1998, the Company completed the acquisition of FISC and the
operations of FISC are included in the consolidated results of the Company
since the date of acquisition. Headquartered in Atlanta, Georgia, FISC was
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,
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 31 states
on a Managed Receivables Portfolio of $270 million.
On August 8, 2000, the Company entered into a partnership agreement
whereby a subsidiary of the Company is the general partner owning 70 percent of
the partnership assets and First Union Investors, Inc. serves as the limited
partner and owns 30 percent of the partnership assets (the "Partnership"). The
Partnership consists primarily of (i) a portfolio of loans previously owned by
FISC, (ii) ownership interest in certain Trust Certificates and subordinated
spread or cash reserve accounts related to two asset securitizations previously
conducted by FISC, and (iii) certain other financial assets, including
charged-off accounts owned by FISC. See Note 7.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its wholly- and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant
F-7
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates used by the Company relate to the allowance for credit losses and
nonaccretable difference. See Notes 3 and 4. Actual results could differ from
those estimates.
RECEIVABLES HELD FOR INVESTMENT. The Company acquires automobile loans
from dealers and originates loans directly to consumers. Fees and expenses of
originating the loan are capitalized and amortized in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases". The basis in the receivables includes the
costs to acquire the receivables from the dealer, plus or minus any fees paid
or received related to the purchase of the receivables.
Receivables are generally acquired from dealers at a premium or discount
from the principal amounts financed by the borrower. The Company and the
dealers negotiate this premium or discount. Included in the carrying amount of
receivables is the insurance premium paid to third-party insurers, net of any
premiums ceded to FIIC for reinsurance. The Company amortizes the difference
between the principal balance of the receivables and its carrying amount over
the expected remaining life of the receivables using the interest method.
RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were
acquired in a portfolio purchase, 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 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.
Additionally, accretion of yield expected to be paid to others is recorded as a
reduction of interest income. The fiscal year 2000 contractual payments
receivable was net of an estimate of future cash flows that were to be sold to
the limited partner. For April 30, 2001, and upon formation of the Partnership,
the contractual payments receivable does not net estimated future cash flows
payable to others and instead such amounts are included as minority interest.
See Note 7 - Acquisition Facility.
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. See Note 4.
INVESTMENT IN TRUST CERTIFICATES. Through the acquisition of FISC, 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 owned trust certificates and interest-only
residuals from each of these trusts which were classified as Investment in
Trust Certificates as of April 30, 2000. Additionally, the Company owned spread
accounts held by the trustee for the benefit of the trust's noteholders. Such
amounts were classified as Restricted Cash as of April 30, 2000. On September
15, 2000, the Company elected to exercise its right to repurchase the senior
notes issued in connection with the ALAC Automobile Receivables Owner Trust
1997-1. Accordingly, the Company acquired $8,110,849 in outstanding receivables
from the trust and borrowed $6,408,150 under the FIACC facility which, combined
with amounts on deposit in the collection account and the outstanding balance
in a cash reserve account, was utilized to repay $7,874,689 in senior notes and
redeem $1,033,456 of the trust certificates. On March 15, 2001, the Company
elected to exercise its right to repurchase the senior notes issued in
connection with the ALAC Automobile Receivables Trust 1998-1. Accordingly, the
Company acquired $9,257,612 in outstanding receivables from the trust and
borrowed $7,174,509 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding balance in a cash reserve
account, was utilized to repay $7,997,615 in senior notes and redeem $1,946,177
of the trust certificates. The receivables purchased were used as collateral to
secure the FIACC borrowing with any residual cash flow generated by the
receivables pledged to the Partnership. A loss of $400,000 was recorded on the
Investment in Trust Certificates during year ended April 30, 2001, attributable
to the impact of the weakened economic conditions. The net loss to the Company,
after minority interest effects, was
F-8
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$280,000. Effective with the call dates of the securitizations, these assets
were included in Receivables Acquired for Investment.
INCOME RECOGNITION. The Company accrues interest income monthly based upon
contractual terms using the effective interest method. Interest income also
includes additional amounts received upon early payoffs of certain receivables
attributable to the difference between the principal balance of the receivables
calculated using the Rule of 78's method and the principal balance of the
receivables calculated using the effective interest method. When a receivable
becomes 90 days past due, income accrual is suspended until the payments become
current. When a loan is charged off or the collateral is repossessed, the
remaining income accrual is written off. Other income includes late charge fees
and is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES. For receivables financed under the FIRC
credit facility, the Company purchases credit enhancement insurance from
third-party insurers which covers the risk of loss upon default and certain
other risks. Until March 1994, such insurance and dealer reserves absorbed
substantially all credit losses. In April 1994, the Company established a
captive insurance subsidiary to reinsure the credit enhancement insurance
coverage. The credit enhancement insurance coverage for all receivables
acquired in March 1994 and thereafter has been reinsured by FIIC. Beginning in
October 1996, all receivables recorded by the Company were covered by credit
enhancement insurance while pledged as collateral for the FIRC credit facility.
Once receivables are transferred to the FIARC commercial paper facility, credit
enhancement insurance is cancelled. In addition, no default insurance is
purchased for core receivables originated and financed under the FIACC
commercial paper facility. Accordingly, the Company is exposed to credit losses
for all receivables either reinsured by FIIC or uninsured and provides an
allowance for such losses.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. Management analyzes the receivable
portfolio characteristics as compared to its underwriting criteria, delinquency
and repossession statistics, historical loss experience, size, quality and
concentration characteristics of the receivable portfolio, as well as external
factors such as current economic conditions.
The automobile purchasers in the non-prime market segment are individuals
with impaired credit profiles who often have little or no personal savings. In
most cases such purchasers' ability to remit payments as required by the terms
of the receivables is entirely dependent on their continued employment and
stability of household and medical expenses. Job losses or events which cause a
significant increase in household or medical expenses could result in defaults
on their consumer debts. A prolonged economic recession resulting in widespread
unemployment in this wage-earning sector could cause a significant rise in
delinquencies and charge-offs, which would adversely affect the Company.
Although the Company considers its allowance to be adequate, there can be no
assurance that it would suffice in the event of a sustained period of economic
distress. The allowance for credit losses is based on estimates and qualitative
evaluations, and ultimate losses will vary from current estimates. These
estimates are reviewed periodically and, as adjustments, either positive or
negative, become necessary, they are reported in earnings in the period they
become known.
On July 6, 2001, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 102, "Selected Loan Loss Allowance Methodology
and Documentation Issues," which requires companies to have adequate
documentation on the development and application of a systematic methodology in
determining allowance for loan losses. The Company believes that it has
complied with the requirements and that the adoption will have no material
impact to the financial statements.
SERVICING AGREEMENT. From its inception until July 1999, the Company was a
party to a servicing agreement with General Electric Capital Corporation (GECC)
under which GECC performed certain loan servicing and collection activities
with respect to the Company's portfolio of Receivables Held for Investment.
Servicing fees were paid monthly to GECC based on the number of receivables
being serviced during the period plus certain reimbursable expenses including
legal and third party recovery costs. Due from servicer primarily represents
unremitted principal and interest payments and proceeds from the sale of
repossessed collateral. In July 1999, the Company elected to terminate the
servicing agreement with GECC in connection with the transfer of the servicing
and collection activities on the receivables to the Company's internal
servicing and collection platform.
F-9
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial
assurance for the third party insurance company it reinsures by maintaining
premiums ceded to it in a restricted trust account for the benefit of the third
party insurance company. The reinsurance agreement provides, among other
things, that the funds held can be withdrawn by the third party insurance
company due to an insolvency of the Company or to reimburse the third party
insurance company for the Company's share of losses paid by the third party
insurance company pursuant to the reinsurance agreement.
ASSETS HELD FOR SALE. The Company commences repossession procedures
against the underlying collateral when the Company determines that collection
efforts are likely to be unsuccessful. Upon repossession, the receivable is
written down to the estimated fair value of the collateral, less the cost of
disposition and plus the expected recoveries from third-party insurers, through
a charge to the allowance for credit losses. Additionally, the repossessed
collateral is reclassified to assets held for sale.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the respective warehouse credit facilities and Term Notes
over the estimated average life of the receivables financed under those
respective facilities as the provisions of such facility generally provide that
receivables assigned to such facility would be allowed to amortize should the
facilities not be extended. Deferred financing costs are expensed
proportionately if borrowing capacity is reduced.
SERVICING INCOME. Servicing income is recognized on loan receivables
previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3 percent on the outstanding 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.
OTHER OPERATING EXPENSES. Other operating expenses include primarily
depreciation expense, professional fees, service bureau fees, telephone,
repossession related expenses, and rent.
INCOME TAXES. The Company follows SFAS No. 109, which prescribes that
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest
rate swap and cap agreements to maximize net interest income while managing the
exposure of floating interest rates under the terms of its credit facilities or
Term Notes (see Note 7). The Company endeavors to maintain the effectiveness of
the interest rate swap or cap agreements by selecting products with dollar
denominated notional principal amounts, interest rate indices and interest
reset periods similar to its credit facilities. The differentials paid or
received on interest rate agreements are accrued and recognized currently as
adjustments to interest expense. Premiums paid or received on these agreements,
if any, are amortized to interest expense over the term of the related
agreement. Gains and losses on early terminations of interest rate swap and cap
agreements are included in the carrying amount of the related debt and
amortized as yield adjustments over the estimated remaining term of the swap
(See Derivatives).
EMPLOYEE STOCK OPTIONS. The Company accounts for its stock-based
compensation under Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees". Under this accounting method, no compensation
expense is recognized in the consolidated statements of operations if no
intrinsic value of the option exists at the date of grant. The Company has made
annual pro forma disclosures of net income and earnings per share as if the
stock based compensation awards were based on the fair value of the awards at
the date of grant. See Note 13.
F-10
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of FASB Statement No. 133."
Effective May 1, 2001, the Company adopted SFAS No. 133 concurrently with
SFAS No. 138. Accordingly, the Company designated its three interest rate swaps
and one interest rate cap having an aggregate notional amount as of May 1, 2001
of $130,165,759 as cash flow hedges as defined under SFAS 133. In conjunction
with this designation and the adoption of SFAS 133 and SFAS 138, the Company
recorded a transition adjustment in the aggregate amount of ($3,763,908) as a
reduction to shareholders' equity and recorded a corresponding liability to
reflect the fair market value of the derivatives and deferred gain resulted
from previously terminated interest rate swap and cap agreements as of May 1,
2001. In connection with the decision to enter into the $100 million floating
rate swaps on June 1, 2001, the Company elected to change the designation of
the $100 million fixed rate swap and not account for the instrument as a hedge
under SFAS 133. The Company has also established guidelines for measuring the
effectiveness of its hedging positions periodically in accordance with the
enacted policy. For the period beginning May 1, 2001, changes in the fair value
of the Company's open hedging positions resulting from the mark-to-market
process will be recorded as unrealized gains or losses and be reflected as an
increase or reduction in stockholders' equity through other comprehensive
income. In addition, to the extent that all or a portion of the Company's
hedging positions are deemed to be ineffective in accordance with the Company's
measurement policy, the amount of any ineffectiveness will be recorded through
net income. The change in fair value of any derivative not designated as a
hedge will also recorded as a gain or loss through income. The Company believes
that the extent of any ineffectiveness or any gain or loss associated with
derivatives not designated as hedges will be immaterial to net income. The
Company does expect, however, to report material fluctuations in other
comprehensive income and shareholders' equity in periods of interest rate
volatility.
INTERNAL USE SOFTWARE COSTS. The Company capitalizes external direct costs
of materials and services consumed in developing internal-use computer software
and payroll costs for employees who devote time to developing internal-use
computer software.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of shares of common stock outstanding (See Note 13 and Note 15).
FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciable assets are amortized using the
straight-line method over the estimated useful lives (two to five years) of the
respective assets.
CASH AND SHORT-TERM INVESTMENTS. The Company considers all investments
with a maturity of three months or less when purchased to be short-term
investments and treated as cash equivalents. See Note 5 for components of
restricted cash.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1999
and 2000 amounts to conform to the 2001 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
The receivables generally have terms of 60 months and are collateralized
by the underlying vehicles. Net receivable balances consisted of the following
at April 30, 2000 and 2001:
F-11
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 2001
-------------- --------------
Receivables............................ $231,696,539 $244,684,343
Unamortized premium and deferred fees.. 6,392,243 6,190,178
Allowance for credit losses............ (2,133,994) (2,688,777)
-------------- --------------
Net receivables................... $235,954,788 $248,185,744
============== ==============
At April 30, 2001, the weighted average remaining term of the receivable
portfolio is 44 months and the weighted average contractual interest rate is
17.65 percent. Principal payments expected to be received on the receivable
portfolio, assuming no defaults and that payments are received in accordance
with contractual terms are summarized in the following table. Receivables may
pay off prior to contractual due dates, primarily due to defaults and early
payoffs.
Year ending April 30-
2002.............................. $ 51,998,060
2003.............................. 61,955,785
2004.............................. 73,820,433
2005.............................. 56,910,065
--------------
$244,684,343
==============
Activity in the allowance for credit losses for the years ended April 30,
2000 and 2001, was as follows:
2000 2001
-------------- --------------
Balance, beginning of year............ $ 1,529,651 $ 2,133,994
Provision for credit losses...... 6,414,572 8,351,234
Charge-offs, net of recoveries... (5,810,229) (7,796,451)
-------------- --------------
Balance, end of year.................. $ 2,133,994 $ 2,688,777
============== ==============
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 April 30, 2000 and 2001:
2000 2001
-------------- --------------
Contractual payments receivable from Receivables
Acquired for Investment purchased at a discount
relating to credit quality ..................... $31,198,093 $31,892,326
Nonaccretable difference................................ (5,387,268) (2,735,961)
Accretable yield........................................ (3,922,371) (3,035,021)
-------------- --------------
Receivables Acquired for Investment purchased at a
discount relating to credit quality, net........... $21,888,454 $26,121,344
============== ==============
The fiscal year 2000 contractual payments receivable was net of an estimate
of future cash flows that were to be sold to the limited partner. For April 30,
2001, and upon formation of the Partnership, the contractual payments receivable
does not net estimated future cash flows payable to others and instead such
amounts are included as minority interest. See Note 7 - Acquisition Facility.
The carrying amount of Receivables Acquired for Investment is net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
estimated that it would be unable to collect.
F-12
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
------------- ------------
Balance at April 30, 1999................... $14,314,526 $ 7,632,607
Accretion.............................. -- (4,963,557)
Eliminations........................... (7,673,937) --
Reclassifications...................... (1,253,321) 1,253,321
------------- ------------
Balance at April 30, 2000................... $ 5,387,268 $ 3,922,371
Additions.............................. 2,279,834 1,534,541
Accretion.............................. -- (3,738,549)
Eliminations........................... (4,758,993) --
Consolidation of partnership........... -- 1,144,510
Reclassifications...................... (172,148) 172,148
------------- ------------
Balance at April 30, 2001................... $ 2,735,961 $ 3,035,021
============= ============
Additions to accretable yield and nonaccretable difference relate to the
repurchase of ALAC Automobile Receivables Owner Trust 1997-1 and ALAC Automobile
Receivables Trust 1998-1. See Note 7 -- FIACC Commercial Paper Facility.
Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period. The change in accretable
yield includes reclassifications from nonaccretable difference for cash flows
expected to be collected in excess of previous estimates. Accretable yield also
increased due to the creation of the Partnership on August 8, 2000 to share
income from Receivables Acquired for Investment with a limited partner.
Partnership income accrues through accretable yield and the limited partner's
portion is accounted for as a minority interest. See Note 7 -- Acquisition
Facility.
Principal payments expected to be received on the receivable portfolio,
assuming no defaults and that payments are received in accordance with
contractual terms are summarized in the following table. Receivables may pay off
prior to contractual due dates, primarily due to defaults and early payoffs.
Year ending April 30 --
2002................................ $16,909,708
2003................................ 8,952,532
-----------
$25,862,240
===========
5. RESTRICTED CASH
The components of restricted cash at April 30, 2000 and 2001 are as
follows:
2000 2001
-------------- --------------
Dealer reserves..................................... $ 28,604 $ 29,131
Acquisition facility compensating balance (Note 7).. 3,574,751 --
Funds held in trust for receivable fundings......... 1,898,650 920,572
Warehouse credit facility account (Note 7).......... 5,206,261 5,665,961
Mark to market collateral account................... -- 1,048,756
Collection and lockbox balances..................... 12,453,027 16,175,343
Other............................................... 250,000 250,000
-------------- --------------
Total restricted cash.......................... $23,411,293 $24,089,763
============== ==============
F-13
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets at April 30,
2000 and 2001 are as follows:
2000 2001
-------------- --------------
Deferred financing costs, net............ $1,527,354 $1,907,556
Furniture and equipment, net............. 1,436,788 1,032,059
Software, net............................ 678,124 284,336
Accounts receivable...................... 792,762 480,769
Other, net............................... 1,383,310 1,190,484
-------------- --------------
Total............................... $5,818,338 $4,895,204
============== ==============
For the year ended April 30, 2001 and related to the reduction of
borrowing availability under the FIACC commercial paper facility, approximately
$230,000 of unamortized deferred financing costs were expensed. Additionally
approximately $696,000 of unamortized software costs, professional fees and
other non-cash costs that had no further useful life were expensed.
7. DEBT
The Company finances the acquisition of its receivables portfolio through
two warehouse credit facilities. The Company's credit facilities provide for
one-year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. In January
2000, the Company issued $168 million in asset-backed notes ("Term Notes")
secured by a pool of receivables. Proceeds from the note issuance were used to
repay outstanding borrowings under the various revolving credit facilities.
Substantially all receivables retained by the Company are pledged as collateral
for the credit facilities and the Term Notes.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been primarily provided through a syndicated warehouse
credit facility agented by Bank of America. The borrowing base is defined as
the sum of the principal balance of the receivables pledged and the amount on
deposit with the Company to fund receivables to be acquired. The Company is
required to maintain a reserve account equal to the greater of one percent of
the principal amount of receivables financed or $250,000. The current term of
the FIRC credit facility expires on November 14, 2001. This maturity date
reflects a renewal of the facility effective November 15, 2000. Under the terms
of the renewal, the maximum facility limit was reduced from $65 million to $50
million effective December 31, 2000 to coincide with the increase in the FIARC
commercial paper facility. Further, under the renewal mechanics of the
facility, should the lenders elect not to renew the facility beyond November
14, 2001, the facility would convert to a term loan facility which would mature
six months thereafter and amortize monthly in accordance with the borrowing
base with any remaining balance due at maturity. No other material changes were
made to the existing terms and conditions of the facility in connection with
the renewal. Borrowings under the FIRC credit facility bear interest at a rate
selected by the Company at the time of the advance of either the base rate,
defined as the higher of the prime rate or the federal funds rate plus .5
percent, the LIBOR rate plus .5 percent, or a rate agreed to by the Company and
the banks. The facility also provides for the payment of a fee of .25 percent
per annum based on the total committed amount.
Borrowings under the FIRC credit facility were $59,540,000 and $36,040,000
at April 30, 2000 and 2001, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.21 percent and 6.91 percent as of such dates. The Company
presently intends to seek a renewal of the facility from its lenders prior to
maturity. Management considers its relationship with its lenders to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility were not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on
the Company.
F-14
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility through
Enterprise Funding Corporation (Enterprise), a commercial paper conduit
administered by Bank of America, (the "FIARC commercial paper facility").
Receivables are transferred periodically from the FIRC credit facility to
Enterprise through the assignment of an undivided interest in a specified group
of receivables. Enterprise issues commercial paper (indirectly secured by the
receivables), the proceeds of which are used to repay the FIRC credit facility.
The financing is provided to a special-purpose, wholly-owned subsidiary of
the Company, FIARC. Credit enhancement for the $150 million facility is provided
to the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. The Company is not a guarantor of, or otherwise a party to, such
commercial paper. Borrowings under the commercial paper facility bear interest
at the commercial paper rate plus a borrowing spread equal to .30 percent per
annum. Additionally, the agreement provides for additional fees based on the
unused amount of the facility and dealer fees associated with the issuance of
the commercial paper. A surety bond premium equal to .35 percent per annum is
assessed based on the outstanding borrowings under the facility. A one percent
cash reserve must be maintained as additional credit support for the facility.
At April 30, 2000 and 2001, the Company had borrowings of $18,004,889 and
$121,808,808, respectively, outstanding under the commercial paper facility at
weighted average interest rates, including the effect of program fees, dealer
fees and hedge instruments, as applicable, of 7.33 percent and 6.60 percent,
respectively.
The current term of the FIARC commercial paper facility expires on November
28, 2001. This maturity date reflects a renewal of the facility effective
November 29, 2000. Pursuant to this renewal, the maximum facility amount was
increased from $135 million to $150 million and the overcollateralization which
serves as the primary credit enhancement for the facility was reduced from 10
percent to 6 percent allowing the Company to now borrow up to 94 percent against
the receivables pledged as collateral for the FIARC commercial paper facility.
No other material changes were made to the terms and conditions of the facility
in connection with the renewal. If the facility was not extended beyond the
maturity date, 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 presently intends to seek a renewal of the facility
from its lenders prior to maturity. Management considers its relationship with
its lenders to be satisfactory and has no reason to believe that this credit
facility will not be renewed. If the facility were not renewed however, or if
material changes were made to its terms and conditions, it could have a material
adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with Variable Funding Capital
Corporation ("VFCC"), a commercial paper conduit administered by First Union
National Bank, (the FIACC commercial paper facility"), to fund the acquisition
of additional receivables generated under certain of the Company's financing
programs. FIACC acquired receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. The Company's interest cost is
based on VFCC's commercial paper rates for specific maturities plus .30 percent.
At April 30, 2001, borrowings were $10,400,901 under the FIACC commercial paper
facility, and had a weighted average interest rate of 5.56 percent, including
the effects of program fees and hedge instruments. There were no outstanding
borrowings at April 30, 2000. The current term of the FIACC commercial paper
facility expires on November 14, 2001. If the facility were not renewed on or
prior to the maturity date, the outstanding balance under the facility would
continue to amortize utilizing cash collections from the receivables pledged as
collateral. The Company presently intends to seek a renewal of the facility from
its lenders prior to maturity. Management considers its relationship with its
lenders to be satisfactory and has no reason to believe that this credit
facility will not be renewed. If the facility were not renewed however, or if
material changes were made to its terms and conditions, it could have a material
adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1, (the "ALAC 97-1 Securitization"). Accordingly,
the Company acquired $8,110,849 in outstanding receivables from the trust and
borrowed $6,408,150 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding
F-15
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance in a cash reserve account, was utilized to repay $7,874,689 in senior
notes and redeem $1,033,456 of the trust certificates. On March 15, 2001, the
Company elected to exercise its right to repurchase the senior notes issued in
connection with the ALAC Automobile Receivables Owner Trust 1998-1, (the "ALAC
98-1 Securitization). Accordingly, the Company acquired $9,257,612 in
outstanding receivables from the trust and borrowed $7,174,509 under the FIACC
facility which, combined with amounts on deposit in the collection account and
the outstanding balance in a cash reserve account, was utilized to repay
$7,997,615 in senior notes and redeem $1,946,178 of the Trust Certificates.
The receivables purchased were used as collateral to secure the FIACC
borrowing with any residual cash flow generated by the receivables pledged to
the partnership. As a result of utilizing FIACC to fund the repurchase of the
ALAC securitizations, the Company has elected to utilize the FIACC commercial
paper facility solely as the financing source for the repurchases and does not
expect to utilize the facility to finance Receivables Held for Investment.
Accordingly, the borrowing capacity was reduced from $25 million to
$11,627,308 effective March 15, 2001.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed notes
("Term Notes"). A pool of automobile receivables totaling $174,968,641, which
were previously owned by FIRC, FIARC and FIACC, secures the Term Notes. Proceeds
from the issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Term Note issuance and to fund a cash reserve account of 2
percent or $3,499,373 which will serve as a portion of the credit enhancement
for the transaction. The Term Notes bear interest at 7.174 percent and require
monthly principal reductions sufficient to reduce the balance of the Term Notes
to 96 percent of the outstanding balance of the underlying receivables pool. The
final maturity of the Term Notes is February 15, 2006. As of April 30, 2000 and
2001, the outstanding principal balances on the Term Notes were $151,104,279 and
$84,925,871, respectively. A surety bond issued by MBIA Insurance Corporation
provides credit enhancement for the Term Note holders. Additional credit support
is provided by the cash reserve account, which equals 2 percent of the original
balance of the receivables pool and a 4 percent over-collateralization
requirement. In the event that certain asset quality covenants are not met, the
reserve account target level will increase to 6 percent of the then current
principal balance of the receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC, an affiliate of First Union National Bank, to finance the Company's
acquisition of FISC. Contemporaneously with the Company's purchase of FISC, FISC
transferred certain assets to FIFS Acquisition, consisting primarily of (i) all
receivables owned by FISC as of the acquisition date, (ii) FISC's ownership
interest in certain Trust Certificates and subordinated spread or cash reserve
accounts related to two asset securitizations previously conducted by FISC, and
(iii) certain other financial assets, including charged-off accounts owned by
FISC 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 bore interest at VFCC's commercial paper rate plus 2.35
percent and expired on August 14, 2000. 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 FISC 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, one-third of the
servicing fee paid to FISC is also utilized to reduce principal outstanding on
the indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner and contributed
its assets for a 70 percent interest in the partnership and First Union
Investors, Inc., an affiliate of First Union, serves as the limited partner with
a 30 percent interest in the partnership (the "Partnership"). Pursuant to the
refinancing, the Partnership issued Class A Notes in the amount of $19,204,362
and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were
used to retire the acquisition debt. The Class A Notes bear interest at VFCC's
commercial paper rate plus 0.95 percent per annum and amortize on a monthly
basis by an amount necessary to reduce the Class A Note balance as of the
payment date to 75 percent of the outstanding principal
F-16
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance of Receivables Acquired for Investment, excluding Receivables Acquired
for Investment that are applicable to FIACC, as of the previous month end. The
Class B Notes bear interest at VFCC's commercial paper rate plus 5.38 percent
per annum and amortize on a monthly basis by an amount which varied based on
excess cash flows received from Receivables Acquired for Investment after
payment of servicing fees, trustee and back-up servicer fees, Class A Note
interest and Class A Note principal, plus collections received on the Trust
Certificates. The outstanding balance of the Class A Notes was $11,126,050 as
of April 30, 2001 and had a weighted average interest rate of 6.26 percent,
including the effects of program fees and hedge instruments. The Class B Notes
were paid in full on September 15, 2000. After the Class B Notes were paid in
full, all cash flows received after payment of Class A Note principal and
interest, servicing fees and other costs, are distributed to the Partnership
for subsequent distribution to the partners based upon the respective
partnership interests. During fiscal year 2001, $3,084,494 was distributed to
the limited partner. The amount of the partners' cash flow will vary depending
on the timing and amount of residual cash flows. The Company is accounting for
First Union's limited partnership interest in the Partnership as a minority
interest.
The Class A Notes mature on July 31, 2001. If the Class A Notes are not
renewed on or prior to the maturity date, the outstanding balance under the
notes would continue to amortize utilizing cash collections from the
receivables pledged as collateral. The Company presently intends to seek a
renewal of the notes from the lender prior to maturity. Management considers
its relationship with the lender to be satisfactory and has no reason to
believe that the notes will not be renewed. If the notes were not renewed
however, or if material changes were made to the terms and conditions, it
could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that was utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December 1999 and
was scheduled to mature on December 22, 2000. Effective December 22, 2000, the
$13.5 million in outstandings were refinanced through the issuance of a $13.5
million term loan. Under the terms of the facility, provided by Bank of America
and First Union, the term loan would be repaid in quarterly installments of
$675,000 beginning on March 31, 2001. In addition to the scheduled principal
payments, the term loan also requires an additional principal payment of
$300,000 on June 30, 2001 under certain conditions relating to the size of Bank
of America's portion of the outstanding balance. Pursuant to this requirement,
the Company paid $300,000 to Bank of America effective June 30, 2001. The
remaining unpaid balance of the term loan is due at maturity on December 22,
2002. Pricing under the facility is based on the LIBOR rate plus 3 percent. The
term loan is secured by all unencumbered assets of the Company, excluding
receivables owned and financed by wholly-owned, special purpose subsidiaries of
the Company and is guaranteed by First Investors Financial Services Group, Inc.
and all subsidiaries that are not special purpose subsidiaries. In consideration
for refinancing the working capital facility, the Company paid each lender an
upfront fee and issued warrants to each lender to purchase, in aggregate,
167,001 shares of the Company's common stock at a strike price of $3.81 per
share. The warrants expire on December 22, 2010. On December 22, 2000, the
warrant value of $175,000 was estimated based on the expected difference between
financing costs with and without the warrants. These costs are included as
deferred financing costs and will be amortized through the maturity date of the
debt. In addition, if certain conditions were met, the Company agreed to issue
additional warrants to Bank of America to acquire up to a maximum of 47,945
additional shares of stock at a price equal to the average closing price for the
immediately preceding 30 trading days prior to each grant date which is June 30,
2001 and December 31, 2001. Pursuant to this requirement, the Company issued
36,986 warrants to Bank of America at a strike price of $3.56 per share on June
30, 2001. All other terms and conditions of the warrants were identical to the
warrants issued in December 2000. The amount of warrants, if any, to be issued
on the December 31, 2001 will be determined by the outstanding balance owing to
Bank of America under of the term loan. In no event, however, can the additional
warrants issued on December 31, 2001 exceed 10,959. The fair value of the
warrants issued on June 30, 2001 will be included as deferred financing costs
and amortized through the maturity date of the debt. At April 30, 2000 and 2001,
there was $13,300,000 and $12,825,000, respectively outstanding under this
facility.
On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital
F-17
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirement. The note was repaid in full on December 20, 1999 with the
proceeds from borrowings under increased working capital facility.
LOAN COVENANTS. The documentation governing these credit facilities and
Term Notes contains numerous covenants relating to the Company's business, the
maintenance of credit enhancement insurance covering the receivables (if
applicable), the observance of certain financial covenants, the avoidance of
certain levels of delinquency experience and other matters. The breach of these
covenants, if not cured within the time limits specified, could precipitate
events of default that might result in the acceleration of the FIRC credit
facility, the Term Notes and the working capital facility or the termination of
the commercial paper facilities. The Company is not currently in default with
any covenants governing these financing arrangements at April 30, 2001.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates that do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of America
pursuant to which the Company's interest rate was fixed at 5.565 percent on a
notional amount of $120 million. The swap agreement expired on January 12, 2000.
In connection with the issuance of the Term Notes, the Company entered into a
swap agreement with Bank of America pursuant to which the Company pays a
floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent
and receives a fixed rate of 7.174 percent from the counterparty. The initial
notional amount of the swap was $167,969,000, which amortizes in accordance with
the expected amortization of the Term Notes. Final maturity of the swap was
August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap
at no material gain or loss and enter into a new swap under which the Company
would pay a fixed rate of 6.30 percent on a notional amount of $100 million.
Under the terms of the swap, the counterparty had the option of extending the
swap for an additional three years to mature on April 15, 2004 at a fixed rate
of 6.42 percent. On April 15, 2001, the counterparty exercised its extension
option.
On June 1, 2001, the Company entered into interest rate swaps with an
aggregate notional amount of $100 million and a maturity date of April 15, 2004.
Under the terms of these swaps, the Company will pay a floating rate based on
one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to
enter into these swap agreements to offset the uneconomical position of the
existing pay fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization and the
financing of that repurchase through the FIACC subsidiary on September 15, 2000,
FIACC entered into an interest rate swap agreement with First Union under which
FIACC pays a fixed rate of 6.76 percent as compared to the one month commercial
paper index rate. The initial notional amount of the swap is $6,408,150, which
amortizes monthly in accordance with the expected amortization of the FIACC
borrowings. The final maturity of the swap is December 15, 2001. On March 15,
2001, in connection with the repurchase of the ALAC 1998-1 Securitization and
the financing of that purchase through the FIACC subsidiary, the Company and the
counterparty modified the existing interest rate swap increasing the notional
amount initially to $11,238,710 and reducing the fixed rate from 6.76 percent to
5.12 percent. The new notional amount is scheduled to amortize monthly in
accordance with the expected principal amortization of the underlying
borrowings. The expiration date of the swap was changed from December 15, 2001
to September 1, 2002.
F-18
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("Class A swap") 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 ("Class B swap") 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. Class A swap has a final maturity of December 20,
2002 while Class B swap matured on 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 that may adversely affect any outstanding
indebtedness that is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement ("Class A cap") 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 Class A swap 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 ("Class B cap") 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 Class B
swap 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 Class B
swap. Pursuant to the refinance of the acquisition facility on August 8, 2000,
the Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $418,609. This derivative net gain is being amortized over the life
of the initial derivative instrument. In addition, the two remaining hedge
instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated the three interest rate swaps
and one interest rate cap with an aggregate notional value of $130,165,759 as
cash flow hedges as defined under SFAS No. 133. Accordingly, any changes in the
fair value of these instruments resulting from the mark-to-market process will
be recorded as unrealized gains or losses and be reflected as an increase or
reduction in stockholders' equity through other comprehensive income. In
connection with the decision to enter into the $100 million floating rate swaps
on June 1, 2001, the Company elected to change the designation of the $100
million fixed rate swap and not account for the instrument as a hedge under SFAS
No. 133. As a result, the change in fair value of both swaps will be reflected
as a gain or loss in net income for the appropriate measurement period.
Management believes that since these two positions effectively offset, any net
gains or losses will be immaterial to income.
8. INCOME TAXES
The temporary differences which give rise to deferred tax assets are as
follows at April 30, 2000 and 2001, respectively:
2000 2001
------------- -------------
Deferred tax assets
Allowance for credit losses............................. $ 1,235,853 $ 1,422,202
Accrued expenses........................................ 300,808 434,294
------------- -------------
1,536,661 1,856,496
------------- -------------
Deferred tax liabilities
Receivables Held for Investment, net.................... (284,342) (464,598)
Receivables Acquired for Investment, net and Investment
in Trust Certificates.............................. (1,139,889) (1,563,805)
Deferred costs, net..................................... (47,555) (23,579)
------------- -------------
(1,471,786) (2,051,982)
------------- -------------
Net deferred tax assets (liabilities)...................... $ 64,875 $ (195,486)
============= =============
F-19
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes on income before income taxes and
minority interest for the years ended April 30, 1999, 2000 and 2001, consists of
the following:
1999 2000 2001
------------ ------------ ----------
Current --
Federal............................ $1,347,472 $ 925,003 $ 65,153
State.............................. 58,739 289,540 1,546
------------ ------------ ----------
$1,406,211 $1,214,543 $ 66,699
============ ============ ==========
Deferred --
Federal............................ $ (255,546) $ 584,694 $259,538
State.............................. -- (95,788) 823
------------ ------------ ----------
$ (255,546) $ 488,906 $260,361
============ ============ ==========
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the years ended April 30,
1999, 2000 and 2001.
1999 2000 2001
------------ ------------ ----------
Income tax -- statutory rate............. 34.0% 34.0% 34.0%
State income tax, net of federal benefit. 2.1 2.5 2.0
Non-deductible expenses.................. .5 .1 .5
Tax free income.......................... (.4) (.1) --
Other.................................... .3 -- --
------------ ------------ ----------
Effective income tax rate........... 36.5% 36.5% 36.5%
============ ============ ==========
9. CREDIT RISKS
Approximately 27 percent of the Company's Receivables Held for Investment
by principal balance at April 30, 2001 represent receivables acquired from
dealers located in Texas. The economy of Texas is primarily dependent on
petroleum and natural gas production and sales of related supplies and services,
petrochemical operations, light and medium manufacturing operations, computer
and computer service businesses, agribusiness and tourism. Job losses in any or
all of these primary economic segments of the Texas economy may result in a
significant increase in delinquencies or defaults in the Company's receivable
portfolio. While vehicles secure the receivables, it is not expected that the
value of the vehicles if repossessed and sold by the Company would be sufficient
to recover the principal outstanding under any defaulted loans.
The Company is also exposed to credit loss in the event that the
counterparties to the swap agreements described in Note 7 do not perform their
obligations. The terms of the Company's interest rate agreements provide for
settlement on a monthly basis and accordingly, any credit loss due to
non-performance of the counterparty would be limited to the amount due from
the counterparty for the month non-performance occurred. The Company would be
exposed to adverse interest rate fluctuations following any such
non-performance. While management believes that it could enter into interest
rate swap agreements with other counterparties to effectively manage such rate
exposure, there is no assurance that it would be able to enter interest rate
agreements on comparable terms as those of its present agreements.
10. MARKET RISKS
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the Company of risk-mitigating
strategies such as hedging.
F-20
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to purchase and retain such
receivables. The Company's credit facilities bear interest at floating rates
which are reset on a short-term basis, whereas its receivables bear interest at
fixed rates which do not generally vary with changes in interest rates. The
Company is therefore exposed primarily to market risks associated with movements
in interest rates on its credit facilities. The Company believes that it takes
the necessary steps to appropriately reduce the potential impact of interest
rate increases on the Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently, all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.
As of April 30, 2001, the Company had $62 million of floating rate secured
debt outstanding net of swap and cap agreements. For every 1 percent increase in
commercial paper rates or LIBOR, annual after-tax earnings would decrease by
approximately $394,000 assuming the Company maintains a level amount of floating
rate debt and assuming an immediate increase in rates. As of June 1, 2001, the
Company increased the floating rate exposure in conjunction with the $100
million floating rate swaps. For every 1 percent increase in LIBOR, annual
after-tax earnings would decrease by approximately $635,000 related to these
swaps.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and estimated fair
values of the Company's financial instruments for those financial instruments
whose carrying amounts differ from their estimated fair values. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
shown in the table are included in the balance sheet under the indicated
captions.
APRIL 30, 2000 APRIL 30, 2001
--------------------------- ---------------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial assets --
Receivables Held for Investment................. $231,696,539 $238,670,780 $244,684,343 $252,013,955
Financial liabilities --
Term Notes...................................... $151,104,279 $150,490,418 $ 84,925,871 $ 79,127,741
Off-balance sheet instruments --
Swap agreements................................. $171,296,496 $ (482,924) $128,853,111 $ (3,964,157)
Cap agreements.................................. $ 41,729,094 $ 1,037,576 $ 1,332,648 $ 28,182
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:
CASH AND SHORT-TERM INVESTMENTS, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES. The carrying amounts approximate fair value because of the
short maturity and market interest rates of those instruments.
RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by
discounting expected cash flows at a risk-adjusted rate of return deemed to be
appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
RECEIVABLES ACQUIRED FOR INVESTMENT. The carrying value approximates fair
value. The fair values were estimated by discounting expected cash flows at a
risk-adjusted rate of return deemed to be appropriate for investors in such
receivables. Expected cash flows take into consideration management's estimates
of prepayments, defaults and recoveries.
F-21
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN TRUST CERTIFICATES. The carrying value approximates fair
value. The fair values were determined by utilizing prepayment speeds, loss rate
assumptions and discount rate assumptions.
TERM NOTES. The fair value was estimated by discounting cash payments using
current rates and comparative maturities. Expected cash payments take into
consideration prepayments, defaults and recoveries on the underlying collateral.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
SWAP AGREEMENTS. The fair value was estimated based on the payment the
Company would have to make to or receive from the swap counterparty to terminate
the swap agreements.
CAP AGREEMENTS. The fair value was estimated based on the payment the
Company would receive from the cap counterparty to terminate the cap agreements.
12. DEFINED CONTRIBUTION PLAN
Effective May 1, 1994, the Company adopted a participant-directed 401(k)
retirement plan for its employees. An employee becomes eligible to participate
in the plan immediately upon employment. The Company pays the administrative
expenses of the 401(k) plan. The Company also matches a percentage of each
participant's voluntary contributions up to a maximum voluntary contribution of
3 percent of the participant's compensation. In fiscal year 2000 and 2001, the
Company made matching contributions to the 401(k) plan in the amounts of $31,954
and $32,932, respectively. Prior to fiscal year 2000, no matching contributions
were made. Effective April 28, 1998, the Company established a
participant-directed Deferred Compensation Plan for certain executive officers
of the Company. Under the terms of the Deferred Compensation Plan, the
participants may elect to make contributions to the plan that exceeds amounts
allowed under the Company's 401(k) plan. The Company pays the administrative
expenses of the Deferred Compensation Plan. As of April 30, 2001 and 2000, the
amounts invested under the Deferred Compensation Plan totaled $527,958 and
$258,251, respectively.
13. SHAREHOLDERS' EQUITY
PREFERRED STOCK. In June 1995, the shareholders approved a new series of
preferred stock (New Preferred Stock) with a $1.00 par value, and authorized
1,000,000 shares. As of April 30, 2001, no shares have been issued.
STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the
Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered
by the Compensation Committee of the Board of Directors and provides that
options may be granted to officers and other key employees for the purchase of
up to 300,000 shares of Common Stock, subject to adjustment in the event of
certain changes in capitalization. Options may be granted either as incentive
stock options (which are intended to qualify for certain favorable tax
treatment) or as non-qualified stock options.
The Compensation Committee selects the persons to receive options and
determines the exercise price, the duration, any conditions on exercise and
other terms of the options. In the case of options intended to be incentive
stock options, the exercise price may not be less than 100 percent of the fair
market value per share of Common Stock on the date of grant. With respect to
non-qualified stock options, the exercise price may be fixed as low as 50
percent of the fair market value per share at the time of grant. In no event may
the duration of an option exceed 10 years and no option may be granted after the
expiration of 10 years from the adoption of the Plan.
The exercise price of the option is payable in full upon exercise and
payment may be in cash, by delivery of shares of Common Stock (valued at their
fair market value at the time of exercise), or by a combination of cash and
shares. At the discretion of the Compensation Committee, options may be issued
in tandem with stock appreciation rights entitling the option holder to receive
an amount in cash or in shares of Common Stock, or a combination
F-22
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereof, equal in value to any increase since the date of grant in the fair
market value of the Common Stock covered by the option.
A summary of the status of the Company's stock option plans for the years
ended April 30, 1999, 2000 and 2001 is presented below:
WEIGHTED
SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE
-------- --------
Outstanding at April 30, 1998.............. 138,000 $9.17
Granted.................................. 10,000 $4.92
Forfeited................................ (1,000) $7.38
--------
Outstanding at April 30, 1999.............. 147,000 $8.93
Granted.................................. 2,500 $5.25
Forfeited................................ (12,500) $8.30
--------
Outstanding at April 30, 2000.............. 137,000 $8.91
Granted.................................. 227,000 $4.53
Forfeited................................ (1,000) $7.38
--------
Outstanding at April 30, 2001.............. 363,000 $6.18
========
Options available for future grants
at April 30, 2001........................ 7,000
========
FISCAL
-----------------------------
1999 2000 2001
------- ------- --------
Options exercisable at end of year....................... 61,400 80,300 116,054
Weighted average exercise of options exercisable....... $10.19 $ 9.75 $ 6.98
Weighted average fair value of options granted......... $ -- $ -- $ --
WEIGHTED
RANGE OF WEIGHTED REMAINING AVERAGE
EXERCISE AVERAGE OPTIONS OPTIONS CONTRACTUAL
PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
-------------- -------------- ----------- ----------- -------------
$4.75 - $11.00 $7.76 70,000 70,000 (1)
$4.00 - $11.00 $6.09 293,000 116,054 9.24
------- --------
363,000 186,054
======= =======
(1) The option will terminate one year after the Director ceases to be a member
of the Board of Directors, except that in the event of the Director's death
while serving as a Director the option would be exercisable by his heirs or
representatives of his estate for a period of two years after date of
death.
The Company accounts for these plans under APB Opinion No. 25 under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
FISCAL
---------------------------------------
1999 2000 2001
---------- ---------- ---------
Net Income (Loss).................................... As Reported $2,001,842 $2,963,535 $ 51,646
Pro Forma $1,939,023 $2,920,289 $(105,073)
Basic and Diluted Net Income (Loss) Per
Common Share....................................... As Reported $ 0.36 $ 0.53 $ 0.01
Pro Forma $ 0.52 $ 0.52 $ (0.02)
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.
The following weighted-average assumptions were used:
FISCAL
1999 2000 2001
---- ---- ----
Risk free interest rate...................... 5.41% 6.45% 5.07%
Expected life of options in years............ 10 10 10
Expected stock price volatility.............. 38% 37% 35%
Expected dividend yield...................... 0% 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO FUND. As of April 30, 2001, the Company had unfunded
receivables in process of approximately $294,200.
EMPLOYMENT AGREEMENT. As of April 30, 2001 the Company was not a party to
any employment agreements.
LITIGATION. The Company from time to time becomes involved in various
routine legal proceedings which are incidental to the business. Management of
the Company vigorously defends such matters. As of April 30, 2001, management
believes there are no such legal proceedings that would have a material adverse
impact on the Company's financial position or results of operations.
LEASES. The Company is a party to a lease agreement for office space in
Houston that expires on February 28, 2003. The Company is party to a lease
agreement for office space in Atlanta which expires on June 30, 2007. The
Company also holds equipment under operating leases that expire in fiscal year
2003. Rent expense for office space and other operating leases for the years
ended April 30, 1999, 2000 and 2001, was $871,851, $1,149,646 and $1,192,466,
respectively. Required minimum lease payments for the remaining terms of the
above leases are:
Year ending April 30-
2002.................................................. $1,514,182
2003.................................................. 808,008
2004.................................................. 646,278
2005.................................................. 571,618
2006.................................................. 582,618
Thereafter............................................ 1,843,631
CAPITAL LEASES. During the year ended April 30, 1999, the Company entered
into a sale-and-leaseback transaction for certain of its computer equipment at
FISC for approximately $2.1 million. Gain on sale of this transaction was not
significant and is being amortized through the term of the lease. For accounting
purposes, the Company has treated this transaction as a capital lease in
accordance with SFAS No. 13 "Accounting for Leases" and recorded this obligation
in Accounts Payable and Accrued Liabilities. Payments are due in monthly
installments of $65,178 through 2002 with an implicit interest rate of 8.8
percent. Depreciation on the equipment has been reflected in accordance with the
Company's accounting policies.
F-24
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At April 30, 2001, the aggregate amounts of annual principal maturities of
the capital lease obligation are as follows:
Year Ending April 30 --
2002.............................................. $456,247
Less - Amounts representing interest ............. 13,108
--------
$443,139
========
15. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the years ended April 30, 1999, 2000 and 2001 are
as follows:
FOR THE YEAR ENDED APRIL 30,
-----------------------------------
1999 2000 2001
--------- --------- ---------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share................. 5,566,669 5,566,669 5,566,669
Effect of dilutive stock options and warrants... 27 484 1,618
--------- --------- ---------
Weighted average shares outstanding
for diluted earnings per Share............... 5,566,696 5,567,153 5,568,287
========= ========== =========
At April 30, 2001, the Company had 458,383 employee stock options and
warrants and 70,000 director 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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 2001.
FOR THE THREE MONTHS ENDED,
---------------------------------------------------------------------
JULY 31, 2000 OCTOBER 31, 2000 JANUARY 31, 2001 APRIL 30, 2001
------------- ---------------- ---------------- --------------
Interest Income............................... $10,989,191 $11,601,863 $11,407,967 $10,365,563
Interest Expense.............................. 5,090,998 5,079,741 5,092,333 4,878,037
Net Income (Loss)............................. 494,598 504,963 385,057 (1,332,972)
Basic and Diluted Net Income (Loss) per
Common Share................................ $ 0.09 $ 0.09 $ 0.07 $ (0.24)
F-25
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 2000.
FOR THE THREE MONTHS ENDED,
--------------------------------------------------------------------
JULY 31, 1999 OCTOBER 31, 1999 JANUARY 31, 2000 APRIL 30, 2000
------------- ---------------- ---------------- --------------
Interest Income...................................... $9,609,333 $10,063,124 $10,584,724 $10,019,046
Interest Expense..................................... 3,879,688 3,984,995 4,142,041 4,503,033
Net Income........................................... 702,416 775,412 807,870 677,837
Basic and Diluted Net Income per Common Share........ $ 0.13 $ 0.14 $ 0.15 $ 0.12
F-26