<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 June 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 37,884,831 shares of voting common stock and 690,990 shares of
non-voting common stock, $.01 par value, outstanding as of July 31, 1998.
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC.
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements Page
Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and September 30, 1997 3
Consolidated Statements of Income - (Unaudited)
Three Months Ended June 30, 1998 and June 30, 1997
and Six Months Ended June 30, 1998 and June 30, 1997 4
Condensed Consolidated Statements of Stockholders'
Equity - (Unaudited) Three Months and Six Months
Ended June 30, 1998 and June 30, 1997 5
Consolidated Statements of Cash Flows- (Unaudited)
Six Months Ended June 30, 1998 and June 30, 1997 7
Notes to Consolidated Financial Statements- (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes In Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 16
</TABLE>
2
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents $ 68,458 $ 94,978
Securities, available for sale 30,958 40,995
Loans held for sale, net 1,808,013 1,400,446
Investment in securitized loans - 190,861
Subordinated certificates held for sale 18,047 18,047
Interest only strips, net 547,720 456,123
Servicing assets 83,109 40,516
Receivable from trusts 259,156 138,816
Other assets 105,066 66,424
---------- ----------
Total assets $2,920,527 $2,447,206
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 47,060 $ 44,445
Warehouse and repurchase agreements 1,423,516 1,238,156
Term lines 246,393 211,751
Time deposits 291,713 120,025
Bonds 145,498 174,088
Convertible subordinated notes 69,920 69,920
Notes payable and other borrowings 40,440 39,321
Deferred tax liabilities, net 149,974 119,355
---------- ----------
Total liabilities 2,414,514 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 - 37,634-1998
and 36,580-1997 377 366
Common stock, non-voting, $0.01 par value:
Authorized shares - 25,000
Issued and outstanding shares - 691-1997 and 1998 7 7
Additional capital 236,477 216,881
Unrealized gains on available for sale securities, net 17,152 20,253
Retained earnings 252,000 192,638
---------- ----------
Total stockholders' equity 506,013 430,145
---------- ----------
Total liabilities and stockholders' equity $2,920,527 $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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Gain on securitized loan sales, net $ 46,983 $ 79,565 $ 85,340 $146,505
Gain on whole loan sales 9,210 6,570 14,157 14,789
Interest income 75,926 50,565 142,899 85,166
Interest only strips interest income 24,807 8,525 48,627 11,225
Origination income 44,950 10,325 77,036 21,845
Servicing income 12,768 6,189 23,906 10,044
Insurance income 4,002 489 6,978 489
Other income 1,046 1,079 3,885 2,410
-------- -------- -------- --------
Total revenues 219,692 163,307 402,828 292,473
Expenses:
Salaries and employee benefits expense 46,830 28,475 82,432 50,860
Interest expense 37,440 26,460 73,413 47,095
Other operating expenses 75,683 31,834 136,937 55,957
Provision for possible credit losses 14,823 13,032 33,137 25,779
-------- -------- -------- --------
Total expenses 174,776 99,801 325,919 179,691
-------- -------- -------- --------
Income before income taxes 44,916 63,506 76,909 112,782
Provision for income taxes (17,068) (24,132) (29,225) (42,857)
-------- -------- -------- --------
Net income $ 27,848 $ 39,374 $ 47,684 $ 69,925
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares 38,149 35,516 38,017 34,825
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ 0.73 $ 1.11 $ 1.25 $ 2.01
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares-assuming dilution 43,942 41,115 43,613 39,987
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ 0.65 $ 0.98 $ 1.13 $ 1.79
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes
4
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated
Common Common other
Preferred stock, stock, non- Additional Retained comprehensive
stock voting voting capital earnings income Total
--------- ------ ----------- ---------- -------- ------------- -----
<S> <C> <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 income:
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
---- ------ ---- -------- -------- ------- --------
---- ------ ---- -------- -------- ------- --------
</TABLE>
See accompanying notes
5
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated
Common Common other
Preferred stock, stock, non- Additional Retained comprehensive
stock voting voting capital earnings income Total
--------- ------ ----------- ---------- -------- ------------- -----
<S> <C> <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 of
reclassification amount 7,171
-------
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
---- ------ ---- -------- -------- ------- --------
---- ------ ---- -------- -------- ------- --------
</TABLE>
See accompanying notes
6
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1998 1997
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 47,684 $ 69,925
Operating activities:
Provision for possible credit losses 33,137 25,779
Depreciation and amortization 4,491 1,289
Gain on sales of loans (99,497) (161,294)
Changes in operating assets and liabilities:
Interest only strip and servicing asset amortization 106,730 31,482
Loans originated or acquired (2,790,872) (2,042,887)
Principal collected and proceeds from sale of loans 2,752,174 1,485,352
Interest only strips, net (133,507) (64,463)
Receivable from trusts (87,550) (58,060)
Other assets (11,339) (9,423)
Accounts payable and accrued expenses 16,141 11,955
Deferred tax liability 24,453 39,283
Other 3,342 7,739
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (134,613) (663,323)
INVESTING ACTIVITIES:
Cash acquisitions (21,877) -
Cash from acquisitions - 2,116
Purchases of available for sale securities (21,072) (48,327)
Proceeds from sale of available for sale securities 20,286 74,277
Purchases of equipment and leasehold improvements (19,339) (14,317)
----------- -----------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (42,002) 13,749
FINANCING ACTIVITIES:
Borrowings on warehouse financing facilities, net 61,549 348,770
(Repayments)/borrowings on term lines of credit, net (29,299) 66,111
Borrowings on notes payable, net 726 8,117
Borrowings on bonds 146,320 177,376
Payments on bonds payable (169,468) -
Net change in deposits 158,567 (779)
Issuance of common stock 17,154 121,748
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 185,549 721,343
----------- -----------
INCREASE IN CASH 8,934 71,769
Cash and cash equivalents at beginning of period 59,524 20,039
----------- -----------
Cash and cash equivalents at end of period $ 68,458 $ 91,808
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period $ 78,674 $ 41,823
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
7
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 six-month periods ended June 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 second quarter of the Company's new fiscal year.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No.133"). SFAS No.133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No.133 is effective for fiscal years
beginning after June 15, 1999. Management has not yet determined the effect
of SFAS No.133 on the consolidated financial statements.
2. LOANS HELD FOR SALE
Loans held for sale consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- ----------
(unaudited)
<S> <C> <C>
High LTV Loans $1,613,590 $1,310,576
Personal consumer 141,822 93,172
Conforming first lien mortgages 24,649 16,488
B/C loans 34,743 -
Other 39,768 14,581
----------- ----------
Subtotal 1,854,572 1,434,817
Allowance for possible credit losses (20,485) (31,539)
Deferred finance charges (25,652) (16,568)
(Discounts)/premiums, net (422) 13,736
----------- ----------
Total $1,808,013 $1,400,446
----------- ----------
----------- ----------
</TABLE>
8
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
3. INTEREST ONLY STRIPS, NET
The activity in the Interest Only Strips (net of allowance for loan losses)
is summarized as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended September 30,
June 30, 1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Balance, beginning of period $ 482,271 $ 132,973
I/O Strips created from securitizations 366,363 608,548
Unrealized loss (6,393) -
Provision for possible losses (248,074) (245,796)
Amortization (101,708) (61,707)
Charge-offs, net 58,060 23,866
Other (2,799) (1,761)
--------- ---------
Balance, end of period $ 547,720 $ 456,123
--------- ---------
--------- ---------
</TABLE>
4. EARNINGS PER SHARE
The table below sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per share - income
available to common stockholders (net income) $27,848 $39,374 $47,684 $69,925
Effect of dilutive securities:
Additional interest on convertible subordinated
notes, net of tax 785 785 1,570 1,570
------- ------- ------- -------
Numerator for diluted earnings per share-income
available to common stockholders after
assumed conversions $28,633 $40,159 $49,254 $71,495
------- ------- ------- -------
------- ------- ------- -------
Denominator:
Denominator for basic earnings per share - weighted
average shares 38,149 35,516 38,017 34,825
Effect of dilutive securities:
Employee stock options 1,503 1,309 1,306 872
Convertible subordinated notes 4,290 4,290 4,290 4,290
------- ------- ------- -------
Dilutive potential common shares 5,793 5,599 5,596 5,162
------- ------- ------- -------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions 43,942 41,115 43,613 39,987
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share $ 0.73 $ 1.11 $ 1.25 $ 2.01
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share $ 0.65 $ 0.98 $ 1.13 $ 1.79
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
9
<PAGE>
FIRSTPLUS FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
5. ACQUISITION OF LIFE FINANCIAL CORP.
On March 11, 1998, the Company and LIFE Financial Corporation ("LIFE")
entered into an Agreement and Plan of Merger (the "Merger Agreement") whereby
LIFE will be acquired by the Company. Under the Merger Agreement, a newly
formed, wholly owned subsidiary of the Company will merge with and into LIFE,
with LIFE being the surviving corporation in the merger ("Merger"). The
Merger is structured as a stock-for-stock merger whereby LIFE stockholders
will receive approximately $20.00 in value of FIRSTPLUS voting common stock
for each share of LIFE common stock, to the extent FIRSTPLUS common stock
trades between $30.00 and $40.00 per share based on the 30-day average prior
to closing of the Merger. It is anticipated that the Merger will be treated
as a tax-free reorganization and a "pooling of interests." Completion of the
Merger is subject to certain conditions, including (i) approval by the
stockholders of LIFE, (ii) approval by the Office of Thrift Supervision
("OTS") and other requisite regulatory authorities, (iii) receipt of an
opinion of counsel for LIFE that the Merger will be treated as a tax-free
reorganization for federal income tax purposes, and (iv) other conditions to
closing that are customary in transactions of this type.
LIFE announced net income of $1.15 million, or $0.17 per diluted LIFE
share for the quarter ended June 30, 1998. The results are lower than the
net income reported for the March 1998 quarter of $3.7 million, or $0.54 per
diluted LIFE share, due to several factors, including, certain I/O Strip
valuation adjustments recorded during the June 1998 quarter. LIFE's
management indicated that they believe that such valuation adjustments reflect
the full amount of adjustments needed to appropriately value such assets,
based on current market conditions and other known factors. If further
adjustments are appropriate, and if such adjustments are of a material
nature, such adjustments could have an adverse effect on the Merger.
The application for the change of control of LIFE was filed with the OTS
in June 1998. LIFE and FIRSTPLUS currently anticipate filing the required
Form S-4 Registration Statement with the Securities Exchange Commission in
August 1998.
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 finance receivables. The
Company's loan products are debt consolidation or home improvement loans
secured by 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.
FINANCIAL CONDITION
JUNE 30, 1998
Loans held for sale and investment in securitized loans increased to
$1.8 billion at June 30, 1998 compared to $1.6 billion at September 30, 1997.
This increase was due to loan originations of $4.1 billion offset by loans
securitized of $3.0 billion, whole loan sales and loan paydowns since
September 30, 1997.
The Company utilizes an enhanced residual valuation model. The model
takes into account the most relevant valuation factors as of the date of the
related securitization and the current balance sheet date, and specifically
addresses discount rates. Management makes estimates and assumptions
regarding the value of the interest only strips ("I/O Strips") at the time of
the securitization and at each 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. Based on current prepayment,
default and discount rate assumptions used in the residual valuation model at
June 30, 1998, the Company recorded a $4.0 million, after tax, unrealized
loss against its I/O Strips. The discount rate is determined based on the
securitization structure, the over-collateralization levels, interest rate
fluctuations and market volatility. The Company also increased its
prepayment and default assumptions, as part of its valuation assessment as of
June 30, 1998. 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 results differing from those
estimates. This valuation partially offsets the previously recorded
unrealized gains on available for sale securities in equity of approximately
$21.1 million.
The Company's I/O Strips increased to $547.7 million at June 30, 1998,
compared to $456.1 million at September 30, 1997, an increase of $91.6
million or 20.1%. The increase in the I/O Strips was the result of the
recognition of the fair value of the I/O Strips from securitization completed
during the six months ended June 30, 1998 and the three months ended December
31, 1997 (the "transition period") securitizations, offset by the
amortization of the I/O Strips and an unrealized loss of $4.0 million, after
tax. I/O Strips are amortized through periodic charges to the statement of
income. As of June 30, 1998, the carrying value of the recorded I/O Strips
reflects their estimated fair value.
Total stockholders' equity at June 30, 1998 was $506.0 million, compared
to $430.1 million at September 30, 1998, an increase of $75.9 million or
17.6%. During the six months ended June 30, 1998 and the transition period,
the Company earned net income of $47.7 million and $11.7 million,
respectively, and issued $17.0 million in common stock during the six months
ended June 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997
The Company's total revenues increased to $219.7 million during its June
1998 quarter, compared to $163.3 million in the June 1997 quarter, an
increase of $56.4 million or 34.5%. During the June 1998 quarter, the
Company's percentage of revenue, excluding gain on securitized loan sales to
total revenue, increased to 78.6%, compared to 51.3% in the June 1997 quarter.
Gain on securitized loan sales, net, decreased to $47.0 million in the
June 1998 quarter, compared to $79.6 million in the June 1997 quarter, a
decrease of $32.6 million or 41.0%. Gain on securitized loan sales, net, in
each quarter was affected by both the size of the securitizations and the
assumptions used in the gain on securitized loan
11
<PAGE>
sales. During the June 1998 quarter, the Company securitized $1.15 billion
of High LTV Loans, compared to $676.4 million in the June 1997 quarter.
During the June 30, 1998 quarter, the Company used an approximate 18.6%
discount rate to value the I/O Strips, by taking into account all cash flows
that will revert to the Company, related to securitizations completed during
the quarter. The resulting gain on securitized loan sales, net, as a
percentage of the loans securitized and sold was 4.09% and 11.8% for the
quarters ended June 30, 1998 and 1997, respectively. Other assumptions used
in assessing the fair value of the I/O Strips during the June 1998 quarter
were proprietary prepayment curves (reaching a voluntary constant prepayment
rate of approximately 16.0% after nine months and further ramps to 17.75%)
and proprietary default curves (resulting in an involuntary prepayment curve
of 4.15%).
Interest income increased to $75.9 million in the June 1998 quarter,
compared to $50.6 million in the June 1997 quarter, an increase of $25.3
million or 50.0%. 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 June 30, 1998 were $1.8 billion, compared to $1.1 billion as of
June 30, 1997.
Interest income on the Company's I/O Strips increased to $24.8 million
in the quarter ended June 30, 1998, compared to $8.5 million in the quarter
ended June 30, 1997, an increase of $16.3 million or 191.8%. This increase
was primarily the result of the Company's larger average I/O Strip balance
during the June 30, 1998 quarter. I/O Strips as of June 30, 1998 were $547.7
million, compared to $375.9 million as of June 30, 1997.
Origination income increased to $45.0 million in the quarter ended June
30, 1998, compared to $10.3 million in the quarter ended June 30, 1997, an
increase of $34.7 million or 336.9%. This increase was the result of the
Company's continuing shift toward direct to consumer originations, which
accounted for 39.7% of High LTV Loan originations compared to 22.8% a year ago.
Origination fees are deferred when collected and subsequently recognized
when the loans are sold. The Company collected and deferred approximately
$57.9 million of loan origination fees during the June 1998 quarter.
Servicing income increased to $12.8 million in the quarter ended June
30, 1998, compared to $6.2 million in the quarter ended June 30, 1997, an
increase of $6.6 million or 106.5%. This increase was a result of the
increase in the Company's securitized loan portfolio, which increased to $5.6
billion at June 30, 1998, compared to $2.3 billion at June 30, 1997.
Total pre-tax operating expenses, which include salaries, employee
benefits, advertising, marketing, servicing and other operating expenses,
increased to $122.5 million in the quarter ended June 30, 1998, compared to
$60.3 million in the quarter ended June 30, 1997, an increase of $62.2
million or 103.2%. The increase in operating expenses during the quarter
ended June 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, the introduction of its High LTV first lien product,
professional fees primarily associated with improving its information
technology and increases in servicing-related personnel.
Interest expense for the quarter ended June 30, 1998 increased to $37.4
million, compared to $26.5 million for the quarter ended June 30, 1997, an
increase of $10.9 million or 41.1%. 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 $14.8 million for the quarter ended June 30, 1998, compared
to $13.0 million for the quarter ended June 30, 1997, an increase of $1.8
million or 13.8%. The 30 day and over delinquency rate for the managed loans
portfolio of 2.2% as of June 30, 1998 was flat compared to 2.2% as of June
30, 1997. Gross servicing portfolio defaults, before recoveries and insurance
recoveries received on Title I loans, equaled $40.0 million or 0.58% of the
June 30, 1998 average quarterly loan portfolio. Of the $40.0 million,
approximately $3.1 million were Title I defaults, which are subject to
recoveries under the Title I insurance program.
12
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997
The Company's total revenues increased to $402.8 million during the six
months ended June 1998, compared to $292.5 million in the six months ended
June 30, 1997, an increase of $110.3 million or 37.7%. During the six months
ended June 30, 1998, the Company's percentage of revenue, excluding gain on
securitized loan sales to total revenue, increased to 78.8%, compared to
49.9% in the six months ended June 30, 1997.
Gain on securitized loan sales, net, decreased to $85.3 million in the
six months ended June 30, 1998, compared to $146.5 million in the six months
ended June 30, 1997, a decrease of $61.2 million or 41.8%. Gain on
securitized loan sales, net, in the six-month period was affected by both the
size of the securitizations and the assumptions used in the gain on
securitized loan sales. During the six months ended June 30, 1998, the
Company securitized $2.2 billion of High LTV Loans, compared to $1.2 billion
in the six months ended June 30, 1997. The resulting gain on securitized
loan sales, net as a percentage of the loans securitized and sold was 3.9%
and 12.2% for the six months ended June 30, 1998 and 1997, respectively.
Interest income increased to $142.9 million in the six months ended June
30, 1998, compared to $85.2 million in the six months ended June 30, 1997, an
increase of $57.7 million or 67.7%. 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 June 30, 1998 were $1.8 billion, compared
to $1.1 billion as of June 30, 1997.
Interest income on the Company's I/O Strips increased to $48.6 million
in the six months ended June 30, 1998, compared to $11.2 million in the six
months ended June 30, 1997, an increase of $37.4 million or 333.9%. This
increase was primarily the result of the Company's larger average I/O Strip
balance during the six months ended June 30, 1998. I/O Strips as of June 30,
1998 were $547.7 million, compared to $375.9 million as of June 30, 1997.
Origination income increased to $77.0 million in the six months ended
June 30, 1998, compared to $21.8 million in the six months ended June 30,
1997, an increase of $55.2 million or 253.2%. The increase was the result of
the Company's increasing direct to consumer loan originations.
Servicing income increased to $23.9 million in the six months ended June
30, 1998, compared to $10.0 million in the six months ended June 30, 1997, an
increase of $13.9 million or 139.0%. This increase was a result of the
increase in the Company's securitized loan portfolio, which increased to $5.6
billion at June 30, 1998, compared to $2.3 billion at June 30, 1997.
Total pre-tax operating expenses, which include salaries, employee
benefits, advertising, marketing, servicing and other operating expenses,
increased to $219.4 million in the six months ended June 30, 1998, compared
to $106.8 million in the six months ended June 30, 1997, an increase of
$112.6 million or 105.4%. The increase in operating expenses during the six
months ended June 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, the introduction of its High LTV first lien
product, professional fees primarily associated with improving its
information technology and increases in servicing-related personnel.
Interest expense for the six months ended June 30, 1998 increased to
$73.4 million, compared to $47.1 million for the six months ended June 30,
1997, an increase of $26.3 million or 55.8%. 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 $33.1 million for the six months ended June 30, 1998,
compared to $25.8 million for the six months ended June 30, 1997, an increase
of $7.3 million or 28.3%. The increase is the result of an increased loans
held for sale portfolio.
13
<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 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. Since the September 1997 quarter, the Company has been
able to utilize a securitization structure whereby the Company issues bonds
in excess of loans delivered. Overcollateralization requirements are met by
future excess cash flows of the specific securitizations. In addition, the
Company has sold a portion of the I/O Strip for cash, which is equal to
approximately 1.0% of loans delivered. The Company expects to continue to
utilize this structure in future securitization transactions.
Adequate credit facilities and other sources of funding, which permit
the Company to fund its operating cash requirements and to securitize or sell
loans in the secondary market, are essential to the continuation of the
Company's ability to originate and purchase loans. After utilizing available
working capital, the Company borrows money to fund its loan originations and
purchases and repays these borrowings as the loans are repaid or sold. Upon
the securitization or sale of loans and the subsequent repayment of the
borrowings, the Company's working capital and warehouse facilities again
become available to fund additional loan originations and purchases.
The Company currently has approximately $5.0 billion in capacity in its
warehouse and repurchase facilities. These facilities carry variable
interest rates, primarily based on LIBOR, ranging from 0.50% to 1.50%. As of
June 30, 1998, the Company had $1.4 billion outstanding under these
facilities. The warehouse and repurchase facilities had a weighted average
interest rate of 6.35% as of June 30, 1998.
In addition, the Company had approximately $495.9 million in term line
facilities that are secured by I/O Strips generated from the related
securitizations. As of June 30, 1998, the Company had $246.4 million
outstanding under these facilities and other lines of credit. These
facilities are with the same institution as the warehouse and repurchase
facility and bear interest rates between LIBOR plus 1.75% and 1.875%.
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 of credit related to each securitization. The debt
service of these bonds are paid from the excess residual income of the I/O
Strips and the previously mentioned servicing fees. If the excess residual
income and servicing fees are not sufficient to meet scheduled debt service
requirements, the bond holders have the right to call a $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 a result of the Company's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Company has
operated, and expects to continue to operate, on a negative operating cash
flow basis, which is expected to increase as the volume of the Company's loan
purchases and originations increase and its securitization program grows.
The Company's operations used $134.6 million during the six months ended June
30, 1998, compared to $663.3 million used during the six months ended June
30, 1997. The cash used in operations is primarily related to 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 $42.0 million during the six
months ended June 30, 1998, compared to $13.7 million in the six months ended
June 30, 1997. Financing activities provided cash of $185.5 million for the
six months ended June 30, 1998, compared to $721.3 million in the six months
ended June 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.
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
14
<PAGE>
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.
IMPACT OF YEAR 2000
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 a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage
in similar normal business activities.
The Company is in the process of upgrading its mission critical systems
as part of its strategic initiatives to accommodate its growth and need for
increased capacity. As part of this process, the Company is ensuring that
these new systems are Year 2000 mitigated.
To a degree, the Company relies on outside software vendors, significant
suppliers and large customers for the operation of its systems. The Company
is initiating formal communications with these parties to determine the
extent to which the Company's upgraded systems are vulnerable to those third
parties' failure to remedy their own Year 2000 issues. 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 intends to utilize both internal and external resources to
test the software for Year 2000 compliance and to determine whether such
software should be reprogrammed or replaced. The Company anticipates
completing the Year 2000 project prior to any anticipated impact on its
operating systems. The total cost of the Year 2000 project is not presently
expected to be material and is being funded through operating cash flows.
FORWARD LOOKING STATEMENTS
The above statements contained in this 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not Applicable
Item 2. CHANGES IN SECURITIES
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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)
date: AUGUST 14, 1998
------------------
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 64,458,000
<SECURITIES> 596,725,000
<RECEIVABLES> 1,828,498,000
<ALLOWANCES> 20,485,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 65,987,000
<DEPRECIATION> 16,127,000
<TOTAL-ASSETS> 2,920,527,000
<CURRENT-LIABILITIES> 47,060,000
<BONDS> 0
0
0
<COMMON> 383,000
<OTHER-SE> 505,630,000
<TOTAL-LIABILITY-AND-EQUITY> 2,920,527,000
<SALES> 0
<TOTAL-REVENUES> 402,827,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 219,369,000
<LOSS-PROVISION> 33,137,000
<INTEREST-EXPENSE> 73,413,000
<INCOME-PRETAX> 76,908,000
<INCOME-TAX> 29,225,000
<INCOME-CONTINUING> 47,683,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,683,000
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.13
</TABLE>
