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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
675 BERING DRIVE, SUITE 710
HOUSTON, TEXAS 77057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES
OUTSTANDING AT
CLASS NOVEMBER 28, 1997
----- -----------------
COMMON STOCK-$.001 PAR VALUE 5,566,669
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<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
OCTOBER 31, 1997
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1997 and
October 31, 1997..................... 3
Consolidated Statements of Operations
for the Three Months
and Six Months Ended October 31, 1996
and 1997............................. 4
Consolidated Statement of
Shareholders' Equity for the Six
Months Ended October 31, 1997........ 5
Consolidated Statements of Cash Flows
for the Six Months Ended
October 31, 1996 and 1997............ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..... 17
SIGNATURES................................... 17
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1997 AND OCTOBER 31, 1997
APRIL 30, OCTOBER 31,
1997 1997
--------------- ------------
(UNAUDITED)
ASSETS
------
Receivables Held for Investment,
net................................ $ 118,299,063 $125,998,247
Cash and Short-Term Investments,
including restricted cash of
$3,550,391 and $3,476,507.......... 5,967,358 4,128,799
Other Receivables:
Due from servicer............... 8,427,565 7,122,436
Accrued interest................ 1,923,360 2,061,808
Assets Held for Sale................. 1,072,463 3,687,358
Other Assets:
Funds held under reinsurance
agreement..................... 2,563,454 1,655,980
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $553,143 and $681,074...... 1,101,947 1,202,803
Deferred income tax asset,
net........................... 387,876 379,910
--------------- ------------
Total assets............... $ 139,743,086 $146,237,341
=============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 112,894,131 $119,355,204
Other Liabilities:
Due to dealers.................. 342,697 271,435
Accounts payable and accrued
liabilities................... 2,460,685 1,541,561
Current income taxes payable.... 109,472 18,304
--------------- ------------
Total liabilities.......... 115,806,985 121,186,504
--------------- ------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares authorized,
5,566,669 and 5,566,669,
shares issued and
outstanding................... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 5,465,616 6,580,352
--------------- ------------
Total shareholders'
equity................... 23,936,101 25,050,837
--------------- ------------
Total liabilities and
shareholders' equity..... $ 139,743,086 $146,237,341
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- --------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Income...................... $ 4,577,626 $ 4,951,665 $ 9,077,657 $ 9,804,962
Interest Expense..................... 1,668,225 1,940,003 3,228,822 3,759,268
------------ ------------ ------------ ------------
Net interest income........ 2,909,401 3,011,662 5,848,835 6,045,694
Provision for Credit Losses.......... 401,367 628,276 760,974 1,339,276
------------ ------------ ------------ ------------
Net Interest Income After Provision
for Credit Losses.................. 2,508,034 2,383,386 5,087,861 4,706,418
------------ ------------ ------------ ------------
Other Income:
Late fees and other............. 145,645 126,412 317,594 306,039
------------ ------------ ------------ ------------
Operating Expenses:
Servicing fees.................. 382,211 446,997 734,525 873,692
Salaries and benefits........... 498,927 609,743 1,117,430 1,265,902
Other........................... 500,903 618,744 1,098,047 1,117,373
------------ ------------ ------------ ------------
Total operating expenses... 1,382,041 1,675,484 2,950,002 3,256,967
------------ ------------ ------------ ------------
Income Before Provision for Income
Taxes.............................. 1,271,638 834,314 2,455,453 1,755,490
------------ ------------ ------------ ------------
Provision for Income Taxes:
Current......................... 323,569 211,522 643,380 632,788
Deferred........................ 140,608 93,003 252,860 7,966
------------ ------------ ------------ ------------
Total provision for income
taxes.................... 464,177 304,525 896,240 640,754
------------ ------------ ------------ ------------
Net Income........................... $ 807,461 $ 529,789 $ 1,559,213 $ 1,114,736
============ ============ ============ ============
Net Income Per Common Share.......... $0.15 $0.10 $0.28 $0.20
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, April 30, 1997.............. $5,567 $ 18,464,918 $ 5,465,616 $ 23,936,101
Net income...................... -- -- 1,114,736 1,114,736
------- -------------- ------------ --------------
Balance, October 31, 1997............ $5,567 $ 18,464,918 $ 6,580,352 $ 25,050,837
======= ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997
(UNAUDITED)
1996 1997
--------------- ---------------
Cash Flows From Operating Activities:
Net income...................... $ 1,559,213 $ 1,114,736
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense..... 799,614 1,125,270
Provision for credit
losses................... 760,974 1,339,276
Charge-offs, net of
recoveries............... (630,761) (1,266,424)
(Increase) decrease in:
Accrued interest
receivable............... (149,276) (138,448)
Restricted cash............ 530,145 73,884
Deferred financing costs
and other................ (289,725) (176,054)
Funds held under
reinsurance agreement.... 1,590,220 907,474
Due from servicer.......... (1,164,593) 1,305,129
Deferred income tax asset,
net...................... -- 7,966
Federal income tax
receivable............... 205,023 --
Increase (decrease) in:
Due to dealers............. (252,802) (71,262)
Accounts payable and
accrued liabilities...... (372,353) (919,124)
Current income taxes
payable.................. (193,434) (91,168)
Deferred income tax
liability, net........... 252,860 --
--------------- ---------------
Net cash provided by
operating
activities.......... 2,645,105 3,211,255
--------------- ---------------
Cash Flows From Investing Activities:
Purchase of receivables......... (35,391,364) (35,214,648)
Principal payments from
receivables................... 21,395,234 23,825,530
Purchase of furniture and
equipment..................... (35,628) (47,885)
--------------- ---------------
Net cash used in
investing
activities.......... (14,031,758) (11,437,003)
--------------- ---------------
Cash Flows From Financing Activities:
Proceeds from advances on
secured debt.................. 31,354,444 29,430,783
Principal payments made on
secured debt.................. (19,970,926) (22,969,710)
--------------- ---------------
Net cash provided by
financing
activities.......... 11,383,518 6,461,073
--------------- ---------------
Decrease in Cash and Short-Term
Investments........................ (3,135) (1,764,675)
Cash and Short-Term Investments at
Beginning of Period................ 3,601,269 2,416,967
--------------- ---------------
Cash and Short-Term Investments at
End of Period...................... $ 3,598,134 $ 652,292
=============== ===============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the
period for --
Interest................... $ 3,055,713 $ 3,754,048
Income taxes............... 631,791 723,956
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1997
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its direct and indirect subsidiaries (collectively
referred to as the Company) is principally involved in the business of acquiring
and holding for investment retail installment contracts secured by new and used
automobiles and light trucks (receivables) originated by factory authorized
franchised dealers. As of October 31, 1997, approximately 44 percent of
receivables held for investment were located in Texas. The Company currently
operates in 17 states.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of a
normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of October 31, 1997, and the results of its
operations for the three months and six months ended October 31, 1996 and 1997,
and its cash flows for the six months ended October 31, 1996 and 1997.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading.
Certain reclassifications have been made to the 1996 amounts to conform
with the 1997 presentation.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders. The weighted average common shares
outstanding for the three months and six months ended October 31, 1996 and 1997,
were 5,566,669.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
APRIL 30, OCTOBER 31,
1997 1997
--------------- ---------------
Receivables.......................... $ 115,742,904 $ 123,298,865
Unamortized premium and deferred
fees............................... 3,738,156 3,954,230
Allowance for credit losses.......... (1,181,997) (1,254,848)
--------------- ---------------
Net receivables................. $ 118,299,063 $ 125,998,247
=============== ===============
7
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. At October 31, 1997, the Company had investments in
receivables pursuant to the core program with an aggregate principal balance of
$120,719,979.
Activity in the allowance for credit losses for the six months ended
October 31, 1997, was as follows:
Balance, beginning of period......... $ 1,181,997
Provision for credit losses.......... 1,339,276
Charge-offs, net of recoveries....... (1,266,425)
------------
Balance, end of period............... $ 1,254,848
============
PARTICIPATING PROGRAM. At October 31, 1997, the Company had investments in
receivables pursuant to the dealer recourse program with an aggregate principal
balance of $2,578,886. The Company was reimbursed by participating dealers for
$3,414 of expenses incurred during the six months ended October 31, 1997. During
the six months ended October 31, 1997, excess interest of $6,135 was remitted to
the dealers pursuant to this program.
The following table summarizes activity in the dealer reserves for the six
months ended October 31, 1997.
Balance, beginning of period......... $ 339,602
Additions............................ 12,966
Charges to dealer reserve accounts,
net of recoveries.................. (85,499)
----------
Balance, end of period............... $ 267,069
==========
4. DEBT
Borrowings under the warehouse credit facility and commercial paper
facility were $31,385,000 and $87,970,204, respectively, at October 31, 1997,
and had weighted average interest rates, including the effect of facility fees,
program fees, dealer fees, and hedge instruments, as applicable, of 6.26 percent
and 6.19 percent, respectively. The effect of the hedge instrument on the
weighted average interest rate is immaterial.
The Company's credit facilities bear interest at floating interest rates
which are reset on a short-term basis whereas its receivables bear interest at
fixed rates which are generally at the maximum rates allowable by law and do not
generally vary with changes in interest rates. To manage the risk of fluctuation
in the interest rate environment, the Company enters into interest rate swaps
and caps to lock in what management believes to be an acceptable net interest
spread. However, the Company will be exposed to limited rate fluctuation risk to
the extent it cannot perfectly match the timing of net advances from its credit
facilities and acquisitions of additional interest rate protection agreements.
The Company, through its wholly-owned subsidiary, First Investors Financial
Services, Inc. ("FIFS"), also maintains a $6 million working capital facility
with NationsBank of Texas, N.A. as agent for the banks party thereto. The
purpose of the facility is to support the Company's working capital needs and
for other general corporate purposes. Under the terms of the facility, the
Company may borrow, repay and reborrow up to the lesser of $6 million or a
borrowing base. The initial term of the facility expires on July 10, 1998, and
is renewable annually at the option of the lenders. In the event that the
lenders elect not to renew, any borrowings outstanding at maturity will be
converted to a term loan which would amortize quarterly in equal increments to
fully amortize the balance within one year from the maturity date. At October
31, 1997, there were no outstanding borrowings under this facility.
8
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The document governing the working capital facility contains numerous
covenants governing the Company's business, the observance of certain covenants
and other matters. The Company serves as a guarantor of the indebtedness which
is additionally secured by the pledge of the outstanding stock of FIFS and two
of FIFS' primary subsidiaries. Under the terms of the guaranty, the Company is
prohibited from paying dividends to shareholders without the consent of the
banks.
On September 20, 1997, the Company received a commitment from First Union
Corporation ("First Union") for a $25 million credit facility to fund the
acquisition of additional receivables. The facility will be provided to a newly
formed special purpose financing subsidiary of the Company by Variable Funding
Capital Corporation, a commercial paper conduit administered by First Union.
Terms of the facility are substantially similar to the Company's existing
commercial paper conduit facility. The consummation of the commitment is subject
to completion and execution of the final loan documentation.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Net income for the three months ended October 31, 1997 was $529,789, a
decrease of 34% from that reported for the comparable period in the preceding
year of $807,461. Net income for the six months ended October 31, 1997 was
$1,114,736, a decrease of 29% from that reported for the comparable period in
the preceding year of $1,559,213. Earnings per common share was $0.10 for the
three months ended October 31, 1997, compared to $0.15 per common share for the
prior period. Earnings per common share was $0.20 for the six months ended
October 31, 1997, compared to $0.28 per common share for the prior period.
NET INTEREST INCOME
The continued profitability of the Company during these periods has been
achieved by the growth of the receivables portfolio and effective management of
net interest income. The following table summarizes the Company's growth in
receivables and net interest income (dollars in thousands):
AS OF OR FOR THE
SIX MONTHS ENDED
OCTOBER 31,
----------------------
1996 1997
---------- ----------
Investment in receivables:
Number.......................... 9,680 11,338
Principal balance............... $ 107,016 $ 123,299
Average principal balance of
receivables outstanding during
the six month period........... $ 101,471 $ 119,796
Average principal balance of
receivables outstanding during
the three month period......... 104,897 121,898
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
Interest income(1)............... $ 4,577 $ 4,952 $ 9,078 $ 9,805
Interest expense................. 1,668 1,940 3,229 3,759
--------- --------- --------- ---------
Net interest income......... $ 2,909 $ 3,012 $ 5,849 $ 6,046
========= ========= ========= =========
- ------------
(1) Amounts shown are net of amortization of premium, deferred fees and yield
participations paid to dealers pursuant to the participating program of $21,
$3, $41 and $6, respectively.
10
<PAGE>
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
receivables and the Company's average cost of debt, and its net interest margin
(averages based on month-end balances):
THREE MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
-------------- --------------
1996 1997 1996 1997
---- ---- ---- ----
Effective yield on receivables(1) ... 17.5% 16.2% 17.9% 16.4%
Average cost of debt(2) ............. 6.6 6.5 6.6 6.5
---- ---- ---- ----
Net interest spread(3) .............. 10.9% 9.7% 11.3% 9.9%
==== ==== ==== ====
Net interest margin(4) .............. 11.1% 9.9% 11.5% 10.1%
==== ==== ==== ====
- ------------
(1) Represents interest income as a percentage of average receivables
outstanding.
(2) Represents interest expense as a percentage of average debt outstanding.
(3) Represents yield on receivables less average cost of debt.
(4) Represents net interest income as a percentage of average receivables
outstanding.
Net interest income is the difference between interest earned from the
receivables portfolio and interest expense incurred on the credit facilities
used to acquire the receivables. Net interest income increased for the three
months and six months ended October 31, 1997 to $3.0 million and $6.0 million,
respectively, from $2.9 million and $5.8 million for the comparable periods in
the preceding year. Net interest income in 1997 represents increases of 4% and
3% from the same periods in 1996.
Changes in the principal amount and rate components associated with the
receivables and debt can be segregated to analyze the periodic changes in net
interest income. The following table analyzes the changes attributable to the
principal amount and rate components of net interest income (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1996 TO 1997 1996 TO 1997
--------------------------------- ---------------------------------
INCREASE DUE TO INCREASE DUE TO
CHANGE IN CHANGE IN
-------------------- --------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 742 $ (367) $ 375 $ 1,639 $ (912) $ 727
Interest expense..................... 289 (17) 272 605 (75) 530
--------- ------- --------- --------- ------- ---------
Net interest income.................. $ 453 $ (350) $ 103 $ 1,034 $ (837) $ 197
========= ======= ========= ========= ======= =========
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1997 AND 1996 (DOLLARS IN
THOUSANDS)
INTEREST INCOME. Interest income for the 1997 periods increased to $4,952
and $9,805 compared with $4,577 and $9,078 for the comparable periods in 1996
and reflects an increase of 8% over the respective periods. The increase in
interest income is due to an increase in the average principal balance of
receivables held of 16% and 18% from the 1996 to 1997 comparable periods. The
increase in average principal balance of receivables held for the three and six
months ended offset a 1.3% and 1.5% decline in the effective yield realized on
the receivables from the 1996 to 1997 comparable periods. Management attributes
the decrease in yield to a reduction in financing fees paid by dealers and an
increase in the percentage of receivables on which rate participation is paid to
dealers as incentive to utilize the Company's financing programs.
11
<PAGE>
INTEREST EXPENSE. Interest expense in 1997 increased to $1,940 and $3,759
as compared to $1,668 and $3,229 in 1996. The increase of 16% over the
respective periods was due to an increase in the weighted average borrowings
outstanding of 17% and 19%. The weighted average cost of debt declined 0.1% over
the respective periods, reflecting a general decline in market rates and the
positive impact of the Company's hedging programs.
NET INTEREST INCOME. Net interest income increased to $3,012 and $6,046 in
1997, an increase of 4% and 3% over the comparable 1996 periods. The increase
resulted from the growth of the receivables portfolio which offset a decline of
1.2% and 1.4% in the net interest spread over the prior year periods.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1997
increased to $628 and $1,339 as compared to $401 and $761 in 1996. The increase
was the result of the growth of the Company's receivables portfolio and the
continued strategy of maintaining loan loss reserves as a percentage of total
loans.
LATE FEES AND OTHER INCOME. Other income decreased to $126 and $306 in
1997 from $146 and $318 in 1996 primarily as a result of lower yields on cash
investments. Other income primarily represents interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased to $447 and $874
in 1997 from $382 and $735 in 1996. Since these costs vary with the volume of
receivables serviced, this increase was primarily attributable to the growth in
the number of receivables serviced, which increased by 1,658 from 1996 to 1997.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased to $610 and
$1,266 in 1997 from $499 and $1,117 in 1996. The increase was due to higher
salary levels per employee and an expansion of the Company's operations.
OTHER EXPENSES. Other expenses increased to $619 and $1,117 in 1997 from
$501 and $1,098 in 1996. The increase was primarily due to an overall expansion
of the Company's asset base and an increase in the volume of applications for
credit processed by the Company in the 1997 periods versus the comparable
periods.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1997, income before
provision for income taxes decreased to $834 and $1,755 or 34% and 29% from the
comparable periods in 1996. This change was a result of the decrease in net
interest income after provision for credit losses of $125 and $381 and an
increase in operating expenses of $293 and $307.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. On October 4, 1995 the Company sold 1.9
million shares of common stock in a public offering and received proceeds of
$19.4 million, net of underwriting discounts and commissions. Approximately $7
million of the proceeds were used to prepay promissory notes plus accrued
interest, to redeem outstanding preferred stock including accrued dividends and
redemption premium, and to pay issuance costs.
The Company's business requires significant cash flow to support its
operating activities. The principal cash requirements include (i) amounts
necessary to acquire receivables from dealers and fund required reserve
accounts, (ii) amounts necessary to fund premiums for credit enhancement
insurance, and (iii) amounts necessary to fund costs to retain receivables,
primarily interest expense and servicing fees. The Company also requires a
significant amount of cash flow for working capital to fund fixed operating
expenses, primarily salaries and benefits.
The Company's most significant cash flow requirement is the acquisition of
receivables from dealers. The Company funds the purchase price of the
receivables through the use of a $55 million warehouse credit facility provided
to F.I.R.C., Inc. ("FIRC") a wholly-owned special purpose financing subsidiary
of the Company. The current warehouse credit facility generally
12
<PAGE>
permits the Company to draw advances up to the outstanding principal balance of
qualified receivables. The Company paid $16.9 million and $35.2 million for
receivables acquired for the three months and six months ended October 31, 1997,
compared to $15.0 million and $35.4 million paid in the comparable 1996 periods.
Receivables that have accumulated in the warehouse credit facility may be
transferred to a commercial paper conduit facility at the option of the Company.
The commercial paper facility provides additional liquidity of up to $105
million to fund the Company's investment in the receivables portfolio.
Substantially all of the Company's receivables are pledged to collateralize
these credit facilities.
On October 22, 1996, the Company entered into a $105 million commercial
paper conduit financing through Enterprise Funding Corporation, a commercial
paper conduit administered by NationsBank, N.A.. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Receivables Corporation ("FIARC"). It replaced an existing $75 million
commercial paper conduit facility which was provided by Enterprise Funding to
FIRC. Credit enhancement for the new $105 million facility is provided to the
commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. Credit enhancement for the replaced $75 million facility was
provided by an Auto Loan Protection Insurance ("ALPI") policy issued by
National Union Fire Insurance Company of Pittsburgh and reinsured by the
Company's captive insurance subsidiary. The ALPI policy continues to provide
credit enhancement for the $55 million warehouse credit facility.
Receivables originally purchased by the Company are financed with
borrowings under the warehouse credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the commercial paper facility used to repay borrowings
under the warehouse credit facility. Once receivables are transferred to the
FIARC subsidiary and pledged as collateral for commercial paper borrowings, the
ALPI policy with respect to the transferred receivables is cancelled with any
unearned premiums returned to FIRC. FIARC may borrow up to 90% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the commercial paper facility must be
maintained in a reserve account for the benefit of the creditors and surety bond
provider.
The current term of the warehouse credit facility expires on October 15,
1998, at which time the outstanding balance will be payable in full, subject to
certain notification provisions allowing the Company a period of six months in
order to endeavor to refinance the facility in the event of termination. The
term of the facility has been extended on seven occasions since its inception in
October 1992. The commercial paper facility was provided for a term of one year,
expiring October 21, 1997 and has been extended to October 20, 1998. If the
facility were not extended, receivables pledged as collateral would be allowed
to amortize; however, no new receivables would be allowed to be transferred from
the warehouse credit facility. Management considers its relationship with all of
the Company's lenders to be satisfactory and has no reason to believe either the
warehouse credit facility or the commercial paper facility will not be renewed.
On September 20, 1997, the Company received a commitment from First Union
Corporation ("First Union") for a $25 million credit facility to fund the
acquisition of additional receivables. The facility will be provided to a newly
formed special purpose financing subsidiary of the Company by Variable Funding
Capital Corporation, a commercial paper conduit administered by First Union.
Terms of the facility are substantially similar to the Company's existing
commercial paper conduit facility. The consummation of the commitment is subject
to completion and execution of the final loan documentation.
In addition to the $160 million in currently available debt facilities
utilized to fund the acquisition of receivables, the Company also maintains a $6
million working capital line of credit to be used for working capital and
general corporate purposes. The facility expires on July 10,
13
<PAGE>
1998. If the lenders elect not to renew, any outstandings will be amortized over
a one year period. There were no outstandings under the facility at October 31,
1997.
The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolio. The Company received
such payments in the amount of $35.8 million and $29.8 million for the six
months ended October 31, 1997 and 1996, respectively. Such cash flow funds
repayment of amounts borrowed under the warehouse credit and commercial paper
facilities and other holding costs, primarily interest expense and servicing and
custodial fees. During the six months ended, the Company required net cash flow
of $11.4 million in 1997 and $14.0 million in 1996 (cash required to acquire
receivables net of principal payments on receivables) to fund the growth of its
receivables portfolio.
The following table summarizes borrowings under the warehouse credit
facility and the commercial paper facility (dollars in thousands):
AS OF OR FOR THE
SIX MONTHS
ENDED
OCTOBER 31,
--------------------
1996 1997
--------- ---------
WAREHOUSE CREDIT FACILITY:
At period-end:
Balance outstanding............. $ 43,110 $ 31,385
Weighted average interest
rate(1)........................ 6.33% 6.26%
During period(2):
Maximum borrowings
outstanding.................... $ 55,000 $ 53,270
Weighted average balance
outstanding.................... 48,993 41,666
Weighted average interest
rate........................... 6.80% 6.33%
COMMERCIAL PAPER FACILITY:
At period-end:
Balance outstanding............. $ 59,322 $ 87,970
Weighted average interest
rate(1)........................ 6.12% 6.19%
During period(2):
Maximum borrowings
outstanding.................... $ 59,322 $ 91,302
Weighted average balance
outstanding.................... 49,216 74,952
Weighted average interest
rate........................... 6.36% 6.51%
- ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
INTEREST RATE MANAGEMENT. The Company's credit facilities bear interest at
floating interest rates which are reset on a short-term basis whereas its
receivables bear interest at fixed rates which are generally at the maximum
rates allowable by law and do not generally vary with changes in interest rates.
To manage the risk of fluctuation in the interest rate environment, the Company
enters into interest rate swaps and caps with notional principal amounts which
approximate the balance of its debt outstanding to lock in what management
believes to be an acceptable net interest spread. However, the Company will be
exposed to limited rate fluctuation risk to the extent it cannot perfectly match
the timing of net advances from its credit facilities and acquisitions of
additional interest rate protection agreements. At October 31, 1997, the Company
was a party to three swap agreements with NationsBank of Texas, N.A. pursuant to
which the Company's interest rate is fixed at a weighted average rate of 5.63%
on an aggregate notional amount of $120 million. Two of these swap agreements,
covering an aggregate notional amount of $90 million, expire in September 1998
with the remaining swap with a notional
14
<PAGE>
amount of $30 million expiring in October 1998. The expiration of each swap
agreement may be extended an additional two years from the initial expiration
date at the option of NationsBank.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations and effective
collection procedures, (ii) providing recourse to dealers under its
participating program for a period of time and thereafter secured by cash
reserves in the event of losses and (iii) insurance against certain losses from
independent third party insurers. As a result of its recourse programs and third
party insurance, the Company is not exposed to credit losses on its entire
receivables portfolio. The following table summarizes the credit loss exposure
of the Company (dollars in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------
1996 1997
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Core Program:
Insured by third party
insurer....................... $ 3,430 $ -- $ 1,202 $ --
Other receivables(1)............ 96,817 760 (2) 119,518 1,255 (2)
Participating Program................ 6,769 546 (3) 2,579 267 (3)
----------- -----------
$ 107,016 $ 123,299
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.8 % 1.1 %
Dealer reserves as a percentage of
participating program
receivables........................ 8.1 % 10.4 %
</TABLE>
- ------------
(1) Represents receivables reinsured by Company's insurance affiliate or
receivables on which no credit loss insurance exists.
(2) Represents the balance of the Company's allowance for credit losses.
(3) Represents the balance of the dealer reserve accounts.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 60 days past due.
Generally, repossession procedures are initiated 60 to 90 days after the payment
default.
CORE PROGRAM. Under the core program, the Company retains the credit risk
associated with the receivables acquired. The Company purchases credit
enhancement insurance from third party insurers which covers the risk of loss
upon default and certain other risks. Until March 1994, such insurance absorbed
substantially all credit losses. In April 1994, the Company established a
captive insurance subsidiary to reinsure certain risks under the credit
enhancement insurance coverage for all receivables acquired in March 1994 and
thereafter. With the completion of the $105 million commercial paper conduit
financing in October 1996, credit loss insurance and the Company's reinsurance
liability is cancelled upon the transfer of receivables to FIARC utilizing
commercial paper borrowings. Provision for credit losses of $628,276 and
$1,339,276 have been recorded for the three months and six months ended October
31, 1997, respectively, for losses which are reinsured by the Company's captive
insurance subsidiary and for losses on receivables pledged as collateral under
the commercial paper conduit facility.
The allowance for credit losses represents management's estimate of losses
for receivables that may become uncollectable. In making this estimate,
management analyzes portfolio characteristics in the light of its underwriting
criteria, delinquency and repossession statistics, historical loss experience,
and size, quality and concentration of the receivables, as well as external
factors
15
<PAGE>
such as future economic outlooks. The allowance for credit losses is based on
estimates and qualitative evaluations and ultimate losses will vary from current
estimates. These estimates are reviewed periodically and as adjustments, either
positive or negative, become necessary, are reported in earnings in the period
they become known.
PARTICIPATING PROGRAM. Under the Company's participating program, the
dealer retains the credit risk for a period of time, usually twelve to eighteen
months. In the event of payment default, the dealer is obligated to repurchase
the receivable. A specified portion of the purchase price is set aside in a
reserve account to secure performance of the dealer's repurchase obligation.
Receivables purchased from each dealer are aggregated into pools of specified
size for purposes of tracking the dealer's participation. When the dealer's
participation in a pool is terminated, a portion of the reserve account
exceeding a specified percentage is released to the dealer and the balance is
retained in the reserve account to fund credit losses until all receivables in
the pool are paid in full.
As a result of a shift in the preference of dealers to sell receivables to
the Company under the core program rather than the participating program, the
participating program accounted for only 2% of the aggregate receivables held by
the Company as of October 31, 1997, representing a 4% decrease from 6% on
October 31, 1996. Management believes that this trend will continue and that the
significance of the participating program by comparison to the core program,
will diminish over future periods.
The following table summarizes the status and collection experience of
receivables acquired by the Company (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX MONTHS ENDED OCTOBER 31,
----------------------------------------------------
1996 1997
----------------------- -----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Delinquent amount outstanding:
30 - 59 days.................... 154 $ 2,257 247 $ 3,557
60 - 89 days.................... 33 528 79 1,229
90 days or more................. 74 1,198 129 1,932
--- --------- --- ---------
Total delinquencies.................. 261 $ 3,983 455 $ 6,718
=== ========= === =========
Total delinquencies as a percentage
of outstanding receivables......... 2.6% 2.7% 3.8% 3.9%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)(3)............ -- 1.4% -- 2.2%
</TABLE>
- ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables are based on gross receivables balances,
which include principal outstanding plus unearned interest income.
(2) Does not give effect to reimbursements under the Company's credit
enhancement insurance policies with respect to charged-off receivables. The
Company recognized no charge-offs prior to March 1994 since all credit
losses were reimbursed by third-party insurers. Subsequent to that time the
primary coverage has been reinsured by an affiliate of the Company under
arrangements whereby the Company bears the entire risk of credit losses, and
charge-offs have accordingly been recognized.
(3) The percentages have been annualized and are not necessarily indicative of
the results for a full year.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
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.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: December 12, 1997 By: /s/ TOMMY A. MOORE, JR.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 12, 1997 By: /s/ BENNIE H. DUCK
BENNIE H. DUCK
SECRETARY, TREASURER AND CHIEF FINANCIAL OFFICER
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> OCT-31-1997
<CASH> 4,128,799
<SECURITIES> 0
<RECEIVABLES> 127,253,095
<ALLOWANCES> 1,254,848
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 146,237,341
<CURRENT-LIABILITIES> 0
<BONDS> 119,355,204
0
0
<COMMON> 5,567
<OTHER-SE> 25,045,270
<TOTAL-LIABILITY-AND-EQUITY> 146,237,341
<SALES> 9,804,962
<TOTAL-REVENUES> 9,804,962
<CGS> 3,759,268
<TOTAL-COSTS> 3,759,268
<OTHER-EXPENSES> 3,256,967
<LOSS-PROVISION> 1,339,276
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,755,490
<INCOME-TAX> 640,754
<INCOME-CONTINUING> 1,114,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,114,736
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
