<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------
Commission file number 0-27550
----------------------------------
FIRSTPLUS Financial Group, Inc.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 75-2561085
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Viceroy, Dallas, Texas 75235
- - -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(214) 599-6400
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 42,198,388 shares of voting common stock and 690,990 shares of
non-voting common stock, $.01 par value, outstanding as of October 31, 1998.
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Unaudited Consolidated Balance Sheets -
September 30, 1998 and September 30, 1997............................. 3
Unaudited Consolidated Statements of Income -
Three Months Ended September 30, 1998 and September 30, 1997
and Nine Months Ended September 30, 1998 and September 30, 1997....... 4
Unaudited Condensed Consolidated Statements of Stockholders' Equity -
Three Months and Nine Months Ended September 30, 1998
and September 30, 1997................................................ 5
Unaudited Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1998 and September 30, 1997........... 7
Notes to Consolidated Financial Statements-................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 18
Item 2. Changes In Securities...................................................... 18
Item 3. Defaults Upon Senior Securities............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders........................ 18
Item 5. Other Information.......................................................... 18
Item 6. Exhibits and Reports on Form 8-K........................................... 18
SIGNATURE.................................................................................... 18
</TABLE>
2
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 73,704 $ 94,978
Securities, available for sale 30,107 40,995
Loans held for sale, net 1,902,126 1,400,446
Investment in securitized loans - 190,861
Interest only strips, net 529,841 456,123
Subordinated certificates held for sale 30,967 18,047
Receivable from trusts 298,977 138,816
Servicing assets 81,528 40,516
Other assets 112,886 66,424
------------- ------------
Total assets $ 3,060,136 $ 2,447,206
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 99,622 $ 44,445
Warehouse and repurchase agreements 1,594,588 1,238,156
Term lines 259,615 211,751
Time deposits 261,772 120,025
Bonds 139,511 174,088
Convertible subordinated notes 38,520 69,920
Notes payable and other borrowings 40,463 39,321
Deferred tax liabilities, net 118,652 119,355
------------- ------------
Total liabilities 2,552,743 2,017,061
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, non-voting, $1.00 par value, 8% cumulative
dividend Authorized shares - Series A - 300;
Series B - 2,300 Issued and outstanding shares -
Series A and Series B - none - -
Common stock, $0.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 41,402 - 1998
and 36,580-1997 414 366
Common stock, non-voting, $0.01 par value:
Authorized shares - 25,000
Issued and outstanding shares - 691-1998 and 691-1997 7 7
Additional capital 310,143 216,881
Unrealized gains on available for sale securities, net 26,807 20,253
Retained earnings 170,022 192,638
------------- ------------
Total stockholders' equity 507,393 430,145
------------- ------------
Total liabilities and stockholders' equity $ 3,060,136 $ 2,447,206
============= ============
</TABLE>
See accompanying notes
3
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Gain on securitized loan sales, net $ 21,450 $ 91,769 $ 106,790 $ 238,274
Gain on whole loan sales 14,561 9,001 28,718 23,790
Interest income 74,750 65,156 217,649 150,322
Interest only strips interest income 30,047 12,978 78,674 24,203
Origination income 47,124 15,954 122,274 37,799
Servicing income 14,726 7,795 38,632 17,839
Insurance income 4,694 1,819 11,672 3,427
Other income 1,040 3,640 4,925 4,931
--------- ---------- ---------- ---------
Total revenues 208,392 208,112 609,334 500,585
Expenses:
Salaries and employee benefits expense 57,281 40,112 139,713 90,972
Interest expense 40,267 31,706 113,680 78,801
Other operating expenses 82,717 42,012 217,768 97,969
Provision for possible credit losses 22,940 14,256 56,076 40,035
Impairment of interest only strips 43,085 - 43,085 -
Lower of cost or market and fair value adjustments 58,115 - 58,115 -
Restructuring and non-recurring charges 36,209 - 36,209 -
--------- ---------- ----------- ---------
Total expenses 340,614 128,086 664,646 307,777
--------- ---------- ----------- ---------
(Loss)/income before income taxes (132,222) 80,026 (55,312) 192,808
Benefit/(provision) for income taxes 50,244 (30,418) 21,019 (73,275)
--------- ---------- ----------- ---------
Net (loss)/income $ (81,978) $ 49,608 $ (34,293) $ 119,533
========= ========== =========== =========
Weighted average common shares 39,651 37,172 38,567 35,616
========== ========== ========== ========
Basic (loss)/earnings per share $ (2.07) $ 1.33 $ (0.89) $ 3.36
========= ========== ========== =========
Weighted average common shares-assuming dilution 39,651 43,350 38,567 41,015
========= ========== ========== =========
Diluted (loss)/earnings per share $ (2.07) $ 1.16 $ (0.89) $ 2.97
========= ========== ========== =========
</TABLE>
See accompanying notes
4
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Common other
stock, stock, Additional Retained comprehensive
voting non-voting capital earnings income Total
------ ---------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 371 $ 7 $219,329 $204,316 $19,262 $443,285
Comprehensive income, net of tax:
Net income 19,836
Other comprehensive income:
Change in unrealized gain on
available for sale
securities, net of
reclassification amount 883
-------
Total comprehensive income 20,719
Issuance of common stock 2 1,843 1,845
----- ---- -------- -------- ------- --------
Balance at March 31, 1998 373 7 221,172 224,152 20,145 465,849
Comprehensive income, net of tax:
Net income 27,848
Other comprehensive loss:
Change in unrealized gain on
available for sale
securities, net of
reclassification amount (2,993)
-------
Total comprehensive income 24,855
Issuance of common stock 4 15,305 15,309
----- ---- -------- -------- ------- --------
Balance at June 30, 1998 377 7 236,477 252,000 17,152 506,013
Comprehensive income, net of tax:
Net loss (81,978)
Other comprehensive income:
Change in unrealized gain on
available for sale
securities, net of
reclassification amount 9,655
-------
Total comprehensive loss (72,323)
Conversion of subordinated notes 20 33,264 33,284
Issuance of common stock 17 40,402 40,419
----- ---- -------- -------- ------- --------
Balance at September 30, 1998 $ 414 $ 7 $310,143 $170,022 $26,807 $507,393
===== ==== ======== ======== ======= ========
</TABLE>
See accompanying notes
5
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Common Common other
stock, stock, Additional Retained comprehensive
voting non-voting capital earnings income Total
------ ---------- ---------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 256 $ 44 $ 88,379 $ 69,511 $ (63) $158,127
Acquisition 11 2,781 (2,617) 175
Comprehensive income, net of tax:
Net income 30,551
Other comprehensive income:
Change in unrealized gain on
available for sale securities, net 7,171
-------
of reclassification amount
Total comprehensive income 37,722
Conversion of non-voting to voting 16 (16) -
Issuance of common stock 42 123,253 123,295
----- ---- -------- -------- ------- --------
Balance at March 31, 1997 325 28 214,413 97,445 7,108 319,319
Acquisition 3 276 3,127 3,406
Comprehensive income, net of tax:
Net income 39,374
Other comprehensive income:
Change in unrealized gain on
available for sale securities, net
of reclassification amount 6,905
-------
Total comprehensive income 46,279
Conversion of non-voting to voting 21 (21) -
Issuance of common stock 1 (795) (794)
----- ---- -------- -------- ------- --------
Balance at June 30, 1997 350 7 213,894 139,946 14,013 368,210
Acquisition 15 1,802 3,084 4,901
Comprehensive income, net of tax:
Net income 49,608
Other comprehensive income:
Change in unrealized gain on
available for sale securities, net
of reclassification amount 6,240
-------
Total comprehensive income 55,848
Issuance of common stock 1 1,185 1,186
----- ---- -------- -------- ------- --------
Balance at September 30, 1997 $ 366 $ 7 $216,881 $192,638 $20,253 $430,145
===== ==== ======== ======== ======= ========
</TABLE>
See accompanying notes
6
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss)/income $ (34,293) $ 119,533
Adjustments to reconcile net (loss)/income to net cash
used in operating activities:
Provision for possible credit losses 56,076 40,035
Depreciation and amortization 7,878 3,091
Gain on sales of loans (135,508) (262,064)
Lower of cost or market and fair value adjustments 58,115 -
Restructuring charges 36,209 -
Changes in operating assets and liabilities:
Loans originated or acquired (4,210,170) (3,505,071)
Principal collected and proceeds from sale of loans 4,032,151 2,721,259
Interest only strip and servicing asset amortization 172,833 61,271
I/O Strip and servicing asset, net (168,569) (106,339)
Subordinated certificates held for sale (18,847) -
Receivable from trusts (127,371) (88,604)
Other assets (17,118) (10,120)
Accounts payable and accrued expenses 41,703 21,051
Deferred tax liability (6,869) 70,228
Other 7,507 5,723
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (306,273) (930,007)
INVESTING ACTIVITIES:
Cash paid for acquisitions (21,877) -
Cash from acquisitions - 3,071
Purchases of available for sale securities (25,774) (58,502)
Proceeds from sale of available for sale securities 25,839 84,499
Purchases of equipment and leasehold improvements (32,092) (19,338)
Other - 4,769
----------- -----------
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (53,904) 14,499
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net 232,621 564,853
(Repayments)/borrowings on term lines of credit, net (16,077) 109,552
Borrowings on notes payable, net 749 3,459
Borrowings on bonds 146,320 174,088
Payments on bonds payable (175,455) -
Net change in time deposits 128,626 13,114
Issuance of common stock 57,573 125,358
Other - 23
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 374,357 990,447
----------- -----------
INCREASE IN CASH 14,180 74,939
Cash and cash equivalents at beginning of period 59,524 20,039
----------- -----------
Cash and cash equivalents at end of period $ 73,704 $ 94,978
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 118,481 $ 82,215
=========== ==========
</TABLE>
See accompanying notes
7
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and nine-month periods ended September 30, 1998 are not
necessarily indicative of the results that may be expected for a full year.
For further information, refer to the consolidated financial statements and
footnotes thereto for the year ended September 30, 1997 included in FIRSTPLUS
Financial Group, Inc.'s 1997 Annual Report filed with the Securities and
Exchange Commission on Form 10-K.
On December 15, 1997, the Board of Directors of FIRSTPLUS Financial
Group, Inc. (the "Company" or "FIRSTPLUS") approved a change in the Company's
fiscal year end from September 30 to December 31, to be effective beginning
January 1, 1998. Accordingly, this Quarterly Report on Form 10-Q represents
the third quarter of the Company's new fiscal year.
On October 23, 1998, the FASB issued a draft guide, in question and
answer format, entitled: "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, Questions and Answers, Second Edition" (the
"draft Q&A"). The draft Q&A indicates that two methods have arisen in
practice for accounting for credit enhancements, items which the Company
records as I/O Strips and receivable from trust. These methods are the
cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such,
the receivable from trust is recorded at face value. The cash-out method
treats credit enhancements as assets owned by the related securitization
trusts. As such, the receivable from trust cash flows are treated as part of
the I/O Strip and the combined I/O Strip and the receivable from trust cash
flows are recorded at a discounted value for the period between when the cash
is collected by the trust and released to the Company. The draft Q&A
indicates that the cash-out method should be used to measure the fair value
of credit enhancements, including subordinated I/O Strips. The draft Q&A
remains subject to a comment period and further amendments prior to becoming
effective and applicable to the Company in its final form.
The Company has historically used the cash-in method to account for its
I/O Strips and receivable from trust. Management has not determined the ultimate
impact the adoption of this draft Q&A will have, but believes it will be
material to the Company.
2. LOANS HELD FOR SALE, NET
Loans held for sale, net consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
High LTV Loans $1,713,151 $1,310,576
Personal consumer 145,461 93,172
Conforming first lien mortgages 23,228 16,488
B/C loans 80,287 -
Other 41,080 14,581
---------- ---------
Subtotal 2,003,207 1,434,817
Allowance for possible credit losses (26,433) (31,539)
Deferred finance charges (26,436) (16,568)
Valuation allowance (42,188) -
(Discounts)/premiums, net (6,024) 13,736
---------- ----------
Total $1,902,126 $1,400,446
========== ==========
</TABLE>
8
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
3. INTEREST ONLY STRIPS, NET
The activity in the Interest Only Strips (net of allowance for possible losses
on loans sold) is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
September 30, September 30,
1998 1997
-------------- ------------
<S> <C> <C>
Balance, beginning of period $ 482,271 $ 132,973
I/O Strips created from securitizations during
the period 486,635 608,548
Impairment of I/O Strips (43,085) -
Unrealized gains, net 9,709 -
Provision for possible losses on loans sold (336,940) (245,796)
Amortization (166,564) (61,707)
Charge-offs, net 98,933 23,866
Other (1,118) (1,761)
---------- ---------
Balance, end of period $ 529,841 $ 456,123
========== =========
</TABLE>
4. EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted (loss)/earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic (loss)/earnings per share -
(loss)/income available to common stockholders
(net (loss)/income) $(81,978) $49,608 $(34,293) $119,533
Effect of dilutive securities:
Additional interest on convertible subordinated
notes, net of tax - 792 - 2,375
-------- ------- -------- --------
Numerator for diluted (loss)/earnings per
share-(loss)/income available to common stockholders
after assumed conversions $(81,978) $50,400 $(34,293) $121,908
======== ======= ======== ========
Denominator:
Denominator for basic (loss)/earnings per share -
weighted average shares 39,651 37,172 38,567 35,616
Effect of dilutive securities:
Employee stock options - 1,888 - 1,109
Convertible subordinated notes - 4,290 - 4,290
-------- ------- -------- --------
Dilutive potential common shares - 6,178 - 5,399
-------- ------- -------- --------
Denominator for diluted (loss)/earnings per share-adjusted
weighted average shares and assumed conversions 39,651 43,350 38,567 41,015
======== ======= ======== ========
Basic (loss)/earnings per share $ (2.07) $ 1.33 $ (0.89) $ 3.36
======== ======= ======== ========
Diluted (loss)/earnings per share $ (2.07) $ 1.16 $ (0.89) $ 2.97
======== ======= ========= ========
</TABLE>
9
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
5. DEBT
The Company's warehouse facilities have either reached capacity, have
been curtailed or will reach contractual maturities in the December 1998
quarter. The Company is currently in negotiations with its banks and
investment banks to reopen and extend the contractual maturities of certain
funding facilities. As part of these negotiations, the Company is required to
complete the proposed sale of its servicing operations to Superior Bank FSB.
If the Company is unable to find additional capacity under these facilities
through either whole loan sales or a securitization, or is unable to secure a
new source of funding, it could have a material adverse effect on the
Company's results of operations and financial condition.
The Company has also requested that its banks and investment banks
establish a three-year term principal paydown schedule for certain of its
term line facilities, which is also contingent upon the loan servicing sale.
In addition, the Company's largest repurchase facility is up for renewal
in December 1998. As part of the negotiations with the lender, two provisions
of the repurchase agreement have been changed. First, the facility has been
changed from a committed facility to an uncommitted facility. Second, the
minimum required market capitalization of the Company has been changed from
$750.0 million to $100.0 million until the renewal date. There can be no
assurances that the facility will be renewed or will not be materially
modified or reduced in size.
Management believes that the negotiations with its banks and investment
banks will be successful, although there can be no assurance that such
negotiations will be successful. Should the Company not be successful in
these negotiations, the Company may lose the right to repurchase its loans
held for sale, certain I/O Strips, receivable from trust and other assets
pledged as collateral for these facilities and may be unable to continue
funding its operations. In such an event, the banks and investment banks may
elect to retain the encumbered assets at a value potentially below the
carrying values recorded on the Company's balance sheet as of September 30,
1998.
6. RESTRUCTURING
During September 1998, the Company finalized and adopted a plan to
significantly restructure its operations. The restructuring is designed to
reduce corporate overhead and to focus the Company's capital resources on its
direct to consumer loan origination channels, while curtailing or selling
other lines of business. The Company announced the restructuring program in
October 1998, which resulted in an immediate work force reduction of
approximately 1,700 employees and the closure of certain operations. The
Company recorded a pre-tax charge of $33.0 million in the third quarter
relating to writing down the value of leasehold improvements, closing
facilities, and writing down the value of assets associated with exited
businesses. The Company publicly announced its restructuring plan and
notified impacted employee groups in October 1998. Accordingly,
severance-related charges, presently estimated at $10.0 million, pre-tax,
will be recorded during the December 1998 quarter. A further reduction of an
additional 1,300 employees is expected as the servicing operations and other
operations are sold or curtailed.
7. SUBSEQUENT EVENTS
STRATEGIC ALLIANCE
On October 15, 1998, the Company announced a strategic alliance with
Coast-To-Coast Financial Corporation ("CCFC") and certain related entities.
The strategic alliance includes the sale of the Company's servicing rights
and servicing operations, the formation of a joint venture to facilitate
future securitizations, a fee-based advisory agreement and the issuance of
warrants to purchase 20,000,000 shares of the Company's common stock at
$4.625 per share. The execution of the strategic alliance is subject to
certain closing conditions.
BRIDGE LOAN FROM CCFC
On October 16, 1998, the Company received a $15.0 million bridge loan
from CCFC, which pays interest at a rate of prime plus 1.0%. Originally, the
bridge loan was due 30 days from issuance. As part of the negotiations for
the sale of the servicing operations, the Company and CCFC are negotiating
the extension of the term of the bridge loan. If the closing is significantly
delayed, CCFC, at its sole discretion, may call the note due immediately. As
collateral for the bridge loan, the Company pledged to CCFC a security
interest in FIRSTPLUS Bank.
SALE OF UNITED KINGDOM OPERATIONS
On October 20, 1998, the Company closed the sale of its United Kingdom
loan origination and servicing operations based in Cardiff, Wales. The sale
generated cash in excess of $13.0 million and resulted in the Company
recording an approximate $700,000 loss.
LITIGATION
Several lawsuits have been filed against the Company and certain of its
officers and directors. The complaints allege violations of the securities
laws through false and misleading statements and seek class action status.
The Company intends to vigorously defend such lawsuits.
Other lawsuits have been filed, within the September 1998 quarter,
against the Company by certain borrowers and former employees, alleging
violations of federal statutes, including violations of the Fair Labor
Standards Act, Real Estate Settlement Act, Truth in Lending Act, as well as
claims relating to breach of contract and wage-related issues. The Company
intends to vigorously defend such lawsuits.
ACQUISITION OF LIFE FINANCIAL CORP.
On October 12, 1998, LIFE Financial Corp. terminated the agreement and
plan of merger between itself and the Company. Subsequent to this action,
LIFE Financial Corp. filed suit against the Company seeking damages. The
Company believes the suit is without merit and intends to vigorously defend
the suit.
10
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRSTPLUS Financial Group, Inc. (together with its subsidiaries, the
"Company" or "FIRSTPLUS") is a specialized consumer finance company that
originates, purchases, services and sells consumer loans. Historically, the
Company's consumer loan products have been debt consolidation or home
improvement loans secured by first or second liens on residential real
property ("High LTV Loans"), non-conforming home equity loans ("B/C Loans"),
conforming first lien loans, and personal consumer loans. The Company sells
substantially all of its High LTV Loans through its securitization program
and retains rights to service these loans.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Annual Report filed with the Securities and Exchange Commission on Form 10-K,
including the consolidated financial statements and notes thereto.
STRATEGIC ALLIANCE AND RESTRUCTURING
On October 15, 1998, the Company announced a strategic alliance with
Coast-To-Coast Financial Corporation ("CCFC") and certain related entities,
which is subject to certain closing conditions that are not yet complete
(the "Stategic Alliance"). The Strategic Alliance would have four key elements:
- Superior Bank FSB ("Superior"), a wholly owned subsidiary of CCFC,
has committed, subject to certain closing conditions, to purchase the
servicing rights to FIRSTPLUS' servicing portfolio and the loan
servicing operations. Following the close of the sale, Superior will
be engaged as loan servicer on all consumer loans originated by
FIRSTPLUS. The closing conditions include the consent and/or approval
of the Company's securitization bond insurer and trustees and consent
of its banks and investment banks.
- CCFC and the Company will form a joint venture to facilitate
securitizations of the Company's High LTV Loans. As part of future
securitization transactions executed by the joint venture, CCFC will
use its best efforts to arrange for funds, based on feasibility,
necessary for overcollateralization and other credit enhancement. The
Company will provide the consumer loans. CCFC will receive a
preferential return on the funds contributed. Subsequent to CCFC's
preferential disbursement, the Company will receive a preferential
return up to two percent of the par value of loans delivered. All
remaining cash flows from the joint venture will be distributed 51%
to CCFC and 49% to the Company.
- The Company and CCFC will enter into an advisory agreement, whereby
CCFC will advise the Company and the Board of Directors regarding the
evaluation and development of its ongoing business plan as well as
securitization and whole loan sale activities. As compensation for
providing this service, CCFC will receive a quarterly fee of 15 basis
points of consumer loans originated by FIRSTPLUS, subject to a minimum
fee of $1,000,000.
- As consideration for implementing the Strategic Alliance, CCFC will
be issued warrants to purchase 20,000,000 FIRSTPLUS shares at a strike
price of $4.625.
In connection with the announcement of the Strategic Alliance, the Company
announced a restructuring of its operations. During September 1998, the Company
finalized and adopted a plan to significantly restructure its operations. The
restructuring is designed to reduce corporate overhead and to focus the
Company's capital resources on its direct to consumer loan origination channels,
while curtailing or selling other lines of business. Specifically, the Company
will or has curtailed or exited the following:
- FIRSTPLUS U.K. was sold on October 20, 1998;
- FIRSTPLUS Consumer Finance Company is being marketed for sale;
- The conforming first lien loan branches are being marketed for sale;
- The correspondent division of FIRSTPLUS has been curtailed;
- The FIRSTPLUS Direct call center and loan origination network has been
relocated to the Dallas call center, although the direct mail
operation will remain in California and work in coordination with the
Dallas call center;
- Approximately 15 retail branches have been closed; and
- A significant number of corporate positions have been eliminated.
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As a result of the Strategic Alliance and the restructuring, the Company's
future financial results will be materially affected. With the curtailing or
selling of certain business lines, future loan originations will be
substantially reduced from prior production levels. The potential impact of the
Strategic Alliance and the restructuring on certain revenue and expense items
are as follows:
- Gain on securitized loan sales - Due to the sharing of economics with
the joint venture partner, future gain on securitized loan sales will
be significantly reduced from prior results;
- Interest income and interest expense (Net Interest Income) - Net
interest income will be reduced due to expected lower production
levels and an expected higher percentage of sold loans to loan
originations;
- Servicing Income - The servicing rights will be sold on all existing
and future consumer loan production; therefore, although there will
continue to be gains from sale of servicing rights, there will be a
significant reduction in future servicing income; and
- Operating costs - Due to the reduction in work force, elimination or
curtailment at certain facilities, the Company's operating costs will
be substantially decreased.
FINANCIAL CONDITION
SEPTEMBER 30, 1998
Loans held for sale increased to $1.9 billion at September 30, 1998,
compared to $1.6 billion at September 30, 1997. The increase can be attributed
to the Company's inability to securitize approximately $500.0 million in High
LTV Loans during September 1998, as more fully discussed in "- Results of
Operations." During the nine months ended September 30, 1998, the Company
originated $4.2 billion, securitized $2.8 billion, and sold $1.1 billion, on a
whole loan basis, of consumer loans.
Management makes estimates and assumptions regarding the value of the
interest only strips ("I/O Strips") at the time of each securitization and at
each subsequent balance sheet date. The primary assumptions used to estimate the
value of the I/O Strips are default and prepayment rates, along with an
appropriate discount rate. The prepayment and default rates are estimated based
on analysis of past experience and expectations for future performance. The
combined prepayment and default assumptions were increased during the September
1998 quarter based on management's assessment of recent prepayment and loss
experience. The discount rate is determined based on the securitization
structure, the over-collateralization levels, interest rate fluctuations and
market volatility. Such assumptions represent management's best estimate based
upon current conditions. Increased competition, continued periods of low
interest rates, general economic conditions and other factors such as the risks
and uncertainties described in the Company's Current Report on Form 8-K, dated
December 19, 1996, could result in actual performance differing materially from
those estimates.
The Company's I/O Strips increased to $529.8 million at September 30,
1998, compared to $456.1 million at September 30, 1997, an increase of $73.7
million or 16.2%. As of September 30, 1998, the Company recorded a $27.0 million
net decrease in the fair value of its I/O Strips. This adjustment consists of a
$43.1 million other than temporary impairment on four of the Company's older I/O
Strips, recorded in the income statement, and $16.1 million of unrealized losses
removed from the valuation allowance for unrealized gains and losses on I/O
Strips, which is recorded as part of stockholders' equity. Additional I/O Strip
activity includes the recognition of the fair value of the I/O Strips from
securitizations completed during the period, offset by amortization. As of
September 30, 1998, the carrying value of the recorded I/O Strips reflects their
estimated fair value.
Total stockholders' equity at September 30, 1998 was $507.4 million,
compared to $430.1 million at September 30, 1997, an increase of $77.3 million
or 18.0%. During the nine months ended September 30, 1998, the Company reported
a total comprehensive loss of $26.7 million. The Company has issued
approximately $57.5 million of common stock during the nine-month period ended
September 30, 1998. In August 1998, holders of $31.4 million of its convertible
subordinated notes converted those notes into equity. As compensation for the
early extinguishment of the notes, the holders received an additional $1.8
million in common stock.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's total revenues were flat at $208.4 million during its
September 1998 quarter, compared to its September 1997 quarter. Total revenue
was largely affected by the gain on securitized loan sales, net, which
decreased by $70.3 million or 76.6%. This decrease was offset by increases in
almost all other revenue categories, most notably interest income on loans
held for sale and I/O Strips, origination income and servicing income.
Gain on securitized loan sales, net, decreased to $21.5 million in the
September 1998 quarter, compared to $91.8 million in the September 1997
quarter, a decrease of $70.3 million or 76.6%. Gain on securitized loan
sales, net, in each quarter was affected by both the size of the
securitizations and changes in assumptions used in the valuation of the I/O
Strips. Such changes in assumptions were reflective of changes in the market
for related securities, as well as collateral performance. During the
September 1998 quarter, the Company securitized $672.0 million of High LTV
Loans, compared to $833.4 million in the September 1997 quarter. The Company
was unable to complete a planned $500.0 million High LTV Loan securitization
due to the Company's inability to fund an increased initial
overcollateralization deposit, which were not required in FIRSTPLUS'
securitization program since March 1997, including its August 1998
securitization. This increase in required initial overcollateralization
levels are a result of the unsettled nature of the asset-backed and other
capital markets as a whole.
During the September 1998 quarter, the Company used a discount rate of
approximately 19.46% to value its I/O Strips, taking into account all cash
flows that will revert to the Company, from its securitizations completed
during the September 1998 quarter. The resulting gain on securitized loan
sales, net, as a percentage of the loans securitized and sold was 3.2% and
11.0% for the quarters ended September 30, 1998 and 1997, respectively. Other
assumptions used in assessing the fair value of the I/O Strips created during
the September 1998 quarter included an all-in proprietary prepayment curve
reaching an approximate 20% CPR in month 18, including proprietary default
curves (resulting in an involuntary prepayment curve of 4.15%).
Interest income increased to $74.8 million in the September 1998
quarter, compared to $65.2 million in the September 1997 quarter, an increase
of $9.6 million or 14.7%. The increase in interest income was primarily
attributable to an increase in the average loans held for sale balance. Loans
held for sale as of September 30, 1998 were $1.9 billion, compared to $1.6
billion at September 30, 1997.
Interest income on the Company's I/O Strips increased to $30.0 million
in the quarter ended September 30, 1998, compared to $13.0 million in the
quarter ended September 30, 1997, an increase of $17.0 million or 130.8%.
This increase was the result of the Company's larger average I/O Strip
balance during the September 30, 1998 quarter and an increased yield. I/O
Strips as of September 30, 1998 were $529.8 million, compared to $456.1
million as of September 30, 1997.
Origination income increased to $47.1 million in the quarter ended
September 30, 1998, compared to $16.0 million in the quarter ended September
30, 1997, an increase of $31.1 million or 194.4%. This increase was the
result of the Company's continuing shift toward direct to consumer
originations, which accounted for 59.6% of High LTV Loan originations,
compared to 26.5% a year earlier. Origination fees are deferred when collected
and subsequently recognized when the loans are sold. The Company collected
and deferred approximately $52.3 million of loan origination fees during the
September 1998 quarter.
Servicing income increased to $14.7 million in the quarter ended
September 30, 1998, compared to $7.8 million in the quarter ended September
30, 1997, an increase of $6.9 million or 88.5%. This increase was primarily a
result of the increase in the Company's securitized loan portfolio, which
increased to $6.0 billion at September 30, 1998, compared to $3.1 billion at
September 30, 1997.
Total pre-tax operating expenses, which include salaries, employee
benefits, advertising, marketing, servicing and other operating expenses,
increased to $140.0 million in the quarter ended September 30, 1998, compared
to $82.1 million in the quarter ended September 30, 1997, an increase of
$57.9 million or 70.5%. The increase in operating expenses during the quarter
ended September 30, 1998, was due to marketing personnel and infrastructure
costs associated with the Company's continued efforts to significantly
increase its High LTV and B/C direct to consumer lending platforms.
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Interest expense for the quarter ended September 30, 1998 increased to
$40.3 million, compared to $31.7 million for the quarter ended September 30,
1997, an increase of $8.6 million or 27.1%. The increase primarily related to
the Company's overall increase in the warehouse facilities and term line
borrowings, which supported both loan volume growth and expanding operations.
The Company's provision for possible credit losses on loans held for
sale increased to $22.9 million for the quarter ended September 30, 1998,
compared to $14.3 million for the quarter ended September 30, 1997, an
increase of $8.6 million or 60.1%. The 30-day and over delinquency rate for
the managed loans portfolio of 2.6% as of September 30, 1998 increased
to 2.5% as of September 30, 1997. Gross servicing portfolio defaults, before
recoveries and insurance recoveries received on Title I loans, equaled $46.6
million or 0.60% of the September 30, 1998 average quarterly loan portfolio.
In addition to the $43.1 million impairment of I/O Strips, the Company
recorded $58.1 million in lower of cost or market and fair value adjustments
related to its loans held for sale portfolio, certain retained certificates
representing interests in loans and certain servicing assets. The secondary
market for the Company's consumer loans decreased in September 1998, such
that the fair value was less than the carrying value. The adjustments
principally related to the Company's wholesale loans generated by the
correspondent division. The servicing asset was adjusted based on the
proposed terms of the Strategic Alliance.
The Company recorded significant charges related to the restructuring
of its operation and the conversion of its convertible subordinated notes
totalling $36.2 million in the quarter ended September 30, 1998. The
restructuring plan resulted in an immediate work force reduction of
approximately 1,700 employees and the closure of certain operations.
Accordingly, the Company recorded a charge of $33.0 million in the quarter
ended September 30, 1998 relating to writing down the value of leasehold
improvements, closing facilities, and writing down the value of assets
associated with exited businesses. The Company publicly announced its
restructuring plan and notified impacted employee groups in October 1998.
Accordingly, severance-related charges, presently estimated at $10.0 million,
pre-tax, will be recorded during the December 1998 quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company's total revenues increased to $609.3 million during the
nine months ended September 1998, compared to $500.6 million in the nine
months ended September 30, 1997, an increase of $108.7 million or 21.7%.
During the nine months ended September 30, 1998, the Company's percentage of
revenue other than gain on securitized loan sales increased to 82.5%,
compared to 52.4% in the nine months ended September 30, 1997. The increase
is related to the growth of the Company's loan portfolio and direct to
consumer loan originations.
Gain on securitized loan sales, net, decreased to $107.0 million in the
nine months ended September 30, 1998, compared to $238.3 million in the nine
months ended September 30, 1997, a decrease of $131.3 million or 55.1%. Gain
on securitized loan sales, net, in the nine-month period was affected by both
the size of the securitizations and changes in assumptions used in the
valuation of the I/O Strips. Such changes in assumptions were reflective
of changes in the market for related securities, as well as collateral
performance. During the nine months ended September 30, 1998, the Company
securitized almost $3.0 billion of High LTV Loans, compared to $2.0 billion
in the nine months ended September 30, 1997. The resulting gain on
securitized loan sales, net, as a percentage of the loans securitized and
sold was 3.4% and 11.9% for the nine months ended September 30, 1998 and
1997, respectively.
Interest income increased to $217.6 million in the nine months ended
September 30, 1998, compared to $150.3 million in the nine months ended
September 30, 1997, an increase of $67.3 million or 44.8%. The increase in
interest income was primarily attributable to an increase in the average
loans held for sale balance. Loans held for sale as of September 30, 1998
were $1.9 billion, compared to $1.6 billion as of September 30, 1997.
Interest income on the Company's I/O Strips increased to $78.7 million
in the nine months ended September 30, 1998, compared to $24.2 million in the
nine months ended September 30, 1997, an increase of $54.5 million or 225.2%.
This increase was primarily the result of the Company's larger average I/O
Strip balance and an increased yield during the nine months ended September
30, 1998. I/O Strips as of September 30, 1998 were $529.8 million, compared
to $456.1 million as of September 30, 1997.
Origination income increased to $122.3 million in the nine months ended
September 30, 1998, compared to $37.8 million in the nine months ended
September 30, 1997, an increase of $84.5 million or 223.5%. The increase was
the result of the Company's increasing direct to consumer loan originations.
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Servicing income increased to $38.6 million in the nine months ended
September 30, 1998, compared to $17.8 million in the nine months ended
September 30, 1997, an increase of $20.8 million or 116.9%. This increase was
a result of the increase in the Company's securitized loan portfolio, which
increased to $6.0 billion at September 30, 1998, compared to $3.1 billion at
September 30, 1997.
Total pre-tax operating expenses, which include salaries, employee
benefits, advertising, marketing, servicing and other operating expenses,
increased to $357.5 million in the nine months ended September 30, 1998,
compared to $188.9 million in the nine months ended September 30, 1997, an
increase of $168.6 million or 89.3%. The increase in operating expenses
during the nine months ended September 30, 1998, was due to marketing costs
associated with the Company's continued efforts to significantly increase its
High LTV and B/C direct to consumer lending platforms, its originations
from its direct to consumer lending division, professional fees primarily
associated with improving its information technology and increases in
servicing-related personnel.
Interest expense for the nine months ended September 30, 1998 increased
to $113.7 million, compared to $78.8 million for the nine months ended
September 30, 1997, an increase of $34.9 million or 44.3%. The increase
primarily related to the Company's overall increase in the warehouse and
repurchase facilities and term line borrowings, which supported both loan
volume growth and expanding operations.
The Company's provision for possible credit losses on loans held for
sale increased to $56.1 million for the nine months ended September 30, 1998,
compared to $40.0 million for the nine months ended September 30, 1997, an
increase of $16.1 million or 40.3%. The increase is the result of an
increased loans held for sale portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements include the funding of (i)
loan originations and purchases, (ii) fees and expenses incurred in
connection with its securitization transactions, (iii) television, radio and
direct mail advertising and other marketing, (iv) capital expenditures on
equipment and leasehold improvements, and (v) administrative and other
operating expenses.
Historically, the Company has utilized its securitization program and
repurchase agreements with banks and investment banks as its two main sources
to finance its operations. The repurchase agreements allow the Company to
borrow against its loans (commonly known as a warehouse facility) and I/O
Strips and receivable from trust (known as term line facilities). Adequate
credit facilities and other sources of funding, which permit the Company to
fund its operating cash requirements and to securitize or sell loans in the
secondary market, are essential for the continuation of the Company's ability
to originate and purchase loans. After utilizing available working capital,
the Company borrows on its warehouse agreements to fund its loan originations
and purchases and repays these borrowings as the loans are repaid or sold.
Upon the securitization or sale of loans and the subsequent repayment of the
borrowings, the Company's working capital and warehouse facilities again
become available to fund additional loan originations and purchases.
As of September 30, 1998, the Company had $1.6 billion outstanding on
warehouse facilities. The terms of the warehouse agreements allow the loans
to remain in the facilities before the Company is required to repurchase the
loans for periods that range from 90 to 330 days. Historically, the Company
met these obligations by obtaining permanent funding for these loans through
its securitization program. However, during September 1998 and continuing
into October and November 1998, the Company and certain other asset-backed
and mortgage-backed securitizors experienced significant reductions in
liquidity due to the inability to complete securitizations. Hedge funds, some
of which were significant buyers of asset-backed and mortgage-backed
investments, were required by their lenders to liquidate substantial portions
of their portfolios, thereby creating an overabundance of supply and,
simultaneously, a reduced demand for asset-backed and mortgage-backed
investments. The Company expects that any securitizations in the foreseeable
future will require substantial initial overcollateralization levels.
As part of the Strategic Alliance, CCFC would be expected to arrange for,
on a best efforts basis, any required initial overcollateralization levels
along with any required insurance.
Currently, the Company has not been able to find permanent financing
or, alternatively, find a buyer for its consumer loans. Therefore, the
warehouse facilities have either reached capacity, have been curtailed or
will reach contractual maturities in the December 1998 quarter. The current
capacity under its warehouse facilities that support its High LTV and B/C
loan products is approximately $110.0 million, with approximately $25.0
million specifically relating to High LTV capacity. Although the Company has
capacity under its facilities, the use of these facilities is restricted or
limited. Specifically, the advance rate on some of the facilities is below
par, which requires the Company to fund portions of loan originations from
other sources. Because the Company currently funds its loan originations and
operations with these
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facilities, their restricted use has caused the Company to experience severe
liquidity shortages. As a result of these liquidity concerns, the Company may
seek to complete large whole loan sales of its High LTV Loan product. During
the September 1998 quarter, the Company sold $200.0 million of High LTV Loans
on a whole loan basis. The Company is currently in negotiations with its
banks and investment banks to reopen and extend the contractual maturities of
certain funding facilities. As part of these negotiations, the Company is
required to complete the sale of its servicing operations to Superior. If the
Company is unable to find additional capacity under these facilities through
either whole loan sales or a securitization, or is unable to secure a new
source of funding, it could have a material adverse effect on the Company's
results of operations and financial condition.
In addition, the Company's largest repurchase facility is up for renewal
in December 1998. As part of the negotiations with the lender, two provisions
of the repurchase agreement have been changed. First, the facility has been
changed from a committed facility to an uncommitted facility. Second, the
minimum required market capitalization of the Company has been changed from
$750.0 million to $100.0 million until the renewal date. There can be no
assurances that the facility will be renewed or that it will not be materially
modified or reduced in size. If the facility is not renewed or is materially
modified, the Company may need to seek additional sources of funding to
support its future loan originations.
As of September 30, 1998, the Company had $189.4 million outstanding
under term line facilities. The borrowings from these facilities were
generally used to cover securitization and operating costs. Upon the
completion of a securitization, the Company borrowed against an agreed upon
value of the I/O Strips and receivable from trust. The Company has not
completed a securitization since August 1998. Therefore, it has not been able
to increase the borrowing base nor has it been able to borrow additional
funds. The Company has also requested that its banks and investment banks
establish a three-year term principal paydown schedule for certain of its
term line facilities, which is also contingent upon the loan servicing sale.
Management believes that the negotiations with its banks and investment
banks will be successful, although there can be no assurance that such
negotiations will be successful. Should the Company not be successful in
these negotiations, the Company may lose the right to repurchase its loans
held for sale, certain I/O Strips, receivable from trust and other assets
pledged as collateral for these facilities and may be unable to continue
funding its operations. In such an event, the banks and investment banks may
elect to retain the encumbered assets at a value potentially below the
carrying values recorded on the Company's balance sheet as of September 30,
1998.
On October 16, 1998, the Company received a $15.0 million bridge loan
from CCFC, which pays interest at a rate of prime plus 1.0%. Originally, the
bridge loan was due 30 days from issuance. As part of the negotiations for
the sale of the servicing operations, the Company and CCFC are negotiating
the extension of the term of the bridge loan. If the closing is significantly
delayed, CCFC, at its sole discretion, may call the note due immediately. As
collateral for the bridge loan, the Company pledged to CCFC a security
interest in FIRSTPLUS Bank.
On October 20, 1998, the U.K. loan and servicing operations were sold
for approximately $13.0 million and the proceeds were used for general
corporate purposes and funding of new loan originations. In addition, the
Company is attempting to sell its consumer finance company and conforming
first lien loan branches. Management hopes to complete these sales by the
end of the year or early part of 1999 and use the proceeds from these future
dispositions for general corporate purposes, funding of new loan originations
or paying down existing debt obligations.
On April 23, 1998, the Company closed its first net interest margin
transaction ("NIMS"). The Company secured $150 million of bonds with I/O
Strips from its 1996-4, 1997-1, 1997-2, 1997-3 and 1997-4 High LTV Loan
securitizations, a limited portion of servicing fees from those
securitizations to be earned, and a $30 million demand note. The bonds carry
a coupon of 8.5% and were sold at 99.55% of par for a bond equivalent yield
of approximately 8.87%. The funds received from the bonds were used to pay
down the term lines facilities related to each securitization. The debt
service of these bonds is paid from the excess residual income of the I/O
Strips and receivable from trust and the previously mentioned servicing fees.
If the excess residual income and servicing fees are not sufficient to meet
scheduled debt service requirements, the bondholders have the right to call
the $30.0 million demand note, with the remaining portion of the debt being
unsecured. As the bonds are secured by the excess residual income of I/O
Strips, the bonds have significant prepayment risk. If prepayment and default
rates are faster than anticipated, the excess residual income may not be
sufficient to cover debt service of the bonds. As of September 30, 1998, the
outstanding balance of the bonds was $139.5 million. The bonds are currently
ahead of the minimum debt service requirements.
Historically, the Company has operated on a negative operating cash
flow basis. The Company's operations used $306.3 million during the nine
months ended September 30, 1998, compared to $930.0 million during the nine
months ended September 30, 1997. The cash used in operations is primarily
related to loan originations, the cost of an enlarged infrastructure and
employee base, advertising and other marketing costs associated with the
increased direct to consumer loan originations and the costs that accompany
the Company's securitization strategy. The Company's investing activities
used cash of $53.9 million during the nine months ended September 30, 1998,
compared to provided cash of $14.5 million in the nine months ended September
30, 1997. Financing activities provided cash of $374.5 million for the nine
months ended September 30, 1998, compared to $990.4 million in the nine
months ended September 30, 1997. The cash provided by financing activities
was primarily due to borrowings related to the warehouse, repurchase, time
deposits and term line facilities, net of repayments, which have been used to
fund loan originations, working capital and securitization costs. Following
the curtailment of the Company's correspondent division, the amount of loan
premiums paid will be substantially less than historic levels. Therefore, the
Company should experience an improvement in operating cash flows.
In addition, the Company has a strategy of maintaining a significant
quantity of loans on its balance sheet, thus increasing the length of time
that loans are held for sale and materially increasing its interest rate
risk. Because the Company's present loan facilities bear interest at variable
rates, the Company has a need for medium- to long-term fixed-rate financing.
If the Company is unable to obtain such financing, it could have a material
adverse effect on the Company's results of operations and financial condition.
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RECENT ACCOUNTING PRONOUNCEMENTS
On October 23, 1998, the FASB issued a draft guide, in question and
answer format, entitled: "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, Questions and Answers, Second Edition" (the
"draft Q&A"). The draft Q&A indicates that two methods have arisen in
practice for accounting for credit enhancements, items which the Company
records as I/O Strips and receivable from trust. These methods are the
cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such,
the receivable from trust is recorded at face value. The cash-out method
treats credit enhancements as assets owned by the related securitization
trusts. As such, the receivable from trust cash flows are treated as part of
the I/O Strip and the combined I/O Strips and the receivable from trust cash
flows are recorded at a discounted value for the period between when the cash
is collected by the trust and released to the Company. The draft Q&A
indicates that the cash-out method should be used to measure the fair value
of credit enhancements, including subordinated I/O Strips. The draft Q&A
remains subject to a comment period and further amendments prior to becoming
effective and applicable to the Company in its final form.
The Company has historically used the cash-in method to account for its
I/O Strips and receivable from trust. Management has not determined the
ultimate impact the adoption of this draft Q&A will have, but believes it will
be material to the Company.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The "Year 2000" issue refers to the phenomenon whereby computer
programs, having been written using two digits rather than four to define the
applicable year, may erroneously recognize a date using "00" as the year 1900
rather than the year 2000. This error could potentially result in systems
failures or miscalculations that cause disruptions of business operations,
including, among other things, a temporary inability to process transactions
or engage in similar normal business activities.
In preparation for the year 2000, the Company has implemented a Year 2000
Program to inventory, assess and renovate its critical systems for loan
origination and servicing, telemarketing, consumer credit, securitization,
payroll, human resources and facilities operations. The major phases of the
Year 2000 Program are the Inventory, Assessment, Remediation and Testing, and
Business Contingency Planning phases. The Company's goal is to achieve Year
2000 mitigation of its mission-critical systems by December 31, 1998.
During the Inventory phase, an outside consultant gathered and
organized applications, networks, distribution computing and infrastructure
profiles and data in order to determine the size, scope and complexity of the
Company's exposure to Year 2000 problems. The Inventory phase was completed
during the quarter ending September 30, 1998. The results of the Inventory
phase are being used to develop an approach to mitigating the Company's Year
2000 problems.
In the Assessment phase, the Company hired an outside consultant to
perform a Year 2000 compliance assessment of the Company's hardware, software
and firmware at various locations and to deliver a comprehensive report of
areas of exposure and recommended solutions for compliance for the Company's
business critical applications. This phase is expected to be completed during
the quarter ended December 31, 1998.
During the Remediation and Testing phase, the Company will upgrade
several servers and take other actions that were identified as necessary
during the Inventory and Assessment phases. The Company then will test
business-critical systems for ability to process dates. This phase was
approximately 10% complete through the end of the quarter ending September 30,
1998, and, assuming that the sale of the Company's servicing operations takes
place, this phase is expected to be completed during the quarter ending
September 30, 1998. In the event that the sale of the servicing operations
does not occur, significant remediation or replacement of the software
currently used in the servicing operations will be required. Such remediation
or replacement of the servicing software likely would not be completed until
sometime in 1999.
In the Business Contingency Planning phase, the Company will develop
contingency plans to address unexpected issues or failures that may arise as
a result of Year 2000 related failures. The business contingency plan will
take an approach that complements the Company's existing Disaster Recovery
Planning Process. The Company expects its contingency plans to be completed
in the first quarter of 1999.
The Company has initiated formal communications with outside vendors
in order to assess the extent to which the Company's upgraded systems are
vulnerable to those third parties' failure to remedy their own Year 2000
issues. The
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Company has received compliance statements from key vendors and will verify
these compliance claims as appropriate. The assessment is ongoing and is
expected to be completed in conjunction with the completion of the business
contingency plan. The failure of key vendors to remedy their own Year 2000
issues could have a material impact on the operations of the Company.
The Company presently believes that, with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company presently estimates its cost for its Year 2000 Program at
$6.2 million. Of this amount, approximately $1.55 million, or 25%, was
spent as of September 30, 1998. If the sale of the Company's servicing
operations is completed, the estimated costs for the Year 2000 Program should
decrease.
FORWARD LOOKING STATEMENTS
The above statements contained in this Form 10-Q that are not historical
facts, including, but not limited to, statements that 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, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
and involve a number of risks and uncertainties. The actual results of the
future events described in such forward-looking statements in this press
release could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: short-term interest rate fluctuations, level of defaults and
prepayments, general economic conditions, competition, government regulation
and possible future litigation, as well as the risks and uncertainties
discussed in the Company's Current Report on Form 8-K, dated December 19,
1996, including without limitation, the uncertainties set forth from time to
time in the Company's other public reports and filings and public statements.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On July 22, 1998, a class action lawsuit entitled MACK ET AL. V.
FIRSTPLUS FINANCIAL, INC. ET. AL. was filed against FIRSTPLUS FINANCIAL, INC.
by employees of FIRSTPLUS FINANCIAL, INC., alleging breach of contract,
improper wage deductions, violations of the Fair Labor Standards Act and
invasion of privacy. In August 1998, the case was dismissed without prejudice
by the United States District Court for the Central District of California,
which referred the employee claims to arbitration for resolution. Plaintiffs
have petitioned the Orange County, California Superior Court for class-wide
and/or consolidated arbitration proceedings, which FIRSTPLUS FINANCIAL, INC.
is vigorously opposing.
On August 4, 1998, a consumer class action suit entitled KAHLER v.
FIRSTPLUS FINANCIAL, INC., et al, was filed against FIRSTPLUS FINANCIAL,
INC., alleging violations of federal statutes including Real Estate
Settlement Act, Truth in Lending Act, and Uniform Unfair Trade Practices Act
in connection with upcharging appraisals and credit reports. The case has
been removed to the United States District Court for the Central District of
California and has not received class action certification. The Company is
vigorously defending such lawsuit.
On October 12, 1998, LIFE Financial Corp. terminated the agreement
and plan of merger between itself and the Company. On October 19, 1998, LIFE
Financial Corp. filed a complaint in the United States District Court,
Northern Districts of Texas, Dallas Division against the Company alleging
breach of the agreement and plan of merger and seeking unspecified monetary
damages. The Company believes the suit is without merit and intends to
vigorously defend the suit.
On October 30, 1998, a complaint was filed in the United States
District Court, Northern District of Texas, Dallas Division, on behalf of
Evan Linnett and Lynne H. Sinay, stockholders of the Company, and all others
similarily situated, against the Company, and against Mr. Phillips, Mr. Green
and Mr. Benac, individually. On October 30, 1998, a complaint was filed in
the United States District Court, Northern District of Texas, Dallas
Division, on behalf of Robert A. Staub, a stockholder of the Company, and all
others similarily situated, against the Company, and against Mr. Phillips,
Mr. Green and Mr. Benac, individually. On November 6, 1998, a complaint was
filed in the United States District Court, Northern District of Texas, Dallas
Division, on behalf of Robert Aldoroti, Gilbert M. Carson and G.M. Carson,
Inc., stockholders of the Company, and all others similarily situated,
against the Company, and against Mr. Phillips, Mr. Green and Mr. Benac,
individually. On November 6, 1998, a complaint was filed in the United
States District Court, Northern District of Texas, Dallas Division, on behalf
of Robert DiPippo and Robert Ziatz, stockholders of the Company, and all
others similarily situated, against the Company, and against Mr. Phillips,
Mr. Green and Mr. Benac, individually. On November 6, 1998, a complaint was
filed in the United States District Court, Northern District of Texas, Dallas
Division, on behalf of Marilyn Mandel, a stockholder of the Company, and all
others similarily situated, against the Company, and against Mr. Phillips,
Mr. Green and Mr. Benac, individually. On November 12, 1998, a complaint was
filed in the United States District Court, Northern District of Texas, Dallas
Division, on behalf of Twin Plus LLC and Trust Advisors Equity PLS LLC,
stockholders of the Company, and all other similarily situated individuals,
against the Company, and against Mr. Phillips, Mr. Green and Mr. Benac,
individually. Each of these suits alleges that the Company and the
individual defendants made misleading and false public statements in various
press releases and public filings in violation of the federal securities
laws. The plaintiffs in each of these class action lawsuits are seeking
unspecified monetary damages. The Company intends to vigorously defend these
lawsuits.
The Company is also aware that other, similar lawsuits have been
or are in the process of being filed against the Company and certain of its
officers and directors. The Company intends to vigorously defend any such
lawsuits.
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
27- Financial Data Schedule
(B) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTPLUS Financial Group, Inc.
(Registrant)
by: /s/ William P. Benac
---------------------------------------------------------
William P. Benac
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)
19
<PAGE>
date: November 17, 1998
20
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