UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27550
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FIRSTPLUS Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 75-2561052
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Viceroy, 8th Floor, Dallas, Texas 75235
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(Address of principal executive offices)
(Zip Code)
(214) 599-6400
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- ---------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report)
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
------- -------
There were 34,461,473 shares of voting common stock and 690,905 shares of
non-voting common stock, $.01 par value outstanding as of June 30, 1997.
1
FIRSTPLUS FINANCIAL GROUP, INC.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets - September 30, 1996
and June 30, 1997 (Unaudited) 3
Consolidated Statements of Income (Unaudited)-
Three Months and Nine Months Ended June 30, 1996 and
June 30, 1997 4
Consolidated Statements of Cash Flows (Unaudited)-
Nine Months Ended June 30, 1996 and June 30, 1997 5
Notes to Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE 14
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
ASSETS
September 30, June 30,
1996 1997
------------- -----------
(Unaudited)
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 23,167 $ 40,802
Loans held for sale, net. . . . . . . . . . . . . . . . . . 430,812 1,093,004
Investment in securitized loans available for sale. . . . . - 194,465
Subordinated certificates held for sale . . . . . . . . . . 16,528 17,440
Interest only strips. . . . . . . . . . . . . . . . . . . . 187,230 565,861
Allowance for possible credit losses on loans sold. . . . . (54,257) (207,701)
-------- ----------
132,973 358,160
Servicing assets. . . . . . . . . . . . . . . . . . . . . . - 22,384
Receivable from trusts. . . . . . . . . . . . . . . . . . . 32,105 108,272
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 20,542 50,824
-------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $656,127 $1,885,351
-------- ----------
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities . . . . . . . . $ 19,669 $ 35,907
Warehouse financing facilities with affiliates . . . . . 354,481 986,784
Certificates of deposit. . . . . . . . . . . . . . . . . - 19,237
Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . - 177,375
Term line of credit. . . . . . . . . . . . . . . . . . . 57,465 150,730
Notes payable. . . . . . . . . . . . . . . . . . . . . . 1,967 11,076
Subordinated notes payable to affiliates . . . . . . . . 7,002 7,002
Convertible subordinated notes . . . . . . . . . . . . . 100,000 69,920
Deferred tax liabilities, net. . . . . . . . . . . . . . 20,974 72,041
-------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . 561,558 1,530,072
-------- ----------
Commitments
Stockholders' Equity:
Common stock, $0.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares -22,499,140 as of
September 30, 1996 and 34,461,473 as of June 30,
1997 . . . . . . . . . . . . . . . . . . . . . . . . 225 345
Non-voting common stock, $0.01 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 4,440,676 as of
September 30, 1996 and 690,905 as of June 30, 1997 . 44 7
Additional capital . . . . . . . . . . . . . . . . . . . 54,696 216,508
Unrealized gain on interest only strips, net . . . . . . - 14,007
Retained earnings. . . . . . . . . . . . . . . . . . . . 39,604 124,412
-------- ----------
Total stockholders' equity . . . . . . . . . . . . . 94,569 355,279
-------- ----------
Total liabilities and stockholders' equity . . . . . $656,127 $1,885,351
-------- ----------
-------- ----------
See accompanying notes.
3
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1997 1996 1997
-------- -------- -------- ---------
Revenues:
Gains on securitized loan sales, net of
costs. . . . . . . . . . . . . . . . . . . . . . . . $ 36,730 $142,092 $ 78,462 $ 350,603
Provision for possible credit losses on
securitized loan sales . . . . . . . . . . . . . . . (10,711) (62,531) (20,238) (154,160)
-------- -------- -------- ---------
Net gain on securitized loan sales . . . . . . . . . 26,019 79,561 58,224 196,443
Net gain on other transactions . . . . . . . . . . . . . 4,592 12,590 11,353 28,248
-------- -------- -------- ---------
Total gain on sale of loans. . . . . . . . . . . . . 30,611 92,151 69,577 224,691
Interest income. . . . . . . . . . . . . . . . . . . . . 6,704 48,824 10,761 102,304
Servicing income . . . . . . . . . . . . . . . . . . . . 1,040 5,794 2,674 12,138
Origination income . . . . . . . . . . . . . . . . . . . 1,884 8,941 4,512 22,090
Other income . . . . . . . . . . . . . . . . . . . . . . 426 822 880 3,184
-------- -------- -------- ---------
Total revenues. . . . . . . . . . . . . . . . . . 40,665 156,532 88,404 364,407
Expenses:
Salaries and employee benefits . . . . . . . . . . . . . 9,383 26,980 22,541 62,753
Interest . . . . . . . . . . . . . . . . . . . . . . . . 3,751 25,098 8,610 57,469
Other operating. . . . . . . . . . . . . . . . . . . . . 8,458 29,957 17,319 73,714
Provision for possible credit losses on loans
held for sale and interest only strips . . . . . . . 3,347 12,926 6,324 31,189
-------- -------- -------- ---------
Total expenses. . . . . . . . . . . . . . . . . . 24,939 94,961 54,794 225,125
-------- -------- -------- ---------
Income before income taxes. . . . . . . . . . . . . . . . . 15,726 61,571 33,610 139,282
Provision for income taxes. . . . . . . . . . . . . . . . . (5,976) (23,397) (12,776) (52,927)
-------- -------- -------- ---------
Net income. . . . . . . . . . . . . . . . . . . . $ 9,750 $ 38,174 $ 20,834 $ 86,355
-------- -------- -------- ---------
-------- -------- -------- ---------
Weighted average common shares and common
equivalent shares outstanding . . . . . . . . . . . . 27,680 36,236 24,412 33,334
-------- -------- -------- ---------
-------- -------- -------- ---------
Primary net income per share of common stock. . . . . . . . $ 0.35 $ 1.05 $ 0.85 $ 2.59
-------- -------- -------- ---------
-------- -------- -------- ---------
Weighted average fully diluted common shares and
common equivalent shares outstanding. . . . . . . . . 27,680 40,525 24,412 38,384
-------- -------- -------- ---------
-------- -------- -------- ---------
Fully diluted net income per share of common stock. . . . . $ 0.35 $ 0.96 $ 0.85 $ 2.32
-------- -------- -------- ---------
-------- -------- -------- ---------
See accompanying notes.
4
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
Nine Months Ended
June 30,
------------------
1996 1997
---- ----
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,834 $ 86,355
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for possible credit losses. . . . . . . . . . . . . . . . . . . 26,562 185,349
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 522 1,565
Gain on sales of loans. . . . . . . . . . . . . . . . . . . . . . . . . . (94,037) (408,476)
Convertible subordinated subdebt partial conversion . . . . . . . . . . . - 1,805
Changes in operating assets and liabilities:
Interest only strip amortization . . . . . . . . . . . . . . . . . . . . 7,280 36,969
Loans originated or acquired . . . . . . . . . . . . . . . . . . . . . . (909,102) (2,827,463)
Principal collected and proceeds from sale of loans. . . . . . . . . . . 785,069 1,997,637
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . (1,298) (7,952)
Investment in interest only strip. . . . . . . . . . . . . . . . . . . . (180) 6,942
Receivable from trusts . . . . . . . . . . . . . . . . . . . . . . . . . (9,749) (86,990)
Investment in servicing asset, net . . . . . . . . . . . . . . . . . . . - (22,384)
Subordinated certificates held for sale. . . . . . . . . . . . . . . . . (15,215) (913)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,582) (20,131)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . 6,449 12,261
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . 9,340 51,032
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . (177,107) (994,394)
---------- -----------
INVESTING ACTIVITIES:
Cash from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . 252 2,629
Purchases of equipment and leasehold improvements, net. . . . . . . . . . (785) (14,779)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . . . . . . . . (533) (12,150)
---------- -----------
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net . . . . . . . . . . . . 102,440 622,884
Borrowings on bonds payable, net. . . . . . . . . . . . . . . . . . . . . - 177,375
Borrowings on term line of credit, net. . . . . . . . . . . . . . . . . . 27,820 93,271
Borrowings on notes payable, net. . . . . . . . . . . . . . . . . . . . . (796) 8,114
Borrowings on investment certificate. . . . . . . . . . . . . . . . . . . - (782)
Repayments of subordinated notes payable to affiliates. . . . . . . . . . (1,000) -
Redemption of preferred stock issued. . . . . . . . . . . . . . . . . . . (2,400) -
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,211 123,317
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . (265) -
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . 177,010 1,024,179
---------- -----------
INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . (630) 17,635
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 2,967 23,167
---------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 2,337 $ 40,802
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period . . . . . . . . . . . . . . . . . . . . . $ 8,610 $ 53,546
---------- -----------
---------- -----------
See accompanying notes.
5
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month and the nine month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended September 30,
1996 included in FIRSTPLUS Financial Group, Inc.'s 1996 Annual Report filed
with the SEC on Form 10-K.
On May 21, 1997, FIRSTPLUS Consumer Finance, Inc., a wholly owned
subsidiary of the Company, acquired The Modern Finance Company ("Modern"),
through an exchange of stock, in a transaction accounted for as a pooling of
interest. However, because of the relative size of the acquisition, the
Company did not restate its historical balance sheets or statements of income
to account for the acquisition. As such, beginning retained earnings was
restated for the effect of all years prior to the year of acquisition. The
Company issued 380,038 shares of its Common Stock to the former shareholders
of Modern. Modern is an originator of small, consumer loans and had a net loan
portfolio of $24.5 million, at the date of acquisition.
6
All tabular information is presented in thousands.
2. LOANS HELD FOR SALE
Loans held for sale consist of the following:
As of As of
September 30, 1996 June 30, 1997
------------------ -------------
(Unaudited)
Conventional loans . . . . . . . . . . . . . . . . . . . $ 386,934 $ 981,137
Title I loans. . . . . . . . . . . . . . . . . . . . . . 34,712 65,913
First lien mortgages . . . . . . . . . . . . . . . . . . 1,714 480
Construction loans . . . . . . . . . . . . . . . . . . . 1,827 95
Consumer finance loans . . . . . . . . . . . . . . . . . - 53,374
---------- -----------
Subtotal. . . . . . . . . . . . . . . . . . . . . . . 425,187 1,100,999
Allowance for possible credit losses . . . . . . . . . . (6,495) (20,351)
Deferred finance charges . . . . . . . . . . . . . . . . - (9,145)
Net purchase premiums. . . . . . . . . . . . . . . . . . 12,120 21,501
---------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 430,812 $ 1,093,004
---------- -----------
---------- -----------
3. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the combined allowance for possible credit losses for loans
held for sale and interest only strips (I/O strips) is summarized as follows:
Year Ended Nine Months Ended
September 30, 1996 June 30, 1997
------------------ -------------
(Unaudited)
Balance, beginning of period . . . . . . . . . . . . . . $ 4,794 $ 60,752
Provision for possible credit losses . . . . . . . . . . 59,644 185,349
Charge offs, net . . . . . . . . . . . . . . . . . . . . (3,901) (18,890)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 215 841
---------- -----------
Balance, end of period . . . . . . . . . . . . . . . . . $ 60,752 $ 228,052
---------- -----------
---------- -----------
Components of Allowance:
Allowance for possible credit losses . . . . . . . . . $ 6,495 $ 20,351
Allowance for possible credit losses on loans sold . . 54,257 207,701
---------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 60,752 $ 228,052
---------- -----------
---------- -----------
4. NET INVESTMENT IN I/O STRIPS
The activity in the Investment in I/O Strips is summarized as follows:
Year Ended Nine Months Ended
September 30, 1996 June 30, 1997
------------------ -------------
(Unaudited)
Balance, beginning of period . . . . . . . . . . . . . $ 29,744 $ 187,230
Gain on sale of loans. . . . . . . . . . . . . . . . . 170,679 408,476
Amortization . . . . . . . . . . . . . . . . . . . . . (12,982) (36,969)
Other. . . . . . . . . . . . . . . . . . . . . . . . . (211) 7,124
---------- -----------
Balance, end of period . . . . . . . . . . . . . . . . 187,230 565,861
Allowance for possible credit losses . . . . . . . . . (54, 257) (207,701)
---------- -----------
Balance, net . . . . . . . . . . . . . . . . . . . . . $ 132,973 $ 358,160
---------- -----------
---------- -----------
7
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. OTHER ASSETS
Other assets consist of the following:
As of As of
September 30, 1996 June 30, 1997
------------------ -------------
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . $ 424 $ 402
Furniture, equipment and leasehold improvements, net . . . 5,497 20,440
Debt offering costs. . . . . . . . . . . . . . . . . . . . 3,112 1,970
Prepaids and other . . . . . . . . . . . . . . . . . . . . 11,509 28,012
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $20,542 $50,824
------- -------
------- -------
6. GAINS ON SALES OF LOANS
The gains on sales of loans and the related costs consist of the following:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- ---------------------
1996 1997 1996 1997
--------- -------- ------ ------
(Unaudited) (Unaudited)
Gain on sale of loans. . . . . . . . . . . . . . . . . . . $ 43,949 $160,765 $ 94,037 $ 408,476
Gain on hedges . . . . . . . . . . . . . . . . . . . . . . 58 3,590 58 3,668
Servicing assets . . . . . . . . . . . . . . . . . . . . . - 11,191 - 21,834
Deferred income. . . . . . . . . . . . . . . . . . . . . . - (11,458) - (22,997)
Premiums, net. . . . . . . . . . . . . . . . . . . . . . . (4,830) (19,421) (10,607) (51,574)
Transaction costs. . . . . . . . . . . . . . . . . . . . . (2,447) (2,575) (5,026) (8,804)
--------- --------- --------- ----------
Net gain (before provision for possible credit losses) . . 36,730 142,092 78,462 350,603
Provision for possible credit losses . . . . . . . . . . . (10,711) (62,531) (20,238) (154,160)
--------- --------- --------- ----------
Net gain on securitized loan sales . . . . . . . . . . . . 26,019 79,561 58,224 196,443
--------- --------- --------- ----------
I/O strip interest income. . . . . . . . . . . . . . . . . 1,577 8,525 2,874 13,942
Recognition of deferred gain . . . . . . . . . . . . . . . - 406 - 406
Due diligence and trustee & administrative costs . . . . . (41) - (41) (192)
Gain on sale of loans not securitized. . . . . . . . . . . 3,056 3,746 8,520 14,179
Provision for possible credit losses on other
loan sales. . . . . . . . . . . . . . . . . . . . . . . . - (87) - (87)
--------- --------- --------- ----------
Net gain on other transactions . . . . . . . . . . . . . . 4,592 12,590 11,353 28,248
--------- --------- --------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,611 $ 92,151 $ 69,577 $ 224,691
--------- --------- --------- ----------
--------- --------- --------- ----------
8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
JUNE 30, 1997
Loans held for sale (including investment in securitized loans) increased
from $430.8 million as of September 30, 1996 to $1.3 billion as of June 30,
1997, an increase of $856.7 million or 198.8%. This increase was primarily
due to an expanded correspondent network, increased direct to consumer
originations and access to funding in the form of repurchase facilities and
warehouse facilities, which allowed for substantial growth in loan
originations.
The Company's net investment in I/O strip increased from $133.0 million
at September 30, 1996 to 358.2 million at June 30, 1997, an increase of
$225.2 million or 169.3%. This increase was due to the $1.6 billion of loans
securitized and sold from October 1, 1996 through June 30, 1997.
The Company's warehouse and repurchase facilities are its primary source
of funding for loan originations. As of September 30, 1996, the Company had
outstanding balances of $354.5 million owed to warehouse and repo lenders at
an approximate 6.6% average rate of interest. As of June 30, 1997, the
Company had outstanding balances of $1.0 billion owed to warehouse and repo
lenders at an approximate 6.7% average rate of interest. This represents a
$651.5 million warehouse and repo line balance increase from September 30,
1996 to the June 30, 1997 balance owing, or a 183.8% increase.
Accounts payable and other accrued liabilities increased from $19.7
million as of September 30, 1996 to $59.3 million as of June 30, 1997.
This represents a $39.6 million increase over the period, or 201.5%. This
increase was primarily a result of accrued advertising expense and an
increase due to the pooling of Modern.
Total shareholders' equity at June 30, 1997 was $355.3 million, as
compared with $94.6 million at September 30, 1996, an increase of $260.7
million or 275.7%. During the nine months ended June 30, 1997, the Company
earned net income of $86.4 million, closed a secondary public offering with
the sale of 4,200,000 shares of voting common stock in an underwritten public
offering which yielded $121.7 million in equity proceeds to the Company,
issued 2,161,385 of common shares for the conversion of certain of the
Company's outstanding subordinated notes and exercise of options and warrants
resulting in a $35.1 million addition to equity and issued 1,986,513 of
voting common shares in conjunction with three acquisitions accounted for as
poolings-of-interests which contributed $2.9 million in equity. In addition,
the Company adopted FASB 125, resulting in a mark to market unrealized gain
on interest only strips classified as available for sale securities and a
corresponding addition to equity of $14.0 million.
RESULTS OF OPERATIONS
The Company's total revenues increased to $156.5 million during its third
fiscal 1997 quarter from $40.7 million for the comparable fiscal 1996
quarter, an increase of $115.9 million or 284.9%. For the nine months ended
June 30, 1997, total revenues increased to $364.4 million from $88.4 million
for the comparable fiscal 1996 period, an increase of $276.0 million or
312.2%.
The increase in the volume of loans originated and purchased by the
Company and the increase in the size and scope of the Company's
securitization program was primarily responsible for this increase in
revenues. The Company's securitization transactions resulted in increased
Gain on Sale of Loans. Gain on Sale of Loans increased because the Company
was able to increase the volume and efficiency of loans sold in the quarter
and nine months ended June 30, 1997, without reduction due to sharing
arrangements present in the nine months ended June 30, 1996. Interest,
servicing and origination income also increased substantially during the June
30, 1997 quarter and nine months ended June 30, 1997 when compared to the
June 30, 1996 quarter and nine months ended June 30, 1996, respectively,
primarily as a result of the increased quantity of loans originated, held for
sale and serviced by the Company.
The Company's provision for possible credit losses on loans sold
increased by $51.8 million, from $10.7 million for the quarter ended June 30,
1996 to $62.5 million for the quarter ended June 30, 1997, and by $133.9
million from $20.2 million for the nine months ended June 30, 1996 to $154.2
million for the nine months ended June 30, 1997. These increases in the
provision for possible credit losses on loans sold were proportional to the
Company's increase in securitization activity, as adjusted for the increasing
percentage of Conventional loans securitized by the Company and the removal
of the warehouse
9
lender's sharing arrangement payment (which required the Warehouse Lender
rather than the Company to reserve for certain loans).
Total expenses including provision for income taxes increased from $30.9
million for the three months ended June 30, 1996 to $118.4 million for the
three months ended June 30, 1997, an increase of $87.4 million or 282.8%.
As a percentage of total revenues, total expenses including taxes decreased
from 76.0% in the June 1996 quarter to 75.6% in the June 1997 quarter. For
the nine months ended June 30, 1997, total expenses increased to $278.1
million from $67.6 million for the comparable fiscal 1996 period, an increase
of $210.5 million or 311.5%. As a percentage of total revenues, total
expenses were 76.4% and 76.3%, respectively, for the nine months ended June
30, 1996 and June 30, 1997.
As a result of the above, net income increased from $9.8 million for the
June 1996 quarter to net income of $38.2 million for the June 1997 quarter.
This represents an increase of $28.4 million, or a 291.5% increase. For the
nine months ended June 30, 1997, net income increased to $86.4 million from
$20.8 million for the comparable fiscal 1996 period, an increase of $65.5
million or 314.4%. Such increases were primarily the result of growth in
loan production and sale of loans through securitizations for the respective
comparative periods, as well as the increase in net interest income earned on
loans retained on the balance sheet, loan origination fees and servicing fees.
The Company completed the funding of the 1996-3 securitization by
delivering $44.4 million in loans in October 1996. The Company also
delivered $350.4 million out of $400.0 million in loans to the 1996-4
securitization in November 1996. The remaining $49.6 million in loans of the
1996-4 securitization were delivered in January 1997. The Company closed the
1997-1 securitization of $600.0 million in loans in February 1997 and
delivered $490.5 million of these loans during February and March 1997.
Funding was completed on the 1997-1 securitization with the delivery of
$109.5 million in April 1997. In June 1997, the Company closed the 1997-2
securitization of $750 million and delivered $566.9 million of these loans
prior to June 30, 1997.
The weighted average Fair, Isaac and Company score (a default prediction
model utilized by the Company) for the loans securitized in the Company's
1997-2 securitization was approximately 681 points. The weighted average
Fair, Isaac and Company score for the Conventional Loans securitized in the
Company's 1996-2 securitization (closed during the quarter ended June 30,
1996) was approximately 663 points.
The Company's servicing loan portfolio (including subserviced loans) had
30 day and over delinquencies of 2.2% as of June 30, 1997, and 3.7% as of
June 30, 1996. This decrease was primarily due to increased loan origination
volumes. On a static pool basis, the Company's seasoned securitizations
(those transactions funded more than six months ago), had a weighted average
30 day and over delinquency rate of 3.7% as of June 30, 1997.
Gross defaults (before recoveries and Title I insurance claims received)
as a percentage of the serviced loan portfolio for the three months ended
June 30, 1997 equaled $11.1 million or 0.35% of the June 1997 average
quarterly loan servicing portfolio. Gross defaults for the nine months ended
June 30, 1997 equaled $23.9 million or 0.7% of the June 1997 loan servicing
portfolio. As of June 30, 1997, actual cumulative defaults in the
securitizations to date were less than the projected cumulative defaults.
On a seasoned pool basis, the weighted average prepayment rates for the
Company's seasoned securitizations (those transactions funded more than six
months ago) which were closed in fiscal years 1996 and 1997 were primarily
within the range of 8.8% and 16.5% for the quarter ended June 30, 1997.
Prepayment rates for newer securitizations and for non-securitized loans on
the Company's balance sheet are not yet sufficient to provide meaningful data
regarding future loan performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
loan originations and purchases, (ii) reserve accounts, overcollateralization
requirements, fees and expenses incurred in connection with its
securitization transactions, (iii) tax payments due on the Company's taxable
income, (iv) television, radio and direct mail advertising and other
marketing, and (v) administrative and other operating expenses.
10
Adequate credit facilities and other sources of funding, which permit the
Company to fund its operating cash requirements and to securitize or sell
loans in the secondary market, are essential to the continuation of the
Company's ability to originate and purchase loans. After utilizing available
working capital, the Company borrows money to fund its loan originations and
purchases, and repays these borrowings as the loans are repaid or sold. Upon
the securitization or sale of loans and the subsequent repayment of the
borrowings, the Company's working capital and warehouse lines of credit again
become available to fund additional loan originations and purchases.
In October 1996, the Company increased a warehouse line facility with
Bank One, Texas, N.A. ("Bank One Facility") from $60 million to $110 million
and a repurchase facility with Bear Stearns Home Equity Trust 1996-1 ("Bear
Stearns Facility") from $300 million to $500 million. At June 30, 1997, the
Company had borrowed $97.0 million under the Bank One Facility and $266.3
million under the Bear Stearns Facility.
In November 1996, the Company entered into the $75 million term line with
Bear Stearns and Co. Inc. ("Bear Stearns Term Line"). The Bear Stearns Term
Line may be utilized by the Company with respect to interest only strips
generated by securitizations in which Bear Stearns is the lead manager. At
June 30, 1997, the Company had borrowed $22.9 million under this facility.
In December 1996, the Company entered into the $100 million term line
with PaineWebber Real Estate Securities Inc. (the "PaineWebber Term Line")
and the $400 million repurchase facility with PaineWebber Real Estate
Securities Inc. ("PaineWebber Repurchase Facility"). In June 1997, the
Company increased the repurchase facility to $500 million. The PaineWebber
Term Line bears interest at LIBOR plus 2.1% and the PaineWebber Repurchase
Facility bears interest at LIBOR plus 1.00%. At June 30, 1997, the Company
had borrowed $57.2 million under the Term Line and $285.9 million under the
repurchase facility.
In April 1997, the Company entered into a $300 million repurchase
facility with Merrill Lynch Mortgage Capital ("Merrill Lynch Repurchase
Facility") and a $75 million term line with Merrill Lynch Mortgage Capital,
Inc. In June 1997, the Company increased the repurchase facility to $400
million. At June 30, 1997, the Company had borrowed $214.2 million under the
repurchase facility and $0 under the term line. In April 1997, the Company
entered into a $200 million warehouse line facility with Industrial Bank of
Japan ("IBJ Warehouse Facility"). At June 30, 1997, the Company had borrowed
$194.5 million under this facility.
At June 30, 1997, the Company had borrowed $63.3 million and $54.7
million from a nationally recognized finance company under a warehouse line
facility and term line facility, respectively.
At June 30, 1997, the Company had borrowed a total of $62.2 million under
various other warehouse and repurchase line facilities, term lines,
investment certificates and other facilities.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash
flow basis, which is expected to increase as the volume of the Company's loan
purchases and originations increase and its securitization program grows.
The Company's operations used $994.4 million during the nine months ended
June 30, 1997. The increase in the use of cash in operations is primarily
related to the cost of an enlarged infrastructure, employee base and the
costs that accompany the Company's securitization strategy (which increases
the Gain on Sale of Loans but reduces the amount of cash received on the sale
of loans as compared to whole-loan sales). Cash from financing and
investing activities provided cash in the amount of $1.0 billion for the
nine months ended June 30, 1997. Financing and investing activities
increased primarily due to additional borrowings related to the repurchase
facilities, the term lines and other borrowings, which have been used to fund
loan originations, working capital and securitization costs.
In addition, the Company has begun to implement a strategy of maintaining
a significant quantity of loans on its balance sheet, thus increasing the
length of time that loans are held for sale and materially increasing its
interest rate risk. Because the Company's present loan facilities bear
interest at variable rates, the Company has a need for medium to long term
fixed-rate financing. If the Company is unable to obtain such financing, it
could have a material adverse effect on the Company's results of operations
and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 establishes simplified standards for computing and
presenting earnings per share ("EPS"). Under SFAS 128 the presentation of
primary EPS will be replaced with a presentation of basic
11
EPS. Basic EPS is computed excluding dilution caused by common stock
equivalents such as stock options and, therefore, will tend to be slightly
higher than primary EPS. The presentation of fully diluted EPS is replaced
with a presentation of diluted EPS. Diluted EPS is computed in a similar
fashion to how fully diluted EPS is computed. The Company will adopt this
pronouncement to report results of operations for the first quarter of fiscal
1998 and for the year ended September 30, 1998. Previously reported EPS will
be restated at that time to conform to SFAS 128. This adoption is not
expected to have a material impact on EPS as currently presented by the
Company.
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon
or comparable terminology. The statements in "Risk Factors" contained in the
Company's current report on Form 8-K, filed with the Securities and Exchange
Commission on December 19, 1996, constitute cautionary statements
identifying important factors, including certain risks and uncertainties,
with respect to such forward-looking statements that could cause actual
results to differ materially from those reflected in such forward-looking
statements.
12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A vote was submitted to security holders, as follows:
(a) Annual Meeting of Shareholders on March 5, 1997
(b) The following directors were elected: Daniel T. Phillips, Eric C. Green,
John Fitzgerald, Daniel J. Jessee, Paul Seegers, and Sheldon I. Stein.
(c) The following is a brief description of the matters voted upon showing the
voting tabulation:
1. ELECTION OF DIRECTORS
Voting Common Stock
-------------------
Name For Withheld
---- --- --------
Daniel T. Phillips 21,318,602 381,182
Eric C. Green 21,318,602 381,182
John Fitzgerald 21,316,652 383,132
Daniel J. Jessee 21,318,602 381,182
Paul Seegers 21,318,602 381,182
Sheldon I. Stein 21,295,052 404,732
2. AN AMENDMENT TO THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE THE COMPANY'S NAME TO "FIRSTPLUS FINANCIAL
GROUP, INC."
Voting Common Stock
-------------------
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
21,276,195 413,439 2,900 7,250
3. AMENDMENTS TO THE COMPANY'S 1995 EMPLOYEE STOCK OPTION PLAN (THE
"PLAN") (THE "plan") TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR
ISSUANCE UNDER THE PLAN FROM 1,100,000 TO 3,200,000 AND TO RATIFY
CERTAIN GRANTS OF STOCK OPTIONS THEREUNDER.
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
14,036,567 2,413,165 3,050 5,247,002
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
10.1 Master Assignment Agreement between FIRSTPLUS FINANCIAL
INC. and Merrill Lynch Mortgage Capital Inc.
10.2 Tri-Party Custodial Agreement among FIRSTPLUS FINANCIAL,
INC., Merrill Lynch Mortgage Capital Inc., Merrill Lynch
Credit Corporation and Bank One, Texas, N.A.
10.3 Annex I Supplemental Terms to Master Repurchase Agreement
Dated as of April 10, 1997, among Merrill Lynch Mortgage
Capital Inc. and Merrill Lynch Credit Corporation and
FIRSTPLUS FINANCIAL, INC.
10.4 Revolving Credit Agreement between FIRSTPLUS FINANCIAL INC.
and Working Capital Management Co. L.P. dated June 16, 1997.
10.5 Sale and Servicing Agreement dated June 1, 1997 between
FIRSTPLUS FUNDING TRUST, FIRSTPLUS FINANCIAL INC. and
FIRSTBANK NATIONAL ASSOCIATION
10.6 INDENTURE between FIRSTPLUS FUNDING TRUST and FIRSTBANK
NATIONAL ASSOCIATION.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(B) Reports on Form 8-K
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTPLUS FINANCIAL GROUP, INC.
(Registrant)
by: /s/ Eric C. Green
--------------------------------
Eric C. Green
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
date: August 14, 1997
14
INDEX TO EXHIBITS
(A) Exhibits
10.1 Master Assignment Agreement between FIRSTPLUS FINANCIAL
INC. and Merrill Lynch Mortgage Capital Inc.
10.2 Tri-Party Custodial Agreement among FIRSTPLUS FINANCIAL, INC.,
Merrill Lynch Mortgage Capital Inc., Merrill Lynch Credit
Corporation and Bank One, Texas, N.A.
10.3 Annex I Supplemental Terms to Master Repurchase Agreement
Dated as of April 10, 1997, among Merrill Lynch Mortgage
Capital Inc. and Merrill Lynch Credit Corporation and
FIRSTPLUS FINANCIAL, INC.
10.4 Revolving Credit Agreement between FIRSTPLUS FINANCIAL INC.
and Working Capital Management Co. L.P. dated June 16, 1997.
10.5 Sale and Servicing Agreement dated June 1, 1997 between
FIRSTPLUS FUNDING TRUST, FIRSTPLUS FINANCIAL INC. and
FIRSTBANK NATIONAL ASSOCIATION
10.6 INDENTURE between FIRSTPLUS FUNDING TRUST and FIRSTBANK
NATIONAL ASSOCIATION.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
15