<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<CAPTION>
(MARK ONE)
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
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 0-27550
</TABLE>
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FIRSTPLUS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 75-2561085
(State or other (I.R.S. Employer
jurisdiction of) Identification
incorporation or No.)
organization)
1600 VICEROY, 8TH FLOOR 75235
DALLAS, TEXAS (Zip Code)
(Address of principal
executive offices)
</TABLE>
Registrant's telephone number, including area code: (214) 599-6400
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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 statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of common stock held by nonaffiliates of the
registrant, based on the closing price of the common stock as reported by the
Nasdaq National Market on November 28, 1997 was $1.4 billion. For purposes of
this computation, all officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
an admission that such officers, directors or 10% beneficial owners are, in
fact, affiliates of the registrant. As of November 28, 1997, 37,391,232 shares
of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual
Meeting of Shareholders to be held March 4, 1998, to be filed with the
Commission not later than 120 days after September 30, 1997, is incorporated by
reference into Part III of this report.
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<PAGE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Item 1. Business.......................................................................................... 1
Item 2. Property.......................................................................................... 19
Item 3. Legal Proceedings................................................................................. 20
Item 4. Submission of matters to a vote of security holders............................................... 20
PART II
Item 5. Market for registrant's common equity and related stockholder matters............................. 20
Item 6. Selected Financial Data........................................................................... 21
Item 7. Management's discussion and analysis of financial condition and results of operations............. 23
Item 8. Financial statements and supplementary data....................................................... 34
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.............. 34
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 34
Item 11. Executive Compensation........................................................................... 34
Item 12. Security ownership of certain beneficial owners and management................................... 34
Item 13. Certain relationships and related transactions................................................... 35
Item 14. Exhibits Financial Statement Schedules, and Reports on Form 8-K.................................. 35
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
FIRSTPLUS Financial Group, Inc. (together with its subsidiaries, the
"Company") is a specialized consumer finance company that originates, purchases,
services and sells consumer finance receivables. The Company's principal loan
product is a debt consolidation or home improvement loan secured by a second
lien on real property ("High LTV Loans"). The Company sells substantially all of
its High LTV Loans through its securitization program and retains rights to
service these loans.
The Company originated or purchased $1.1 billion of High LTV Loans during
fiscal 1996, which increased to $3.7 billion in fiscal 1997. During the current
fiscal year and in prior fiscal years, the Company has utilized securitized loan
sales as a fundamental part of its business and financing strategy. Securitized
loan sales require companies to recognize revenue on the date of sale based on
the present value of estimated future cash flow streams (i.e., gain-on-sale
accounting: see "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Certain Accounting Considerations"). During fiscal 1997,
the Company increased its non-securitization revenues (primarily, the sum of
interest income, interest only strips interest income, servicing income,
origination income and net gains on other loan sales), thereby decreasing the
percentage of revenues resulting from the gain on securitized loan sales such
that non-securitization related revenue for fiscal 1996 represented 37.1% of
total revenues, compared to 51.3% for fiscal 1997. The Company is continuing to
explore ways to increase its non-securitization related revenues, and to reduce
or eliminate its use of gain-on-sale accounting.
The Company had total revenue of $149.7 million for fiscal 1996 compared to
total revenue of $591.4 million for fiscal 1997, along with net income of $34.2
million or $1.31 per fully diluted share for fiscal 1996, compared to net income
of $139.2 million or $3.52 per fully diluted share for fiscal 1997. The
Company's serviced loan portfolio as of September 30, 1996 and 1997 was $1.3
billion and $4.7 billion, respectively, and stockholders' equity was $94.6
million and $430.1 million, respectively.
The Company relies principally on the creditworthiness of its borrowers for
repayment of High LTV Loans. The Company focuses on credit-worthy borrowers who,
as a result of insufficient home equity values, have limited access to secured
consumer financing. Consequently, the Company makes loans to borrowers who will
have aggregate mortgage indebtedness in excess of the appraised value of the
mortgaged properties. The Company uses its own credit evaluation criteria to
classify its applicants as "A+" through "D." These criteria include, as a
significant component, a credit evaluation scoring methodology developed by
Fair, Issac and Company, a consulting firm specializing in creating default-
predictive models through scoring mechanisms ("FICO"). The Company currently
makes High LTV Loans to borrowers it classifies as C+ or better. The Company
believes that the credit quality of its borrowers has improved over the last
several years, evidenced by several factors. For fiscal 1997, 89.1% of the
Company's originations were classified by the Company as B or better, compared
to 83.2% in fiscal 1996. Also, in the Company's most recent securitization
(1997-3), the weighted average FICO score was 684, compared to a weighted
average FICO score of 636 in the Company's first securitization (1994-1).
The Company's principal origination channel is its network of regional
independent correspondent lenders ("Correspondents"), numbering approximately
614. Correspondents are typically finance companies, commercial banks, or
thrifts that do not have the infrastructure to hold and service portfolios of
High LTV Loans. The Company's Correspondents originate loans ("Correspondent
Loans") using the Company's underwriting criteria and sell these loans to the
Company. During fiscal 1996 and fiscal 1997, FIRSTPLUS purchased $1.1 billion
and $2.9 billion, or 96.0% and 79.2%, respectively, of its total High LTV Loan
originations through the Correspondent origination channel.
The Company continues to expand its origination channels through the use of
telemarketing, direct mail, national advertising and a nationwide retail branch
operation to originate loans directly to qualified borrowers ("Direct to
Consumer Loans"). The Company is pursuing this strategy to continue to increase
1
<PAGE>
its Direct to Consumer originations because the Company believes that this
origination channel should prove to be more profitable and allow the Company to
have better control over the quality of the Company's production. To achieve
this goal, the Company is building national recognition of the FIRSTPLUS brand
name through increased national advertising, the use of celebrity spokespersons,
such as Dan Marino, a professional football player with the Miami Dolphins, and
the sponsorship of sporting events, such as the FIRSTPLUS NASCAR Racing Team.
The Company employs innovative direct mail marketing techniques and currently
mails approximately 500,000 pieces of mail per day. The Company processes Direct
to Consumer originations through its two telemarketing centers, 45 retail
branches and its centralized processing centers. The Company's two telemarketing
centers currently receive approximately 5,700 inbound calls per day. The
Company's outbound telemarketing center makes approximately 39,500 calls
(approximately 4.0% are connected to potential customers) a day, which are
follow-up calls from direct mailings sent to potential customers and calls to
potential customers listed on purchased phone lists. During fiscal 1996 and
1997, the Company originated $45.1 million and $765.3 million, respectively, of
High LTV Loans through the Direct to Consumer origination channel, or 4.0% and
20.8% of total High LTV Loan production, respectively.
The High LTV Loans originated by the Company in fiscal 1996 and 1997 had an
average principal amount of approximately $27,671 and $30,936, respectively, a
weighted average interest rate of 15.1% and 13.9% per annum, respectively, and a
weighted average FICO score of 662 and 678, respectively. A portion of the High
LTV Loans that the Company originates are Title I loans that are insured,
subject to certain exceptions, for 90% of the principal balance and certain
interest costs under the Title I Credit Insurance program (the "Title I
Program") administered by the Federal Housing Administration ("FHA"). In fiscal
1996 and fiscal 1997, the Company purchased or originated $120.6 million and
$87.8 million of Title I loans or 11.1% and 2.4%, of total High LTV
originations, respectively.
The Company sells substantially all of the High LTV Loans it originates or
purchases through its securitization program and generally retains rights to
service such loans. During fiscal 1996 and fiscal 1997, the Company sold through
securitization transactions approximately $723.1 million and $2.4 billion of
High LTV Loans or 64% and 67% of total production, respectively. The Company
also maintains an inventory of loans held for sale that generates interest
income for the Company. The Company earns servicing fees on a monthly basis,
primarily at a rate of 0.75% for the securitized loans it services. At September
30, 1997, the principal amount of the High LTV Loans serviced by the Company
(the "Serviced Loan Portfolio") was $4.7 billion, which includes $1.3 billion of
loans held for sale, on which servicing is not earned.
The Company also originates non-conforming home equity loans ("Home Equity
Loans"), conforming first lien loans and personal consumer loans. Home Equity
Loans are first or second lien loans to credit-impaired borrowers with
significant equity in their homes, but whose borrowing needs are not being met
by traditional financial institutions. Home Equity Loans are originated through
FIRSTPLUS Freedom (a wholly owned subsidiary that was acquired on August 29,
1997), either through brokers or the FIRSTPLUS telemarketing centers. The
Company sells, on a whole-loan basis, Home Equity Loans servicing released.
Conforming first lien loans are first lien loans that conform to the Federal
National Mortgage Association ("FNMA" or "Fannie Mae") guidelines. Conforming
first lien loans are also originated through FIRSTPLUS Freedom. The Company
sells conforming first lien loans to FNMA for cash, servicing released. The
Company also originates personal consumer loans, which are retained in its loan
portfolio. Personal consumer loans are typically secured by personal property
and other consumer products, evidenced by UCC filings for amounts generally
ranging between $600 and $2,000 per loan and for terms of approximately nine to
18 months. Weighted interest rates range from 24% to 39% on direct loans and 18%
to 24% on sales finance contracts. The average interest rates for all accounts
is approximately 34%. To expand the consumer finance product, the Company
acquired National Loans, Inc. ("National"), The Modern Finance Company
("Modern") and Southern Management Corporation
2
<PAGE>
("SMC"), all of which have consumer finance branches and originate personal
consumer loans. The total number of consumer finance branches as of September
30, 1997 was 117.
LOAN PRODUCTS
The Company originates or purchases High LTV Loans, Home Equity Loans,
conforming first lien loans, and personal consumer loans. Each of those
products, except for personal consumer loans, is typically secured by a first or
second mortgage lien. The Company lends to borrowers in various credit
categories.
HIGH LTV LOANS. A High LTV Loan is a debt consolidation or home improvement
loan secured primarily by a second lien. Home improvements generally encompass a
wide variety of projects, such as exterior/interior finishing, structural
additions, roofing, plumbing, heating and insulation. The Company relies
principally on the creditworthiness of the borrower, and to a lesser extent on
the underlying collateral, for repayment of High LTV Loans. The average size of
a High LTV Loan made by the Company during fiscal 1996 and fiscal 1997 was
approximately $26,034 and $30,936, respectively.
Under the Company's High LTV Loan program, the entire loan amount can be
used for any combination of debt consolidation, home improvements, closing costs
and cash out, subject to a cash out maximum per grade. The loan proceeds may be
used to purchase assets other than real property. The loan terms under the
program range from one to 25 years.
The following table sets forth certain information with respect to the
Company's High LTV Loan program:
HIGH LTV LOAN PROGRAM(3)
<TABLE>
<CAPTION>
CREDIT FICO MAXIMUM LOAN MAXIMUM MAXIMUM
GRADE SCORE AMOUNT(1) LTV(2) CASH OUT
- --------- --------- --------------- ----------- -----------
<C> <S> <C> <C> <C>
A+ 700+ $ 100,000 125.0% $ 35,000
A 680-699 $ 75,000 125.0% $ 25,000
B+ 660-679 $ 65,000 125.0% $ 15,000
B 640-659 $ 45,000 125.0% $ 5,000
C+ 620-639 $ 30,000 125.0% $ 1,000
C/D not available for this program
</TABLE>
- ------------------------
(1) The maximum loan amount includes all closing costs and is limited to $35,000
for condos and 2-4 units, with A+ and A credit grades and $25,000 for B+ and
B credit grades.
(2) LTV is determined by adding all debt secured by the property and dividing
the result by the value of the property. The Maximum LTV does not give
effect to any increased value from the home improvement portion of the loan.
(3) One of the Company's loan products, Buster Plus, requires that 40% of the
loan proceeds be used for home improvements.
TITLE I LOANS. The Company makes loans under the Title I Program. Several
types of loans may be made under the Title I Program, including property
improvement loans to finance the alteration, repair or improvement of existing
single family, multifamily and non-residential structures. Under the Title I
Program, loan processing and credit determination procedures are carried out by
the lending institution. Under the Title I Program, FHA does not review
individual loans at the time of approval, except when the amount of a Title I
Program loan would result in any borrower having a total unpaid principal
obligation on all Title I loans in excess of $25,000. No equity is required in
the property subject to improvement for loans of $25,000 or less. Title I loans
are fully amortizing with maximum terms to maturity of 20 years. All
3
<PAGE>
borrowers are required to possess a one-half vested interest or more in the
property subject to improvement and are qualified based upon their ability to
make monthly payments rather than on the LTV ratio on the underlying real estate
collateral.
The Title I Program is an insurance program. A lender under the Title I
Program assumes the risk of losing up to 10% of the principal balance on every
loan, plus certain expenses submitted to FHA for an insurance claim, plus a
portion of the interest on such loans. FHA insures the remaining 90% of the
principal balance of each loan and certain interest costs, provided that the
lender has not depleted its loss reserve account established with HUD and the
loan was originated within HUD guidelines. The HUD loss reserve account balance
is adjusted by HUD as claims are paid and new Title I loans are acquired. If at
any time claims exceed the loss reserve balance, the remaining Title I loans
will be uninsured until the reserve account balance is increased by new loan
originations or purchases. When Title I loans are securitized, all loss reserves
related to the securitized loans are transferred to the securitization trust. As
a result, the Company's loss reserve account is significantly reduced after each
of the Company's securitization transactions that involve the sale of Title I
loans until new originations or purchases replenish the Company's HUD loss
reserve account. The borrower generally pays HUD an insurance charge equal to
0.5% of the loan amount, multiplied by the number of years of the loan term.
The average size of a Title I loan originated by the Company for fiscal 1996
and fiscal 1997 was approximately $17,414 and $21,343, respectively. During
fiscal 1996 and fiscal 1997, originations of Title I loans accounted for
approximately 10.7% and 2.4%, respectively, of the Company's total High LTV
Loans originated and purchased.
HOME EQUITY LOANS. Home Equity Loans are first or second lien loans to
credit-impaired borrowers with significant equity in their homes, but whose
borrowing needs are not being met by traditional financial institutions. The
Company considers the equity in the property as the major source of repayment on
the loan. The Company originated $20.9 million of such loans during fiscal 1997
and originated an immaterial amount of Home Equity Loans during fiscal 1996.
Home Equity Loans are originated through FIRSTPLUS Freedom.
CONFORMING FIRST LIEN LOANS. "Conforming First Lien Loans" are first lien
loans that conform to Fannie Mae guidelines. Conforming First Lien Loans are
originated through FIRSTPLUS Freedom. The Company sells Conforming First Lien
Loans servicing released to FNMA for cash servicing released. The Company
originated $127.5 million of such loans during fiscal 1997 and originated an
immaterial amount of Conforming First Lien Loans during fiscal 1996.
PERSONAL CONSUMER LOANS. Personal consumer loans are typically secured by
personal property and other consumer products, evidenced by UCC filings, for
amounts generally ranging between $1,500 and $2,000 per loan and for a term of
approximately 18 months, although many of the loans are repaid prior to
maturity. The Company makes its credit decisions primarily based on its
assessment of a customer's ability to repay the obligation. In making a credit
decision, in addition to the size of the obligation, the Company generally
considers a customer's income level, type and length of employment, stability of
residence, personal references and prior credit history. Interest rates during
fiscal 1997 ranged from 24% to 39% on direct loans and 18% to 24% on sales
finance contracts. The average interest rate for all accounts was approximately
34% during fiscal 1997.
LOAN ORIGINATION CHANNELS
The Company purchases Correspondent Loans through its network of regional
Correspondents and originates Direct to Consumer Loans through direct mail,
telemarketing, national advertising and a nationwide retail branch operation.
4
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The table below presents the loan production for each quarter since the
beginning of fiscal 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
DECEMBER 31, 1995 MARCH 31, JUNE 30, SEPTEMBER
1996 1996 30, 1996
-------------------- -------------------- -------------------- ---------
DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Direct to Consumer
High LTV.................................... $ 684 29 $ 5,130 186 $ 8,533 349 $ 30,768
Home Equity................................. -- -- -- -- -- -- --
Conforming First Lien....................... -- -- -- -- -- -- --
Personal Consumer........................... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total..................................... 684 29 5,130 186 8,533 349 30,768
Correspondent
High LTV.................................... 162,885 7,786 124,974 5,151 256,648 9,369 536,157
Home Equity................................. -- -- -- -- -- -- --
Conforming First Lien....................... -- -- -- -- -- -- --
Other....................................... 61,424 1,153 141,129 1,948 118,325 1,760 61,293
--------- --------- --------- --------- --------- --------- ---------
Total..................................... 224,309 8,939 266,103 7,099 374,973 11,129 597,450
--------- --------- --------- --------- --------- --------- ---------
Total Production............................ $ 224,993 8,968 $ 271,233 7,285 $ 383,506 11,478 $ 628,218
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------
DECEMBER 31, 1996 MARCH 31, JUNE 30, SEPTEMBER
1997 1997 30, 1997
-------------------- -------------------- -------------------- ---------
DOLLARS UNITS DOLLARS UNITS DOLLARS UNITS DOLLARS
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Direct to Consumer
High LTV.................................... $ 64,106 2,360 $ 160,890 5,522 $ 230,414 7,777 $ 309,933
Home Equity................................. -- -- -- -- -- -- 2,634
Conforming First Lien....................... -- -- -- -- -- -- 83,943
Personal Consumer........................... -- -- -- -- 15,200 7,852 38,700
--------- --------- --------- --------- --------- --------- ---------
Total..................................... 64,106 2,360 160,890 5,522 245,614 15,629 435,210
Correspondent
High LTV.................................... 583,168 20,200 704,161 22,663 763,127 24,082 858,341
Home Equity................................. -- -- -- -- -- -- 18,300
Conforming First Lien....................... -- -- -- -- -- -- 43,512
Other....................................... 37,158 728 14,089 146 -- -- 146
--------- --------- --------- --------- --------- --------- ---------
Total Correspondent....................... 620,326 20,928 718,250 22,809 763,127 24,082 920,299
--------- --------- --------- --------- --------- --------- ---------
Total Production.............................. $ 684,432 23,288 $ 879,140 28,331 $1,008,741 39,711 $1,355,509
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
UNITS
---------
<S> <C>
Direct to Consumer
High LTV.................................... 1,200
Home Equity................................. --
Conforming First Lien....................... --
Personal Consumer........................... --
---------
Total..................................... 1,200
Correspondent
High LTV.................................... 19,173
Home Equity................................. --
Conforming First Lien....................... --
Other....................................... 1,163
---------
Total..................................... 20,336
---------
Total Production............................ 21,536
---------
---------
UNITS
---------
<S> <C>
Direct to Consumer
High LTV.................................... 10,145
Home Equity................................. 29
Conforming First Lien....................... 750
Personal Consumer........................... 72,327
---------
Total..................................... 83,251
Correspondent
High LTV.................................... 26,011
Home Equity................................. 203
Conforming First Lien....................... 368
Other....................................... 3
---------
Total Correspondent....................... 26,585
---------
Total Production.............................. 109,836
---------
---------
</TABLE>
CORRESPONDENT LOANS. Correspondent Loans are originated and closed by
independent Correspondents in accordance with the Company's own underwriting
standards and are subsequently purchased by the Company. During fiscal 1996 and
fiscal 1997, the Company purchased approximately $1.1 billion and $2.9 billion
of High LTV Correspondent Loans, respectively. The Company typically purchases
Correspondent Loans at or above the par value of such loans. The average
principal amount of High LTV Correspondent Loans originated during fiscal 1996
and fiscal 1997 was $26,053 and $31,291, respectively. The Company anticipates
that its correspondent operations will continue to expand in the future, but at
a slower rate than experienced to date. Correspondent Loans will continue to
represent the majority of the overall production over the next 12 to 18 months.
The Company's Correspondent Loan program involves the purchase of High LTV
Loans, Home Equity Loans and Conforming First Lien Loans from Correspondents
with whom the Company maintains ongoing relationships. These lenders are usually
situated in local markets where they are able to contact borrowers directly.
Correspondents tend to be commercial banks or finance companies that lack the
infrastructure to hold and service portfolios of loans. Instead, these entities
concentrate on originating loans and then selling their production at a premium.
5
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The Correspondent Loan program benefits the Company by providing a
cost-effective means for the Company to market to borrowers who are not easily
accessible by the Company. Furthermore, the correspondent agreements require
that the selling institution warrant the validity and enforceability of the
loan, thereby reducing the risk of fraud or improper documentation. In the event
such warranty is breached, the Company may require the Correspondent to
repurchase such loan. The Correspondent Loan market is very competitive, and
loans sold by Correspondents are generally priced at a premium of between 2% to
7% over par value, as compared to purchase prices at par or slightly below par
for loans originated by the Company through direct channels.
The Company currently has the ability to purchase Correspondent Loans in 46
states and has purchased loans from approximately 614 Correspondents. During
fiscal 1996 and fiscal 1997, approximately 48.6% and 26.2%, respectively (by
dollar volume), of the Company's Correspondent Loans were originated from 10
Correspondents. The Company allows Correspondents to participate in the
Company's correspondent operations only after a review of their reputation,
consumer finance lending experience and financial condition, including a review
of references, credit history and financial statements. The development of new
Correspondent relationships is directed by marketing managers.
Generally, the Correspondent prepares the loan application, assembles the
supporting documentation and processes the loan. Once the loan package is
complete, it is submitted to the Company's Correspondent Loan underwriting
personnel, who review each loan package and, in some cases, perform independent
employment and credit verification and arrange for a review of the appraisal, if
any, submitted with the loan package. Each Correspondent Loan is separately
underwritten by the Company in accordance with the Company's own underwriting
standards. See "--Underwriting." If the loan package meets the Company's
underwriting criteria, the Correspondent Loan is closed by the originating
lender and then purchased by the Company. The Company typically approves the
loan within two business days of a complete loan package's submission by the
Correspondent.
DIRECT TO CONSUMER LOANS. The Company originated approximately $45.1
million and $765.3 million of High LTV Direct to Consumer Loans in fiscal 1996
and fiscal 1997, respectively. Direct to Consumer Loans are typically originated
through direct mailings, telemarketing, and national advertising and nationwide
retail branches. The Direct to Consumer Loan origination channel is the
Company's fastest growing origination channel and is designed to decrease the
costs and increase the volume, size and quality of its loan originations. The
Company will target its marketing efforts at credit-worthy homeowners who
qualify as candidates for debt consolidation or have home improvement projects
needs, but have little equity in their homes. Direct to Consumer Loan borrowers
typically pay origination fees that range between 3% to 8.5% of the loan amount
at closing. Management believes that this program will distinguish the Company
from other major home lenders as its FIRSTPLUS name recognition increases.
Direct to Consumer Loan applications are processed and underwritten by
Company personnel and are funded directly by the Company. For High LTV Direct to
Consumer Loans originated during fiscal 1996 and fiscal 1997, the average
principal amount was $25,575 and $29,658, respectively, the weighted average
term to maturity was 214 months and 211 months, respectively, and the weighted
average interest rate was 16.2% and 13.9%, respectively.
MARKETING
The Company's marketing program is designed to develop national recognition
of the FIRSTPLUS brand name. To achieve this objective, the Company employs a
strategy that includes a combination of national television, local radio, direct
mail and telemarketing. The television campaign utilizes the Company's
spokesperson, star quarterback Dan Marino. The national television advertising
is reinforced through direct mailings and radio advertisements to targeted
borrowers in local markets. Customer applications are taken by the Company
through the use of its 1-800-510-PLUS phone number and its telemarketing
operation.
The Company also is pursuing an affinity marketing strategy. The Company
currently sponsors the FIRSTPLUS NASCAR racing team and celebrity golf
tournaments in Texas, Florida and Puerto Rico.
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During the 1997 NASCAR racing season, more than 148 million people watched
NASCAR races on television and another 5.6 million watched the races in person.
The Company has representatives at such events to gather information from
prospective customers and also to provide loan applications. Additionally, the
Company is developing alliances with home improvement retailers to further the
distribution of its home improvement loan products, whereby customers will be
able to apply for loans at kiosks located in home improvement stores throughout
the country.
UNDERWRITING
The Company's underwriting group primarily operates out of the Company's
Dallas, Texas headquarters. The Company receives loan applications from its
network of Correspondents via facsimile machines. In addition, individuals
respond to the Company's direct marketing program by United States mail or
through direct telephone contact with Company representatives. Loan applications
are monitored by the Company's tracking department to ensure prompt turnaround,
efficient underwriting procedures and accurate credit verification. The loan
processing staff prepares an application file by obtaining credit bureau
reports, highlighting any significant credit events and prioritizing
applications that need immediate attention before submitting the application to
the appropriate loan underwriter. The Company applies the same underwriting
criteria to Correspondent Loans. The Company's underwriters have an average of
seven years of banking, finance and consumer loan experience. The Company has
put in place a credit policy that provides a number of guidelines to assist
underwriters in the credit decision process.
Loans are classified by the Company into seven gradations of quality, from
"A+" to "D" credits. However, the Company currently makes loans only to
borrowers it classifies as "C+" or better for High LTV Loans and "C" or better
for Title I Loans. The Company's methodology for determining loan quality
considers primary credit characteristics and a series of parameters based on
property types. Primary characteristics include the borrower's FICO score,
debt-to-income ratio, mortgage credit history, consumer credit history,
bankruptcies, foreclosures, notice of defaults, deeds in lieu of foreclosure and
repossessions. The Company believes that the most important credit
characteristics are the borrower's FICO score and debt-to-income ratio, the
latter of which may not exceed 50% of the applicant's gross income (45% of the
applicant's gross income for B+ or lower credits with strong disposable income).
The Company has developed an algorithm based on the consumer credit file, which
when coupled with the FICO score (a dominant factor used in assessing the
consumer credit file), provides a means to assess the applicant's probability of
default. The algorithm utilized by the Company includes such edit checks as
present delinquency review, minimum satisfactory rated accounts, maximum
derogatory counters, segmentation for special borrower classes and stringent
policies for credit bureau selection. The Company's algorithm acts as a cutoff,
segregating likely deficit candidates from the entire pool of applicants in an
automated fashion. The parameters limit the size of the loan and the borrower
classes and property types that may be allowed. Generally, there are no LTV
restrictions for Title I loans. The maximum lien position for Title I loans is
third lien.
7
<PAGE>
The following table summarizes the underlying borrower characteristics for
each classification used by the Company.
<TABLE>
<CAPTION>
CONSUMER
HISTORY DEBT SERVICE-TO-
CLASSIFICATION(1) EXISTING MORTGAGE FICO SCORE BANKRUPTCY FILINGS INCOME RATIO(2)
- --------------- --------------------------- ----------- ------------------------------------- -----------------
<S> <C> <C> <C> <C>
"A+" Credit Maximum of one 30-day late 700+ Must have been discharged for at Generally 50% or
payment in last 12 months least three years with re- established less
and no 60-day late payment credit prior to closing
ever
"A" Credit Maximum of one 30-day late 680-699 Must have been discharged for at Generally 50% or
payment in last 12 months least three years with re- established less
and no 60-day late payment credit prior to closing
ever
"B+" Credit Maximum of one 30-day late 660-679 Must have been discharged for at Generally 45% or
payment in last 12 months least three years with re- established less
and no 60-day late payments credit prior to closing
ever
"B" Credit Maximum of one 30-day late 640-659 Must have been discharged for at Generally 45% or
payment in last 12 months least five years with reestablished less
and no 60-day late payment credit prior to closing
ever
"C+" Credit Maximum of one 30-day late 620-639 Must have been discharged for at Generally 40% or
payment in last 12 months least five years with reestablished less
and no 60-day late payment credit prior to closing
ever
</TABLE>
- ------------------------
(1) The Company does not originate High LTV Loans to borrowers it classifies as
"C" or "D" credits or Title I loans to borrowers it classifies as "D"
credits.
(2) Calculated by dividing the borrower's debt obligations (after any debt
consolidation) by their monthly gross earnings. Installment debt with less
than six payments remaining may be excluded.
SERVICING OPERATIONS
GENERAL. The Company services all of the High LTV Loans it originates or
purchases at its headquarters in Dallas, Texas, except for a small portion of
High LTV Loans that are serviced at Citizens Thrift & Loan Association
("FIRSTPLUS Bank"), a subsidiary of the Company. Subsequent to year end the High
LTV Loans at FIRSTPLUS Freedom were moved to the Dallas Servicing Operations.
The Company's Serviced Loan Portfolio consists entirely of High LTV Loans. The
Company's servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent borrowers, handling borrower
defaults, recording mortgages and assignments, investor and securitization
reporting and management portfolio reporting. It is the Company's strategy to
grow and build its Serviced Loan Portfolio.
The Company receives a servicing fee based on a stipulated percentage of the
declining principal balance of each loan serviced. Servicing fees are collected
by the Company out of the borrower's monthly loan payments. In addition, the
Company, as servicer, receives most late and assumption charges paid by the
borrower, as well as other miscellaneous fees for performing various loan
servicing functions.
The Serviced Loan Portfolio is subject to reduction by normal monthly
payments, prepayments, foreclosures and charge-offs. In general, revenues from
the Serviced Loan Portfolio may be adversely affected as interest rates decline
and loan prepayments increase. In some states in which the Company currently
operates, prepayment fees may be limited or prohibited by applicable state law.
In addition, the Company's ability to collect prepayment fees under certain
circumstances will be restricted in future
8
<PAGE>
periods under recently enacted laws. Prepayment fees are prohibited on all Title
I loans. See "--Regulation."
The following table sets forth the dollar amount and average loan amount of
High LTV Loans, subdivided into Non-Title I loans ("Conventional") and Title I
loans, included in the Serviced Loan Portfolio as of September 30, 1997:
HIGH LTV LOANS-SERVICED LOAN PORTFOLIO
AS OF SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Conventional:
Total dollar amount(1)........................................ $4,370,989
Average loan amount........................................... $ 29,961
Title I:
Total dollar amount(1)........................................ $ 286,680
Average loan amount........................................... $ 14,099
Total:
Total dollar amount(1)........................................ $4,657,669
Average loan amount........................................... $ 28,020
</TABLE>
- ------------------------
(1) Amounts in thousands
The following table summarizes the loans in the Serviced Loan Portfolio by
geographic concentration as of September 30, 1997:
GEOGRAPHIC CONCENTRATION OF SERVICED LOAN PORTFOLIO
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATE:
California........................................................... $ 1,917,872 41.2%
Florida.............................................................. 349,450 7.5
Arizona.............................................................. 191,203 4.1
Colorado............................................................. 185,108 4.0
Georgia.............................................................. 171,644 3.7
All others........................................................... 1,842,392 39.5
------------ -----
Total.............................................................. $ 4,657,669 100.0%
------------ -----
------------ -----
</TABLE>
LOANS HELD FOR SALE. Loans held for sale are carried at the lower of cost
or market. These loans represent investments the Company has made in loans that
it currently expects to sell within a 180-day period. The Company may elect to
hold the loans on its balance sheet for periods in excess of 180 days in the
future in order to maximize the interest income resulting from holding such
loans on the balance sheet, as well as to reduce the costs related to
securitization transactions. To implement such a strategy, it will be necessary
for the Company to obtain alternative sources of funds to finance this longer
warehouse period.
9
<PAGE>
The components of loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
<S> <C> <C>
1996 1997
---------- ------------
(IN THOUSANDS)
High LTV............................................................ $ 421,646 $ 1,310,576
Personal consumer................................................... -- 93,172
Conforming First Lien............................................... -- 16,488
Home Equity......................................................... -- 1,653
Other............................................................... 3,541 12,928
---------- ------------
Subtotal.......................................................... 425,187 1,434,817
Allowance for possible credit losses................................ (6,495) (31,539)
Deferred finance charges............................................ -- (16,568)
Net purchase premiums............................................... 12,120 13,736
---------- ------------
Total............................................................. $ 430,812 $ 1,400,446
---------- ------------
---------- ------------
</TABLE>
DELINQUENCIES AND FORECLOSURES. The Company's collection operations include
customer complaint monitoring, resolution of inspection discrepancies, daily
delinquency maintenance, legal remedies and HUD claims. Loans originated or
purchased by the Company are generally secured by mortgages, deeds of trust,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the collateral is located. Depending on local law,
foreclosure is effected by judicial action or nonjudicial sale, and is subject
to various notice and filing requirements. In general, the borrower, or any
person having a junior encumbrance on the real estate, may cure a monetary
default by paying the entire amount in arrears plus other designated costs and
expenses incurred in enforcing the obligation during a statutorily prescribed
reinstatement period. Generally, state law controls the amount of foreclosure
expenses and costs, including attorneys' fees, that may be recovered by a
lender. After the reinstatement period has expired without the default having
been cured, the borrower or junior lienholder no longer has the right to
reinstate the loan and must pay the loan in full to prevent the scheduled
foreclosure sale.
Typically, the Company has chosen not to pursue foreclosures due to the
costs involved. However, the Company may pursue foreclosure as an alternative in
its default management process. The Company evaluates loans and determines
whether foreclosure is economically and procedurally the most viable alternative
for collection of each loan that is in default. For loans that reach the later
states of delinquency (typically more than 91 days), a loan work-up is
initiated. This work-up outlines the type of loan, (i.e., Title I or non-Title
I), lien position (first or junior) and other qualification information. An
appraisal is ordered from a select group of qualified appraisers approved by the
Company in order to assess property value and calculate potential equity. If
this initial assessment suggests that equity exists above certain thresholds,
the Company will order a title opinion from a qualified source. The title
opinion reveals lien position as well as any potential tax delinquency issues or
judgments. Upon completion of this work-up, the loan's recovery potential is
assessed. For Title I loans, if the recovery potential approximates 100% of the
principal balance plus a pre-determined amount, the loan is considered for
foreclosure. If this potential recovery is not met, the loan will be referred to
HUD as a claim. For non-Title I loans, a determination is made on the partial or
full recovery of principal balance and associated expense. If the recovery
potential is sufficient from a cost/benefit/loss perspective, the Company may
initiate foreclosure proceedings. If the evaluations indicate that foreclosure
offers no economic advantage to the Company, it may be determined to secure and
file a judgment against the borrower instead of pursuing further foreclosure
efforts and incurring additional costs. In addition, the Company may choose to
pursue garnishment proceedings against the borrower.
The Company's loans under the Title I Loan Program are eligible for HUD
insurance. HUD insurance insures 90% of Title I loans, provided that the Company
has not depleted its loss reserve account established with HUD and provided the
loans were originated within applicable HUD guidelines. The
10
<PAGE>
balance in the loss reserve account is adjusted by HUD as claims are paid and
new Title I loans are originated or purchased. At September 30, 1997, claims in
process for all loans serviced by the Company were approximately $15.8 million.
If at any time claims exceed the Company's or any securitization trust's loss
reserve balance, the remaining Title I loans will be uninsured until the
respective reserve account balance is increased by new loan originations or
purchases. The Company's non-Title I loans are non-insured.
The activity in the allowance for possible credit losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
<S> <C> <C>
1996 1997
--------- ----------
(AMOUNTS IN
THOUSANDS)
Balance, beginning of year..................................... $ 4,794 $ 60,752
Provision for possible credit losses........................... 59,644 276,926
Charge-offs, net............................................... (3,902) (35,544)
Other.......................................................... 216 8,592
--------- ----------
Balance, end of year........................................... $ 60,752 $ 310,726
--------- ----------
--------- ----------
Components of Allowance:
Allowance for possible credit losses on loans held for sale.... $ 6,495 $ 31,539
Allowance for possible credit losses on loans sold............. 54,257 279,187
--------- ----------
Total.......................................................... $ 60,752 $ 310,726
--------- ----------
--------- ----------
</TABLE>
The following tables set forth delinquency, loss and default information
with respect to the Serviced Loan Portfolio at the dates and for the periods
indicated:
DELINQUENCY CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
<TABLE>
<CAPTION>
FIRSTPLUS
FINANCIAL(1) COMPANY
-------------------- --------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------------------------
1993 1994 1995 1996 1997
--------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Amount of Serviced Loan Portfolio at end of
period............................................ $ 62,629 $ 52,835 $ 238,584 $ 1,267,147 $ 4,657,669
Delinquent loans as a percentage of loans service
(period end)(2):
31-60 days....................................... 3.1% 2.5% 1.8% 0.8% 0.9%
61-90 days....................................... 0.8 0.8 0.7 0.4 0.4
91 days and over................................. 2.9 3.6 2.2 1.6 1.2
--------- --------- ---------- ------------ ------------
TOTAL.......................................... 6.8% 6.9% 4.7% 2.8% 2.5%
--------- --------- ---------- ------------ ------------
--------- --------- ---------- ------------ ------------
</TABLE>
- ------------------------
(1) Data is presented for FIRSTPLUS Financial, Inc. ("FIRSTPLUS Financial")
because prior to October 4, 1994 the Company did not have servicing
operations and because the servicing operations of FIRSTPLUS Financial West,
Inc. ("FIRSTPLUS West") for such periods related primarily to non-High LTV
Loans. See "--Combination," below.
(2) Includes loans on properties on which the Company is foreclosing and
properties in bankruptcy, but excludes real estate owned.
11
<PAGE>
LOSS AND DEFAULT CHARACTERISTICS
OF THE SERVICED LOAN PORTFOLIO
<TABLE>
<CAPTION>
FIRSTPLUS
FINANCIAL(1) COMPANY
-------------------- -------------------------------------------
YEAR ENDED DECEMBER YEAR ENDED
31, -------------------------------------------
-------------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1997
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net losses as a percentage of the average
Serviced Loan Portfolio(2)................ 0.39% 0.44% 0.04% 0.26% 0.23%
Defaults as a percentage of the average
Serviced Loan Portfolio(2)(3)............. 2.04% 2.64% 0.69% 1.29% 1.32%
</TABLE>
- ------------------------
(1) Data is presented for FIRSTPLUS Financial because prior to October 4, 1994
the Company did not have servicing operations and because the servicing
operations of FIRSTPLUS West for such periods related primarily to non-High
LTV Loans. See "-- Combination," below.
(2) The average Serviced Loan Portfolio is calculated by adding the beginning
and ending balances for the fiscal year and dividing the sum by two.
(3) A loan is defaulted when management deems that the loan is no longer
collectible. Generally, this occurs after 180 days of delinquency.
While the preceding tables generally indicate that the Company is
experiencing declining delinquency, loss and default rates on its Serviced Loan
Portfolio as a whole, such rates have followed historical trends on a
pool-by-pool basis, which trends assume increased rates of delinquencies over
time. Although such increases to date have been within the parameters
anticipated by the Company at the time of each securitization, there can be no
assurance that such rates will not continue to increase. Loans selected by the
Company to contribute to the securitization trusts generally possess reduced
delinquency, default and loss rates due to certain requirements of the
securitization trusts and the Company's own policy with regard to selecting
loans to contribute to the securitization trusts. As these loans age, the
securitization trusts will tend to experience gradual increases in delinquency,
default and loss rates because of the underlying securitized loans' trend toward
historically higher delinquency, default and loss rates. The overall decline in
such rates on the Serviced Loan Portfolio is principally due to the increased
volume of loans originated by the Company. The Company calculates its
delinquency and default rates by dividing the amount of delinquent or defaulted
loans in the Serviced Loan Portfolio by the total Serviced Loan Portfolio. Since
the Company originates higher volumes of new loans that, due to their lack of
seasoning, tend to have lower delinquency and default rates, the Company's
overall delinquency and default rates have decreased. See "--Securitization,"
below.
12
<PAGE>
The following table sets forth certain delinquency and default information
with respect to the Company's securitizations:
DELINQUENCY AND DEFAULTS FOR THE COMPANY'S SECURITIZATIONS
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
---------------------- ---------------------- ---------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
As of September 30, 1995
Current.................................. $34,868,000 91.3% $15,139,000 92.5% $96,420,000 96.0% $65,297,000
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $1,387,000 3.6% $ 453,000 2.8% $1,800,000 1.8% $ 199,000
61-90 days............................... 473,000 1.3 250,000 1.5 793,000 0.8 191,000
91 days and over......................... 1,444,000 3.8 526,000 3.2 1,433,000 1.4 30,000
---------- --- ---------- --- ---------- --- ----------
Total.................................. $3,304,000 8.7% $1,229,000 7.5% $4,026,000 4.0% $ 420,000
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 71,000 0.2% $ -- 0.0% $ -- 0.0% $ --
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of December 31, 1995
Current.................................. $32,363,000 91.3% $14,259,000 93.0% $91,198,000 94.6% $72,189,000
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $1,778,000 5.0% $ 444,000 2.9% $2,080,000 2.2% $ 947,000
61-90 days............................... 379,000 1.1 204,000 1.3 785,000 0.8 229,000
91 days and over......................... 939,000 2.6 425,000 2.8 2,345,000 2.4 317,000
---------- --- ---------- --- ---------- --- ----------
Total.................................. $3,096,000 8.7% $1,073,000 7.0% $5,210,000 5.4% $1,493,000
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 987,000 2.4% $ 490,000 3.0% $ 558,000 0.6% $ --
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of March 31, 1996
Current.................................. $30,713,649 94.2% $13,811,292 93.8% $86,622,634 93.9% $69,665,579
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 905,179 2.8% $ 278,372 1.9% $1,491,122 1.6% $1,295,274
61-90 days............................... 239,990 0.7 125,908 0.9 838,610 0.9 549,267
91 days and over......................... 793,467 2.3 508,113 3.4 3,330,116 3.6 970,070
---------- --- ---------- --- ---------- --- ----------
Total.................................. $1,938,636 5.8% $ 912,393 6.2% $5,659,848 6.1% $2,814,611
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 185,054 0.5% $ 105,556 0.7% $ 471,493 0.5% $ 97,304
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of June 30, 1996
Current.................................. $28,168,294 93.0% $13,019,667 92.9% $81,073,528 92.8% $66,219,920
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 855,792 2.8% $ 398,922 2.8% $1,820,636 2.1% $1,287,665
61-90 days............................... 297,607 1.0 130,923 0.9 823,536 0.9 732,604
91 days and over......................... 970,497 3.2 475,344 3.4 3,700,779 4.2 2,429,046
---------- --- ---------- --- ---------- --- ----------
Total.................................. $2,123,896 7.0% $1,005,189 7.1% $6,344,951 7.2% $4,449,315
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 199,381 0.6% $ 225,326 1.6% $1,110,712 1.2% $ 137,237
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of September 30, 1996
Current.................................. $26,144,645 93.0% $11,679,850 91.2% $75,587,362 92.3% $62,174,546
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 715,727 2.5% $ 550,826 4.3% $1,774,053 2.2% $1,664,704
61-90 days............................... 242,578 0.9 114,445 0.9 819,700 1.0 894,362
91 days and over......................... 1,004,791 3.6 464,207 3.6 3,722,225 4.5 2,118,067
---------- --- ---------- --- ---------- --- ----------
Total.................................. $1,963,096 7.0% $1,129,478 8.8% $6,315,978 7.7% $4,677,133
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 320,051 1.1% $ 264,774 2.0% $1,536,788 1.8% $ 857,380
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
<CAPTION>
1995-4
----------------------
<S> <C> <C> <C>
As of September 30, 1995
Current.................................. 99.4%
---
---
31-60 days............................... 0.3%
61-90 days............................... 0.3
91 days and over......................... 0.0
---
Total.................................. 0.6%
---
---
Defaults/Defaults as a percentage of
average monthly balance................ 0.0%
---
---
As of December 31, 1995
Current.................................. 98.0% $74,663,000 99.7%
--- ---------- ---
--- ---------- ---
31-60 days............................... 1.3% $ 218,000 0.3%
61-90 days............................... 0.3 16,000 0.0
91 days and over......................... 0.4 25,000 0.0
--- ---------- ---
Total.................................. 2.0% $ 259,000 0.3%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 0.0% $ -- 0.0%
--- ---------- ---
--- ---------- ---
As of March 31, 1996
Current.................................. 96.1% 77,427,295 98.5%
--- ---------- ---
--- ---------- ---
31-60 days............................... 1.8% $ 617,991 0.8%
61-90 days............................... 0.8 225,096 0.3
91 days and over......................... 1.3 275,033 0.4
--- ---------- ---
Total.................................. 3.9% 1,118,120 1.5%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 0.1% $ 40,000 0.1%
--- ---------- ---
--- ---------- ---
As of June 30, 1996
Current.................................. 93.8% $73,917,023 95.9%
--- ---------- ---
--- ---------- ---
31-60 days............................... 1.8% $1,283,481 1.7%
61-90 days............................... 1.0 782,049 1.0
91 days and over......................... 3.4 108,581 1.4
--- ---------- ---
Total.................................. 6.2% $2,174,111 4.1%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 0.2% $ 100,109 0.1%
--- ---------- ---
--- ---------- ---
As of September 30, 1996
Current.................................. 93.0% $70,611,343 95.4%
--- ---------- ---
--- ---------- ---
31-60 days............................... 2.5% $1,379,826 1.9%
61-90 days............................... 1.3 687,279 0.9
91 days and over......................... 3.2 1,356,079 1.8
--- ---------- ---
Total.................................. 7.0% $3,423,184 4.6%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 1.2% $ 394,616 0.5%
--- ---------- ---
--- ---------- ---
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
1994-1 1995-1 1995-2 1995-3
---------------------- ---------------------- ---------------------- ----------
As of December 30, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Current.................................. $23,532,768 92.0% $10,665,351 91.7% $70,457,783 92.1% $59,383,111
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $1,080,529 4.2% $ 462,741 4.0% $1,807,848 2.4% $1,468,843
61-90 days............................... 350,183 1.4 233,389 2.0 823,190 1.0 658,259
91 days and over......................... 619,926 2.4 263,562 2.3 3,446,709 4.5 1,793,172
---------- --- ---------- --- ---------- --- ----------
Total.................................. $2,050,638 8.0% $ 959,692 8.3% $6,077,747 7.9% $3,920,274
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 634,203 2.4% $ 490,392 4.1% $1,813,791 2.3% $ 800,500
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of March 30, 1997
Current.................................. $22,114,581 92.8% $10,618,716 94.9% $66,114,521 92.2% $56,938,309
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 825,212 3.5% $ 272,528 2.4% $1,577,440 2.2% $ 962,811
61-90 days............................... 288,668 1.2 101,867 0.9 572,560 0.8 691,445
91 days and over......................... 606,693 2.5 198,544 1.8 3,463,309 4.8 1,300,808
---------- --- ---------- --- ---------- --- ----------
Total.................................. $1,720,573 7.2% $ 572,939 5.1% $5,613,309 7.8% $2,955,064
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 178,380 0.7% $ 48,209 0.4% $1,358,895 2.4% $ 641,747
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of June 30, 1997
Current.................................. $20,283,423 93.9% $9,941,667 93.9% $61,081,909 92.0% $53,575,335
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 531,183 2.5% $ 294,120 2.8% $1,631,118 2.5% $1,207,350
61-90 days............................... 287,073 1.3 86,402 0.8 573,466 0.9 644,270
91 days and over......................... 482,870 2.3 262,737 2.5 3,108,656 4.6 1,254,797
---------- --- ---------- --- ---------- --- ----------
Total.................................. $1,301,126 6.1% $ 643,259 6.1% $5,313,240 8.0% $3,106,417
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 404,878 1.8% $ 173,790 1.6% $1,767,437 2.6% $1,021,438
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
As of September 30, 1997
Current.................................. $18,072,652 91.8% $8,866,499 89.2% $55,488,546 90.8% $49,187,177
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
31-60 days............................... $ 692,133 3.5% $ 593,298 6.0% $1,969,756 2.8% $1,602,473
61-90 days............................... 342,706 1.7 186,600 1.9 828,135 1.4 565,210
91 days and over......................... 585,576 3.0 288,825 2.9 3,050,793 5.0 1,401,868
---------- --- ---------- --- ---------- --- ----------
Total.................................. $1,620,415 8.2% $1,068,723 10.8% $5,848,684 9.2% $3,569,551
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
Defaults/Defaults as a percentage of
average monthly balance................ $ 269,331 1.3% $ 134,480 1.3% $1,272,839 2.0% $ 913,673
---------- --- ---------- --- ---------- --- ----------
---------- --- ---------- --- ---------- --- ----------
<CAPTION>
1995-4
----------------------
As of December 30, 1996
<S> <C> <C> <C>
Current.................................. % $66,304,004 94.7%
--- ---------- ---
--- ---------- ---
31-60 days............................... 2.3% $1,760,430 2.5%
61-90 days............................... 1.0 562,062 0.8
91 days and over......................... 2.7 1,386,342 2.0
--- ---------- ---
Total.................................. 6.0% $3,708,834 5.3%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 1.2% $ 679,389 1.0%
--- ---------- ---
--- ---------- ---
As of March 30, 1997
Current.................................. 95.0% $62,347,932 94.9%
--- ---------- ---
--- ---------- ---
31-60 days............................... 1.6% $1,644,842 2.5%
61-90 days............................... 1.2 450,710 0.7
91 days and over......................... 2.2 1,263,599 1.9
--- ---------- ---
Total.................................. 5.0% $3,359,151 5.1%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 1.1% $ 716,857 1.4%
--- ---------- ---
--- ---------- ---
As of June 30, 1997
Current.................................. 94.6% $59,660,176 94.9%
--- ---------- ---
--- ---------- ---
31-60 days............................... 2.1% $1,292,324 2.0%
61-90 days............................... 1.1 678,822 1.1
91 days and over......................... 2.2 1,311,599 2.0
--- ---------- ---
Total.................................. 5.4% $3,282,745 5.1%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 1.8% $1,023,114 1.6%
--- ---------- ---
--- ---------- ---
As of September 30, 1997
Current.................................. 93.0% $55,617,635 93.2%
--- ---------- ---
--- ---------- ---
31-60 days............................... 3.1% $1,707,917 2.9%
61-90 days............................... 1.1 746,972 1.3
91 days and over......................... 2.8 1,607,128 2.6
--- ---------- ---
Total.................................. 7.0% $4,062,017 6.8%
--- ---------- ---
--- ---------- ---
Defaults/Defaults as a percentage of
average monthly balance................ 1.7% $ 961,716 1.6%
--- ---------- ---
--- ---------- ---
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
1996-1 1996-2 1996-A 1996-3
----------------------- ----------------------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
As of March 31, 1995
Current.............................. $117,918,981 99.3%
----------- ---
----------- ---
31-60 days........................... 326,276 0.3%
61-90 days........................... 361,219 0.3
91 days and over..................... 74,722 0.1
----------- ---
Total.............................. $ 762,217 0.7%
----------- ---
----------- ---
Defaults/Defaults as a percentage of
average monthly balance............ $ -- 0.0%
----------- ---
----------- ---
As of June 30, 1996
Current.............................. $113,928,024 97.4% $208,420,466 99.8% $8,333,228 99.2%
----------- --- ----------- --- --------- ---
----------- --- ----------- --- --------- ---
31-60 days........................... $ 1,511,784 1.3% $ 427,930 0.2% $ 65,949 0.8%
61-90 days........................... 638,324 0.6 -- 0.0 0 0.0
91 days and over..................... 860,779 0.7 28,385 0.0 0 0.0
----------- --- ----------- --- --------- ---
Total.............................. $ 3,010,887 2.6% $ 456,315 0.2% $ 65,949 0.8%
----------- --- ----------- --- --------- ---
----------- --- ----------- --- --------- ---
Defaults/Defaults as a percentage of
average monthly balance............ $ -- 0.0% $ -- 0.0% $ -- 0.0%
----------- --- ----------- --- --------- ---
----------- --- ----------- --- --------- ---
As of September 30, 1996
Current.............................. $109,902,730 96.3% $243,902,224 98.9% $7,690,213 96.9% $254,868,067
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
31-60 days........................... $ 1,336,403 1.2% $ 1,480,512 0.6% $ 116,997 1.5% $ 25,000
61-90 days........................... 558,174 0.5 591,187 0.3 55,477 0.7 20,000
91 days and over..................... 2,266,643 2.0 589,090 0.2 72,897 0.9 0
----------- --- ----------- --- --------- --- -----------
Total.............................. $ 4,161,220 3.7% $ 2,660,789 1.1% $ 245,371 3.1% $ 45,000
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
Defaults/Defaults as a percentage of
average monthly balance............ $ 175,637 0.2% $ 200,030 0.1% $ -- 0.0% $ --
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
As of December 31, 1996
Current.............................. $105,266,013 95.6% $236,002,357 97.8% 6,809,793 95.2% 295,021,700
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
31-60 days........................... $ 2,227,931 2.0% $ 2,599,079 1.0% $ 170,583 2.4% $ 1,410,730
61-90 days........................... 929,707 0.9 1,380,711 0.6 50,708 0.7 507,110
91 days and over..................... 1,665,290 1.5 1,388,226 0.6 121,214 1.7 206,053
----------- --- ----------- --- --------- --- -----------
Total.............................. $ 4,822,928 4.4% $ 5,368,016 2.2% $ 342,505 4.8% $ 2,123,893
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
Defaults/Defaults as a percentage of
average monthly balance............ $ 1,123,446 1.0% $ 440,064 1.8% $ 57,447 0.8% $ --
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
<CAPTION>
1996-4
-----------------------
<S> <C> <C> <C>
As of March 31, 1995
Current..............................
31-60 days...........................
61-90 days...........................
91 days and over.....................
Total..............................
Defaults/Defaults as a percentage of
average monthly balance............
As of June 30, 1996
Current..............................
31-60 days...........................
61-90 days...........................
91 days and over.....................
Total..............................
Defaults/Defaults as a percentage of
average monthly balance............
As of September 30, 1996
Current.............................. 100.0%
-----
-----
31-60 days........................... 0.0%
61-90 days........................... 0.0
91 days and over..................... 0.0
-----
Total.............................. 0.0%
-----
-----
Defaults/Defaults as a percentage of
average monthly balance............ 0.0%
-----
-----
As of December 31, 1996
Current.............................. 99.3% 346,944,358 99.5%
----- ----------- ---
----- ----------- ---
31-60 days........................... 0.5% $ 989,446 0.3%
61-90 days........................... 0.2 543,897 0.2
91 days and over..................... 0.0 122,019 0.0
----- ----------- ---
Total.............................. 0.7% $ 1,655,362 0.5%
----- ----------- ---
----- ----------- ---
Defaults/Defaults as a percentage of
average monthly balance............ 0.0% $ -- 0.0%
----- ----------- ---
----- ----------- ---
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
1996-1 1996-2 1996-A 1996-3
----------------------- ----------------------- --------------------- -----------
As of March 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Current.............................. $101,613,983 96.3% $227,178,957 97.3% $6,753,126 96.4% $287,341,905
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
31-60 days........................... $ 1,424,564 1.4% $ 2,347,100 1.0% $ 108,681 1.6% $ 2,247,690
61-90 days........................... 871,113 0.8 1,190,151 0.5 50,910 0.7 1,425,593
91 days and over..................... 1,636,840 1.5 2,785,904 1.2 93,532 1.3 1,236,080
----------- --- ----------- --- --------- --- -----------
Total.............................. $ 3,932,517 3.7% $ 6,323,155 2.7% $ 253,123 3.6% $ 4,909,363
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
Defaults/Defaults as a percentage of
average monthly balance............ $ 951,492 0.9% $ 1,660,128 0.7% $ 58,890 0.8% $ 95,557
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
As of June 30, 1997
Current.............................. $96,315,509 95.7% $214,467,653 96.4% $6,112,007 95.0% $275,944,211
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
31-60 days........................... $ 1,626,416 1.6% $ 2,758,418 1.2% $ 115,608 1.8% $ 3,638,976
61-90 days........................... 703,507 0.7 1,371,029 0.7 101,526 1.6 2,062,225
91 days and over..................... 1,962,182 2.0 3,791,681 1.7 100,900 1.6 3,220,510
----------- --- ----------- --- --------- --- -----------
Total.............................. $ 4,292,105 4.3% $ 7,921,128 3.6% $ 318,034 5.0% $ 8,921,711
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
Defaults/Defaults as a percentage of
average monthly balance............ $ 1,592,801 1.6% $ 2,275,500 1.0% $ 90,102 1.4% $ 1,391,811
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
As of September 30, 1997
Current.............................. $84,803,215 94.8% $199,122,950 95.0% $5,641,689 93.6% $260,420,883
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
31-60 days........................... $ 1,644,166 1.7% $ 4,231,050 2.0% $ 126,240 2.1% $ 4,269,060
61-90 days........................... 1,090,910 1.2 2,055,542 1.0 90,543 1.5 2,676,132
91 days and over..................... 2,187,792 2.3 4,313,916 2.0 168,860 2.8 5,198,596
----------- --- ----------- --- --------- --- -----------
Total.............................. $ 4,922,868 5.2% $10,600,508 5.0% $ 385,643 6.4% $12,143,788
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
Defaults/Defaults as a percentage of
average monthly balance............ $ 1,282,167 1.3% $ 2,782,107 1.3% $ 51,688 0.9% $ 2,534,166
----------- --- ----------- --- --------- --- -----------
----------- --- ----------- --- --------- --- -----------
<CAPTION>
1996-4
-----------------------
As of March 30, 1997
<S> <C> <C> <C>
Current.............................. 98.3% $386,003,905 98.4%
----- ----------- ---
----- ----------- ---
31-60 days........................... 0.8% $ 3,482,976 0.9%
61-90 days........................... 0.5 1,163,532 0.3
91 days and over..................... 0.4 1,588,531 0.4
----- ----------- ---
Total.............................. 1.7% $ 6,235,039 1.6%
----- ----------- ---
----- ----------- ---
Defaults/Defaults as a percentage of
average monthly balance............ 0.3% $ 455,114 0.1%
----- ----------- ---
----- ----------- ---
As of June 30, 1997
Current.............................. 96.9% $372,819,289 98.0%
----- ----------- ---
----- ----------- ---
31-60 days........................... 1.3% $ 3,371,302 0.7%
61-90 days........................... 0.7 2,251,278 0.5
91 days and over..................... 1.1 3,868,870 0.8
----- ----------- ---
Total.............................. 3.1% $ 9,491,450 2.0%
----- ----------- ---
----- ----------- ---
Defaults/Defaults as a percentage of
average monthly balance............ 0.5% $ 1,449,334 0.6%
----- ----------- ---
----- ----------- ---
As of September 30, 1997
Current.............................. 95.5% $354,229,887 96.2%
----- ----------- ---
----- ----------- ---
31-60 days........................... 1.6% $ 5,658,964 1.5%
61-90 days........................... 1.0 3,085,950 0.8
91 days and over..................... 1.9 5,300,546 1.5
----- ----------- ---
Total.............................. 4.5% $14,045,460 3.8%
----- ----------- ---
----- ----------- ---
Defaults/Defaults as a percentage of
average monthly balance............ 0.9% $ 3,240,850 0.9%
----- ----------- ---
----- ----------- ---
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 30, 1997
Current........................................ $485,624,541 99.5%
----------- ---
----------- ---
31-60 days..................................... $ 1,839,260 0.4%
61-90 days..................................... 535,362 0.1
91 days and over............................... 0 0.0
----------- ---
Total........................................ $ 2,374,622 0.5%
----------- ---
----------- ---
Defaults/Defaults as a percentage of average
monthly balance.............................. $ -- 0.1%
----------- ---
----------- ---
As of June 30, 1997
Current........................................ $581,974,459 98.8% $562,506,359 99.7%
----------- --- ----------- ---
----------- --- ----------- ---
31-60 days..................................... $ 3,403,985 0.6% $ 1,561,006 0.3%
61-90 days..................................... 1,439,664 0.2 0 0.0
91 days and over............................... 2,461,163 0.4 0 0.0
----------- --- ----------- ---
Total........................................ $ 7,304,822 1.2% $ 1,561,006 0.3%
----------- --- ----------- ---
----------- --- ----------- ---
Defaults/Defaults as a percentage of average
monthly balance.............................. $ -- 0.6% $ -- 0.0%
----------- --- ----------- ---
----------- --- ----------- ---
As of September 30, 1997
Current........................................ $561,445,682 97.7% $726,587,736 99.0% $646,169,548 99.8%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
31-60 days..................................... $ 5,424,873 0.9% 4,321,224 0.6% $ 1,048,375 0.2%
61-90 days..................................... 2,977,183 0.5 1,604,839 0.2 0 0.0
91 days and over............................... 5,131,242 0.9 1,340,478 0.2 0 0.0
----------- --- ----------- --- ----------- ---
Total........................................ $13,533,298 2.3% $ 7,266,541 1.0% $ 1,048,375 0.2%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
Defaults/Defaults as a percentage of average
monthly balance.............................. $ 1,764,460 0.8% $ -- -- % $ -- -- %
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
The Company has made substantial investments in upgrading its information
technology infrastructure during the past year and will continue to make such
investments throughout 1998. The Company has installed large scale Unix-based
Sun hardware to run the new loan origination software and believes such hardware
will become the Company's platform for the future. The Company has standardized
on an ATM-based network backbone technology and a frame relay network to connect
its major processing locations. Other standardization efforts include addressing
database management, data warehousing, knowledge management, application
development and back-office systems architectures. The Company's communications
and knowledge-sharing are supported by a group-wide Lotus Notes infrastructure.
The Company is making major upgrades to the call center technologies
employed by the various sites of the Company and is planning to employ
Internet-based technology to create online communication network with its
Correspondents and other customers. Intelligent document imaging technologies
will be deployed throughout the Company during fiscal 1998.
SECURITIZATION
Since fiscal 1995, substantially all of the loans originated or purchased by
the Company have been sold through securitization transactions. The Company sold
through securitization transactions approximately $723.1 million and $2.4
billion of loans during fiscal 1996 and fiscal 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Accounting Considerations."
HOME IMPROVEMENT INDUSTRY
Home improvement lending is a large, highly fragmented industry. In recent
years, a trend toward consolidation has developed. From the standpoint of
individual owners, the Company believes that this
17
<PAGE>
trend results from family succession issues, a desire for liquidity and
increasing tax estate planning and regulatory complexities, as well as the
increasing competitive threat posed by larger lenders. From the standpoint of
such larger lenders, it appears that the consolidation trend is driven by the
benefits derived from economies of scale, improved managerial control and
strategic planning.
While there are many factors driving the home improvement market the Company
believes that appreciation of housing values is a key factor driving the growth
of the industry. Other factors that affect the growth of the industry include
aging and turnover rates of the housing stock, the length of time the homeowner
has lived in the home and real rental rates.
COMPETITION
The consumer finance market is highly competitive and fragmented. The
Company competes with a number of finance companies that provide financing
programs to individuals who cannot qualify for traditional financing. In the
past year, competition has increased for these individuals, thereby providing
more financing alternatives. To a lesser extent, the Company competes, or will
compete, with commercial banks, savings and loan associations, credit unions,
insurance companies and captive finance arms of major manufacturing companies
that currently tend to apply more traditional lending criteria. In addition, in
the past year, several companies announced loan programs that will compete
directly with the Company's loan products, particularly its High LTV Loans. Many
of these competitors and potential competitors are substantially larger and have
significantly greater capital and other resources than the Company. In fiscal
1996 and fiscal 1997, approximately 97% and 77%, respectively, of the Company's
loans originated were Correspondent Loans, which are expected to remain a
significant part of the Company's loan production program. As a purchaser of
Correspondent Loans, the Company is exposed to fluctuations in the volume and
price of Correspondent Loans resulting from competition from other purchasers of
such loans, market conditions and other factors. In addition, Fannie Mae has
purchased and is expected to continue to purchase significant volumes of Title I
loans on a whole-loan basis. Purchases by Fannie Mae could be made from sources
from which the Company also purchases loans. To the extent that purchasers of
loans, such as Fannie Mae, enter, or increase their purchasing activities in,
the markets in which the Company purchases loans, competitive pressures may
decrease the availability of loans or increase the price the Company would have
to pay for loans, a phenomenon that has occurred with respect to Title I loans.
In addition, increases in the number of companies seeking to originate or
purchase loans tend to lower the rates of interest that the Company can charge
borrowers and can cause higher prepayment rates, thereby reducing the potential
value of subsequently earned gain on securitized loan sales. To the extent that
any of these lenders or Fannie Mae significantly expands its activities in the
Company's market, or to the extent that new competitors enter the market, the
Company's results of operations and financial condition could be materially
adversely affected. However, by focusing primarily on higher LTV home
improvement loans and debt consolidation loans and by relying on the
creditworthiness of the borrower rather than the collateral, the Company
believes it is able to differentiate itself from other participants in the
market.
REGULATION
The operations of the Company are subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities.
Regulated matters include, without limitation, loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
The Company's loan origination activities are subject to laws and
regulations in each of the states in which those activities are conducted. The
Company's activities as a lender are also subject to various federal laws
including but not limited to the Truth in Lending Act ("TILA"), the Real Estate
Settlement Procedures Act ("RESPA"), the Equal Credit Opportunity Act ("ECOA"),
the Home Mortgage Disclosure Act ("HMDA") and the Fair Credit Reporting Act of
1970, as amended, ("FCRA").
18
<PAGE>
TILA and Regulation Z promulgated thereunder contain disclosure requirements
designed to provide consumers with uniform, understandable information with
respect to the cost, terms and conditions of loans and credit transactions in
order to give them the ability to compare credit terms. TILA also provides
consumers a three-day right to cancel certain credit transactions after
consummation of those transactions, including loans of the type originated by
the Company. The Company believes that it is in compliance with TILA in all
material respects. If the Company were found not to be in compliance with TILA,
aggrieved borrowers could have the right to rescind their loan transactions with
the Company and demand the return of finance charges paid to the Company.
In September 1994, the Home Ownership and Equity Protection Act of 1994 (the
"HOEPA") was enacted. Among other things, the HOEPA makes certain amendments to
TILA. The TILA amendments, which became effective in October 1995, generally
apply to mortgage loans ("covered loans") with (i) total points and fees upon
origination in excess of the greater of eight percent of the loan amount or
$400, or (ii) an annual percentage rate of more than 10 percentage points higher
than comparably maturing United States Treasury securities. A substantial
majority of the loans originated or purchased by the Company are covered by the
HOEPA.
The HOEPA imposes additional disclosure requirements on lenders originating
covered loans and prohibits lenders from originating covered loans that are
underwritten solely on the basis of the borrower's home equity without regard to
the borrower's ability to repay the loan. The Company applies to all covered
loans underwriting criteria that take into consideration the borrower's ability
to repay.
The HOEPA also prohibits lenders from including prepayment fee clauses in
covered loans to borrowers with a debt-to-income ratio in excess of 50% or
covered loans used to refinance existing loans originated by the same lender.
The Company will continue to collect prepayment fees on loans originated prior
to effectiveness of the HOEPA and on non-covered loans, as well as on covered
loans in permitted circumstances. Because the HOEPA did not become effective
until October 1995, the level of prepayment fee revenues were not affected in
fiscal 1995, but the level of prepayment fee revenues may decline in future
years. The HOEPA imposes other restrictions on covered loans, including
restrictions on balloon payments and negative amortization features, that the
Company does not believe will have a material effect on its operations.
The Company is also required to comply with ECOA, which prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise applicants of the reasons for any credit denial. In instances where
the applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the FCRA, requires lenders to supply the applicant with the name and address of
the reporting agency. The Company is also required to file an annual report with
HUD pursuant to the HMDA.
RESPA and Regulation X promulgated thereunder certain certain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to settlement charges and other costs incurred in
connection with obtaining a mortgage loan secured by the borrower's principal
residence. RESPA and Regulation X also prohibit any person from paying or
receiving a referral fee or any other compensation with respect to covered loans
except for the payment of reasonable value for settlement services actually
provided in connection with the loan. The Company believes that it is in
compliance with RESPA in all material respects.
In addition, the Company is subject to various other federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and servicers, and
disclosures that must be made to consumer borrowers. Failure to comply with
these laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loan transactions
and to demand the return of finance charges paid to the Company.
19
<PAGE>
In the course of its business, the Company may acquire properties securing
loans that are in default. See "--Servicing Operations." There is a risk that
hazardous or toxic waste could be found on such properties. In such event, the
Company could be held responsible for the cost of cleaning up or removing such
waste, and such cost could exceed the value of the underlying properties.
FIRSTPLUS Bank is subject to extensive regulation and supervision under
various federal and state laws. FIRSTPLUS Bank is an industrial loan company
organized under the laws of the State of California and is subject to regulation
by the California Department of Financial Institutions. The deposits of
FIRSTPLUS Bank are insured by the Federal Depository Insurance Corporation to
the maximum extent permitted by law, which is currently $100,000 per depositor
in most cases.
California and federal law and regulations govern most aspects of the
business and operations of FIRSTPLUS Bank, including investments, reserves, the
nature and amount of any collateral for loans, maximum loans to one borrower,
the timing of availability of deposited funds, the issuance of securities,
payment of dividends, branching and expansion. FIRSTPLUS Bank is also subject to
requirements and restrictions of various consumer laws and regulations in
connection with both its lending and deposit-taking activities.
Federal and state agencies have broad enforcement powers over depository
institutions, including the power to impose substantial fines and other civil
and criminal penalties, to terminate deposit insurance and to appoint a
conservator or a receiver under a variety of circumstances.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to subsequent modification and
change. There are currently proposed various laws, rules and regulations that,
if adopted, could have an adverse effect on the Company. There can be no
assurance that proposed laws, rules and regulations, or other such laws, rules
or regulations, will not be adopted in the future that could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business or
prospects of the Company.
COMBINATION
The Company was incorporated in Nevada in October 1994 to combine the
operations of SFA: State Financial Acceptance Corporation ("SFAC"), a High LTV
Loan originator formed in January 1990, and FIRSTPLUS Financial, an approved
Title I loan originator and servicer formed in April 1986 (the "Combination").
The Company entered into an agreement with the shareholders of SFAC and with
Farm Bureau Life Insurance Company, Inc. ("Farm Bureau"), which at the time was
an affiliate of a principal shareholder of FIRSTPLUS Financial, whereby the
shareholders of SFAC exchanged their common and preferred stock of SFAC and Farm
Bureau exchanged its common stock of FIRSTPLUS Financial for common and
preferred stock of the Company. Effective October 4, 1994, FIRSTPLUS Financial
and SFAC became wholly owned subsidiaries of the Company, with the shareholders
of SFAC controlling the voting shares of the Company. For accounting purposes,
the Combination was treated as a purchase of FIRSTPLUS Financial by the Company,
and SFAC was accounted for at book value in a manner similar to a pooling of
interests as a transaction between entities under common control. In connection
with the Combination, each of SFAC and FIRSTPLUS Financial changed their
respective fiscal year end from a calendar year end to a September 30 year end.
EMPLOYEES
At September 30, 1997, the Company employed approximately 3,250 persons. Of
the total number of employees at such date, approximately 1,000 were located at
the Company's headquarters in Dallas, Texas, and approximately 2,250 were
located at the Company's other offices. None of the Company's employees is
subject to a collective bargaining agreement, and the Company believes that its
relations with its employees are good.
20
<PAGE>
ITEM 2. PROPERTIES.
The executive and administrative offices of the Company are located at 1600
Viceroy Drive, Dallas, Texas 75235, and consist of approximately 248,000 square
feet. The lease on the premises extends through August 31, 2012 and the current
annual rental is approximately $3.2 million.
The Company also leases space for 199 of its offices. These facilities
aggregate approximately 665,000 square feet, with an annual aggregate base
rental of approximately $5.5 million. The terms of these leases vary as to
duration and escalation provisions. In general, the leases expire through
September 2001.
The Company believes that its facilities are adequate for its current needs,
but it will need additional space within the next 12 months. In order to support
the growth of its business, the Company is pursuing the purchase and
sale-leaseback of other properties in Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved from time to time in routine litigation incidental
to its business. However, the Company believes that it is not a party to any
material pending litigation that, if decided adversely to the Company, would
have a material adverse effect on the business, income, assets or operations of
the Company. The Company is not aware of any material threatened litigation that
might involve the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the stockholders of the Company during
the fourth quarter of the fiscal year ended September 30, 1997.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The share price information below has been retroactively adjusted to give
effect to the one-for-one common stock dividend paid by the Company on November
29, 1996 to stockholders of record on November 15, 1996. The common stock has
been quoted on the Nasdaq National Market ("Nasdaq") under the symbol "FPFG"
since March 1997 and before that it was quoted on the Nasdaq under the symbol
"RACF" since the Company's Initial Public Offering. The following table sets
forth the high and low sales prices of the common stock for the periods
indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Second Quarter (beginning February 1, 1996)................................ $ 11.88 $ 8.75
Third Quarter.............................................................. $ 16.25 $ 11.00
Fourth Quarter............................................................. $ 22.88 $ 12.44
YEAR ENDING SEPTEMBER 30, 1997
First Quarter.............................................................. $ 30.75 $ 19.75
Second Quarter............................................................. $ 36.75 $ 20.50
Third Quarter.............................................................. $ 35.00 $ 20.50
Fourth Quarter............................................................. $ 56.25 $ 32.75
YEAR ENDED SEPTEMBER 30, 1998
First Quarter (through November 28, 1997).................................. $ 61.88 $ 37.00
</TABLE>
On November 28, 1997, the last reported sales price for the common stock was
$38.13 per share. As of November 28, 1997, the Company had 36,700,327
outstanding shares of common stock held by 281 stockholders of record. As of
November 28, 1997, the Company had 690,905 outstanding shares of common stock
non-voting, held by two stockholders of record.
The Company has never paid, and has no present intention of paying, cash
dividends on its common stock. The Company currently intends to retain its
earnings to finance the growth and development of its business. Any
determination in the future to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors.
Under the terms of the Company's warehouse facilities and other debt agreements,
the Company's ability to pay cash dividends to its stockholders is limited.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth historical selected financial information of
the Company as of the dates and for the periods indicated. The Company was
formed by the shareholders and management of SFAC and the parent of FIRSTPLUS
Financial to acquire FIRSTPLUS Financial in the Combination, which was accounted
for as a purchase of FIRSTPLUS Financial and was consummated on October 4, 1994.
The income statement and balance sheet data is derived from the consolidated
audited financial statements of the Company. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the
22
<PAGE>
financial statements and the notes thereto and other financial information
included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ----------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gains on sales of securitized loans, net of costs.. $ 17,115 $ 27,671 $ 24,597 $ 142,433 $ 519,426
Provision for possible credit losses on securitized
loan sales....................................... -- -- (3,907) (48,397) (231,211)
--------- --------- --------- ----------- ----------
Net gain on securitized loan sales............... 17,115 27,671 20,690 94,036 288,215
Net gains on other loan sales...................... -- -- 4,517 11,091 30,086
--------- --------- --------- ----------- ----------
Total gain on sale of loans, net................... 17,115 27,671 25,207 105,127 318,301
Interest income.................................... 145 1,845 2,860 25,727 172,734
Interest only strips interest income............... -- -- -- 5,115 26,920
Servicing income................................... -- 72 1,049 4,008 21,122
Origination income................................. -- -- 553 7,242 41,537
Other income....................................... 54 252 321 2,441 10,826
--------- --------- --------- ----------- ----------
Total revenues................................... 17,314 29,840 29,990 149,660 591,440
Expenses:
Salaries and employee benefits..................... 7,265 17,054 10,110 36,402 107,558
Interest expenses.................................. 28 1,041 2,660 16,892 93,514
Other operating expense............................ 2,632 6,465 6,964 29,938 120,581
Provision for possible credit losses............... -- 125 513 11,247 45,307
--------- --------- --------- ----------- ----------
Total expenses................................... 9,925 24,685 20,247 94,479 366,960
--------- --------- --------- ----------- ----------
Income before income taxes........................... 7,389 5,155 9,743 55,181 224,480
Provision for income taxes........................... -- -- (3,903) (20,969) (85,311)
--------- --------- --------- ----------- ----------
Net income........................................... $ 7,389 $ 5,155 $ 5,840 $ 34,212 $ 139,169
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Per Share Data:
Net income per share of common stock:
Primary.............................................. $ 0.47 $ 0.31 $ 0.28 $ 1.35 $ 3.95
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Fully diluted........................................ $ 0.47 $ 0.31 $ 0.28 $ 1.31 $ 3.52
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
Weighted average common and common equivalent shares
outstanding:
Primary.............................................. 15,597 16,277 20,297 25,358 35,242
Fully diluted........................................ 15,597 16,277 20,297 26,354 40,522
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------------------
1994 1995 1996 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale, net........................................... $ 6,105 $ 19,435 $ 430,812 $ 1,400,446
Interest only strips, net.......................................... -- 29,744 132,973 456,123
Total assets....................................................... 12,141 61,341 656,127 2,447,206
Warehouse financing................................................ 4,995 18,530 354,481 1,238,156
Term lines......................................................... -- 9,249 57,465 211,751
Notes payable and other borrowings................................. -- 8,003 8,969 39,321
Convertible subordinated notes..................................... -- -- 100,000 69,920
Total liabilities.................................................. 7,821 49,607 561,558 2,017,061
Stockholders' equity............................................... 4,321 11,734 94,569 430,145
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding "Selected
Financial Data." Additionally, the Company's Consolidated Financial Statements
and the notes thereto, as well as other data included in this Report, should be
read and analyzed in combination with the analysis below.
FIRSTPLUS is a specialized consumer finance company that originates,
purchases, services and sells consumer finance receivables. The Company's
principal loan product is a debt consolidation or home improvement loan secured
by a second lien on real property. The Company sells substantially all of its
High LTV Loans through its securitization program and retains rights to service
these loans.
During the current fiscal year and in prior fiscal years, the Company
utilized securitized loan sales as a fundamental part of its business and
financing strategy. Securitized loan sales require companies to recognize
revenue at the date of sale based on the present value of estimated future cash
flow streams (i.e., gain-on-sale accounting). See "--Certain Accounting
Considerations." The Company increased its non-securitization related revenue
(primarily the sum of interest income, interest only interest income, servicing
income, origination income, and net gains on other loan sales) in fiscal 1997
and decreased the percentage of revenues resulting from the gain on securitized
loan sales. Non-securitization related revenue for fiscal 1997 grew to 51.3% of
total revenues, compared to 37.2% for fiscal 1996. The Company is continuing to
explore ways to increase its non-securitization related revenues, and to reduce
or eliminate the use of gain-on-sale accounting.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1997
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1996
The Company's total revenues increased from $149.7 million for fiscal 1996
to $591.4 million for fiscal 1997, an increase of $441.7 million, or 295.1%.
The following table sets forth information regarding the components of the
Company's revenues for fiscal 1996 and fiscal 1997:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
<S> <C> <C> <C> <C>
1996 1997
--------------------- ----------------------
(DOLLARS IN THOUSANDS)
Gains on securitized loan sales, net of costs....... $ 142,433 $ 519,426
Provision for possible credit losses on securitized
loan sales........................................ (48,397) (231,211)
---------- -----------
Net gain on securitized loan sales................ 94,036 62.9% 288,215 48.7%
Net gain on other loan sales........................ 11,091 7.4 30,086 5.1
---------- --------- ----------- ---------
Total gain on sale of loans, net.................. 105,127 70.3 318,301 53.8
Interest income..................................... 25,727 17.2 172,734 29.2
Interest only strips interest income................ 5,115 3.4 26,920 4.6
Servicing income.................................... 4,008 2.7 21,122 3.6
Origination income.................................. 7,242 4.8 41,537 7.0
Insurance and other income.......................... 2,441 1.6 10,826 1.8
---------- --------- ----------- ---------
Total Revenues.................................... $ 149,660 100% $ 591,440 100%
---------- --------- ----------- ---------
---------- --------- ----------- ---------
</TABLE>
Total gain on sale of loans increased from $105.1 million for fiscal 1996 to
$318.3 million for fiscal 1997, an increase of $213.2 million, or 202.9%. Total
gain on sale of loans decreased as a percentage of
24
<PAGE>
total revenue from 70.3% in fiscal 1996 to 53.8% in fiscal 1997. The Company
securitized and sold $723.1 million of High LTV Loans during fiscal 1996
(resulting in net gain on securitized loan sales of $94.0 million) and $2.4
billion of High LTV Loans during fiscal 1997 (resulting in net gain on
securitized loan sales of $288.2 million), an increase of $1.7 billion, or
231.9%. The Company earned a weighted average 13.0% profit margin (the ratio of
its net gain on sale of loans, after commissions earned, premiums paid and
provision for possible credit losses, as a percentage of loans securitized and
sold) on the securitized loan sales during fiscal 1996, compared to a 12.0%
weighted average profit margin during fiscal 1997.
The following table sets forth certain data with respect to each of the
securitizations the Company closed during fiscal 1997:
<TABLE>
<CAPTION>
1996-3(1) 1996-4 1997-1 1997-2 1997-3
----------- ---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
High LTV Loans sold................................ $ 44,587 $ 400,000 $ 600,000 $ 750,000 $ 650,332(2)
Overcollateralization(3)........................... -- 238 393 169 606
----------- ---------- ---------- ---------- -------------
Total High LTV Loans securitized................... $ 44,587 $ 400,238 $ 600,393 $ 750,169 $ 650,938
----------- ---------- ---------- ---------- -------------
----------- ---------- ---------- ---------- -------------
Gain on securitized loan sales..................... $ 10,078 $ 89,710 $ 136,458 $ 148,197 $ 134,983
Provision for possible credit losses............... 4,000 39,619 58,721 68,559 60,311
----------- ---------- ---------- ---------- -------------
Net gain on securitized loan sales................. $ 6,078 $ 50,091 $ 77,737 $ 79,638 $ 74,672
----------- ---------- ---------- ---------- -------------
----------- ---------- ---------- ---------- -------------
Net gain on securitized loan sales as a percentage
of total loans securitized and sold (profit
margin)(4)....................................... 13.6% 12.5% 12.9% 10.6% 11.5%
Weighted average life of certificates sold
(yrs.)........................................... 5.3 5.3 5.5 5.7 5.9
Weighted average FICO score........................ 664 664 676 682 684
</TABLE>
- ------------------------
(1) Reflects remaining portion of securitization, the larger portion of which
was completed during the quarter ended September 30, 1996.
(2) Only $650.3 million of the $800.0 million securitization was funded during
fiscal 1997. Therefore, the remaining balance will be funded in fiscal 1998.
(3) Represents the overcollateralization requirement that is funded with loans.
(4) Gain after commissions earned, premiums paid and recognition of provision
for possible credit losses.
The Company's increase in securitization activity is related to the
increased origination of High LTV Loans from fiscal 1996 to fiscal 1997, due to
the following reasons:
1. The Company increased the size of its Correspondent network during this
time period, both numerically (306 to 631 for the fiscal year) and
geographically (26 states versus 33 states during the respective fiscal
years);
2. The Company increased its production of Direct to Consumer Loans from
$45.1 million to $765.3 million during the respective fiscal years;
The Company paid net loan premiums of $36.4 million in fiscal 1996, compared
to net loan premiums of $65.1 million in fiscal 1997, representing an average
loan purchase price of 103.1% of par for fiscal 1997, and 102.4% of par for
fiscal 1996. This increase resulted from the Company's purchase of loans with
relatively higher FICO scores in fiscal 1997. Loan purchase prices are directly
related to the quality of the loans purchased, the face interest rate of the
acquired loans, the quantity of loans that the Correspondent commits to sell,
the nature and longevity of the relationship that the Company maintains with the
Correspondent and competitive pressures.
25
<PAGE>
The Company increased the number of whole-loan sales during fiscal 1997
through the sale of Title I Loans and Conforming First Lien Loans to government
agencies and Home Equity Loans to other finance companies.
Interest only strips interest income increased from $5.1 million in fiscal
1996 to $26.9 million in fiscal 1997, an increase of $21.8 million, or 427.5%.
The increase is the result of the Company having an increased amount of
securitizations that produce more interest income.
Interest income increased from $25.7 million for fiscal 1996 to $172.7
million for fiscal 1997, an increase of $147.0 million, or 572.0%. The increase
is a result of the increased loan production during fiscal 1997 and the
Company's ability to hold loans on its balance sheet for longer periods of time
prior to securitization, thereby increasing the average loans held for sale
balance. During fiscal 1996 and fiscal 1997, the Company's average monthly
balance of loans held for sale was $197.5 million and $1.0 billion,
respectively, an increase of $847.5 million, or 429.1%, respectively.
Servicing fee income increased from $4.0 million for fiscal 1996 to $21.1
million for fiscal 1997, an increase of $17.1 million, or 427.5%. This increase
was primarily the result of a significant increase in the average balance of the
Serviced Loan Portfolio from $1.3 billion for fiscal 1996 to $2.9 billion for
fiscal 1997, an increase of $1.6 billion, or 123%. This increase in the
Company's average Serviced Loan Portfolio was the result of the Company's
increase in securitizations during fiscal 1997.
Origination income increased from $7.2 million in fiscal 1996 to $41.5
million in fiscal 1997, an increase of $34.3 million, or 476.4%. The Company
collects origination fees on Direct to Consumer Loan originations. The
origination fees are deferred and recognized when the loans are securitized,
based on an average allocation methodology. The increase in origination income
is the result of Direct to Consumer Loan originations increasing from 4% to 23%
of total High LTV Loan production in fiscal 1996 and fiscal 1997, respectively.
Other income increased from $2.4 million in fiscal 1996 to $10.8 million in
fiscal 1997, an increase of $8.4 million, or 350.0%. A large component of this
increase is due to the increase of insurance-related premiums. The increase in
Direct to Consumer Loans provides the Company with the opportunity to sell
add-on products such as credit-related policies.
The following table sets forth information regarding the components of the
Company's expenses for fiscal 1996 and fiscal 1997:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
---------------------
1996 1997
--------- ----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Salaries and employee benefits......................................... $ 36,402 $ 107,558
Interest expense....................................................... 16,892 93,514
Other operating expenses............................................... 29,938 120,581
Provision for possible credit losses................................... 11,247 45,307
--------- ----------
Total Expenses....................................................... $ 94,479 $ 366,960
--------- ----------
--------- ----------
</TABLE>
Salaries and employee benefits increased from $36.4 million for fiscal 1996
to $107.6 million for fiscal 1997, an increase of $71.2 million, or 195.6%. The
Company employed approximately 950 persons as of September 30, 1996, compared to
approximately 3,250 persons as of September 30, 1997, an increase of 242.1%.
However, during the same time, total revenues increased from $149.7 million to
$591.4 million, an increase of $441.7 million, or 295.1%. Although the number of
employees increased, the Company's employees were able to originate, securitize
and service a proportionately larger loan volume, thereby generating
proportionately larger revenues per employee. The Company earned $158,000 of
revenue per employee for fiscal 1996, compared to $182,000 of revenue per
employee for fiscal 1997.
26
<PAGE>
Interest expense increased from $16.9 million for fiscal 1996 to $93.5
million for fiscal 1997, an increase of $76.6 million, or 453.3%. Interest
expense increased primarily because there were significant increases in
borrowings under the Company's various facilities during fiscal 1997 and
subordinated debt was outstanding for all of fiscal 1997, while it was
outstanding for only 1.5 months during fiscal 1996. As of September 30, 1996,
the Company's warehouse debt totaled $354.5 million and bore interest at a
weighted average rate of approximately 6.6%. As of September 30, 1997, the
Company's warehouse debt totaled $1.2 billion and bore interest at a weighted
average interest rate of approximately 6.6%.
Other operating expenses increased as the Company accommodated the
significantly expanded loan origination, securitization and servicing volumes
during the respective fiscal years. Other operating expenses consist primarily
of rents, professional fees and the costs associated with marketing,
underwriting, administration and servicing. The Company expects to incur
significantly greater marketing expenses in fiscal 1998 due to its continued
strategy of increasing its brand name recognition and its goal of generating
significantly larger amounts of Direct to Consumer Loans.
The provision for possible credit losses increased from $11.2 million for
fiscal 1996 to $45.3 million for fiscal 1997, an increase of $34.1 million, or
304.5%. This increase reflects the 225% growth in the loans held for sale
portfolio during fiscal 1997, as well as the impact of holding the loans on the
balance sheet for longer periods of time during fiscal 1997.
FISCAL YEAR ENDED SEPTEMBER 30, 1996
VERSUS FISCAL YEAR ENDED SEPTEMBER 30, 1995
The Company's total revenues increased from $30.0 million for fiscal 1995 to
$149.7 million for fiscal 1996, an increase of $119.7 million, or 399.0%. This
increase was primarily the result of increases in the Company's net gain on
securitized loan sales, although the Company also experienced significant
increases in its servicing-related income, interest income and other income
during this time period.
The following table sets forth information regarding the components of the
Company's revenues for fiscal 1995 and fiscal 1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1995 1996
-------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gain on securitized loan sales, net of costs.................... $ 24,597 $ 142,433
Provision for possible credit losses on securitized loan
sales......................................................... (3,907) (48,397)
Net gain on securitized loan sales............................ 20,690 69.0% 94,036 62.9%
--------- ----------
Net gain on other loan sales.................................... 4,517 15.1 11,091 7.4
--------- --------- ---------- ---------
Total gain on sale of loans, net.............................. 25,207 84.1 105,127 70.3
Interest income................................................. 2,860 9.5 25,727 17.2
Interest only strips interest income............................ -- -- 5,115 3.4
Servicing income................................................ 1,049 3.5 4,008 2.7
Origination income.............................................. 553 1.8 7,242 4.8
Insurance and other income...................................... 321 1.1 2,441 1.6
--------- --------- ---------- ---------
Total Revenues................................................ $ 29,990 100.0% $ 149,660 100.0%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
Total gain on sale of loans increased from $25.2 million for fiscal 1995 to
$105.1 million for fiscal 1996, an increase of $79.9 million, or 317.1%. The
Company securitized and sold $234.8 million of High LTV Loans during fiscal 1995
(resulting in a net gain on securitized loan sales of $20.7 million), compared
to $723.1 million of High LTV Loans during fiscal 1996 (resulting in a net gain
on securitized loan sales of $94.0 million), an increase of $488.3 million, or
208.0%. The Company sold $113.5 million of loans that did
27
<PAGE>
not meet its securitization parameters ("non-strategic loans") in whole-loan
sales during fiscal 1995 (resulting in net gain on other loan sales of $4.5
million), compared to $290.5 million of non-strategic loans in whole-loan sales
during fiscal year 1996 (resulting in net gain on other loan sales of $11.1
million). Additionally, the Company earned a weighted average 8.8% profit margin
(the ratio of its gain on sale of loans, after commissions earned, premiums paid
and provision for possible credit losses, as a percentage of loans securitized
and sold) on the loans it securitized and sold during fiscal 1995, compared to a
13.0% weighted average profit margin on the loans securitized and sold during
fiscal 1996.
The following table sets forth certain data with respect to each of the
securitizations the Company closed during fiscal 1996:
<TABLE>
<CAPTION>
1995-3(1) 1995-4 1996-1 1996-2 1996-A(2) 1996-3
----------- --------- ---------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans sold.................................. $ 9,284 $ 77,599 $ 115,559 $ 241,625 $ 8,516 $ 255,413
Overcollateralization (3)................... -- 2,400 4,440 8,375 -- 113
----------- --------- ---------- ---------- ----------- ----------
Total loans securitized..................... $ 9,284 $ 79,999 $ 119,999 $ 250,000 $ 8,516 $ 255,526
----------- --------- ---------- ---------- ----------- ----------
----------- --------- ---------- ---------- ----------- ----------
Gain on securitized loan sales, net......... $ 1,503 $ 16,049 $ 24,190 $ 43,239 $ 691 $ 56,761
Provision for possible credit losses........ 270 3,706 5,551 12,546 203 26,121
----------- --------- ---------- ---------- ----------- ----------
Net gain on securitized loan sales.......... $ 1,233 $ 12,343 $ 18,639 $ 30,693 $ 488 $ 30,640
----------- --------- ---------- ---------- ----------- ----------
----------- --------- ---------- ---------- ----------- ----------
Net gain after provision for credit losses
as a percentage of total loans securitized
and sold ("profit margin") (4)............ 13.3% 15.4% 15.5% 12.3% 5.7% 12.0%
Weighted average life of certificates sold
(yrs.).................................... 4.9 4.2 4.4 4.8 2.9 5.4
Weighted average FICO score................. 636 645 656 662 651 664
Percentage of total loans securitized:
Conventional.............................. 53.9% 62.5% 80.7% 89.0% 41.5% 100.0%
Title I................................... 46.1% 37.5% 19.3% 11.0% 58.5% 0.0%
</TABLE>
- ------------------------
(1) Reflects remaining portion of securitization, the larger portion of which
was completed during the quarter ended September 30, 1995.
(2) Most of the Title I loans in this securitization were unsecured.
(3) Represents the overcollateralization requirement that is funded with loans.
(4) Gain after commissions earned, premiums paid and recognition of provision
for possible credit losses.
The Company's increased securitization activity relates to the increased
origination of High LTV Loans for fiscal 1996. The Company was able to increase
its production of High LTV Loans from fiscal 1995 to fiscal 1996, for the
following reasons:
1. The Company increased the size of its Correspondent network during this
time period, both numerically (86 to 306 during the respective fiscal
years) and geographically (19 states to 26 states during the respective
fiscal years);
2. The Company increased its production of Direct to Consumer Loans from
$906,000 to $45.1 million during the respective fiscal years;
3. The Company decreased its production of loans originated through home
improvement contractors, which are generally of lower quality, from $36.8
million to $21.6 million during the respective fiscal years; and
4. The Company acquired First Security Mortgage Corp. (which the Company
operates as its "FIRSTPLUS East" division) in December 1995 in a purchase
transaction and FIRSTPLUS West
28
<PAGE>
in May 1996 in a pooling transaction. During fiscal 1996, FIRSTPLUS East
and FIRSTPLUS West originated a total of $206.0 million of strategic
loans.
During fiscal 1996, the Company originated and securitized a greater
percentage of non-Title I loans, when compared to fiscal 1995. This continued
increase in non-Title I loan emphasis was a result of the relatively small size
of the Title I loan market and the Company's desire to meet the needs of its
customers, who generally request higher loan amounts and more flexible loan
proceeds utilization than the Title I Program offers. Although non-Title I loans
require the Company to reserve greater amounts for anticipated losses than do
Title I loans, Title I loans generally produce lower gross revenues due to the
increased premiums paid in acquisition.
The Company's profit margin on securitized loans sold increased from a
weighted average of 8.8% for fiscal 1995 to 13.0% for fiscal 1996. A portion of
this increase was due to the fact that the Company was contractually required to
share its securitization gains in its 1994-1 and 1995-2 securitizations, which
closed in December 1994 and June 1995, respectively. While the Company was not
required to share any securitization gain for any securitizations closed during
fiscal 1996, $9.2 million of loans delivered in October 1995, that were
attributable to the 1995-3 securitization were subject to the sharing
arrangement. Profit margin increases also resulted from the favorable interest
rate environment during the period from October 1995 to January 1996, and from
increases in interest paid over the life of the loan.
The Company's gain on securitized loan sales, net, profit margin decreased
during fiscal 1996, from 15.4% in the first quarter to 12.0% in the fourth
quarter. The decrease was primarily due to the sharp increases in general
interest rates from February 1996 to June 1996.
The Company received net loan discounts of $826,000 for fiscal 1995,
compared to $36.4 million of net loan premiums paid for fiscal 1995. This
represented an average loan purchase price of 99.6% of par for fiscal 1995,
compared to 102.4% of par for fiscal 1996. This increase resulted from the
Company's purchase of loans with relatively higher FICO scores and from
increased competition for Title I loans. Loan purchase prices are directly
related to the quality of the loans purchased, the face interest rate of the
acquired loans, the quantity of loans that the Correspondent commits to sell,
the nature and longevity of that the relationship the Company maintains with the
Correspondent and competitive pressures.
Interest only strips interest income increased from none in fiscal 1995 to
$5.1 million in fiscal 1996. The increase was the result of the Company having
no interest only strips outstanding in fiscal 1995.
Interest income increased from $2.9 million for fiscal 1995 to $25.7 million
for fiscal 1996, an increase of $22.8 million, or 786.2%. This increase was
primarily the result of a significant increase in the Company's average balance
of loans held for sale. The Company securitizes its loans on a regular basis;
however, it earns interest income on the loans it originates prior to such
securitizations. During fiscal 1995 and fiscal 1996, the Company's average
monthly balance of loans held for sale, including non-strategic loans, was $19.4
million at par and $197.5 million at par, respectively, an increase of $178.1
million, or 918.0%.
Servicing fee income increased from $1.0 million for fiscal 1995 to $4.0
million for fiscal 1996, an increase of $30 million, or 300.0%. This increase
was primarily the result of a significant increase in the average balance of the
Serviced Loan Portfolio from $238.6 million for fiscal 1995 to $1.3 billion for
fiscal 1996, an increase of $1.0 billion, or 444.8%. This increase in the
Company's average Serviced Loan Portfolio was the result of the Company's
increases in loan originations and securitizations during the respective fiscal
years.
Remaining revenue items increased from $874,000 for fiscal 1995 to $9.7
million for fiscal 1996, an increase of $8.8 million, or 1,007.9%. Remaining
revenue items consist primarily of loan origination fees that are funded by
borrowers at closing.
29
<PAGE>
The following table sets forth information regarding the components of the
Company's expenses for fiscal 1995 and fiscal 1996:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30,
--------------------
1995 1996
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Salaries and employee benefits....................................... $ 10,110 $ 36,402
Interest expense..................................................... 2,660 16,892
Other operating expenses............................................. 6,964 29,938
Provision for possible credit losses................................. 513 11,247
--------- ---------
Total.............................................................. $ 20,247 $ 94,479
--------- ---------
--------- ---------
</TABLE>
Salaries and employee benefits increased from $10.1 million for fiscal 1995
to $36.4 million for fiscal 1996, an increase of $26.3 million, or 260.1%. The
Company employed approximately 480 persons as of September 30, 1995, compared to
approximately 950 persons as of September 30, 1996, an increase of 97.9%.
However, during the same time, total revenues increased from $30.0 million to
$149.7 million, an increase of $119.7 million, or 399.0%. Although the number of
employees increased, the Company's employees were able to originate, securitize
and service a proportionately larger amount of loan volume, thereby generating
proportionately larger revenues per employee. The Company earned $62,000 of
revenue per employee for fiscal 1995, compared to $158,000 of revenue per
employee for fiscal 1996.
Interest expense increased from $2.7 million for fiscal 1995 to $16.9
million for fiscal 1996, an increase of $14.2 million, or 535.0%. Interest
expense increased primarily because of the significant increases in borrowings
under the Company's warehouse facilities that were incurred during fiscal 1996,
partially offset by more favorable interest rates. As of September 30, 1995, the
Company's warehouse debt totaled $18.5 million and bore interest at a weighted
average rate of approximately 9.25%. As of September 30, 1995, the Company's
warehouse debt totaled $354.5 million and bore interest at a weighted average
rate of approximately 6.6%.
Other operating expenses increased as the Company accommodated the
significantly expanded loan origination, loan servicing and loan securitization
volumes during the respective fiscal years. Other operating expenses consist
primarily of Title I Program insurance premiums paid upon the origination of
Title I loans, professional fees, rents and the costs associated with marketing,
underwriting, administration and servicing.
The provision for possible credit losses on securitized loan sales increased
from $3.9 million for fiscal 1995 to $48.4 million for fiscal 1996, an increase
of $44.5 million, or 1,141.0%. The increase was primarily attributable to the
208.1% increase in volume of loans securitized from $234.8 million in fiscal
1995 to $723.1 million in fiscal 1996, and to the fact that a greater amount of
securitized loans in fiscal 1996 were non-Title I loans, which require the
Company to provide for a higher level of losses, as compared to insured Title I
loans. To a lesser extent, the increase is the result of (i) an increase of $2.5
million taken because the default rate for a pool of bulk purchased loans
included in the 1995-2 securitization exceeded the estimates made at the time of
the securitization, which adjustment was determined in conformity with the
Company's current estimation methodology, (ii) an increase of $5.6 million taken
for the increased amount of loans held for sale on the Company's balance sheet
and (iii) the Company's change from a constant default rate to default curves
commencing in the fourth quarter of fiscal 1996.
Income tax expense increased from $3.9 million for fiscal 1995 to $21.0
million for fiscal 1996, an increase of $17.1 million, or 437.3%. The income tax
expense was recorded at statutory rates.
30
<PAGE>
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, (ii) reserve accounts, overcollateralization requirements, fees
and expenses incurred in connection with its securitization transactions, (iii)
television, radio and direct mail advertising and other marketing and (iv)
administrative and other operating expenses. The Company has been able to
utilize a new securitization structure for the 1997-2 and 1997-2 securitizations
that does not require an attendant monoline insurance policy. This structure
allows the Company to issue the bonds without initial overcollateralization
requirements. Overcollateralization requirements are met by future excess cash
flows of the specific securitizations. The Company expects to continue to
utilize this structure in future securitization transactions.
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. In
August 1997, the Company increased a repurchase facility with Bear Stearns Home
Equity Trust 1996-1 ("Bear Sterns Facility") from $300 million to $600 million.
At September 30, 1997, the Company had $79.6 million outstanding under the Bank
One Facility and $317.7 million outstanding 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 pledging as collateral the interest only strips generated by
securitizations in which Bear Stearns is the lead manager. At September 30,
1997, the Company had borrowed $55.0 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 repurchase facility was
increased to $500 million. At September 30, 1997, the Company had $66.0 million
outstanding under the Term Line and $412.8 million outstanding under the
repurchase facility.
In April 1997, the Company entered into a $300 million repurchase facility
with Merrill Lynch Mortgage Capital, Inc. ("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
September 30, 1997, the Company had borrowed $278.2 million under the repurchase
facility and none 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 September
30, 1997, the Company had $190.9 million outstanding under this facility.
At September 30, 1997, the Company had borrowed $31.3 million from a
nationally recognized finance company under a warehouse line facility and term
line facility.
As a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company operates,
and expects to continue to operate, on a negative operating cash flow basis. The
Company's operations used $496.7 million during fiscal 1996 and $1.2 billion
during fiscal 1997. The increase in the use of cash in operations is primarily
related to the costs of an enlarged infrastructure, an increasing employee base
and the Company's securitization strategy (which increases the gain on sale of
securitized 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
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. The Company has
significantly improved its negative cash flow experience by improving certain
negative cash flow features of its securitization program and by maintaining a
larger balance of loans held for sale on its balance sheet, which produces a
positive net interest cash flow, as well as, increasing the collection of
origination fees related to Direct to Consumer Loans.
31
<PAGE>
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 conditions.
Based on the Company's anticipated rate of growth, the Company believes that
it will need to arrange additional warehouse lines of credit or other financing
sources within the next 90 days. The Company is currently negotiating for
increased and/or additional warehouse facilities. The Company's existing
warehouse lines of credit restrict its ability to incur other indebtedness. The
Company has no commitments for such increased and/or additional financings, and
there can be no assurance that the Company will be successful in consummating
any such financing transactions in the future or on terms the Company would
consider to be favorable. In such event, the Company's growth and operations
could be curtailed, which could have a material adverse effect on the Company's
results of operations and financial condition.
CERTAIN ACCOUNTING CONSIDERATIONS
During fiscal 1996 and fiscal 1997, the Company sold a substantial amount of
its High LTV Loans to third-party investors in securitization transactions. In a
securitization transaction, loans originated and purchased by the Company are
sold to an independent entity, generally a grantor or owner trust, that holds
the loans as trustee for third-party investors. The Company retains the right to
service the securitized loans or appoint an approved subservicer.
The Company retains an interest only strip ("I/O Strip"), which is
certificated, which represents the present value of the right to the excess cash
flows generated by the securitized loans that represents the difference between
(a) interest at the stated rate paid by borrowers and (b) the sum of (i)
pass-through interest paid to third-party investors, (ii) trustee fees, (iii)
FHA insurance fees (if applicable), (iv) third-party credit enhancement fees (if
applicable), (v) stipulated servicing fees and (vi) estimated loan portfolio
losses. The Company's right to receive this excess cash flow stream begins after
certain reserve requirements have been met, which are specific to each
securitization and are used as a means of credit enhancement. The Company
determines the present value of this anticipated cash flow stream at the time
each securitization transaction closes, utilizing valuation assumptions
appropriate for each particular transaction.
The significant valuation assumptions are related to the anticipated average
lives of the loans sold, the anticipated prepayment speeds and the anticipated
credit losses related thereto. In order to determine the present value of this
excess cash flow, the Company currently applies an estimated market discount
rate of between 10% and 11% to the expected pro forma gross cash flows, which
are calculated utilizing the weighted average lives of the securitized loans,
and currently applies a risk free discount rate of 6.5% to the anticipated
losses attendant to this pro forma cash flow stream (the "Allowance for Possible
Credit Losses on Loans Sold" on its balance sheet). Accordingly, the overall
effective discount rate utilized on the cash flows, net of expected credit
losses is approximately 12.5%. As of September 30, 1996 and 1997, the Company's
I/O Strips were $187.2 million and $735.3 million, respectively, and its
allowance for possible credit losses on loans securitized were $54.3 million and
$279.2 million, respectively. The allowance represented approximately 29% and
38% of the I/O Strips at September 30, 1996 and 1997, respectively.
The annual prepayment rate of the securitized loans is a function of full
and partial prepayments and defaults. In the I/O Strips' fair value estimates,
the Company makes assumptions of the prepayment rates of the underlying loans,
which the Company believes are reasonable. During fiscal 1997, the Company
utilized proprietary prepayment curves generated by the Company's structured
finance group (reaching an approximate maximum annual rate of between 14% and
16%).
32
<PAGE>
With respect to the calculation of the gross charge-off rate for a
particular securitization pool, the Company, in part, utilizes the FICO scores
of that securitization pool to measure the creditworthiness of the borrowers
whose loans are included in the pool. During fiscal 1997, the Company's
securitization pool score distributions typically were between 620 and 720, with
a weighted average pool score of between 664 and 684. The Company estimates
default rates for FICO scores based on historical loan performance and other
data available to the Company. The Company has developed historical default
rates for its borrowers based on each ten point interval of the FICO score
range. Using the expected default rate for each FICO score interval for each
securitization, the Company estimates the overall default rate for the borrowers
in the securitized pool. When estimating the fair value of the I/O Strips
attributable to these securitizations, the Company assumes that its
securitization pools will produce annual default rates that correspond to the
historical default rates for the FICO score ranges associated with the
individual pools, adjusted for accelerated levels of defaults for loan pools
with FICO scores lower than 620 and for seasoned loans that have little or no
increase in the frequency of defaults.
In its estimates of annual default rates and total delinquencies, the
Company utilizes assumptions that it believes are reasonable. The Company
estimates annual default rates and total delinquencies based upon FICO scores,
the life of the loans and the mix of the Title I loans to Conventional loans in
the securitization, as well as other factors. To more accurately reflect the
timing of the actual loan default rates and the impact of the defaults on the
overall prepayment rates, the Company utilizes proprietary default curves rather
than assuming that defaults occur in a straight line manner over time. The use
of the default curves does not impact the estimated total amount of defaults in
a securitization, only the timing of when such defaults will occur. The Company
believes that the recourse portion of the net I/O Strips' value should be
adequate to cover anticipated losses. The Company assumes that there will be no
recoveries on charged-off Conventional Loans in its loss estimates. The Company
also estimates that total delinquencies (i.e., loans more than 30 days past due)
will average 6% to 9% over the life of each securitization.
The I/O Strips are accounted for under SFAS 115 "ACCOUNTING FOR INVESTMENTS
IN CERTAIN DEBT AND EQUITY MARKETABLE SECURITIES." As an I/O Strip is subject to
significant prepayment risk, and therefore has an undetermined maturity date, it
cannot be classified as held to maturity. The Company has chosen to classify its
I/O Strips as available for sale securities. Based on this classification, the
Company is required to mark these securities to fair value with the accompanying
increases or decreases in fair value being recorded as a separate component of
stockholders' equity, net of tax. The determination of fair value is based on
the previously mentioned valuation basis, and the Company assesses fair value
quarterly.
As the gain recognized in the year of sale is equal to the present value of
the estimated future cash flows from the I/O Strips, the amount of cash actually
received over the lives of the loans normally exceeds the gain previously
recognized at the time of the loans were sold, and, therefore, residual interest
income is recognized over the life of the loans securitized. The I/O Strips are
amortized based on an accelerated method that is not materially different from
the interest method.
The Company generally retains the right to service loans it originates or
purchases and then subsequently securitizes. Fees for servicing loans are based
on a stipulated percentage (generally 0.75%) of the unpaid principal balance of
the associated loans. Prior to fiscal 1997, the Company recognized servicing fee
income, late charges and other ancillary income when collected and charged costs
to service loans when incurred. For loan portfolios securitized subsequent to
December 31, 1996, the Company began recognizing a servicing asset as part of
its gain on securitized loan sales. The servicing asset is calculated as the
present value of the expected future net servicing revenue based on common
industry assumptions and the Company's historical experience. These factors
include default and prepayment speeds.
On a quarterly basis, the Company assesses the carrying value of its I/O
Strips and servicing assets for impairment. There can be no assurance that the
Company's estimates used to determine the gain on securitized loan sales, I/O
Strips and servicing assets valuations will remain appropriate for the life of
each securitization. If actual loan prepayments or defaults exceed the Company's
estimates, the carrying value
33
<PAGE>
of the Company's I/O Strips and/or servicing assets may be decreased or the
Company may increase its allowance for possible credit losses on loans sold
through a charge against earnings during the period management recognizes the
disparity. Other factors may also result in a writedown of the Company's I/O
Strips in subsequent periods. As of September 30, 1997, the Company determined
that no such impairment existed.
The Company records its loans at the lower of cost or market. Any
originations below par are recorded as loan origination discounts, thereby
reducing the Company's cost basis in such loans. Any purchases above par are
recorded as loan purchase premiums, thereby increasing the Company's cost basis
in its loans. If the Company's accounts reflect net discounts in excess of
premiums at the time it securitizes such loans, the Company recognizes such net
discount as a reduction to its cost of loans sold. Conversely, if the Company's
accounts reflect net premiums in excess of discounts at the time it securitizes
its loans, the Company recognizes such net premium as an addition to its cost of
loans sold.
HEDGING ACTIVITIES
The Company's profitability may be directly affected by fluctuations in
interest rates. While the Company monitors interest rates and employs a strategy
designed to hedge some of the risks associated with changes in interest rates,
no assurance can be given that the Company's results of operations and financial
condition will not be adversely affected during periods of fluctuations in
interest rates. The Company's interest rate hedging strategy currently includes
purchasing put contracts on treasury securities, selling short treasury
securities and maintaining a pre-funding strategy with respect to its
securitizations. Since the interest rates on the Company's indebtedness used to
fund and acquire loans are variable and the rates charged on loans the Company
originates are fixed, increases in the interest rates after loans are originated
and prior to their sale could have a material adverse effect on the Company's
results of operations and financial condition. In addition, increases in
interest rates prior to sale of the loans may reduce the gain on securitized
loan sales earned by the Company. The ultimate sale of the Company's loans will
fix the spread between the interest rates paid by borrowers and the interest
rates paid to investors in securitization transactions with respect to such
loans, although increases in interest rates may narrow the potential spread that
existed at the time the loans were originated by the Company.
IMPACT OF INFLATION
Increases in the inflation rate generally result in increased interest
rates. Since the Company borrows funds at a variable rate, increased interest
rates will increase the borrowing costs of the Company. Inflation will also
increase the operating costs of the Company. The Company may not be able to pass
on the effects of inflation and accompanying higher interest rates to its
borrowers due to usury laws, other legal or regulatory restrictions or
competitive pressures.
SEASONALITY
The Company is affected by consumer demand for debt consolidation and home
improvement loans, which is partially influenced by regional trends, economic
conditions and personal preferences. The Company's business is generally subject
to seasonal trends, with home improvements generally peaking during the spring
and summer seasons and declining to lower levels in the fall and winter months.
Delinquencies on loan payments typically increase in November and December of
each calendar year.
YEAR 2000
The Company utilizes a number of software systems to originate, securitize
and service its various loan products. The Company has and will continue to make
certain investments in its software systems and applications to ensure the
Company is Year 2000 compliant. The financial impact of becoming year 2000
34
<PAGE>
compliant has not been and is not expected to be material to the Company to its
financial position or results of operations in a given year.
FORWARD LOOKING STATEMENTS
Certain information contained in this Form 10-K 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, and reference is made to such Form 8-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data are set forth herein
commencing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in response to this Item is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of Report.
1. FINANCIAL STATEMENTS:
The Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1 of this Report.
2. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
3. EXHIBITS:
The exhibits are listed on the Exhibit Index attached hereto.
36
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets as of September 30, 1996 and 1997............................................ F-3
Consolidated Statements of Income for the Fiscal Years Ended September 30, 1995, 1996 and 1997........... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended September 30, 1995, 1996 and
1997................................................................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 30, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
FIRSTPLUS Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of FIRSTPLUS
Financial Group, Inc. and subsidiaries as of September 30, 1996 and 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 FIRSTPLUS
Financial Group, Inc. and subsidiaries at September 30, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
October 30, 1997
F-2
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Cash and cash equivalents................................................................ $ 23,167 $ 94,978
Securities, available for sale........................................................... -- 40,995
Loans held for sale, net................................................................. 430,812 1,400,446
Investment in securitized loans.......................................................... -- 190,861
Subordinated certificates available for sale............................................. 16,528 18,047
Interest only strips..................................................................... 187,230 735,310
Allowance for possible credit losses on loans sold....................................... (54,257) (279,187)
--------- -----------
Interest only strips, net................................................................ 132,973 456,123
Servicing assets......................................................................... -- 40,516
Receivable from trusts................................................................... 32,105 138,816
Other assets............................................................................. 20,542 66,424
--------- -----------
Total assets......................................................................... $ 656,127 $ 2,447,206
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities................................................. $ 19,669 $ 44,445
Warehouse financing...................................................................... 354,481 1,238,156
Term lines............................................................................... 57,465 211,751
Time deposits............................................................................ -- 120,025
Bonds.................................................................................... -- 174,088
Convertible subordinated notes........................................................... 100,000 69,920
Notes payable and other borrowings....................................................... 8,969 39,321
Deferred tax liabilities, net............................................................ 20,974 119,355
--------- -----------
Total liabilities.................................................................... 561,558 2,017,061
Commitments and contingencies
Stockholders' equity:
Preferred stock Series A, non-voting, $1.00 par value, 8% cumulative
dividend:
Authorized shares--300
Issued and outstanding shares--none--1996; none--1997 -- --
Preferred stock Series B, non-voting, $1.00 par value, 8% cumulative
dividend:
Authorized shares--2,300
Issued and outstanding shares--none--1996; none--1997 -- --
Common stock, $0.01 par value:
Authorized shares--100,000
Issued and outstanding shares--22,499--1996 and 36,580--1997......................... 225 366
Common stock, non-voting, $0.01 par value:
Authorized shares--25,000
Issued and outstanding shares--4,441--1996 and 691--1997............................. 44 7
Additional capital..................................................................... 54,696 216,881
Unrealized gains on available for sale securities, net................................. -- 20,253
Retained earnings...................................................................... 39,604 192,638
--------- -----------
Total stockholders' equity........................................................... 94,569 430,145
--------- -----------
Total liabilities and stockholders' equity........................................... $ 656,127 $ 2,447,206
--------- -----------
--------- -----------
</TABLE>
See accompanying notes
F-3
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Gains on sales of securitized loans, net of costs........................... $ 24,597 $ 142,433 $ 519,426
Provision for possible credit losses on securitized loan sales.............. (3,907) (48,397) (231,211)
--------- ---------- -----------
Net gain on securitized loan sales........................................ 20,690 94,036 288,215
Net gain on other loan sales................................................ 4,517 11,091 30,086
--------- ---------- -----------
Total gain on sale of loans, net.......................................... 25,207 105,127 318,301
Interest income............................................................. 2,860 25,727 172,734
Interest only strips interest income........................................ -- 5,115 26,920
Servicing income............................................................ 1,049 4,008 21,122
Origination income.......................................................... 553 7,242 41,537
Other income................................................................ 321 2,441 10,826
--------- ---------- -----------
Total revenues............................................................ 29,990 149,660 591,440
Expenses:
Salaries and employee benefits expense...................................... 10,110 36,402 107,558
Interest expense............................................................ 2,660 16,892 93,514
Other operating expenses.................................................... 6,964 29,938 120,581
Provision for possible credit losses........................................ 513 11,247 45,307
--------- ---------- -----------
Total expenses............................................................ 20,247 94,479 366,960
--------- ---------- -----------
Income before income taxes.................................................... 9,743 55,181 224,480
Provision for income taxes.................................................... (3,903) (20,969) (85,311)
--------- ---------- -----------
Net income................................................................ $ 5,840 $ 34,212 $ 139,169
--------- ---------- -----------
--------- ---------- -----------
Weighted average common shares and common equivalent
shares outstanding.......................................................... 20,297 25,358 35,242
--------- ---------- -----------
--------- ---------- -----------
Primary net income per share.................................................. $ 0.28 $ 1.35 $ 3.95
--------- ---------- -----------
--------- ---------- -----------
Weighted average fully diluted common and common equivalent shares
outstanding................................................................. 20,297 26,354 40,522
--------- ---------- -----------
--------- ---------- -----------
Fully diluted net income per share............................................ $ 0.28 $ 1.31 $ 3.52
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
See accompanying notes
F-4
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------------------------------- -------------------------------------
SERIES "A" SERIES "B" VOTING NON-VOTING
------------------------ ------------------------ ------------------------ -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994.... 300 $ 300 -- $ -- 10,980 $ 110 --
Investment in subsidiary--RNFC... 2,300 2,300 4,020 40
Issuance of common stock and
exercise of warrants........... 2,949
Redemption of preferred stock.... (200) (200)
Preferred stock dividends........
Distributions....................
Net income.......................
--- ----- ----------- ----------- ----------- ----- -----------
Balance at September 30, 1995.... 100 100 2,300 2,300 15,000 150 2,949
Issuance of common stock and
exercise of stock warrants..... 6,590 66 2,401
Conversion of non-voting to
voting......................... 909 9 (909)
Redemption of preferred stock.... (100) (100) (2,300) (2,300)
Preferred stock dividends........
Net income.......................
Other............................
--- ----- ----------- ----------- ----------- ----- -----------
Balance at September 30, 1996.... -- -- -- -- 22,499 225 4,441
Acquisitions..................... 3,975 40
Conversion of subordinated
notes.......................... 1,931 20
Issuance of common stock and
exercise of warrants........... 4,524 45 67
Conversion of non-voting to
voting......................... 3,817 38 (3,817)
Retirement of common stock....... (166) (2)
Unrealized gains on available for
sale securities, net...........
Net income.......................
--- ----- ----------- ----------- ----------- ----- -----------
Balance at September 30, 1997.... -- $ -- -- $ -- 36,580 $ 366 691
--- ----- ----------- ----------- ----------- ----- -----------
--- ----- ----------- ----------- ----------- ----- -----------
<CAPTION>
UNREALIZED
GAINS ON
AVAILABLE
FOR SALE RETAINED
ADDITIONAL SECURITIES, EARNINGS
AMOUNT CAPITAL NET (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994.... $ -- $ 5,124 $ -- $ (1,213) $ 4,321
Investment in subsidiary--RNFC... 1,127 3,467
Issuance of common stock and
exercise of warrants........... 29 471 500
Redemption of preferred stock.... (200)
Preferred stock dividends........ (27) (27)
Distributions.................... (2,167) (2,167)
Net income....................... (1,018) 6,858 5,840
--- ----------- ----------- ----------- ---------
Balance at September 30, 1995.... 29 3,537 -- 5,618 11,734
Issuance of common stock and
exercise of stock warrants..... 24 51,121 51,211
Conversion of non-voting to
voting......................... (9) --
Redemption of preferred stock.... (2,400)
Preferred stock dividends........ (265) (265)
Net income....................... (39) 34,251 34,212
Other............................ 77 77
--- ----------- ----------- ----------- ---------
Balance at September 30, 1996.... 44 54,696 -- 39,604 94,569
Acquisitions..................... 6,476 13,865 20,381
Conversion of subordinated
notes.......................... 30,515 30,535
Issuance of common stock and
exercise of warrants........... 1 125,192 125,238
Conversion of non-voting to
voting......................... (38)
Retirement of common stock....... 2
Unrealized gains on available for
sale securities, net........... 20,253 20,253
Net income....................... 139,169 139,169
--- ----------- ----------- ----------- ---------
Balance at September 30, 1997.... $ 7 $ 216,881 $ 20,253 $ 192,638 $ 430,145
--- ----------- ----------- ----------- ---------
--- ----------- ----------- ----------- ---------
</TABLE>
See accompanying notes
F-5
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
--------------------------------------
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................................................... $ 5,840 $ 34,212 $ 139,169
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for possible credit losses.............................................. 4,387 59,644 276,926
Depreciation and amortization..................................................... 420 663 4,393
Gain on sales of loans............................................................ (34,009) (170,679) (606,992)
Changes in operating assets and liabilities:
Interest only strip amortization................................................ 488 13,392 61,610
Loans originated or acquired.................................................... (208,710) (1,662,943) (4,132,778)
Principal collected and proceeds from sale of loans............................. 203,840 1,257,526 3,101,788
Accrued interest receivable..................................................... 458 (3,030) (10,745)
Interest only strips, net....................................................... 1,365 (198) 17,763
Servicing assets, net........................................................... -- -- (39,719)
Receivable from trusts.......................................................... (2,418) (33,324) (126,576)
Subordinated certificates....................................................... (1,313) (15,215) (1,519)
Other assets.................................................................... (1,049) (7,845) (24,737)
Accounts payable and accrued liabilities........................................ 2,382 12,303 10,517
Deferred tax liabilities, net................................................... 2,111 18,842 98,381
Other........................................................................... 484 -- 1,832
---------- ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES............................................... (25,724) (496,652) (1,230,687)
INVESTING ACTIVITIES:
Cash from acquisitions.............................................................. 625 252 15,055
Purchases of available for sale securities.......................................... -- -- (8,887)
Proceeds from sale of available for sale securities................................. -- -- 24,730
Purchases of equipment and leasehold improvements................................... (761) (4,447) (20,853)
Other............................................................................... 22 -- 1,909
---------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................. (114) (4,195) 11,954
FINANCING ACTIVITIES:
Borrowings on warehouse financing, net.............................................. 10,436 324,892 839,053
Borrowings on term lines............................................................ 9,249 48,216 136,712
Borrowings on bonds................................................................. -- -- 174,088
Borrowings on other facilities, net................................................. 222 876 16,581
Proceeds from subordinated notes payable to affiliates.............................. 8,003 -- --
Proceeds from convertible subordinated notes........................................ -- 100,000 --
Common stock issued................................................................. 500 51,211 125,238
Other............................................................................... (2,395) (3,665) (1,128)
---------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................... 26,015 521,530 1,290,544
---------- ------------ ------------
INCREASE IN CASH.................................................................... 177 20,682 71,811
Cash and cash equivalents at beginning of year...................................... 2,308 2,485 23,167
---------- ------------ ------------
Cash and cash equivalents at end of year............................................ $ 2,485 $ 23,167 $ 94,978
---------- ------------ ------------
---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year....................................................... $ 1,997 $ 16,892 $ 93,938
---------- ------------ ------------
---------- ------------ ------------
Non-cash investing activities:
Acquisition of assets, net.......................................................... $ 2,312 $ -- $ --
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes
F-6
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. DESCRIPTION OF BUSINESS AND ACQUISITIONS
FIRSTPLUS Financial Group, Inc., a Nevada corporation (together with its
subsidiaries, the "Company") is a specialized consumer finance company that
originates, purchases, services and sells consumer finance receivables. The
Company's principal loan product is a debt consolidation or home improvement
loan secured by a second lien on real property ("High LTV Loans"). The Company
sells substantially all of its High LTV Loans through its securitization program
and retains rights to service these loans.
In May 1996, 1,600,000 common shares of the Company were issued in exchange
for all of the outstanding common stock of Mortgage Plus Incorporated (MPI), in
a transaction accounted for as a pooling of interests. MPI was subsequently
renamed FIRSTPLUS Financial West, Inc. (FIRSTPLUS West). As such, the
consolidated financial information of the Company was restated to include the
accounts of FIRSTPLUS West for all periods presented. As FIRSTPLUS West was a
Subchapter S corporation prior to the pooling with RAC, its retained earnings
activity (net income (loss) and distributions) on a separate company basis has
been reclassified to additional capital. Prior to the acquisition, FIRSTPLUS
West operated on a fiscal year end of April 30. FIRSTPLUS West's prior years
financial statements have been combined with the Company's financial statements
without recasting the periods presented, except for the financial information as
of and for the fiscal years ended September 30, 1996 and 1995. Such combination
results in operations for FIRSTPLUS West for the period from July 1, 1995
through September 30, 1995 being excluded from the representation.
During fiscal 1997, FIRSTPLUS acquired National Loans, Inc. ("National"), a
consumer finance company on October 1, 1996, for 501,996 common shares; Capital
Direct Funding Group, Inc. ("FIRSTPLUS Direct"), an originator of High LTV Loans
and other loans through direct mail marketing techniques on February 28, 1997,
for 1,104,478 common shares. The Modern Financial Company ("Modern"), a consumer
finance company based in Columbus, Ohio was acquired on March 31, 1997, for
380,038 common shares; Western Interstate Bancorp ("FIRSTPLUS Bank"), a Tustin,
California-based industrial loan company on August 28, 1997, for 589,745 common
shares; Freedom Mortgage Company ("FIRSTPLUS Freedom"), an originator of home
equity loans and conforming first lien loans, on August 29, 1997, for 574,050
common shares; and Southern Management Corporation ("SMC"), a consumer finance
company based in Greenville, South Carolina on August 29, 1997 for 824,340
common shares. All of the acquisitions in fiscal 1997 have been accounted for as
poolings-of-interests, and have been pooled from the first day of the quarter in
which they were acquired, except for FIRSTPLUS Bank. FIRSTPLUS Bank has been
pooled beginning on October 1, 1996. Due to the immaterial impact of all these
transactions, prior periods have not been restated.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of FIRSTPLUS
Financial Group, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
F-7
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 125 "Accounting for
Transfer and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is generally effective for
transactions that occur after December 31, 1996, and is to be applied
prospectively. In applying SFAS 125 to the Company's securitized loan sales, the
Company is required to recognize revenue ("Net gain on securitized loan sales")
and allocate the total cost of the High LTV Loans sold to the following
financial components based on their relative fair values: High LTV Loans sold,
retained subordinated certificates, interest only strips ("I/O Strips") and
servicing rights. The Company adopted SFAS 125 as of January 1, 1997.
The Company retains an I/O Strip, which is certificated, which represents
the present value of the right to the excess cash flows generated by the
securitized loans which represents the difference between (a) interest at the
stated rate paid by borrowers and (b) the sum of (i) pass-through interest paid
to third-party investors, (ii) trustee fees, (iii) FHA insurance fees (if
applicable), (iv) third-party credit enhancement fees (if applicable), (v)
stipulated servicing fees and (vi) estimated loan portfolio losses. The
Company's right to receive this excess cash flow stream begins after certain
reserve requirements have been met, which are specific to each securitization
and used as a means of credit enhancement. The Company determines the present
value of this anticipated cash flow stream at the time each securitization
transaction closes, utilizing valuation assumptions appropriate for each
particular transaction.
The significant valuation assumptions are related to the anticipated average
lives of the loans sold, including the anticipated prepayment speeds and the
anticipated credit losses related thereto. In order to determine the present
value of this excess cash flow, the Company currently applies an estimated
market discount rate of between 10% and 11% to the expected pro forma gross cash
flows, which is calculated utilizing the weighted average lives of the
securitized loans, and currently applies a risk free discount rate of 6.5% to
the anticipated losses attendant to this pro forma cash flow stream (the
"Allowance for Possible Credit Losses on Loans Sold"). Accordingly, the overall
effective discount rate utilized on the cash flows, net of expected credit
losses is approximately 12.5%.
The I/O Strips are accounted for under SFAS 115 "Accounting for Investments
in Certain Debt and Equity Marketable Securities." As an I/O Strip is subject to
significant prepayment risk, and therefore has an undetermined maturity date, it
cannot be classified as held to maturity. The Company has chosen to classify its
I/O Strips as available for sale securities. Based on this classification, the
Company is required to mark these securities to fair value with the accompanying
increases or decreases in fair value being recorded as a separate component of
stockholders' equity, net of tax. The determination of fair value is based on
the previously mentioned basis.
As the gain recognized in the year of sale is equal to the net estimated
future cash flows from the I/O Strips, discounted at a market interest rate, the
amount of cash actually received over the lives of the loans is expected to
exceed the gain previously recognized at the time the loans are sold. The I/O
Strips are amortized based on an accelerated method against the cash flows
resulting in income recognition that is not materially different from the
interest method.
The Company generally retains the right to service loans it originates or
purchases and subsequently securitizes. Fees for servicing loans are based on a
stipulated percentage (generally 0.75%) of the unpaid
F-8
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
principal balance of the associated loans. For loan portfolios securitized prior
to the adoption of SFAS 125, the Company recognized servicing fee income, late
charges and other ancillary income when collected and charged costs to service
loans when incurred. With the adoption of SFAS 125, the Company recognizes a
servicing asset as part of its gain on securitized loan sales. The servicing
asset is calculated as the present value of the expected future net servicing
revenue based on common industry assumptions as well as on the Company's
historical experience. These assumptions include default and prepayment speeds.
On a quarterly basis, the Company assesses the carrying value of its I/O
Strips and servicing assets for impairment. There can be no assurance that the
Company's estimates used to determine the gain on securitized loan sales, I/O
Strips and servicing assets valuations will remain appropriate for the life of
each securitization. If actual loan prepayments or defaults exceed the Company's
estimates, the carrying value of the Company's I/O Strips and/or servicing
assets may be decreased or the Company may increase its allowance for possible
credit losses on loans sold through a charge against earnings during the period
management recognizes the disparity. Other factors may also result in a
writedown of the Company's I/O Strips in subsequent periods. As of September 30,
1997, the Company determined that no such impairment existed.
With the adoption of SFAS 125, the Company reclassified certain items on its
balance sheet and income statements. On the balance sheet, the Excess Servicing
Receivable presented in prior periods has been reclassified as I/O Strips and
the allowance for possible credit losses on loans sold has been reclassified
from the liabilities section and presented as a contra asset to the I/O Strips.
In the income statement, the provision for possible credit losses on securitized
loans sold is now shown as a reduction of the gains on sales of securitized
loans, net of costs.
Interest income from loans is recognized using the interest method.
Origination fees, premiums, and discounts are deferred when collected and
are recognized using an average allocation methodology when the loans are sold,
which is typically within six months of origination.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or market. Typically,
the Company obtains a second lien as collateral.
RECEIVABLE FROM TRUSTS
The Company is required to maintain cash and other collateral with the
trustees for the Trusts equal to a set percentage of the par value of the
securitized portfolio to supplement unanticipated shortfalls in payments to
certificate holders (the Receivable from Trusts). The certificate holders'
recourse to the Company is limited to this required reserve balance and the
Receivable related to the specific securitization. Cash on deposit is invested
in certain short-term instruments as permitted by each Trust's pooling and
servicing agreement. To the extent that amounts on deposit exceed specified
levels, distributions are made
F-9
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to the Company. Upon maturity of the certificates, any remaining amounts on
deposit are distributed to the Company.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES ON LOANS HELD FOR SALE
The provision for credit losses is charged to income in amounts sufficient
to maintain the allowance at a level considered adequate to cover anticipated
losses resulting from liquidation of outstanding loans. The allowance for credit
losses is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay, and
collateral values. The Company charges off defaulted loans when the loans are
deemed to be uncollectible.
FURNITURE, EQUIPMENT, LEASEHOLD IMPROVEMENTS AND GOODWILL
Depreciable assets are stated at cost less accumulated depreciation.
Equipment is depreciated using a straight-line method based on estimated useful
lives ranging from 1 to 5 years. Leasehold improvements are amortized over the
life of the lease or asset whichever is shorter.
Goodwill is amortized on a straight-line basis over ten years.
INCOME TAXES
Federal and state income taxes are accounted for utilizing the liability
method, and deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
ADVERTISING
Advertising costs are expensed as incurred. During fiscal 1995, 1996, and
1997, the Company incurred advertising costs of $130,000, $2.5 million and $45.8
million, respectively.
RISK MANAGEMENT
Derivatives involve, to varying degrees, credit and market risk. With regard
to credit risk, the Company may be exposed to loss in the event of
non-performance by a counterparty. The Company controls credit risk by entering
into derivative contracts only with highly credit rated counterparties and
through credit approvals, limits and monitoring procedures. The Company has not
experienced non-performance by any counterparty.
Market risk is the possibility that a change in interest rates will cause
the value of a financial instrument to decrease or its obligations to become
more costly to settle. When derivatives are used for the purpose of risk
management they generally do not expose the Company to market risk because gains
and losses on the derivatives largely offset losses and gains on the asset,
liability or transaction being hedged.
The level of and fluctuation in interest rates and the level of prepayment
in the Company's securitizations may directly affect the Company's earnings. The
interest rates on the Company's debt used to fund and acquire loans are variable
and the rates charged on the loans the Company originates or purchases are
fixed. While the Company monitors the interest rate environment and employs
fixed rate
F-10
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
hedging strategies, changes in interest rates after loans are originated or
purchased and prior to their sale could have a material adverse impact on the
Company's results or operations and financial condition. In addition, increase
in interest rates prior to the sale of the loans may reduce the gain on
securitized loan sales. The current fixed rate hedge products utilized are the
purchases of United States Treasury put options, and selling short on United
States treasuries. Members of the Company's senior management determine the
amount and timing of hedging transactions. At September 30, 1997, the Company
had open hedging positions with notional balances of $100 million.
The Company also mitigates its exposure to interest rate risk through a
pre-funding strategy in which it agrees to sell loans to the securitization
trust in the future at an agreed-upon price. The pre-funding locks in the price
agreed upon with investors on the pricing date (typically five business days
prior to the closing date of the securitization) for a period of generally 60
days or less. In a pre-funding arrangement, the Company typically delivers
approximately 75% of the loans sold at the closing and the remainder generally
within 30 days after the closing.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary earnings per common and common equivalent share are computed by
dividing net income less preferred dividends by the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding for the period.
Common Stock equivalents consist of the dilutive effect of Common Stock which
may be issued assuming exercise of stock options or warrants for the period such
options or warrants were outstanding, using the treasury stock method. Fully
diluted earnings per share reflect the dilutive effect of Common Stock that may
be issued, assuming conversion of the convertible subordinated notes and
exercise of stock options and warrants.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items for fiscal 1995 and fiscal 1996 have been reclassified to
conform to current year presentation.
RECENT ACCOUNTING ANNOUNCEMENTS
In February 1997, the FASB issued SFAS 128, "Earnings Per Share" ("SFAS
128") which establishes standards for computing and presenting earnings per
share ("EPS") by replacing the presentation of primary EPS with a presentation
of basic EPS. Primary EPS includes common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS. It also requires
dual presentation of basic and fully diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company will
adopt SFAS 128 effective December 31, 1997 and does not expect the adoption of
SFAS 128 to have a material impact on its financial statements.
F-11
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the FASB issued SFAS 129, "Disclosure of Information about
Capital Structure" ("SFAS 129"). SFAS 129 establishes disclosure requirements
regarding pertinent rights and privileges of outstanding securities. Examples of
disclosure items regarding securities include, though are not limited to, items
such as dividend and liquidation preferences, participation rights, call prices
and dates, conversion or exercise prices or rates. The number of shares issued
upon conversion, exercise or satisfaction of required conditions during at least
the most recent annual fiscal period and any subsequent interim period must also
be disclosed. Disclosure of liquidation preferences of preferred stock in the
equity section of the Balance Sheet is also required. SFAS 129 is effective for
financial periods beginning after December 15, 1997.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes disclosure standards for reporting comprehensive
income in a full set of general purpose financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The adoption of
this standard is not expected to have an impact on the Company's financial
position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for periods
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
this standard is not expected to have an impact on the Company's financial or
results of operation.
3. SECURITIES
The following is a summary of available for sale securities (excluding I/O
Strips):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------------- ------------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency obligations......... $ 37,983 $ 79 $ (36) $ 38,026
Other debt securities.......................... 2,927 55 (13) 2,969
--------- ----- --- -----------
Total debt securities.......................... $ 40,910 $ 134 $ (49) $ 40,995
--------- ----- --- -----------
--------- ----- --- -----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ESTIMATED
COST FAIR VALUE
----------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................................... $ 21,321 $ 21,294
Due after one year through five years................................. 1,277 1,284
Due after five years.................................................. 18,312 18,417
----------- -----------
$ 40,910 $ 40,995
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
4. LOANS HELD FOR SALE
The components of loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1996 1997
---------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
High LTV Loans...................................................... $ 421,646 $ 1,310,576
Personal consumer................................................... -- 93,172
Conforming first lien mortgages..................................... -- 16,488
Other............................................................... 3,541 14,581
---------- ------------
Subtotal.......................................................... 425,187 1,434,817
Allowance for possible credit losses................................ (6,495) (31,539)
Deferred finance charges............................................ -- (16,568)
Net purchase premiums............................................... 12,120 13,736
---------- ------------
Total............................................................. $ 430,812 $ 1,400,446
---------- ------------
---------- ------------
</TABLE>
The serviced loan portfolio, which includes the High LTV Loans held for
sale, the High LTV Loans serviced for the securitizations and other investors,
totaled $4.7 billion at September 30, 1997.
5. ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The activity in the allowance for possible credit losses is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
---------------------
1996 1997
--------- ----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Balance, beginning of year............................................. $ 4,794 $ 60,752
Provision for possible credit losses................................... 59,644 276,926
Charge-offs, net....................................................... (3,902) (35,544)
Other.................................................................. 216 8,592
--------- ----------
Balance, end of year................................................... $ 60,752 $ 310,726
--------- ----------
--------- ----------
Components of Allowance:
Allowance for possible credit losses on loans held for sale............ $ 6,495 $ 31,539
Allowance for possible credit losses on loans sold..................... 54,257 279,187
--------- ----------
Total.................................................................. $ 60,752 $ 310,726
--------- ----------
--------- ----------
</TABLE>
At September 30, 1996 and 1997, the gross allowance for possible credit
losses on loans sold of $69.6 million and $372.5 million, respectively, was
recorded at a discount using a risk-free discount rate of 6.5%.
F-13
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
6. INTEREST ONLY STRIPS
The activity in the I/O Strips is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1996 1997
---------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Balance, beginning of year........................................... $ 29,744 $ 187,230
Gains on sales of securitized loans.................................. 170,679 608,548
Amortization......................................................... (12,982) (61,707)
Other................................................................ (211) 1,239
---------- -----------
Balance, end of year................................................. 187,230 735,310
Allowance for possible credit losses................................. (54,257) (279,187)
---------- -----------
Balance, net......................................................... $ 132,973 $ 456,123
---------- -----------
---------- -----------
</TABLE>
7. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Goodwill, net........................................................... $ 424 $ 853
Debt offering costs..................................................... 3,112 1,767
Furniture, equipment and leasehold improvements, net.................... 5,497 26,012
Prepaids and other...................................................... 11,509 37,792
--------- ---------
$ 20,542 $ 66,424
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
8. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
----------------------- ------------------------
AMOUNT OF OUTSTANDING AMOUNT OF OUTSTANDING
LENDER AND INTEREST RATE FACILITY BALANCE FACILITY BALANCE
- ---------------------------------------------------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
WAREHOUSE FINANCING
Bank One, Texas, N.A., Fed Funds + 1.0%............. $ 60,000 $ 50,968 $ 110,000 $ 79,580
Residential Funding Corp; LIBOR + 1.5%.............. 130,000 116,445 145,000 31,262
REPURCHASE AGREEMENTS
Bear Stearns Home Equity Trust 1996-1; LIBOR +
1.0%.............................................. 300,000 144,564 600,000 317,712
PaineWebber Real Estate Securities Inc.; LIBOR +
1.0%.............................................. -- -- 600,000 412,334
Merrill Lynch Mortgage Capital Inc.; LIBOR + 1.0%... -- -- 400,000 278,187
Industrial Bank of Japan; LIBOR + 2.0%.............. -- -- 16,798
Other; various...................................... 42,504 102,283
----------- ------------
$ 354,481 $ 1,238,156
----------- ------------
----------- ------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
----------------------- ------------------------
AMOUNT OF OUTSTANDING AMOUNT OF OUTSTANDING
LENDER AND INTEREST RATE FACILITY BALANCE FACILITY BALANCE
- ---------------------------------------------------- ---------- ----------- ---------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
TERM LINES
Bear Stearns and Co. Inc.; LIBOR + 2.25%............ -- -- $ 75,000 $ 55,500
PaineWebber Real Estate Securities Inc.; LIBOR +
2.1%.............................................. -- -- 100,000 66,000
Merrill Lynch Mortgage Capital, Inc.; LIBOR +
2.25%............................................. -- -- 75,000 --
Residential Funding Corp.; GMAC CD Rate + 2.5%...... 70,000 57,465 70,000 51,200
Other; various...................................... -- 39,051
----------- ------------
$ 57,465 $ 211,751
----------- ------------
----------- ------------
</TABLE>
The warehouse financing and term lines are generally renewable within one
year.
TIME DEPOSITS
The Company, through FIRSTPLUS Bank, has various time deposits, mostly
Certificates of Deposits, from customers bearing interest rates of 3.75% to
7.50%.
F-15
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
8. DEBT (CONTINUED)
BONDS
The Company has a committed borrowing arrangement that allows the Company to
warehouse up to
$200 million of loans for a period of up to a year bearing interest at LIBOR +
0.575%. These loans are classified as investment in securitized loans.
CONVERTIBLE SUBORDINATED NOTES
In August 1996, the Company issued the Convertible Subordinated Notes in the
aggregate principal amount of $100 million. The Convertible Subordinated Notes
mature in August 2003 and bear interest at 7.25%, and, as of September 30, 1997,
are convertible into 4,289,571 shares of common stock at a conversion price of
$16.30 per share.
Maturities of long-term debt for years subsequent to September 30, 1997, are
as follows (amounts in thousands).
<TABLE>
<S> <C>
1998............................................ $1,246,557
1999............................................ 508,627
2000............................................ 16,855
2001............................................ 3,509
2002............................................ 6,741
Thereafter...................................... 70,972
---------
$1,853,261
---------
---------
</TABLE>
In conjunction with the various borrowings, the Company has agreed to
certain financial covenants regarding tangible net worth and leverage. In
addition, FIRSTPLUS Financial is restricted from transferring the I/O Strips to
FIRSTPLUS or any of its subsidiaries.
F-16
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
--------------------
1996 1997
--------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Current:
Federal............................................................... $ 1,884 $ --
State................................................................. 222 157
--------- ---------
2,106 157
--------- ---------
Deferred:
Federal............................................................... 16,878 79,777
State................................................................. 1,985 5,377
--------- ---------
18,863 85,154
--------- ---------
$ 20,969 $ 85,311
--------- ---------
--------- ---------
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
---------------------
1996 1997
--------- ----------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for possible credit losses................................. $ 2,566 $ 11,985
Other................................................................ -- 751
--------- ----------
2,566 12,736
Deferred tax liabilities:
I/O Strips........................................................... 23,455 118,377
Servicing assets..................................................... -- 13,591
Other................................................................ 85 123
--------- ----------
23,540 132,091
--------- ----------
Net deferred tax liabilities........................................... $ 20,974 $ 119,355
--------- ----------
--------- ----------
</TABLE>
F-17
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
9. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER
30
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Statutory rate................................................................ 35.0% 35.0%
State tax, net of federal benefit............................................. 3.0 2.2
Other......................................................................... -- 0.8
--------- ---------
38.0% 38.0%
--------- ---------
--------- ---------
</TABLE>
10. STOCKHOLDERS' EQUITY
On October 22, 1996, the Company's Board of Directors approved a two-for-one
common stock split. The split, effectuated as a stock dividend of one newly
issued share of common stock for each share of common stock outstanding, was
effective for shareholders of record at the close of business on November 15,
1996, and payable on November 29, 1996. Par value remained at $0.01 per share.
Financial information contained in these financial statements has been adjusted
to reflect the impact of the common stock split.
As of September 30, 1997, the Company had outstanding warrants to purchase
500,000 shares of the common stock at an exercise price of $7.00 per share. The
warrants were associated with the issuance of certain subordinated notes.
11. STOCK COMPENSATION PLANS
The Company has stock options outstanding to participants under the 1995
Employee Stock Option Plan. The 1995 Employee Stock Option Plan provides for
grants of incentive stock options (Incentive Options) and nonqualified stock
options (Nonqualified Options) to all eligible employees of the Company and its
subsidiaries. All Incentive Options will have an exercise price per share no
less than the market value of the Company's Common Stock on the date the option
is granted. Nonqualified Options may be granted with an exercise price per share
less than fair market value of the Common Stock at the date of grant. No options
under the 1995 Employee Option Plan may be exercised more than ten years from
the date of grant. A maximum of 3,200,000 shares of Common Stock have been
reserved for sale upon exercise of options under this plan.
The Company has stock options outstanding to participants under the 1995
Non-Employee Director Plan to grant options to members of the Board of Directors
who are not employees of the Company or its subsidiaries on the date they become
a director. Each non-employee director, at the time the 1995 Non-Employee
Director Plan was adopted, received an option to purchase 10,000 shares of
Common Stock (Initial Option) at the initial public offering price less the
underwriters' discount. Subsequently, on the date of each annual stockholder's
meeting, the director will receive a nonqualified stock option to purchase 2,000
shares of Common Stock with an exercise price equal to the fair market value of
the Common Stock on the date of grant. A maximum of 100,000 shares of Common
Stock have been reserved under the 1995 Director Plan.
F-18
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
11. STOCK COMPENSATION PLANS (CONTINUED)
The Company has an employee stock purchase plan, the FIRSTPLUS Financial
Group, Inc. Employee Stock Purchase Plan ("Purchase Plan"), with a total number
of common shares issuable of 500,000. The Purchase Plan provides a means for
employees to purchase shares of Common Stock at 85% of the fair market value.
Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------------------------------------
1997
1996 -------------------------
--------------------------- WEIGHTED-
WEIGHTED- AVERAGE
NUMBER OF AVERAGE NUMBER OF EXERCISE
SHARES EXERCISE PRICE SHARES PRICE
---------- --------------- ---------- -------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year.......................................... -- $ -- 1,457,358 $ 9.34
Options granted................................. 1,476,006 9.31 1,805,848 26.90
Option canceled................................. 18,648 7.00 178,159 17.38
Options exercised............................... -- -- 300,741 8.49
---------- ----------
Options outstanding at end of year.............. 1,457,358 9.34 2,784,306 20.31
---------- ----------
---------- ----------
Options exercisable............................. 10,000 12.75 388,342 13.55
---------- ----------
---------- ----------
</TABLE>
The following table summarizes information about options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF WEIGHTED AVERAGE REMAINING CONTRACTED LIFE
SHARES EXERCISE PRICE (IN YEARS)
---------- ----------------- -------------------------
<S> <C> <C> <C>
Exercise prices:
$5.00 - $12.00
Options outstanding............................. 972,605 $ 7.87 8.2
Options exercisable............................. 276,146 $ 7.90
$12.01 - $24.00
Options outstanding............................. 1,013,851 $ 21.12 8.3
Options exercisable............................. 54,194 $ 15.50
$24.01 - $36.00
Options outstanding............................. 659,400 $ 32.26 9.4
Options exercisable............................. 24,667 $ 30.61
$36.01 - $48.00
Options outstanding............................. 126,450 $ 44.29 9.9
Options exercisable............................. 33,335 $ 44.50
$48.01 - $50.88
Options outstanding............................. 12,000 $ 50.20 8.3
Options exercisable............................. -- $ --
</TABLE>
F-19
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
11. STOCK COMPENSATION PLANS (CONTINUED)
In October 1995, SFAS 123 "ACCOUNTING FOR STOCK-BASED COMPENSATION" was
issued. This statement established a new fair value-based accounting method for
stock-based compensation plans and encourages (but does not require) employers
to adopt the new method in place of the provisions of Accounting Principles
Board Opinion No. 25 "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25").
Companies may continue to apply the accounting provisions of APB 25 in
determining net income; however, they must apply the disclosure requirements of
SFAS 123 for all grants issued after 1994. The Company elected to continue to
apply the provisions of APB 25 in accounting for the employee stock plans
described above. Accordingly, no compensation cost has been recognized.
Had compensation cost for these employee stock plans been determined based
on the new fair value method under SFAS 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30
---------------------
1996 1997
--------- ----------
(AMOUNTS IN
THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income:
As reported.......................................................... $ 34,212 $ 139,169
Pro forma............................................................ 31,670 120,833
Net income per common share:
Primary:
As reported........................................................ $ 1.35 $ 3.95
Pro forma.......................................................... $ 1.25 $ 3.43
Fully diluted:
As reported........................................................ $ 1.31 $ 3.52
Pro forma.......................................................... $ 1.22 $ 3.07
</TABLE>
The fair value of each option grant is estimated based on the date of grant.
In determining the fair value, the Company used a modified Black-Scholes
option-pricing model. For the fixed stock option plans, the following
weighted-average assumptions are used for 1996 and 1997, respectively, expected
volatility of 41.5% and 56.6%; risk-free interest rates of 6.3% and 5.9%; and
expected lives of five years for both years. The weighted-average grant-date
fair value of options granted are $4.47 and $17.21 for the years ended September
30, 1996 and 1997, respectively. Because options vest over several years and
additional option grants are expected, the effect of pro forma calculations are
not likely to be representative of similar future calculations.
F-20
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
12. GAINS ON SALES OF LOANS
The gains on sales of loans, as defined in Note 2, and the related cost are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------
1995 1996 1997
--------- ---------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Gains on sales of securitized loans....................... $ 30,065 $ 170,679 $ 606,992
Servicing assets--basis allocation........................ -- -- 36,686
Unrealized gains on I/O Strips............................ -- -- (37,904)
Premiums, net............................................. (1,994) (20,836) (75,093)
Transaction costs......................................... (3,474) (7,410) (11,255)
--------- ---------- -----------
Net gain before provision for possible credit losses on
securitized loan sales.................................. 24,597 142,433 519,426
Provision for possible credit losses on securitized loan
sales................................................... (3,907) (48,397) (231,211)
--------- ---------- -----------
Net gain on securitized loan sales........................ $ 20,690 $ 94,036 $ 288,215
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
13. TRANSACTIONS WITH AFFILIATES
In December 1994, the Company repurchased certain loan participations from
an affiliate, Farm Bureau, and other investors at par value. The repurchased
loans were sold in a securitization transaction. The affiliate received a
participation interest in the securitization. The affiliate held $2.6 million of
loan participations. These participations were subsequently repurchased by the
Company.
The Company has a warehouse facility with Bank One, an affiliate of Banc One
Capital Partners II and Banc One Capital Partners V, which are stockholders of
the Company.
The Company has issued the 12% fixed rate subordinated notes to Banc One
Capital Partners II, Banc One Capital Partners V, and Farm Bureau.
Additionally, the Company used Bear, Stearns & Co. Inc., as co-placement
agent in the Company's 1995-4, 1996-1, 1996-2, 1996-3, 1996-4, 1997-1, 1997-2,
and 1997-3 securitization transactions. The Company also is provided financing
through the Bear Stearns Facility. A managing director from Bear, Stearns & Co.
Inc., is a director of the Company.
The Company had a credit facility with Farm Bureau, which is a stockholder
of the Company.
14. EMPLOYEE BENEFIT PLANS
The Company has an Employees' 401(k) Savings Plan (the Plan) for eligible
employees. An employee is eligible to participate in the Plan after employment
of at least one month.
Participants may elect to make contributions to the Plan in amounts equal to
not less than 1% nor more than 15% of their eligible compensation. The Company
may elect to match elective contributions up to a maximum of 4% of the
participant's eligible compensation. The Company has made no such contributions
for the fiscal year ended September 30, 1997.
F-21
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
15. COMMITMENTS AND CONTINGENCIES
The Company leases premises and equipment under operating leases with
various expiration dates. Approximate future minimum lease payments are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
1998........................................................ $ 16,907
1999........................................................ 16,347
2000........................................................ 12,417
2001........................................................ 7,486
2002........................................................ 5,863
Thereafter.................................................. 43,926
--------
Total....................................................... $ 102,946
--------
--------
</TABLE>
Rent expense for the years ended September 30, 1995, 1996 and 1997 was
approximately $715,000, $2.8 million and $5.9 million, respectively.
The Company is involved in certain litigation arising in the normal course
of business. Management's opinion is that the resolution of such litigation will
not have a material adverse effect on the Company's financial condition.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
In certain securitization transactions, the Company subordinates a portion
of its residual interest in excess cash flows to investors. The investors'
protection from losses is provided by the subordination of the Company's cash
flows including various combinations of cash deposits and credit enhancements
provided by third parties, primarily attendant monoline insurance policies.
These balances are classified as receivables from trusts on the Company's
balance sheet. In senior subordinated structures, the senior certificate holders
are protected from losses by outstanding subordinated certificates.
The Company is active in originating loans to customers throughout the
United States. All loans are primarily made on a secured basis after reviewing
each potential borrower's credit application and evaluating their financial
history and ability to repay.
Approximately 41.2% of the loans in the Company's serviced loan portfolio at
September 30, 1997 was secured by residential properties located in California.
No other state accounted for more than 10%.
SFAS 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS," requires
the Company to disclose the estimated fair value of its financial instruments.
The fair value estimates as of September 30, 1996 and 1997 are based on
pertinent information available to management as of the respective dates.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been revalued for
purposes of these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein. The following describes the methods and assumptions used by the Company
in estimating fair values:
CASH AND CASH EQUIVALENTS. The carrying amount of cash and cash
equivalents, approximates fair value because they generally mature in 90 days or
less and do not present unanticipated credit concerns.
F-22
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
SECURITIES, AVAILABLE FOR SALE. The fair value of securities are determined
based on the quoted market price of the listed securities at year end.
LOANS HELD FOR SALE AND INVESTMENT IN SECURITIZED LOANS. Since it is the
Company's business to sell loans it originates, the fair values were estimated
using current investor yields or outstanding commitments from investors.
I/O STRIPS AND SERVICING ASSET. The fair values of the I/O Strips and
servicing assets are calculated using prepayment, default and interest rate
assumptions that the Company believes market participants would use for similar
instruments at the time of sale. Projected performance is monitored on an
ongoing basis.
WAREHOUSE FINANCING, TERM LINES AND BONDS. The fair value of the warehouse
financing facilities and term lines of credit approximate the carrying value as
the instruments carry variable rates of interest at terms the Company believes
to be reflective of current market conditions.
TIME DEPOSITS. The fair value of the time deposits approximates the
carrying value as the instruments are of a short term nature and are at terms
the Company considers to be reflective of current market conditions.
CONVERTIBLE SUBORDINATED NOTES. The fair value of convertible subordinated
notes is determined based upon a quoted market price for both notes and the
associated common shares.
HEDGE POSITIONS. The fair value of hedge positions are based on quoted
market prices at year end.
F-23
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
DERIVATIVES. The fair value of derivatives has been determined by
multiplying the contracted amount by the difference in the contracted rates and
the current market rate.
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------------------
1996 1997
---------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS
Cash and cash equivalents.......................... $ 23,167 $ 23,167 $ 94,978 $ 94,978
Securities, available for sale..................... -- -- 40,995 40,995
Loans held for sale, net........................... 430,812 433,573 1,400,446 1,467,845
Investment in securitized loans.................... -- -- 190,861 199,450
Subordinated certificates available for sale....... 16,528 16,528 18,047 18,047
Interest only strips, net.......................... 132,973 132,973 456,123 456,123
Servicing assets................................... -- -- 40,516 40,516
LIABILITIES
Warehouse financing................................ 354,481 354,481 1,238,156 1,238,156
Term lines......................................... 57,465 57,465 211,751 211,751
Time Deposits...................................... -- -- 120,025 120,025
Bonds.............................................. -- -- 174,088 174,088
Convertible subordinated notes..................... 100,000 100,000 69,920 245,419
Hedge position notional amount outstanding......... -- -- 100,000 100,000
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. The estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
Fair value estimates are based on judgments regarding future loss and prepayment
experience, current economic conditions, specific risk characteristics and other
factors. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a regional branch network
with significant dealer relationships and proprietary credit scoring systems,
which contribute to the Company's ongoing profitability and neither of which is
considered a financial instrument.
F-24
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the year end September 30,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
REVENUES
Gain on securitized loan sales, net of costs................ $ 17,849 $ 23,883 $ 36,730 $ 63,971
Provision for possible credit losses........................ (3,358) (6,169) (10,711) (28,159)
------------ ---------- ---------- -------------
Net gain on securitized loan sales........................ 14,491 17,714 26,019 35,812
Net gain on other loan sales................................ 2,315 3,150 3,015 2,611
------------ ---------- ---------- -------------
Total gain on sale of loans............................... 16,806 20,864 29,034 38,423
Interest income............................................. 1,767 2,290 6,704 14,966
Interest only strips interest income........................ 109 1,187 1,577 2,242
Servicing income............................................ 694 940 1,040 1,334
Origination income.......................................... 471 2,158 1,884 2,729
Other income................................................ 263 190 426 1,562
------------ ---------- ---------- -------------
Total revenues............................................ 20,110 27,629 40,665 61,256
EXPENSES
Salaries and employee benefits.............................. 5,459 7,699 9,383 13,861
Interest.................................................... 2,043 2,816 3,751 8,282
Other operating............................................. 3,761 5,100 8,458 12,619
Provision for possible credit losses........................ 1,291 1,686 3,347 4,923
------------ ---------- ---------- -------------
Total expenses............................................ 12,554 17,301 24,939 39,685
------------ ---------- ---------- -------------
Income before income taxes.................................. 7,556 10,328 15,726 21,571
Provision for income taxes.................................. (2,871) (3,929) (5,976) (8,193)
------------ ---------- ---------- -------------
Net income.................................................. $ 4,685 $ 6,399 $ 9,750 $ 13,378
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
</TABLE>
F-25
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996(1) 1997(1) 1997(1) 1997
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
REVENUES
Gain on securitized loan sales, net of costs................ $ 88,652 $ 119,859 $ 142,096 $ 168,819
Provision for possible credit losses........................ (38,711) (52,919) (62,531) (77,050)
------------ ---------- ---------- -------------
Net gain on securitized loan sales........................ 49,941 66,940 79,565 91,769
Net gain on other loan sales................................ 6,296 8,219 6,570 9,001
------------ ---------- ---------- -------------
Total gain on sale of loans............................... 56,237 75,159 86,135 100,770
Interest income............................................. 22,412 34,601 50,565 65,156
Interest only strips interest income........................ 2,717 2,700 8,525 12,978
Servicing income............................................ 3,283 3,855 6,189 7,795
Origination income.......................................... 3,738 11,520 10,325 15,954
Other income................................................ 2,468 1,331 1,568 5,459
------------ ---------- ---------- -------------
Total revenues.......................................... 90,855 129,166 163,307 208,112
EXPENSES
Salaries and employee benefits.............................. 16,586 22,385 28,475 40,112
Interest.................................................... 14,713 20,635 26,460 31,706
Other operating............................................. 22,612 24,123 31,834 42,012
Provision for possible credit losses........................ 5,272 12,747 13,032 14,256
------------ ---------- ---------- -------------
Total expenses.......................................... 59,183 79,890 99,801 128,086
------------ ---------- ---------- -------------
Income before income taxes.................................. 31,672 49,276 63,506 80,026
Provision for income taxes.................................. (12,036) (18,725) (24,132) (30,418)
------------ ---------- ---------- -------------
Net income.................................................. $ 19,636 $ 30,551 $ 39,374 $ 49,608
------------ ---------- ---------- -------------
------------ ---------- ---------- -------------
</TABLE>
- ------------------------
(1) These quarters have been restated from previously disclosed interim results
to show the effect of the FIRSTPLUS Bank pooling.
F-26
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
18. PARENT COMPANY ONLY INFORMATION
The condensed financial statements of FIRSTPLUS Financial Group, Inc.,
prepared on a parent company unconsolidated basis are as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------
1996 1997
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Assets
Cash and cash equivalents........................................... $ 31 $ 27,299
Investment in subsidiaries.......................................... 206,548 429,732
Receivable from subsidiary.......................................... 2,166 34,805
Other assets........................................................ 6,649 8,229
---------- ----------
Total assets...................................................... $ 215,394 $ 500,065
---------- ----------
---------- ----------
Liabilities and Stockholders' equity
Accrued expenses and other liabilities.............................. $ 20,825 $ --
Convertible subordinated notes...................................... 100,000 69,920
---------- ----------
Total liabilities................................................. 120,825 69,920
Stockholders' equity
Common stock...................................................... 225 366
Common stock, non-voting.......................................... 44 7
Additional capital................................................ 54,696 216,881
Retained earnings................................................. 39,604 212,891
---------- ----------
Total stockholders' equity........................................ 94,569 430,145
---------- ----------
Total liabilities and stockholders' equity........................ $ 215,394 $ 500,065
---------- ----------
---------- ----------
CONDENSED STATEMENTS OF INCOME
<CAPTION>
SEPTEMBER 30
----------------------
1996 1997
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Equity in earnings of subsidiaries.................................... $ 57,045 $ 227,006
Other income.......................................................... -- 417
---------- ----------
Total revenues...................................................... 57,045 227,423
Interest expense...................................................... 814 736
Other operating expenses.............................................. 1,050 2,207
---------- ----------
Income before income taxes.......................................... 55,181 224,480
Provision for income taxes............................................ 20,969 85,311
---------- ----------
Net income.......................................................... $ 34,212 $ 139,169
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
18. PARENT COMPANY ONLY INFORMATION (CONTINUED)
<TABLE>
<S> <C> <C>
CONDENSED STATEMENTS OF CASH FLOW
<CAPTION>
SEPTEMBER 30
----------------------
1996 1997
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net income.......................................................... $ 34,212 $ 139,169
Undistributed earnings in equity of subsidiaries.................. (57,045) (206,753)
Other operating activities........................................ 10,798 (22,407)
---------- ----------
Net cash used in operating activities........................... (12,035) (89,991)
Investing Activities:
Capital contributions to subsidiaries............................. (136,481) (7,305)
---------- ----------
Net cash used in investing activities........................... (136,481) (7,305)
Financing Activities:
Redemptions of preferred stock.................................... (2,400) --
Proceeds of convertible note...................................... 100,000 --
Common stock issued............................................... 51,211 125,238
Other............................................................. (265) (674)
---------- ----------
Net cash provided by financing activities....................... 148,546 124,564
---------- ----------
Increase in cash and cash equivalents............................... 30 27,268
Cash and cash equivalents at beginning of year...................... 1 31
---------- ----------
Cash and cash equivalents at end of year............................ $ 31 $ 27,299
---------- ----------
---------- ----------
</TABLE>
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Dallas,
State of Texas, on December 8, 1997.
<TABLE>
<S> <C> <C>
FIRSTPLUS FINANCIAL GROUP, INC.
/S/ DANIEL T. PHILLIPS
-----------------------------------------
Daniel T. Phillips
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ DANIEL T. PHILLIPS Chief Executive Officer
- ------------------------------ (Principal Executive December 8, 1997
Daniel T. Phillips Officer)
/s/ ERIC C. GREEN
- ------------------------------ President and Director December 8, 1997
Eric C. Green
/s/ WILLIAM P. BENAC Chief Financial Officer
- ------------------------------ (Principal Financial and December 8, 1997
William P. Benac Accounting Officer)
/s/ JOHN FITZGERALD
- ------------------------------ Director December 8, 1997
John Fitzgerald
/s/ DAN JESSEE
- ------------------------------ Director December 8, 1997
Dan Jessee
/s/ PAUL NUSSBAUM
- ------------------------------ Director December 8, 1997
Paul Nussbaum
/s/ PAUL SEEGERS
- ------------------------------ Director December 8, 1997
Paul Seegers
/s/ SHELDON I. STEIN
- ------------------------------ Director December 8, 1997
Sheldon I. Stein
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1* Amended and Restated Articles of Incorporation of the Registrant (Exhibit 3.1)
3.2* Amended and Restated Bylaws of the Registrant (Exhibit 3.2)
4.1* Specimen certificate for Common Stock of the Registrant (Exhibit 4)
4.2**** Indenture, dated August 20, 1996, between the Registrant and Bank One, Columbus, N.A., as trustee
thereunder
4.3**** Note Resale Registration Rights Agreement, dated August 20, 1996, among the Registrant and the Initial
Purchasers named therein
4.4**** Form of Definitive 7.25% Convertible Subordinated Note Due 2003 of the Registrant
4.5**** Form of Restricted Global 7.25% Convertible Subordinated Note Due 2003 of the Registrant
4.6**** Form of Regulation S Global 7.25% Convertible Subordinated Note Due 2003 of the Registrant
10.1* Form of Home Improvement Buy-Sell Agreement (Exhibit 10.1)
10.2* Form of Continuous Purchase FHA Title I Loan Correspondent Agreement (Exhibit 10.2)
10.3* Form of Continuous Purchase Conventional Direct Loan Broker Agreement (Exhibit 10.3)
10.4* 1995 Employee Stock Option Plan for FIRSTPLUS Financial Group, Inc. (Exhibit 10.4)
10.5* Non-Employee Director Stock Option Plan for FIRSTPLUS Financial Group, Inc. (Exhibit 10.5)
10.6* FIRSTPLUS Financial Group, Inc. Employee Stock Purchase Plan (Exhibit 10.6)
10.7* Description of Officer Bonus Program (Exhibit 10.7)
10.8* Credit Agreement among FIRSTPLUS Financial Group, Inc., Remodelers National Funding Corporation, and
Bank One, Texas, National Association, dated as of March 17, 1995, as amended by First Amendment to
Credit Agreement dated as of May 12, 1995 and by Second Amendment to Credit Agreement dated as of June
6, 1995 (Exhibit 10.8)
10.9* Promissory Note, dated as of June 6, 1995, from Remodelers National Funding Corporation, as maker, to
Bank One, Texas, National Association (Exhibit 10.9)
10.10* Security Agreement, dated as of March 17, 1995, among Remodelers National Funding Corporation and Bank
One, Texas, National Association (Exhibit 10.10)
10.11* Guaranty, dated as of March 17, 1995, from FIRSTPLUS Financial Group, Inc. to Bank One, Texas,
National Association (Exhibit 10.11)
10.12* Warehousing Credit, Term Loan and Security Agreement, dated as of June 15, 1995, among Remodelers
National Funding Corporation, FIRSTPLUS Financial Group, Inc., and Residential Funding Corporation, as
amended by First Amendment to The Warehouse Credit, Term Loan and Security Agreement, dated August 25,
1995 (Exhibit 10.12)
10.13* Promissory Note, dated as of June 15, 1995, from Remodelers National Funding Corporation, as maker, to
Residential Funding Corporation (Exhibit 10.13)
10.14* Promissory Note, dated as of June 29, 1995, from Remodelers National Funding Corporation, as maker, to
Residential Funding Corporation (Exhibit 10.14)
10.15* Guaranty, dated as of June 15, 1995, from FIRSTPLUS Financial Group, Inc. to Residential Funding
Corporation (Exhibit 10.15)
10.16* Custodian Agreement, dated as of June 15, 1995, among Remodelers National Funding Corporation,
FIRSTPLUS Financial Group, Inc., Residential Funding Corporation and First Trust National Association
(Exhibit 10.16)
10.17* Senior Subordinated Note and Warrant Purchase Agreement, dated as of March 31, 1995, among FIRSTPLUS
Financial Group, Inc., Remodelers National Funding Corporation, SFA: State Financial Acceptance
Corporation, Banc One Capital Partners II, Limited Partnership and Farm Bureau Life Insurance Company
(Exhibit 10.17)
10.18* Senior Subordinated Note, dated as of March 31, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and SFA: State Financial Acceptance Corporation, as makers, to Farm
Bureau Life Insurance Company (Exhibit 10.18)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.19* Senior Subordinated Note, dated as of March 31, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and SFA: State Financial Acceptance Corporation, as makers, to Banc One
Capital Partners II, Limited Partnership (Exhibit 10.19)
10.20* FIRSTPLUS Financial Group, Inc. Warrant Certificate, dated as of April 12, 1995, for Farm Bureau Life
Insurance Corporation (including registration rights agreement) (Exhibit 10.20)
10.21* FIRSTPLUS Financial Group, Inc. Warrant Certificate, dated as of March 31, 1995, for Banc One Capital
Partners II, Limited Partnership (including registration rights agreement) (Exhibit 10.21)
10.22* Subordinated Security Agreement, dated as of March 31, 1995, among FIRSTPLUS Financial Group, Inc.,
Remodelers National Funding Corporation, SFA: State Financial Acceptance Corporation, Banc Once
Capital Partners II, Limited Partnership and Farm Bureau Life Insurance Company (Exhibit 10.22)
10.23* Security Agreement _ Assignment of Servicing Agreements, dated as of March 31, 1995, among FIRSTPLUS
Financial Group, Inc., Remodelers National Funding Corporation, SFA: State Financial Acceptance
Corporation and Banc Once Capital Partners II, Limited Partnership, as agent for Banc One Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance Company (Exhibit 10.23)
10.24* Security Agreement _ Pledge of Common Stock, dated as of March 31, 1995, among FIRSTPLUS Financial
Group, Inc. and Banc One Capital Partners II, Limited Partnership, as agent for Banc One Capital
Partners II, Limited Partnership and Farm Bureau Life Insurance Company (Exhibit 10.24)
10.25* Employment Agreement by and between FIRSTPLUS Financial Group, Inc. and Ronald M. Mankoff (Exhibit
10.25)
10.26* Employment Agreement by and between FIRSTPLUS Financial Group, Inc. and Daniel T. Phillips (Exhibit
10.26)
10.27* Employment Agreement by and between FIRSTPLUS Financial Group, Inc. and Eric C. Green (Exhibit 10.27)
10.28* Employment Agreement by and between FIRSTPLUS Financial Group, Inc. and James H. Poythress (Exhibit
10.28)
10.29* Loan Commitment from Bank One, Texas, N.A., to FIRSTPLUS Financial Group, Inc. (Exhibit 10.29)
10.30* Form of Continuous Purchase Home Improvement Broker Agreement (Exhibit 10.30)
10.31* Form of Pass-Through Home Improvement Financing Agreement (Exhibit 10.31)
10.32* Form of Dealer/Contractor Application (Exhibit 10.32)
10.33* Form of Broker/Correspondent Application (Exhibit 10.33)
10.34* Promissory Note, dated December 29, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers National
Funding Corporation and State Financial Acceptance Corporation, as makers, to Farm Bureau Life
Insurance Company (Exhibit 10.34)
10.35* Loan Commitment from Residential Funding Corporation to Remodelers National Funding Corporation and
FIRSTPLUS Financial Group, Inc. (Exhibit 10.35)
10.36* Stock Purchase and Sale Agreement, dated as of November 30, 1995, by and among FIRSTPLUS Financial
Group, Inc., FIRSTPLUS East Mortgage Corporation and its shareholders (Exhibit 10.36)
10.37* First Amendment to Credit Agreement and Note, dated as of June 21, 1995, by and among Remodelers
National Funding Corporation, SFA: State Financial Acceptance Corporation, FIRSTPLUS Financial Group,
Inc. and Banc One Capital Partners V, Ltd. (Exhibit 10.37)
10.38* Senior Subordinated Note, dated November 1, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and State Financial Acceptance Corporation, as makers, to Banc One
Capital Partners II, Limited Partnership (Exhibit 10.38)
10.39* Senior Subordinated Note, dated November 16, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and State Financial Acceptance Corporation, as makers, to and Banc One
Capital Partners II, Limited Partnership (Exhibit 10.39)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.40* Senior Subordinated Note, dated September 27, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.40)
10.41* Senior Subordinated Note, dated September 27, 1995, from FIRSTPLUS Financial Group, Inc., Remodelers
National Funding Corporation and State Financial Acceptance Corporation, as makers, to Farm Bureau
Life Insurance Company (Exhibit 10.41)
10.42* Senior Subordinated Note and Warrant Purchase Agreement, amended and restated as of July 16, 1995,
among FIRSTPLUS Financial Group, Inc., Remodelers National Funding Corporation and SFA: State
Financial Acceptance Corporation, as sellers, and Banc One Capital Partners II, Limited Partnership,
Farm Bureau Life Insurance Company and Banc One Capital Partners V, Ltd., as purchasers (Exhibit
10.42)
10.43* FIRSTPLUS Financial Group, Inc. Warrant Certificate, dated as of July 16, 1995, for Banc One Capital
Partners V, Ltd. (Exhibit 10.43)
10.44* Second Amended and Restated Subordinated Security Agreement, amended and restated as of September 27,
1995, made by FIRSTPLUS Financial Group, Inc., Remodelers National Funding Corporation and SFA: State
Financial Acceptance Corporation for the benefit of Banc One Capital Partners II, Limited Partnership,
Farm Bureau Life Insurance Company and Banc One Capital Partners V, Ltd. (Exhibit 10.44)
10.45* Second Amended and Restated Security Agreement _ Pledge of Common Stock, amended and restated as of
September 27, 1995, made by FIRSTPLUS Financial Group, Inc., for the benefit of Banc One Capital
Partners II, Limited Partnership, Farm Bureau Life Insurance Company and Banc One Capital Partners V,
Ltd. (Exhibit 10.45)
10.46* Second Amended and Restated Security Agreement _ Assignment of Servicing Agreements, amended and
restated as of September 27, 1995, made by FIRSTPLUS Financial Group, Inc., for the benefit of Banc
One Capital Partners II, Limited Partnership, Farm Bureau Life Insurance Company and Banc One Capital
Partners V, Ltd. (Exhibit 10.46)
10.47* Second Amendment to the Warehouse Credit, Term Loan and Security Agreement, dated as of September 15,
1995, by and among Remodelers National Funding Corp., FIRSTPLUS Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.47)
10.48* Form of Letter Agreement, dated January 29, 1996, by and between FIRSTPLUS Financial Group, Inc. and
Residential Funding Corporation, regarding the Warehouse Credit, Term Loan and Security Agreement,
dated June 15, 1995 (Exhibit 10.48)
10.49* Form of Letter Agreement, dated January 29, 1996, by and between FIRSTPLUS Financial Group, Inc. and
Banc One, Texas, National Association, regarding the Credit Agreement, dated as of March 17, 1995
(Exhibit 10.49)
10.50* Form of Letter Agreement, dated January 29, 1996, by and among FIRSTPLUS Financial Group, Inc., Banc
One Capital Partners II, Limited Partnership, Farm Bureau Life Insurance Company and Banc One Capital
Partners V, Ltd., regarding the Senior Subordinated Note and Warrant Purchase Agreement, dated as of
March 31, 1995 (Exhibit 10.50)
10.51* Third Amendment to the Warehouse Credit, Term Loan and Security Agreement, dated as of January 22,
1996, by and among Remodelers National Funding Corp., FIRSTPLUS Financial Group, Inc. and Residential
Funding Corporation (Exhibit 10.51)
10.52* Subordinated Loan Agreement, dated as of September 27, 1995, by and among FIRSTPLUS Financial Group,
Inc., Remodelers National Funding Corporation and SFA: State Financial Acceptance Corp., as borrowers,
and Banc One Capital Partners II, Limited Partnership and Farm Bureau Life Insurance Company, as
lenders, as amended by First Amendment to Subordinated Loan Agreement (Exhibit 10.52)
10.53* Letter Agreement, dated June 7, 1995, between Banc One Capital Corporation and FIRSTPLUS Financial
Group, Inc. regarding financial advisory and consultation services (Exhibit 10.53)
10.54** Registration Rights Agreement, dated as of March 31, 1996, by and among FIRSTPLUS Financial Group,
Inc. and the shareholders of Mortgage Plus Incorporated (Exhibit 10.2)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.55** Agreement and Plan of Merger, dated as of May 22, 1996, among FIRSTPLUS Financial Corporation, Inc.,
FIRSTPLUS West, Inc. and Mortgage Plus Incorporated and the shareholders (Exhibit 10.1)
10.56*** Master Repurchase Agreement, dated as of May 10, 1996, by and between FIRSTPLUS Financial, Inc. and
Bear Stearns Home Equity Trust 1996-1 (Exhibit 10.1)
10.57*** Custody Agreement, dated May 10, 1996, among FIRSTPLUS Financial, Inc., Bear Stearns Home Equity Trust
1996-1, and Bank One Texas, N.A. (Exhibit 10.2)
10.58*** Fifth Amendment to Credit Agreement, dated June 20, 1996, by and among FIRSTPLUS Financial, Inc.,
FIRSTPLUS Financial Group, Inc. and Bank One, Texas, National Association (Exhibit 10.3)
10.59*** Promissory Note, dated June 30, 1996, between FIRSTPLUS Financial, Inc. and Bank One, Texas, National
Association (Exhibit 10.4)
10.60* Credit Agreement, dated October 17, 1996, between FIRSTPLUS Financial, Inc. and Bank One Texas,
National Association
10.61+ Master Assignment Agreement between FIRSTPLUS FINANCIAL, INC. and Merrill Lynch Mortgage Capital Inc.
(Exhibit 10.1)
10.62+ Tri-Party Custodial Agreement among FIRSTPLUS FINANCIAL, INC., Merrill Lynch Mortgage Capital Inc.,
Merrill Lynch Credit Corporation and Bank One, Texas, N.A. (Exhibit 10.2)
10.63+ 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.
(Exhibit 10.3)
10.64+ Revolving Credit Agreement between FIRSTPLUS FINANCIAL, INC. and working Capital Management Co. dated
June 16, 1997. (Exhibit 10.4)
10.65+ Sale and Servicing Agreement dated June 1, 1997 between FIRSTPLUS FUNDING TRUST, FIRSTPLUS FINANCIAL,
INC. and FIRSTBANK NATIONAL ASSOCIATION (Exhibit 10.5)
10.66+ INDENTURE between FIRSTPLUS FUNDING TRUST and FIRSTBANK NATIONAL ASSOCIATION (Exhibit 10.6)
11 Statement Regarding Computation of Per Share Earnings
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
- ------------------------
*Incorporated by reference from exhibit shown in parenthesis contained in the
Company's Registration Statement on Form S-1 (Registration No. 33-96688),
filed by the Company with the Commission.
**Incorporated by reference from exhibit shown in parenthesis contained in the
Company's current report on Form 8-K, filed by the Company with the
Commission on June 14, 1996.
***Incorporated by reference from exhibit shown in parenthesis contained in the
Company's Form 10-Q for the quarterly period ended June 30, 1996, filed by
the Company with the Commission on August 6, 1996.
****Incorporated by reference from the exhibit shown in parenthesis contained in
the Company's registration Statement on Form S-1 (Registration No.
333-14171), filed by the Company with the Commission.
+Incorporated by reference from exhibit shown in parenthesis contained in the
Company's Form 10-Q for the quarterly period ended June 30, 1997, filed by
the Company with the Commission on August 14, 1997.
<PAGE>
EXHIBIT 11
FIRSTPLUS FINANCIAL GROUP, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Income per common and common equivalent share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income.................................................... $ 5,840 $ 34,212 $ 139,169
Less: accrual of preferred stock dividends.................... (199) (66) --
------------ ------------ ------------
Primary net income applicable to common stock................. $ 5,641 $ 34,146 $ 139,169
------------ ------------ ------------
------------ ------------ ------------
Interest on convertible subordinated notes less the effect of
income taxes................................................ -- $ 505 $ 3,471
------------ ------------ ------------
------------ ------------ ------------
Fully diluted net income applicable to common stock........... $ 5,641 $ 34,651 $ 142,640
------------ ------------ ------------
------------ ------------ ------------
Average common shares outstanding............................. 17,895,862 24,712,194 33,758,502
Common stock equivalents:
Warrants and options........................................ 2,401,012 645,968 1,483,079
------------ ------------ ------------
Weighted average common and common equivalent shares
outstanding................................................. 20,296,874 25,358,162 35,241,581
------------ ------------ ------------
------------ ------------ ------------
Primary net income per share of common stock.................. $ 0.28 $ 1.35 $ 3.95
------------ ------------ ------------
------------ ------------ ------------
Average common shares outstanding............................. 17,895,862 24,712,194 33,758,502
Common stock equivalents:
Warrants and options........................................ 2,401,012 1,641,332 6,763,438
------------ ------------ ------------
Weighted average fully diluted common and common equivalent
shares outstanding.......................................... 20,296,874 26,353,526 40,521,940
------------ ------------ ------------
------------ ------------ ------------
Fully diluted net income per share of common stock............ $ 0.28 $ 1.31 $ 3.52
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8) pertaining to the 1995 Employee Stock Option Plan for RAC
Financial Group, Inc., the 1995 Nonemployee Director Stock Option Plan for
RAC Financial Group, Inc., the 1995 Employee Stock Purchase Plan for RAC
Financial Group, Inc., the Stock Option Agreement for Dan Marino, the Stock
Option Agreement for Charles T. Owens, and the Stock Option Agreement for
Ralph Stringer, the Registration Statement (Form S-3 No. 333-37715) of
FIRSTPLUS Financial Group, Inc. and related Prospectus, the Registration
Statement (Form S-3 No. 333-37945) of FIRSTPLUS Financial Group, Inc. and
related Prospectus, and the Registration Statement (Form S-3 No. 333-40851)
of FIRSTPLUS Financial Group, Inc. and related Prospectus, of our report
dated October 30, 1997, with respect to the consolidated financial statements
of FIRSTPLUS Financial Group, Inc. and subsidiaries included in the Annual
Report (Form 10-K) for the year ended September 30, 1997.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 94,978,000
<SECURITIES> 515,165,000
<RECEIVABLES> 1,622,846,000
<ALLOWANCES> 31,539,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 32,515,000
<DEPRECIATION> 6,503,000
<TOTAL-ASSETS> 2,447,206,000
<CURRENT-LIABILITIES> 93,279,000
<BONDS> 0
0
0
<COMMON> 373,000
<OTHER-SE> 429,772,000
<TOTAL-LIABILITY-AND-EQUITY> 2,447,206,000
<SALES> 0
<TOTAL-REVENUES> 591,440,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 228,139,000
<LOSS-PROVISION> 45,307,000
<INTEREST-EXPENSE> 93,514,000
<INCOME-PRETAX> 224,480,000
<INCOME-TAX> 85,311,000
<INCOME-CONTINUING> 139,169,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 139,169,000
<EPS-PRIMARY> 3.95
<EPS-DILUTED> 3.52
</TABLE>
