UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_________________
COMMISSION FILE NUMBER 0-26686
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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
- - --------------------------------------------------------------------------------
Common Stock - $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 1997, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $14,821,275.
There were 5,566,669 shares of Common Stock of the registrant outstanding
as of June 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held September 3, 1997, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 1997.
================================================================================
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 1997
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business............................. 1
Item 2. Properties........................... 14
Item 3. Legal Proceedings.................... 14
Item 4. Submission of Matters to a Vote of
Security Holders................... 14
PART II
Item 5. Market for Registrants' Common Equity
and Related Shareholder Matters.... 15
Item 6. Selected Consolidated Financial
Data............................... 16
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Item 8. Financial Statements and
Supplementary Data................. 27
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure............... 27
PART III
Item 10. Directors and Executive Officers..... 28
Item 11. Executive Compensation............... 28
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 28
Item 13. Certain Relationships and Related
Transactions....................... 28
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form
8-K................................ 28
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a
specialized consumer finance company engaged in the purchase and retention of
receivables originated by franchised automobile dealers from the sale of new and
late-model used vehicles to consumers with substandard credit profiles. The
Company does not securitize receivables for resale to investors. As of April 30,
1997, the Company held receivables in the aggregate principal amount of
$115,742,904 having an effective yield of 17.1% and a net interest spread to the
Company of 10.6% (net of cost of funds and other carrying costs).
HISTORY
The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A.
Stockard to conduct an automobile finance business, with Mr. Moore providing the
operating expertise and Mr. Stockard and members of his family furnishing the
initial financial support. During the first three years of the Company's
existence, its operations consisted primarily of purchasing and pooling
receivables for resale to financial institutions and others. In March 1992, the
Company obtained additional capital from a group of private investors and
decided to expand its operations and reorient its business. Instead of acquiring
receivables for resale, the Company adopted a strategy of purchasing receivables
for retention. In October 1992, the Company established its warehouse credit
facility for this purpose and began to retain all receivables acquired.
INDUSTRY
The automobile finance industry is the second largest consumer finance
market in the United States. Most automobile financing is provided by captive
finance subsidiaries of major automobile manufacturers, banks, thrifts, credit
unions and independent finance companies such as the Company. The overall
industry is generally segmented according to the type of vehicle sold (new vs.
used), the nature of the dealership (franchised vs. independent) and the credit
characteristics of the borrower (prime vs. sub-prime). The Company believes that
the vast majority of the automobile financing that is being provided by captive
finance companies and financial institutions tends to be for new vehicles
purchased by borrowers with sound credit profiles. On the other hand, the
independent finance companies generally tend to serve the sub-prime market. The
sub-prime market is comprised of individuals who are relatively high credit
risks and who have limited access to traditional financing sources, generally
due to unfavorable past credit experience, low income or limited financial
resources and/or the absence or limited extent of prior credit history.
ORIGINATING DEALER BASE
GENERAL. The Company primarily purchases receivables from the new and used
car departments of dealers operating under franchises from the major automobile
manufacturers. The Company does not do business with "independent" dealers who
operate used car lots with no manufacturer affiliation. No dealer or group of
dealers (who are affiliated with each other through common ownership) accounted
for more than 5% of the receivables owned by the Company at April 30, 1997, and
no dealer or group of related dealers originated more than 5% of the receivables
held by the Company at that date. The volume and frequency of receivable
purchases from particular dealers vary widely with the size of the dealerships
as well as market and competitive factors in the various dealership locations.
LOCATION OF DEALERS. Approximately 30% of the dealers with whom the
Company has agreements are located in Texas, where the Company has operated
since 1989. The Company commenced operations in Utah and Idaho in 1992 and,
during the past three years, has expanded its dealership base into Missouri,
Colorado, Oklahoma, Kansas, Georgia, Ohio, Michigan, Iowa, Nebraska, Kentucky,
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Tennessee, North Carolina, South Carolina, and Arizona. As of April 30, 1997,
the Company had completed the licensing process in Minnesota, Virginia, Indiana,
Washington, Oregon, California, New Mexico, Illinois, Alabama, and New York, but
had not commenced operations in those states.
The following table summarizes, with respect to each state in which the
Company operates, the date operations commenced, the number of dealers with whom
the Company had agreements in such state as of April 30, 1997, and the number of
receivables (and percentage of total receivables) acquired by the Company from
dealers in such state during the last two fiscal years:
<TABLE>
<CAPTION>
RECEIVABLES ACQUIRED
---------------------------------------
YEAR ENDED YEAR ENDED
DATE NUMBER OF APRIL 30, 1996 APRIL 30, 1997
BUSINESS DEALERS AT ------------------ ------------------
STATES COMMENCED APRIL 30, 1997 NUMBER % NUMBER %
- - ------------------------------------- --------- -------------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Texas................................ 2/89 311 5,137 60.2% 5,026 47.7%
Oklahoma............................. 7/94 85 698 8.2 784 7.4
Georgia.............................. 9/94 96 679 8.0 1,408 13.4
Ohio................................. 9/94 128 630 7.4 1,304 12.4
Missouri............................. 12/93 95 392 4.6 550 5.2
Utah................................. 10/92 63 326 3.8 256 2.4
Michigan............................. 10/94 89 170 2.0 349 3.3
Colorado............................. 8/94 72 218 2.6 198 1.9
All others(1)........................ -- 204 279 3.2 668 6.3
-------------- ------ --------- ------ ---------
Total...................... 1,143 8,529 100.0% 10,543 100.0%
============== ====== ========= ====== =========
</TABLE>
- - ------------
(1) Includes dealers located in Arizona, Iowa, Kansas, Kentucky, Nebraska, North
Carolina, South Carolina, Tennessee and Idaho. The aggregate receivables
acquired from the dealers in each of these states represented less than 7%
of total receivables acquired during the year ended April 30, 1997.
MARKETING REPRESENTATIVES. The Company utilizes a system of regional
marketing representatives to recruit, enroll and train new dealers as well as to
maintain relationships with the Company's existing dealers. The representatives
are full-time employees who reside in the region for which they are responsible.
In addition to soliciting and enrolling new dealers, the regional
representatives assist new dealers in assimilating the Company's system of
credit application submission, review, acceptance and funding, as well as
dealing with routine dealer relations on a daily basis. The role of the regional
representatives is generally limited to marketing the Company's core finance
programs and maintaining relationships with the Company's originating dealer
base. The representatives do not enter into or modify dealer agreements on
behalf of the Company, do not participate in credit evaluation or loan funding
decisions and do not handle funds belonging to the Company or its dealers. Each
representative reports to, and is supervised by, the Company's marketing manager
in Houston.
It has been the policy of the Company to avoid the establishment of branch
offices because it believes that the expenses and administrative burden of such
offices are generally unjustified. Moreover, in view of the availability of
modern data transmission technology, the Company has concluded that the critical
functions of credit evaluation and loan origination are best performed and
controlled on a centralized basis from its Houston facility. Accordingly, as the
marketing representative system has operated satisfactorily, the Company does
not plan to create branch offices in the future.
DEALER FINANCING PROGRAMS
GENERAL. The Company has two types of agreements with its originating
dealers. All agreements are non-exclusive and no "sign up" fees are charged to
the dealers. The most common arrangement is a conventional program (the "core
program") whereby the dealer sells receivables to the Company at
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a negotiated price and the dealer retains no further credit risk or interest in
the collections from the receivables sold. The other type of arrangement is a
participating program (the "participating program") under which selected
dealers sell receivables to the Company priced at par (i.e., the outstanding
principal balance of the receivables) but for a period of time retain the credit
risk as well as the right to receive a portion of the finance charge collections
from the receivables sold. Fees paid related to the purchase of receivables
include premiums for certain types of third party insurance and fees paid to
third parties to verify certain application data submitted by dealers. In
addition to purchasing receivables from dealers under the core and participating
programs as they are originated, the Company has also acquired seasoned
receivables in bulk portfolio acquisitions and may continue to do so from time
to time.
CORE PROGRAM. Under its core program, the Company had dealership
agreements with 1,143 dealers at April 30, 1997. These are non-exclusive
agreements terminable at any time by either party and they require no specific
volume levels. The receivables are purchased at par or at prices that may
reflect a discount or premium depending on the annual percentage rates of
particular receivables. The agreements with the core program dealers contain
customary representations and warranties concerning title to the receivables
sold, validity of the liens on the underlying vehicles, compliance with
applicable laws and related matters. Although the dealers are obligated to
repurchase receivables which do not conform to these warranties, under the core
program the dealers do not guarantee collectability or obligate themselves to
repurchase receivables solely because of payment default. As of April 30, 1997,
approximately 96% of the outstanding receivables held by the Company had been
acquired pursuant to the core program. Based on recent production experience and
consistent with the Company's growth strategy, the Company believes it is likely
that the percentage of its receivables attributable to the core program will
continue to increase relative to that of the participating program.
PARTICIPATING PROGRAM. The Company has participating program agreements
with four groups of affiliated dealers consisting of 29 selected dealerships
located primarily in Texas. Under these agreements, the dealers are obligated
for a period of time (typically 12 to 18 months) to repurchase receivables in
the event of payment defaults. Although the receivables are purchased at par, a
specified portion of the purchase price is set aside in a reserve account to
secure performance of the dealer's repurchase obligations. The receivables
purchased are aggregated into pools of specified size and the dealer is entitled
to receive monthly all finance charge collections from the pool in excess of an
agreed rate. After the agreed period expires and certain conditions are met, the
dealer (either automatically or, in some cases, at its election) is released
from its repurchase obligations and the dealer's right to participate in a
portion of finance charge collections is terminated. The portion of the reserve
account exceeding a specified percentage is then released to the dealer, with
the balance retained in the reserve to fund credit losses until all receivables
in the pool are paid in full, at which time any funds remaining in the reserve
account are paid over to the dealer. After the dealer's right to share in
finance charges has terminated with respect to a particular pool, the Company's
right to receive the yield from the receivables included in the pool becomes the
same as for receivables acquired under the core program and the Company's
default risk with respect to the pool becomes essentially the same as under the
core program except for the continuing protection afforded by the retained
reserve. The specific participating program agreements are subject to
negotiation and differ in various respects, including reserve requirements and
the amount of the dealers' participation in pool yields. As of April 30, 1997,
approximately 4% of the outstanding receivables held by the Company had been
acquired under the participating program. Of this amount, less than 1% of total
receivables continued to be covered by a repurchase obligation from the dealer.
Furthermore, the Company is no longer originating receivables under the
participating program which will cause these loans as a percentage of the total
portfolio to continue to decline.
PORTFOLIO ACQUISITIONS. In addition to acquiring receivables from dealers
on an ongoing basis at the time of origination, the Company may from time to
time acquire pools of seasoned receivables in bulk purchases from financial
institutions and others on a negotiated basis. As of April 30, 1997, less than
1% in principal amount of the outstanding receivables held by the Company had
been acquired
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in portfolio acquisitions. In view of the Company's third-party servicing
arrangements which enable it to absorb large volumes of receivables on short
notice and with minimal internal disruption, the Company intends to review
additional acquisition opportunities that may arise in the future.
CREDIT EVALUATION
GENERAL. In connection with the origination of a receivable for purchase
by the Company, the Company follows systematic procedures designed to eliminate
unacceptable risks. This involves a three-step process whereby (i) the
creditworthiness of the borrower and the terms of the proposed transaction are
evaluated and either approved, declined or modified by the Company's credit
verification department, (ii) the loan documentation and collateralization is
reviewed by the Company's funding department, and (iii) additional collateral
verification procedures are conducted by an independent firm under contract with
the Company. During the course of this process, the Company's credit
verification and funding personnel coordinate closely with the finance and
insurance departments of the dealers tendering receivables.
THIRD-PARTY COLLATERAL VERIFICATION UNDER CORE PROGRAM. As a condition to
the purchase of receivables under the core program, the Company requires an
individual audit evaluation by CBI Equifax ("Equifax"), a nationally
recognized credit investigation service which is under contract with the
Company. Equifax conducts personal telephonic interviews with each vehicle
purchaser to verify the details of the credit application and to confirm that
the material terms of the sale conform to the purchaser's understanding of the
transaction. In some instances, Equifax field personnel examine the condition of
the vehicle as an additional means of verifying collateral value. The Company
will purchase a receivable under its core program only after receipt and review
of a satisfactory Equifax report.
SERVICING
The Company believes that competent, attentive and efficient servicing is
as important as sound credit evaluation for purposes of assuring the integrity
of a receivable. An essential ingredient in the Company's ability to absorb and
carry large volumes of receivables on a cost-effective basis is the utilization
of an independent third-party servicing organization under contract to perform
all of the servicing functions. This enables the Company to avail itself of the
strength and efficiency of a large, experienced and specialized servicing staff
without incurring the payroll and administrative expense attendant to what is
the most labor-intensive aspect of an automobile finance company's business.
Since its inception in 1989, the Company has had a servicing relationship
with General Electric Capital Corporation ("GECC"), an affiliate of the
General Electric Corporation. The division of GECC which services the Company's
receivables operates primarily as a servicer of automobile installment loans and
is one of the largest such servicers in the United States. The Company has been
advised that it is the only independent finance company operating in the
sub-prime market for which this division performs the servicing function. The
Company believes that the availability of GECC's servicing organization, which
affords an infrastructure capable of absorbing increased volumes of receivables
with no significant effect on the Company's internal operations, has
substantially eliminated the risk that receivable additions, including those
resulting from possible acquisitions, could exceed the Company's administrative
capacity.
A specific team of employees at GECC is dedicated primarily to servicing
the Company's receivables. These persons coordinate with the Company's personnel
on a daily basis and their familiarity with the Company's business and portfolio
enable them to perform in a timely, responsive and cost-effective manner. The
Company maintains data bases enabling it to monitor and confirm the accuracy of
the periodic reports and other information provided by GECC and to reconcile
discrepancies when they exist.
4
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The following table sets forth certain information concerning the volumes
of receivables serviced for the Company by GECC as of the dates indicated:
AS OF APRIL 30,
--------------------------------
1996 1997
-------------- ----------------
Number of Receivables................ 8,529 10,543
Aggregate Principal Amount of
Receivables........................ $ 94,357,356 $ 115,742,904
Under its servicing agreements with the Company, GECC is responsible for
three primary functions: (i) receipt, review and verification of all collateral
and documentation requirements, (ii) establishment and administration of payment
and collection schedules, and (iii) repossession and disposition of vehicles
securing defaulted receivables.
Servicing fees paid by the Company represent a variable cost that increases
in proportion to the volume of receivables carried. The Company believes that
this arrangement represents a significant cost advantage in comparison to
conducting the servicing function internally. During its two fiscal years ended
April 30, 1997, the Company incurred servicing and related fees in the amount of
$1,125,520 and $1,536,225, respectively, which represented 1.4% and 1.5%,
respectively, of the average principal amount of receivables outstanding in each
of the respective periods.
The Company's current relationship with GECC is governed by a servicing
agreement entered into in October 1992, although the Company has done business
with GECC under prior agreements since its inception in 1989. The present
agreement terminates on October 31, 2000, subject to earlier termination
depending on the outcome of annual pricing renegotiations. In the event the GECC
arrangement were to terminate, GECC would remain obligated to continue to
service the existing receivables through their maturity. The Company considers
its relationship with GECC to be satisfactory and has no reason to believe that
the servicing arrangements will be terminated prior to the expiration of the
current agreement.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify vehicle purchasers whom it regards as creditworthy
despite credit histories that limit their access to traditional sources of
consumer credit. In addition to personal credit qualifications, the Company
attempts to assure that the characteristics of the automobile sold and the terms
of the sale are likely to result in a consistently performing receivable. These
considerations include amount financed, monthly payments required, duration of
the loan, age of the automobile, mileage on the automobile and other factors.
CUSTOMER PROFILE. The Company's primary goal in credit evaluation is to
select receivables arising from sales to customers having stable personal
situations, predictable incomes and the ability and inclination to perform their
obligations in a timely manner. Many of the Company's customers are persons who
have experienced credit difficulties in the past by reason of illness, divorce,
job loss, reduction in pay or other adversities, but who appear to the Company
to have the capability and commitment to meet their obligations. Through its
credit evaluation process, the Company seeks to distinguish these persons from
those applicants who are chronically poor credit risks. Certain
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information concerning the Company's obligors for the past two fiscal years
(based on credit information compiled at the time of the loan origination) is
set forth in the following table:
APRIL 30,
--------------------
1996 1997
--------- ---------
Average monthly gross income......... $ 3,295 $ 3,397
Average ratio of consumer debt to
gross income....................... 33% 34%
Average years in current
employment......................... 6 6
Average years in current residence... 5 5
Residence owned...................... 34% 35%
Residence rented..................... 57% 56%
Other residence arrangements(1)...... 9% 9%
- - ------------
(1) Includes military personnel and persons residing with relatives.
PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the sub-prime market, the Company endeavors
to maintain a receivables portfolio having characteristics that, in its
judgment, reflect an optimal balance between achievable yield and acceptable
risk. The following table sets forth certain information concerning the
composition of the Company's portfolio as of the end of the past two fiscal
years:
APRIL 30,
----------------------
1996 1997
---------- ----------
New Vehicles:
Percentage of portfolio(1)...... 40% 35%
Number of receivables
outstanding.................... 3,407 3,720
Average amount at date of
acquisition.................... $ 15,398 $ 15,890
Average term (months) at date of
acquisition(2)................. 59 59
Average remaining term
(months)(2).................... 47 44
Average monthly payment......... $398 $ 407
Average annual percentage
rate........................... 18.0% 17.8%
Used Vehicles:
Percentage of portfolio(1)...... 60% 65%
Number of receivables
outstanding.................... 5,122 6,823
Average age of vehicle at date
of acquisition (years)(3)...... 1.8 1.8
Average amount at date of
acquisition.................... $ 12,523 $ 13,148
Average term (months) at date of
acquisition(2)................. 53 52
Average remaining term
(months)(2).................... 45 43
Average monthly payment......... $365 $ 370
Average annual percentage
rate........................... 18.9% 18.3%
- - ------------
(1) Calculated on the basis of number of receivables outstanding as of the date
indicated.
(2) Because the actual life of many receivables will differ from the stated term
by reason of prepayments and defaults, data reflecting the average stated
term of receivables included in a portfolio will not correspond with actual
average life.
(3) In view of the popularity in recent years of new automobile leasing
programs, the Company believes that large numbers of late-model used
automobiles will be available for sale over the near term as these vehicles
come "off lease". Accordingly, the Company expects the portion of its
portfolio consisting of late-model used automobiles to increase relative to
new vehicles.
FINANCING ARRANGEMENTS
GENERAL. At the time the Company acquires receivables, they are financed
by transferring them, at an amount equal to their outstanding principal balance,
to F.I.R.C., Inc. ("FIRC"), which is a
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wholly-owned special purpose finance subsidiary of the Company. FIRC maintains a
$55,000,000 syndicated credit facility with NationsBank of Texas, N.A.
("NationsBank"), as agent for the participating banks, that provides warehouse
financing for the initial purchase of receivables. Participations in this
facility are held by Wells Fargo Bank (Texas) and The Sumitomo Bank, Limited, in
the amounts of $10,000,000 and $20,000,000, respectively, and the facility is
structured to permit the inclusion of other participating banks from time to
time. The Company also has a conduit finance facility with Enterprise Funding
Corporation ("Enterprise"), a commercial paper conduit administered by
NationsBank, N.A., which allows First Investors Auto Receivables Corporation
("FIARC"), a separate wholly-owned special purpose finance subsidiary of the
Company indirect access to the commercial paper market for an additional $105
million in financing. Taken together, these related credit facilities provide
$160 million in financing capacity in a two-tiered arrangement whereby the
receivables acquired by FIRC are initially warehoused under a commercial bank
credit line and then, when accumulated in sufficient amount, are transferred to
FIARC and refinanced on a longer-term basis at an interest rate indexed to
commercial paper rates.
WAREHOUSE CREDIT FACILITY. As receivables are purchased from dealers and
transferred to FIRC, they are immediately pledged to a commercial bank that
serves as the collateral agent for NationsBank and the other banks that
participate in the warehouse credit facility. When a loan package in proper form
is received and verified by GECC, it notifies the collateral agent and the
collateral agent releases the purchase price to FIRC for payment to the Company.
The warehouse facility has a borrowing base that, subject to certain
adjustments, permits FIRC to draw advances up to the outstanding principal
balance of qualified receivables but not in excess of the present facility limit
of $55,000,000. Uninsured losses on receivables, or certain other events
adversely affecting the collectability of receivables, can result in their
ineligibility for inclusion in the borrowing base, and in the event that the
Company's advances exceed the borrowing base the Company must prepay the credit
line until the imbalance is corrected.
Under the warehouse facility the Company has three interest rate options:
(i) the NationsBank prime rate in effect from time to time, (ii) a rate equal to
.5% above the "LIBOR" rate (the average U.S. dollar deposit rate prevailing
from time to time in the London interbank market) for selected advance terms, or
(iii) any other short-term fixed interest rate agreed upon by the Company and
the lenders. The Company is also required to pay periodic facility fees as well
as an annual agency fee, and to maintain certain escrow reserves. This facility
is secured by the pledge of all of the receivables financed, as well as the
related escrow accounts and all of the capital stock of FIRC. When collections
of principal and interest on the Company's receivables are received by GECC, in
its capacity as servicer, all proceeds are remitted directly to the collateral
agent for application to the payment of interest due on the credit facility and
certain other charges, with the balance of collections then being distributed to
the Company.
The current term of the warehouse credit facility expires on April 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 this facility has been extended on six occasions since its inception in
October, 1992. Management considers its relationship with its warehouse lenders
to be satisfactory and has no reason to believe that this credit facility will
not be renewed.
COMMERCIAL PAPER FACILITY. When a sufficient number of receivables have
been accumulated under the warehouse credit facility, they may be refinanced
under the commercial paper facility through a transfer of a group of specified
receivables from FIRC to FIARC. FIARC's purchase is funded through borrowings
under the commercial paper facility equal to 90% of the aggregate principal
balance of the receivables transferred. The remaining 10% of funds required to
repay borrowings under the warehouse credit facility by the amount of the
receivables transferred, are advanced by the Company in the form of an equity
contribution to FIARC. Enterprise funds the advance to FIARC through the
issuance, by an affiliate of Enterprise, of commercial paper (indirectly secured
by the
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receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. At April 30, 1997,
the maximum borrowings available under the commercial paper facility was $105
million. The Company's interest cost is based on Enterprises commercial paper
rates for specific maturities plus 0.25%. In addition, the Company is required
to pay periodic facility fees and other costs related to the issuance of
commercial paper.
As collections are received on the transferred receivables by GECC in its
capacity as servicer, they are remitted directly to a collection account
maintained by the collateral agent for the commercial paper facility. From that
account, a portion of the collected funds are distributed to Enterprise in an
amount equal to the principal reduction required to maintain the 90% advance
rate and to pay carrying costs and related expenses, with the balance being
released to the Company. In addition to the 90% advance rate, FIARC must
maintain a 1% cash reserve as additional credit support for the facility.
The commercial paper facility was established in March 1994 for an initial
term of one year and was subsequently extended on three occasions to May 1997.
In October 1996, the Company replaced the original commercial paper facility,
which had been increased to $75 million, with a $105 million facility with
Enterprise which is credit enhanced by a surety bond issued by MBIA Insurance
Corporation. The new facility expires in October 1997. If the facility were
terminated, no new receivables could be transferred to FIARC from FIRC and the
receivables financed under the commercial paper facility would be allowed to
amortize. The Company presently intends to endeavor to extend this arrangement
when the current term expires.
LOAN COVENANTS. The documentation governing both the warehouse credit line
and the commercial paper facility contains numerous covenants relating to the
Company's business, the maintenance of credit enhancement insurance covering the
receivables, the observance of certain financial covenants, the avoidance of
certain levels of delinquency experience, and other matters. The breach of these
covenants, if not cured within the time limits specified, could precipitate
events of default that might result in the acceleration of the warehouse credit
line or the termination of the commercial paper facility. Through the operation
of the collateral agency arrangements described above, which are in the nature
of a "lock-box" security device embracing the collection of principal and
interest on almost all of the Company's receivables, such a default could cause
the immediate termination of the Company's primary source of liquidity. The
Company is currently in compliance with all covenants governing the warehouse
credit line and the commercial paper facility.
INTEREST RATE MANAGEMENT. Since interest paid on the Company's borrowings
varies with indexed rates in the case of the warehouse credit line and varies
with commercial paper rates under the commercial paper facility, the Company's
cost of funds will fluctuate with interest rates generally. In order to achieve
some degree of protection from the potential impact of rising interest rates on
its results of operations, the Company has utilized conventional interest rate
management contracts, including so-called "caps" and "swaps". Under these
swap agreements, the Company is obligated to make net monthly payments to
NationsBank only in the event that the prevailing 30-day LIBOR interest rate
declines below the applicable ceiling rates specified in the agreements. In the
event that interest rates should decline generally in that manner, the cost to
the Company would be offset in large part by a corresponding decline in the
Company's cost of funds under its variable rate credit facilities. Accordingly,
the Company's maximum exposure under these swap arrangments is reasonably
quantifiable and management believes that they entail substantially less risk
than certain other types of interest rate hedging products. Furthermore, the
risk that the Company's interest rate management becomes ineffective is
generally limited to the extent that the swap agreements may expire prior to the
maturity of the receivables.
The Company is currently a party to a swap agreement with NationsBank
pursuant to which the Company's interest rate exposure is fixed, through August
1997, at a rate of 5.545% on a notional amount of $100,000,000 (as further
described in Note 6 in the Notes to Consolidated Financial Statements). This
agreement may be extended to August 1999, at the sole discretion of NationsBank.
8
<PAGE>
The Company is currently evaluating additional interest rate management products
with a view to fixing or limiting its interest rate exposure with respect to
amounts that are substantially equivalent to its aggregate outstanding
borrowings under the warehouse credit facility and the commercial paper
facility.
CREDIT ENHANCEMENT -- WAREHOUSE CREDIT FACILITY. In order to obtain a
lower cost of funding, the Company has agreed under its warehouse credit
facility to maintain credit enhancement insurance covering all of its
receivables pledged as collateral under this facility. The facility lenders are
named as additional insureds under these policies. The coverages are obtained on
each receivable at the time it is purchased by the Company and the applicable
premiums are prepaid for the life of the receivable. Each receivable is covered
by three separate credit insurance policies, consisting of basic default
insurance under a standard auto loan protection policy (known as "ALPI"
insurance) together with certain supplemental coverages relating to physical
damage and other risks. These coverages are carried solely by the Company at its
expense and neither the vehicle purchasers nor the dealers are charged for the
coverages and they are usually unaware of their existence. The Company's ALPI
insurance policy is written by National Union Fire Insurance Company of
Pittsburgh ("National Union"), which is a wholly-owned subsidiary of American
International Group. As of April 30, 1997, National Union had been assigned a
rating of A+ + by A.M. Best Company, Inc.
The premiums that the Company paid during its past fiscal year for its
three credit enhancement insurance coverages, which consist primarily of the
basic ALPI insurance, represented approximately 4.6% of the principal amount of
the receivables acquired during the year. Aggregate premiums paid for ALPI
coverage alone during the three fiscal years ended April 30, 1997 were
$1,563,297, $2,495,686 and $2,510,266, respectively, and accounted for 3.2%,
3.8% and 3.8%, respectively, of the aggregate principal balance of the
receivables acquired during such periods.
Prior to establishing its relationship with National Union in March 1994,
the Company's ALPI policy was provided by another third-party insurer. Since the
premiums the Company was paying for its ALPI coverage to a third-party insurer
greatly exceeded the amount of claims paid, the Company decided that creating a
"captive" insurance affiliate to reinsure the ALPI coverage would be more
cost-effective. In April 1994 the Company organized First Investors Insurance
Company (the "Insurance Affiliate") under the captive insurance company laws
of the State of Vermont. The Insurance Affiliate is an indirect wholly-owned
subsidiary of the Company and is a party to a reinsurance agreement whereby the
Insurance Affiliate reinsures 100% of the risk under the Company's ALPI
insurance policy. At the time each receivable is insured by National Union, the
risk is automatically reinsured to its full extent and approximately 96% of the
premium paid by the Company to National Union with respect to such receivable is
ceded to the Insurance Affiliate. When a loss covered by the ALPI policy occurs,
it is paid by National Union after the claim is processed, and National Union is
then reimbursed in full by the Insurance Affiliate. As of April 30, 1997, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $4,839,774 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$2,450,231. In addition to the monthly premiums and liquidity reserves of the
Insurance Affiliate, a trust account is maintained by National Union to secure
the Insurance Affiliates obligations for losses it has reinsured.
The result of the foregoing reinsurance structure is that National Union,
as the "fronting" insurer under the captive arrangement, is unconditionally
obligated to the Company's credit facility lenders for all losses covered by the
ALPI policy and the Company, through its Insurance Affiliate, is obligated to
indemnify National Union for all such losses. As of April 30, 1997, the
Insurance Affiliate had capital and surplus of $300,039 and unencumbered cash
reserves of $1,313,454 in addition to the $1,250,000 trust account.
The ALPI coverage, as well as the Insurance Affiliates' liability under the
Reinsurance Agreement, remains in effect for each receivable that is pledged as
collateral under the warehouse credit facility. Once receivables are transferred
from FIRC to FIARC and financed under the commercial paper
9
<PAGE>
facility, ALPI coverage and the Insurance Affiliate's liability under the
Reinsurance Agreement is cancelled with respect to the transferred receivables.
Any unearned premium associated with the transferred receivables is returned to
the Company. The Company believes the losses its Insurance Affiliate will be
required to indemnify will be less than the premiums ceded to it. However, there
can be no assurance that losses will not exceed the premiums ceded and the
capital and surplus of the Insurance Affiliate.
CREDIT ENHANCEMENT -- COMMERCIAL PAPER FACILITY. Prior to October 1996,
the ALPI Policy, through the structure outlined above, served as credit
enhancement for both the bank warehouse credit facility and the commercial paper
facility. In October 1996, in connection with the increase in the commercial
paper facility to $105 million, the Company elected to diversify its credit
enhancement mechanisms, obtaining a surety bond from MBIA Insurance Corporation
to enhance the commercial paper facility and retaining the ALPI Policy to
enhance the warehouse facility. The surety bond provides payment of principal
and interest to Enterprise in the event of a payment default by FIARC. MBIA is
paid a surety premium equal to 0.35% per annum on the average outstanding
borrowings under the facility. The surety bond was issued for an initial term of
two years, expiring in October, 1998. Termination of the surety bond would
result in a default under the commercial paper facility. The Company presently
intends to endeavor to extend this arrangement when the current term expires.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
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 loss 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 (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
---------------------------------------------------
1996 1997
----------------------- -----------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Core Program:
Insured by third party
insurers...................... $ 5,491 $-- $ 2,293 $ --
Other receivables(1)............ 79,260 630(2) 109,391 1,182(2)
Participating Program................ 9,606 766(3) 4,059 340(3)
----------- -----------
$94,357 $ 115,743
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.8% 1.1%
Dealer reserves as a percentage of
participating program
receivables........................ 8.0% 8.4%
</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.
10
<PAGE>
The following table sets forth certain information regarding the Company's
delinquency and charge-off experience (based on the gross principal balance of
the Company's portfolio) over its last two fiscal years (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED APRIL 30,
-------------------------------------------
1996 1997
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
CORE PROGRAM
Delinquent amount outstanding:
30 - 59 days.................... 133 $ 2,144 162 $ 2,548
60 - 89 days.................... 17 278 54 873
90 days or more................. 29 433 93 1,520
-------- --------- -------- ---------
Total delinquencies.................. 179 $ 2,855 309 $ 4,941
-------- --------- -------- ---------
Total delinquencies as a percentage
of outstanding receivables acquired
pursuant to portfolio acquisitions
and the core program............... 2.4% 2.4% 3.0% 3.1%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to portfolio
acquisitions and the core
program(2)......................... -- 1.1% -- 2.0%
PARTICIPATING PROGRAM
Delinquent amount outstanding:
30 - 59 days....................... 26 $ 284 19 $ 134
60 - 89 days....................... 4 57 3 27
90 days or more.................... 12 164 14 163
-------- --------- -------- ---------
Total delinquencies.................. 42 $ 505 36 $ 324
-------- --------- -------- ---------
Total delinquencies as a percentage
of participating program
receivables........................ 3.4% 4.0% 5.1% 6.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to the
participating program.............. -- 0% -- 0%
</TABLE>
- - ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage 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 under such policies. 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.
The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Equifax personnel (described above under "Credit
Evaluation") and attentive servicing of receivables. In addition, based on its
experience, the Company believes that delinquency risk can be reduced to some
degree by managing the composition of its portfolio to include a relatively
large proportion of receivables arising from the sale of new or late-model used
cars. These vehicles are less likely to experience mechanical problems during
the initial 21 months of the loan (which is the period of highest delinquency
risk) and the purchasers of such vehicles appear to have a relatively higher
commitment to loan performance than the purchasers of older used automobiles.
Therefore, the Company (unlike many of its competitors in
11
<PAGE>
the sub-prime market) concentrates on financing new and late-model used cars to
the extent practicable. In view of the popularity in recent years of new
automobile leasing programs sponsored by manufacturers and franchised dealers,
the Company believes that large numbers of late-model used automobiles will be
available for sale over the near term as these vehicles come "off lease". As
of April 30, 1997, approximately 35% of the receivables that had been acquired
by the Company related to new vehicles and approximately 65% of the receivables
arose from the sale of used vehicles. Of the Company's receivables held at that
date, approximately 76% originated from the sale of vehicles that were either
new or no more than two model years old at the time of sale.
SECURITIZATION
Many finance companies similar to the Company engage in "securitization"
transactions whereby receivables are pooled and conveyed to a trust or other
special purpose entity, with interests in the entity being sold to investors. As
the pooled receivables amortize, finance charge collections are passed through
to the investors at a specified rate for the life of the pool and an interest in
collections exceeding the specified rate is retained by the sponsoring finance
company. For accounting purposes, the sponsor often recognizes as revenue the
discounted present value of this interest as estimated over the life of the
pool. This revenue, or "gain on sale", is recognized for the period in which
the transaction occurs.
The Company has only effected one such transaction, which involved a $6.9
million receivables pool securitized in early 1992. Consequently, the Company's
results of operations for its last three fiscal years do not reflect sales of
receivables. Consistent with the Company's business strategy of acquiring and
retaining receivables, the Company does not currently intend to engage in
securitization transactions resulting in gains on sale of receivables. However,
in the event that securitization should appear appropriate in the future as a
means of reducing interest rate exposure, enhancing liquidity or for other
reasons, the Company believes that its operating history, as well as its
established servicing and credit enhancement insurance arrangements, would
enable it to securitize its receivables portfolio efficiently and expeditiously.
EMPLOYEES
The Company had 48 employees at April 30, 1997. The Company believes that
it operates with relatively fewer employees than are typically associated with
finance companies of comparable size, because it conducts its servicing
functions under contract with GECC. The Company also believes that this
servicing arrangement enables it to absorb substantially increased volumes of
receivables without proportionate increases in staffing.
All of the Company's employees are located in Houston, with the exception
of the regional marketing representatives residing in their respective regions.
The Company's employees are covered by group health insurance, but the Company
has no pension, profit-sharing or bonus plans or other material benefit
programs. The Company maintains a "401(k)" retirement plan for which it has no
contribution obligations. The Company has no collective bargaining agreements
and considers its employee relations to be satisfactory.
INFORMATION SYSTEMS
The Company utilizes advanced information management systems including a
fully integrated software program designed to expedite each element in the
receivables acquisition process, including the entry and verification of credit
application data, credit analysis and the communication of credit decisions to
originating dealers. This system, together with the data management resources of
GECC available to the Company under its servicing arrangements, allows the
prompt collation and retrieval of data concerning the composition of the
receivables portfolio, the characteristics and performance status of the
underlying receivables, and other information necessary for management purposes.
The Company believes that its data processing capacity is sufficient to
accommodate significantly increased volumes of receivables without material
additional capital expenditures for this purpose.
12
<PAGE>
COMPETITION
The business of direct and indirect lending for the purchase of new and
used automobiles is intensely competitive in the United States. Such financing
is provided by commercial banks, thrifts, credit unions, the large captive
finance companies affiliated with automobile manufacturers, and many small
independent finance companies such as the Company. Many of these competitors and
potential competitors have significantly greater financial resources than the
Company and, particularly in the case of the captive finance companies, enjoy
ready access to large numbers of dealers. The Company believes that a number of
factors including historical market orientations, traditional risk-aversion
preferences and in some cases regulatory constraints, have discouraged many of
these entities from entering the sub-prime sector of the market where the
Company operates. However, as competition intensifies, these well-capitalized
concerns could enter the market, and the Company could find itself at a
competitive disadvantage.
The sub-prime market in which the Company operates presently consists of a
large number of relatively small independent finance companies doing business on
a local and regional basis. Reliable data regarding the number of such companies
and their market shares is unavailable; however, the market is highly fragmented
and intensely competitive. There are no significant barriers to entry in this
market and, as capital becomes available to the existing companies and new
entrants, it is probable that competition will intensify.
REGULATION
The operations of the Company are subject to regulation, supervision and
licensing under various federal and state laws and regulations. State consumer
protection laws, motor vehicle installment sales acts and usury laws impose
ceilings on permissible finance charges, require licensing of finance companies
as consumer lenders, and prescribe many of the substantive provisions of the
retail installment sales contracts that the Company purchases. Federal consumer
credit statutes and regulations primarily require disclosure of credit terms in
consumer finance transactions, although rules adopted by the Federal Trade
Commission (including the so-called holder-in-due-course rule) also affect the
substantive rights and remedies of finance companies purchasing automobile
installment sales contracts.
The Company's business requires it to hold consumer lending licenses issued
by individual states, under which the Company is subject to periodic
examinations. State consumer credit regulatory authorities generally enjoy broad
discretion in the revocation and renewal of such licenses and the loss of one or
more of these could adversely affect the Company's operations.
In addition to specific licensing and consumer regulations applicable to
the Company's business, the Company's ability to enforce and collect its
receivables is limited by several laws of general application including the
Federal bankruptcy laws and the Uniform Commercial Codes of the various states.
These and similar statutes govern the procedures, and in many instances limit
the rights of creditors, in connection with asserting defaults, repossessing and
selling collateral, realizing on the proceeds thereof, and enforcing
deficiencies.
The Company's insurance subsidiary is subject to regulation by the
Department of Banking, Insurance and Securities of the State of Vermont. The
plan of operation of the subsidiary, described above under "Financing
Arrangements" and "Credit Enhancement", was approved by the Department and
any material changes in those operations would likewise require the Department's
approval. The subsidiary is subject to minimum capital and surplus requirements,
restrictions on dividend payments, annual reporting, and periodic examination
requirements.
The Company believes that its operations comply in all material respects
with the requirements of laws and regulations applicable to its business. These
requirements, and the interpretations thereof, change from time to time and are
not uniform among the states in which the Company operates. The Company retains
a specialized consumer credit legal counsel that engages and supervises local
legal counsel in each state where the Company does business, to monitor
compliance on an ongoing basis
13
<PAGE>
and to respond to changes in applicable requirements as they occur. Moreover,
the Company's servicer operates on a nationwide basis and assists the Company in
conforming to the various requirements concerning loan documentation, collection
procedures and collateral liquidation.
ITEM 2. PROPERTIES
The Company's principal physical properties are its data processing and
communications equipment and furniture and fixtures, all of which the Company
believes to be adequate for its intended use. Certain items of computer
equipment and related software are held under leases and licenses requiring
aggregate rentals and license fees in the amount of approximately $100,000
annually.
The Company's offices in suburban Houston consist of approximately 8,500
square feet on the seventh floor of an eight-story office building. This space
is held under a lease requiring annual rentals of approximately $110,000 and
expiring in November 1999, with an option to renew for five years at the market
rate then prevailing. The Company owns no real property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is currently not
aware of any threatened litigation that could have a material adverse effect on
the Company's business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's securities holders
during the fourth quarter of the past fiscal year.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock has been traded on the Nasdaq National Market
System, under the symbol FIFS since the completion of the Company's initial
public offering on October 4, 1995. High and low bid prices of the common stock
are set forth below for the periods indicated.
THREE MONTHS ENDED HIGH LOW
- - ------------------------------------- ---- ----
April 30, 1997....................... 9 6 3/4
January 31, 1997..................... 10 1/8 6 7/8
October 31, 1996..................... 10 1/4 8 5/8
July 31, 1996........................ 12 3/8 9 1/2
April 30, 1996....................... 11 5/8 8
January 31, 1996..................... 10 1/2 8
October 31, 1995 (from October 4,
1995)................................ 11 3/4 9 1/4
As of June 30, 1997, there were approximately 37 shareholders of record of
the Company's common stock. The number of beneficial owners is unknown to the
Company at this time.
The Company has not declared or paid any cash dividends on its common stock
since its inception. The payment of cash dividends in the future will depend on
the Company's earnings, financial condition and capital needs and on other
factors deemed pertinent by the Company's Board of Directors. It is currently
the policy of the Board of Directors to retain earnings to finance the operation
and expansion of the Company's business and the Company has no plans to pay any
cash dividends on the common stock in the foreseeable future.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 1997, has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with such statements (dollars in thousands, except share data).
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest income(1)............... $ 213 $ 3,587 $ 8,977 $ 14,144 $ 18,151
Interest expense................. 59 1,064 3,502 5,245 6,706
--------- --------- --------- ---------- ----------
Net interest income......... 154 2,523 5,475 8,899 11,445
Provision for credit losses(2)... -- 115 597 704 2,520
--------- --------- --------- ---------- ----------
Net interest income after
provision for credit
losses.................... 154 2,408 4,878 8,195 8,925
--------- --------- --------- ---------- ----------
Gain (loss) on receivables sold
with recourse(1).............. 447 -- (138) -- --
Other income..................... 7 32 207 587 693
--------- --------- --------- ---------- ----------
Total other income.......... 454 32 69 587 693
--------- --------- --------- ---------- ----------
Servicing fees................... 56 360 732 1,126 1,536
Salaries and benefits............ 358 663 1,149 1,900 2,351
Other............................ 503 804 1,330 2,002 2,356
--------- --------- --------- ---------- ----------
Total operating expenses.... 917 1,827 3,211 5,028 6,243
--------- --------- --------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes.... (309) 613 1,736 3,754 3,375
Provision (benefit) for income
taxes......................... (10) 120 627 1,295 1,232
--------- --------- --------- ---------- ----------
Net income (loss)................ $ (299) $ 493 $ 1,109 $ 2,459 $ 2,143
--------- --------- --------- ---------- ----------
Preferred stock dividends........ (37) (103) (107) (50) --
--------- --------- --------- ---------- ----------
Net income (loss) allocable to
common shareholders before
redemption of preferred
stock......................... (336) 390 1,002 2,409 2,143
Premium paid upon redemption of
preferred stock............... -- -- -- (160) --
--------- --------- --------- ---------- ----------
Net income (loss) allocable to
common shareholders after
redemption of preferred
stock......................... $ (336) $ 390 $ 1,002 $ 2,249 $ 2,143
========= ========= ========= ========== ==========
Net income (loss) per common
share before redemption of
preferred stock(3)............ $ (0.09) $ 0.11 $ 0.27 $ 0.51 $ 0.39
========= ========= ========= ========== ==========
Net income (loss) per common
share after redemption of
preferred stock(3)............ $ (0.09) $ 0.11 $ 0.27 $ 0.47 $ 0.39
========= ========= ========= ========== ==========
AS OF APRIL 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
BALANCE SHEET DATA:
Receivables, net................. $ 8,011 $ 36,300 $ 63,166 $ 96,263 $ 118,299
Other assets..................... 3,220 4,184 11,468 19,397 21,444
--------- --------- --------- ---------- ----------
Total assets................ $ 11,231 $ 40,484 $ 74,634 $ 115,660 $ 139,743
========= ========= ========= ========== ==========
Debt............................. $ 10,017 $ 38,018 $ 69,664 $ 91,049 $ 112,894
Other liabilities................ 729 1,590 3,093 2,818 2,913
Shareholders' equity............. 485 876 1,877 21,793 23,936
--------- --------- --------- ---------- ----------
Total liabilities and
shareholders' equity...... $ 11,231 $ 40,484 $ 74,634 $ 115,660 $ 139,743
========= ========= ========= ========== ==========
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
16
<PAGE>
- - ------------
(1) In November 1992, the Company changed its business strategy from the sale of
receivables to retaining receivables for investment. Since November 1992,
the primary source of the Company's revenues has been interest income from
receivables retained for investment. Prior to such date, the principal
source of income was gain from sale of receivables to investors. The loss on
receivables sold with recourse recognized in 1995 related to the revision of
the Company's estimated recourse obligations which arose in conjunction with
the Company's sale of certain receivables to third party investors. Such
receivables were acquired from the third party investors by certain
shareholders, then repurchased by the Company. See Note 3 to Notes to
Consolidated Financial Statements. The Company is not subject to any further
recourse obligations on receivables sold to investors.
(2) 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 and dealer reserves absorbed substantially all
credit losses. In May 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.
Beginning in October 1996, the Company limited the extent of the receivables
covered by credit enhancement insurance to those receivables financed under
the warehouse credit facility. Receivables financed under the commercial
paper facility are either insured by third parties or uninsured.
Accordingly, the Company is exposed to credit losses on receivables which
are either uninsured or reinsured by its captive insurance subsidiary and
must provide an allowance for such losses.
(3) Net income (loss) per common share amounts are calculated based on net
income (loss) available to common shareholders after preferred dividends, if
any, and in the case of the year ended April 30, 1996, the premium paid to
the holders of the 1993 preferred stock upon its redemption divided by the
weighted average number of shares outstanding, adjusted for the 3-for-1
stock split.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a specialized consumer finance company engaged in the
purchase and retention of receivables originated by franchised automobile
dealers from the sale of new and late-model used vehicles to consumers with
substandard credit profiles. At April 30, 1997, the Company had a network of
1,143 franchised dealers in 17 states from which it purchases the receivables at
the time of origination. The Company has completed the licensing process in 10
additional states. While the Company intends to continue to geographically
diversify its receivables portfolio, approximately 45% of receivables by
principal balance at April 30, 1997 represent receivables acquired from dealers
located in Texas.
From its inception in 1989 through October 1992, the business strategy of
the Company was to purchase, pool and sell receivables to third-party investors
and to recognize gains associated with those sales on a current basis. In
November 1992, the Company decided that it could achieve a more stable and
predictable income stream through acquiring and retaining receivables for net
interest income recognized over the life of the receivables. The primary element
in this strategy is access to institutional financing in sufficient magnitudes
and at rates enabling the Company to purchase significant volumes of receivables
and retain them at a funding cost allowing an adequate net interest margin
between portfolio yield and cost of funds. Through the utilization of flexible
secured credit facilities and comprehensive credit insurance, the Company has
been able to access financing on terms permitting it to implement this strategy
and to pursue it successfully through the present time. Management believes that
continued pursuit of this strategy will enable the Company to sustain its growth
and maintain a stable earnings stream on a relatively conservative basis.
Therefore, since November 1992, the primary source of the Company's
revenues has been interest income from receivables retained as investments,
while its primary cost has been interest expense arising from the financing of
the Company's investment in such receivables. The increasing profitability of
the Company during this period has been determined by the growth of the
receivables portfolio and effective management of net interest income and fixed
operating expenses. Management believes that its current operating structure,
including the strategic outsourcing of certain functions, such as servicing,
will enable it to increase its volume of receivables acquisitions without having
to increase fixed operating expenses on a proportional basis. The following
table summarizes the Company's growth in receivables and net interest income for
the last two fiscal years (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED APRIL 30,
-----------------------
1996 1997
---------- -----------
Investment in receivables:
Number.......................... 8,529 10,543
Principal balance............... $ 94,357 $ 115,743
Average principal balance of
receivables outstanding during
the twelve month period....... $ 78,250 $ 105,857
Average principal balance of
receivables outstanding during
the three month period........ $ 89,002 $ 112,544
Interest income(1)................... $ 14,144 $ 18,151
Interest expense..................... 5,245 6,706
---------- -----------
Net interest income............. $ 8,899 $ 11,445
========== ===========
- - ------------
(1) Amounts shown are net of yield participations paid to dealers pursuant to
the participating program of $212 and $74, respectively.
18
<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):
YEARS ENDED
APRIL 30,
--------------------
1996 1997
--------- ---------
Effective yield on receivables(1).... 18.1% 17.1%
Average cost of debt(2).............. 6.8 6.5
--------- ---------
Net interest spread(3)............... 11.3% 10.6%
========= =========
Net interest margin(4)............... 11.4% 10.8%
========= =========
- - ------------
(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.
The Company intends to increase its acquisition of receivables by expanding
its dealer base in existing states served, and by expanding its dealer base into
new states. To the extent that the Company's receivables acquisitions exceed the
extinguishment of receivables through principal payments, payoffs or defaults,
its receivables portfolio and interest income will continue to increase. The
following table summarizes the activity in the Company's receivables portfolio
(in thousands):
YEARS ENDED
APRIL 30,
------------------------
1996 1997
----------- -----------
Principal balance, beginning of
period............................. $ 62,793 $ 94,357
Acquisitions......................... 66,179 66,081
Principal payments and payoffs....... (27,724) (36,567)
Defaults prior to liquidations and
recoveries (1)..................... (6,891) (8,128)
----------- -----------
Principal balance, end of period..... $ 94,357 $ 115,743
=========== ===========
- - ------------
(1) Represents gross principal balances.
Receivables may be paid earlier than their contractual term, primarily due
to prepayments and liquidation of collateral after defaults. See "Delinquency
and Credit Loss Experience".
ANALYSIS OF NET INTEREST INCOME
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 to $11.445
million in 1997, an increase of 109% and 29% when compared to amounts reported
in 1995 and 1996. The increase resulted primarily from the growth of the
receivables portfolio, partially offset by an increase in interest incurred on
the credit facilities.
The amount of net interest income is the result of the relationship between
the average principal amount of receivables held and average rate earned thereon
and the average principal amount of debt incurred to finance such receivables
and the average rates paid thereon. Changes in the principal amount and rate
components associated with the receivables and debt can be segregated to analyze
19
<PAGE>
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 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------------------
1995 TO 1996 1996 TO 1997
-------------------------------- --------------------------------
INCREASE
INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO 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...................... $ 4,794 $ 373 $5,167 $ 4,990 $ (983) $4,007
Interest expense..................... 1,650 93 1,743 1,723 (262) 1,461
--------- ------- ---------- --------- ------- ----------
Net interest income.................. $ 3,144 $ 280 $3,424 $ 3,267 $ (721) $2,546
========= ======= ========== ========= ======= ==========
</TABLE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 1997, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1996
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1997 increased by $4,007, or 28%,
over 1996, primarily as a result of an increase in the average principal balance
of receivables held of 35% from 1996 to 1997 which offset a 1.0% decline in the
effective yield realized on the receivables.
INTEREST EXPENSE. Interest expense for 1997 increased by $1,461, or 28%,
over 1996. An increase in the weighted average borrowings outstanding of 33%
resulted in $1,723 of this difference which was offset by a reduction of 0.3% in
the weighted average cost of debt which positively impacted interest expense by
$262.
NET INTEREST INCOME. Net interest income increased to $11,445 in 1997, an
increase of 29% over 1996. The increase resulted primarily from the growth of
the receivables portfolio and an increase in the percentage of the portfolio
financed with equity which offset a decline in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1997
increased by $1,816, or 258%, over 1996, as a result of an increase in net
charge-offs from $604 in fiscal year 1996 to $1,968 in fiscal year 1997. An
approximate 53% growth in the April 30, 1996 average principal balance of the
Company's receivables portfolio over the prior year led to increased charge-offs
which generally occur as the portfolio seasons. At April 30, 1997, the Company
increased its estimate of losses associated with certain assets held for sale to
adjust for lower than expected realized amounts of those assets. This resulted
in a corresponding increase in net charge-offs and provision for the period.
OTHER INCOME. For 1997, other income, which consists primarily of late
fees, increased by $107, or 18%, over 1996, primarily as a result of an increase
in the volume of receivables retained.
SERVICING FEE EXPENSES. Servicing fee expenses increased $411, or 36%,
from 1996 to 1997. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the increase in the number
of receivables serviced, which increased by 2,014, or 24%, from 1996 to 1997.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $1,900
in 1996 to $2,351 in 1997, an increase of $451 or 24%. As a percentage of
interest income, salaries and benefits declined from 13.4% in 1996 to 13.0% in
1997. This dollar increase was primarily due to increases in base compensation
and is directly attributable to the growth in the receivables portfolio and the
Company's expansion into new markets.
OTHER EXPENSES. Other expenses for 1997 increased 18% from 1996 primarily
due to the overall expansion of the Company's operations. As a percentage of
interest income, other operating expenses declined from 14% in 1996 to 13% in
1997.
20
<PAGE>
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1997, income before
provision for income taxes decreased by $378, or 10%, from 1996 as a result of
the increase in provision for credit losses of $1,816 and other factors
discussed above.
FISCAL YEAR ENDED APRIL 30, 1996, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1995
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1996 increased by $5,167, or 58%,
over 1995, primarily as a result of an increase in the average principal balance
of receivables held of 53% from 1995 to 1996. The remaining increase was
attributable to a 0.5% increase in the effective yield realized on the
receivables.
INTEREST EXPENSE. Interest expense for 1996 increased by $1,743, or 50%,
over 1995. An increase in the weighted average borrowings outstanding of 46%
resulted in $1,650 of this difference while an increase in the weighted average
cost of debt resulted in the remaining difference of $93.
NET INTEREST INCOME. Net interest income increased to $8,899 in 1996, an
increase of 63% over 1995. The increase resulted primarily from the growth of
the receivables portfolio and an increase in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1996
increased by $107, or 18%, over 1995, as a result of an increase in net
charge-offs from $187 in fiscal year 1995 to $604 in fiscal year 1996. An
approximate 140% growth in the April 30, 1995 average principal balance of the
Company's receivables portfolio over the prior year led to increased charge-offs
which generally occur as the portfolio seasons.
OTHER INCOME. For 1996, other income, which consists primarily of late
fees, increased by $379, or 183%, over 1995, primarily as a result of an
increase in the volume of receivables retained, together with higher rates
allowed to be charged for late payments by certain states.
SERVICING FEE EXPENSES. Servicing fee expenses increased $393, or 54%,
from 1995 to 1996. Since these costs vary with the volume of receivables
serviced, this increase was primarily attributable to the increase in the number
of receivables serviced, which increased by 2,691, or 46%, from 1995 to 1996.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $1,149
in 1995 to $1,900 in 1996, an increase of $751 or 65%. This increase was
primarily due to increases in incentive compensation and in the number of
full-time employees from 37 to 51 and is directly attributable to the growth in
the receivables portfolio and the Company's expansion into new markets.
OTHER EXPENSES. Other expenses for 1996 increased 50% from 1995 primarily
due to the overall expansion of the Company's operations.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1996, income before
provision for income taxes increased by $2,018, or 116%, from 1995 as a result
of the increase in net interest income after provision for credit losses of
$3,316, partially offset by an increase in operating expenses of $1,816, both as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. 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 warehouse
21
<PAGE>
credit facility. The current warehouse credit facility generally permits the
Company to draw advances up to the outstanding principal balance of qualified
receivables, but not to exceed $55 million. The Company paid $68.9 million for
receivables acquired in 1997 compared to $68.7 million paid in 1996. 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 currently provides additional liquidity of up to $105 million.
Substantially all of the Company's receivables are pledged to collateralize
these credit facilities.
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 $61.4 million in 1997 and $45.9 million in 1996.
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 fiscal years 1997 and 1996, the
Company required net cash flow, respectively, of $23.3 million and $35.6 million
(cash required to acquire receivables net of principal payments on receivables)
to fund the growth of its receivables portfolio. The Company has relied on
borrowed funds to provide the source of cash flow to fund such growth.
CAPITALIZATION. Since the change in business strategy to retaining
receivables in November 1992, the Company has financed its acquisition of such
receivables primarily through two related credit facilities. The Company's
equity was not a significant factor in its capitalization until the completion
of the Company's initial public offering of common stock in October 1995,
resulting in net proceeds of $18.5 million. However, the Company expects to
continue to rely primarily on its credit facilities to acquire and retain
receivables. The Company believes its existing credit facilities have adequate
capacity to fund the increase of the receivables portfolio expected in the
foreseeable future. While the Company has no reason to believe that these
facilities will not continue to be available, their termination could have a
material adverse effect on the Company's operations if substitute financing on
comparable terms was not obtained.
WAREHOUSE CREDIT FACILITY. The initial acquisition of the receivables has
been financed through a syndicated warehouse credit facility managed by
NationsBank of Texas, N.A. ("NationsBank"). The warehouse credit facility
currently provides for maximum borrowings, subject to certain adjustments, up to
the outstanding principal balance of qualified receivables, but not to exceed
the current facility limit of $55 million. Borrowings under the warehouse credit
facility bear interest pursuant to certain indexed variable rate options at the
election of the Company or any other short-term fixed interest rate agreed upon
by the Company and the lenders. The Company bases its selection of the interest
rate option primarily on its expectations of market interest rate fluctuations,
the timing and the amount of the required funding and the period of time it
anticipates requiring the funding prior to transfer to the commercial paper
facility. The warehouse credit facility provides for a term of one year at which
time the outstanding principal balance will be payable in full, although there
are provisions allowing the Company a period of six months to refinance the
facility in the event that it is not renewed.
22
<PAGE>
The following table summarizes borrowings under the warehouse credit
facility (dollar amounts in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1996 1997
---------- ----------
At period-end:
Balance outstanding............. $ 41,470 $ 49,650
Weighted average interest
rate(1)........................ 6.41% 6.31%
During period(2):
Maximum borrowings
outstanding.................... $ 50,223 $ 55,000
Weighted average balance
outstanding.................... 39,431 46,585
Weighted average interest
rate........................... 6.89% 6.50%
- - ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
COMMERCIAL PAPER FACILITY. In addition to the warehouse credit facility
discussed above, the Company has indirect access to the commercial paper market
through a $105 million commercial paper conduit facility with Enterprise Funding
Corporation ("Enterprise"), a commercial paper conduit managed by NationsBank,
N.A. Receivables that have accumulated in the warehouse facility may be
transferred to the commercial paper facility by transferring a specific group of
receivables to a discrete special purpose financing subsidiary and pledging
those receivables as collateral. Receivables are generally transferred from the
warehouse credit facility to the commercial paper facility to refinance them on
a longer term basis at interest rates based on commercial paper rates and to
provide additional borrowing capacity under the warehouse credit facility.
Borrowings under the commercial paper facility bear interest at the commercial
paper rate plus .25%. If the commercial paper facility were terminated, no new
receivables could be transferred from the warehouse credit facility to
Enterprise; however, the then outstanding receivables would continue to be
financed until fully amortized.
The following table summarizes borrowings under the commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1996 1997
---------- ----------
At period-end:
Balance outstanding............. $ 49,579 $ 63,244
Weighted average interest
rate(1)........................ 6.21% 6.09%
During period(2):
Maximum borrowings
outstanding.................... $ 49,579 $ 71,387
Weighted average balance
outstanding.................... 37,682 55,856
Weighted average interest
rate........................... 6.71% 6.59%
- - ------------
(1) Based on interest rates, facility fees, surety bond fees and hedge
instruments applied to borrowings outstanding at period-end.
(2) Based on month-end balances.
INTEREST RATE MANAGEMENT. The Company's operating revenues are derived
almost entirely from the collection of interest on the receivables that it
retains and its primary expense is the interest that it pays on borrowings
incurred to purchase and retain such receivables. The Company's capacity to
generate earnings is therefore largely a function of its ability to maintain a
sufficient net interest
23
<PAGE>
margin. Accordingly, significant increases in the interest rates at which the
Company borrows funds could promptly reduce the net interest margin between
portfolio yield and cost of funds and thereby adversely affect the Company's
results of operations. The Company endeavors to offset rate fluctuation risk by
using interest rate management products that convert all or a substantial
portion of its floating rate exposure to fixed rates. The Company seeks to
minimize its exposure to adverse interest rate movements by entering into
interest rate swap agreements with notional principal amounts which approximate
the balance of its debt outstanding under its warehouse and commercial paper
credit facilities. 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
swaps.
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 which 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. During the years ended April 30, 1997, 1996 and 1995 amounts
paid pursuant to the Company's interest rate management products were not
material in relation to interest expense in the aggregate nor did they have a
material impact on the Company's weighted average costs of funds during such
periods.
The Company is currently a party to a swap agreement with NationsBank
pursuant to which the Company's interest rate exposure is fixed, through August
1997, at a rate of 5.545% on a notional amount of $100 million (as further
described in Note 6 to Notes to Consolidated Financial Statements). This
agreement may be extended to August 1999, at the sole discretion of NationsBank.
As a result, at April 30, 1997, the Company had converted a total of $100
million in floating rate debt to a fixed rate and had outstanding floating rate
debt of $12,894,131. The Company is currently evaluating additional interest
rate management products with a view to fixing or limiting its interest rate
exposure with respect to amounts that are substantially equivalent to its
aggregate outstanding borrowings under the warehouse credit line and the
commercial paper facility.
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
24
<PAGE>
on its entire receivables portfolio. The following table summarizes the credit
loss exposure of the Company (dollars in thousands):
<TABLE>
<CAPTION>
APRIL 30,
------------------------------------------------
1996 1997
--------------------- ---------------------
RECEIVABLES RESERVE RECEIVABLES RESERVE
BALANCE BALANCE BALANCE BALANCE
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Core Program:
Insured by third party
insurer....................... $ 5,491 $ -- $ 2,293 $ --
Other receivables(2)............ 79,260 630 (2) 109,391 1,182(2)
Participating Program................ 9,606 766 (3) 4,059 340(3)
----------- -----------
$94,357 $ 115,743
=========== ===========
Allowance for credit losses as a
percentage of other
receivables(1)..................... 0.8 % 1.1%
Dealer reserves as a percentage of
participating program
receivables........................ 8.0 % 8.4%
</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 AND PORTFOLIO ACQUISITIONS. Under the core program and for
receivables acquired pursuant to bulk portfolio acquisitions, 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. Provisions for credit losses of $704,000 and $2,520,253 have
been recorded for the years ended April 30, 1996 and 1997, respectively for
losses on receivables which are either uninsured or which are reinsured by the
Company's captive insurance subsidiary.
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 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.
25
<PAGE>
The following table summarizes the status and collection experience of
receivables acquired under the core program and pursuant to portfolio
acquisitions (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED APRIL 30,
----------------------------------------------
1996 1997
--------------------- ---------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Delinquent amount outstanding:
30-59 days...................... 133 $ 2,144 162 $ 2,548
60-89 days...................... 17 278 54 873
90 days or more................. 29 433 93 1,520
-------- --------- -------- ---------
Total delinquencies.................. 179 $ 2,855 309 $ 4,941
-------- --------- -------- ---------
Total delinquencies as a percentage
of outstanding receivables acquired
pursuant to portfolio acquisitions
and the core program............... 2.4% 2.4% 3.0% 3.1%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to portfolio
acquisitions and the core
program(2)......................... -- 1.1% -- 2.0%
</TABLE>
- - ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percent of outstanding receivables acquired in portfolio transactions and
pursuant to the core program 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.
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 establishing relationships only with
franchised dealers and securing each dealer's repurchase obligation with a
funded reserve account, the Company has incurred no losses under the
participating program.
26
<PAGE>
The following table summarizes the status of receivables under the
participating program (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED APRIL 30,
------------------------------------------------
1996 1997
---------------------- ----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Delinquent amount outstanding:
30 - 59 days....................... 26 $ 284 19 $ 134
60 - 89 days....................... 4 57 3 27
90 days or more.................... 12 164 14 163
--- ---------- --- ----------
Total delinquencies.................. 42 $ 505 36 $ 324
--- ---------- --- ----------
Total delinquencies as a percentage
of participating program
receivables........................ 3.4% 4.0% 5.1% 6.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period which were
acquired pursuant to the
participating program.............. -- 0% -- 0%
</TABLE>
- - ------------
(1) Amounts of delinquent receivables outstanding and total delinquencies as a
percentage of outstanding receivables pursuant to the participating program
are based on gross receivables balances, which include principal outstanding
plus unearned interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in this Form
10-K are listed under Item 14(a). The Company is not required to file any
supplementary financial data under this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information responsive to this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders expected to be held September 3, 1997, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this item appears under the caption "Summary
Compensation Table" in the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders expected to be held September 3, 1997, which is to be
filed with the Securities and Exchange Commission, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this item appears under the caption "Security
Ownership of Management and Certain Beneficial Owners" in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders expected to be held
September 3, 1997, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item appears under the caption "Certain
Transactions" in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders expected to be held September 3, 1997, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page F-1.
(3) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
*3.1 -- Articles of Incorporation, as amended
*3.2 -- Bylaws, as amended
*4.1 -- Excerpts from the Articles of Incorporation, as amended (included in
Exhibit 3.1).
*4.3 -- Specimen Stock Certificate
*10.5 -- Credit Agreement dated as of October 16, 1992 among F.I.R.C., Inc. ("FIRC") and
NationsBank of Texas, N.A., individually and as agent for the banks party thereto, as
amended by First Amendment to Credit Agreement and Loan Documents dated as of November 5,
1993, Second Amendment to Credit Agreement and Loan Documents dated as of March 3, 1994,
Third Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995 and
Fourth Amendment to Credit Agreement and Loan Documents dated as of July 7, 1995.
*10.6 -- Collateral Security Agreement dated as of October 16, 1992 between FIRC and Texas Commerce
Bank National Association as collateral agent for the ratable benefit of NationsBank of
Texas, N.A., as agent, and the banks party to the Credit Agreement filed as Exhibit 10.5.
*10.7 -- Escrow Agreement dated as of October 16, 1992 among FIRC, NationsBank of Texas, N.A. as
agent for the banks party to the Credit Agreement filed as Exhibit 10.5, and Texas
Commerce Bank National Association as Escrow Agent.
28
<PAGE>
<C> <S>
*10.8 -- Transfer and Administration Agreement dated as of March 3, 1994 among FIRC, Enterprise
Funding Corporation, Texas Commerce Bank National Association and NationsBank N.A.
(Carolinas) (formerly NationsBank of North Carolina, N.A.), as amended by Amendment Number
1 dated August 1, 1994, Amendment Number 2 dated February 28, 1995 and Amendment No. 3
dated March 21, 1995.
*10.9 -- Servicing Agreement dated as of October 16, 1992 between FIRC and General Electric Capital
Corporation, as amended by First Amendment to Servicing Agreement dated as of November 4,
1993, Second Amendment to Servicing Agreement dated as of March 1, 1994 and Third
Amendment to Servicing Agreement dated as of June 1, 1995.
*10.10 -- Purchase Agreement between FIRC and First Investors Financial Services, Inc. ("First
Investors") dated October 16, 1992, as amended by First Amendment to Purchase Agreement
dated as of November 5, 1993 and Second Amendment to Purchase Agreement dated as of March
3, 1994.
*10.11 -- Auto Loan Protection Insurance Policy dated October 13, 1992 issued by Agricultural Excess
& Surplus Insurance Company to FIRC as insured.
*10.12 -- Auto Loan Protection Insurance Policy dated April 8, 1994 issued by National Union Fire
Insurance Company of Pittsburgh to FIRC as insured.
*10.13 -- Facultative Reinsurance Agreement between National Fire Insurance Company of Pittsburgh
and First Investors Insurance Company, as reinsurer, dated as of May 26, 1995.
*10.14 -- Blanket Collateral Protection Insurance Policy dated October 5, 1992 issued by
Agricultural Excess & Surplus Insurance Company to FIRC as insured.
*10.15 -- ISDA Master Agreement dated August 12, 1994 between FIRC and NationsBank of Texas, N.A.
together with Confirmation of U.S. Dollar Rate Swap Transaction dated June 14, 1995 and
Confirmation for U.S. Dollar Rate Swap Transaction dated May 16, 1995.
*10.16 -- Employment Agreement dated as of March 20, 1992 between the Registrant and Tommy A. Moore,
Jr., as amended by First Amendment dated as of March 15, 1995 and Second Amendment dated
as of July 1, 1995.
*10.17 -- Lease Agreement between A.I.G. Realty, Inc. and First Investors dated as of June 1, 1992,
as amended by Amendment One dated October 29, 1993 and Amendment Two dated October 26,
1994.
*10.18 -- Redemption Agreement dated as of June 8, 1995 among the Registrant and all holders of its
class of 1993 Preferred Stock.
*10.21 -- 1995 Employee Stock Option Plan of the Registrant.
*10.22 -- Form of Stock Option Agreement between the Registrant and Robert L. Clarke dated August
25, 1995.
**10.23 -- Amendment No. 4 dated November 20, 1995 to the Transfer and Administration Agreement dated
as of March 3, 1994, filed as Exhibit 10.8.
**10.24 -- Employment Agreement dated as of May 1, 1996 between the Registrant and Bennie H. Duck.
**10.25 -- Amendment Three dated October 10, 1995 to the Lease Agreement between A.I.G. Realty, Inc.
and the Registrant, filed as Exhibit 10.17.
**10.26 -- Confirmation for U.S. Dollar Rate Swap Transaction dated November 16, 1995.
**10.27 -- Commitment Letter dated June 24, 1996 between Enterprise Funding Corporation and FIRC,
Inc.
***10.28 -- Confirmation for U.S. Dollar Rate Swap Transaction dated August 7, 1996.
****10.29 -- Security Agreement dated as of October 22, 1996 among First Investors Auto Receivables
Corporation, Enterprise Funding Corporation, Texas Commerce Bank National Association,
MBIA Insurance Corporation, NationsBank N.A., and First Investors Financial Services, Inc.
****10.30 -- Note Purchase Agreement dated as of October 22, 1996 between First Investors Auto
Receivables Corporation and Enterprise Funding Corporation.
****10.31 -- Purchase Agreement dated as of October 22, 1996 between First Investors Financial
Services, Inc. and First Investors Auto Receivables Corporation.
29
<PAGE>
****10.32 -- Insurance Agreement dated as of October 1, 1996 among First Investors Auto Receivables
Corporation, MBIA Insurance Corporation, First Investors Financial Services, Inc., Texas
Commerce Bank National Association, and NationsBank N.A.
****10.33 -- Servicing Agreement dated as of October 22, 1996 between First Investors Auto Receivables
Corporation and General Electric Capital Corporation.
****10.34 -- Amended and Restated Credit Agreement dated as of October 30, 1996 among F.I.R.C., Inc.
and NationsBank of Texas, N.A., individually and as Agent for the financial institutions
party thereto.
****10.35 -- Amended and Restated Collateral Security Agreement dated as of October 30, 1996 between
F.I.R.C., Inc. and Texas Commerce Bank National Association as collateral agent for the
ratable benefit of NationsBank of Texas, N.A. individually and as agent for the financial
institutions party to the Amended and Restated Credit Agreement filed as Exhibit 10.34.
****10.36 -- Amended and Restated Purchase Agreement dated as of October 30, 1996 between First
Investors Financial Services, Inc. and F.I.R.C., Inc.
****10.37 -- Amended and Restated Servicing Agreement between F.I.R.C., Inc. and General Electric
Capital Corporation.
*****10.38 -- Third Amendment dated January 20, 1997 to the Employment Agreement dated as of March 20,
1992 between the Registrant and Tommy A. Moore, Jr.
*21.1 -- Subsidiaries of the Registrant.
</TABLE>
* Asterisk indicates exhibit previously filed with the Company's Registration
Statement on Form S-1, Registration No. 33-94336 and incorporated herein by
reference.
** Asterisks indicate exhibits previously filed on 1996 Form 10-K and
incorporated herein by reference.
*** Asterisks indicate exhibits previously filed on July 31, 1996 First Quarter
Form 10-Q and incorporated herein by reference.
**** Asterisks indicate exhibits previously filed on October 31, 1996 Second
Quarter Form 10-Q and incorporated herein by reference.
***** Asterisks indicate exhibits previously filed on January 31, 1997 Third
Quarter Form 10-Q and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)
Date: July 11, 1997 By: /s/Tommy A. Moore, Jr.
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of First
Investors Financial Services Group, Inc. and in the capacities and on the date
indicated.
SIGNATURE TITLE
- - ------------------------------- -----------------------------------------
/s/Fentress Bracewell Chairman of the Board, Director
FENTRESS BRACEWELL
/s/Tommy A. Moore, Jr. President and Chief Executive Officer, Director
TOMMY A. MOORE, JR. (Principal Executive Officer)
/s/Bennie H. Duck Vice President and Chief Financial Officer
BENNIE H. DUCK (Principal Financial and Accounting Officer)
/s/Bradley F. Bracewell Director
BRADLEY F. BRACEWELL
/s/Robert L. Clarke Director
ROBERT L. CLARKE
/s/Roberto Marchesini Director
ROBERTO MARCHESINI
/s/J. W. Smelley Director
J. W. SMELLEY
/s/Walter A. Stockard Director
WALTER A. STOCKARD
/s/Walter A. Stockard, Jr. Director
WALTER A. STOCKARD, JR.
Date: July 11, 1997
31
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants ............................ F-2
Consolidated Balance Sheets as of April 30, 1996 and 1997 ........... F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1995, 1996 and 1997 .................................. F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended April 30, 1995, 1996 and 1997 ...................... F-5
Consolidated Statements of Cash Flows for the Years Ended
April 30, 1995, 1996 and 1997 .................................. F-6
Notes to Consolidated Financial Statements .......................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:
We have audited the accompanying consolidated balance sheets of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 1996 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 25, 1997
F-2
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1996 AND 1997
ASSETS 1996 1997
- - ------------------------------------- ---------------- ----------------
Receivables Held for Investment,
net................................ $ 96,263,092 $ 118,299,063
Cash and Short-Term Investments,
including restricted cash of
$3,048,148 and $3,550,391.......... 6,649,417 5,967,358
Other Receivables:
Due from servicer............... 5,266,531 8,427,565
Accrued interest................ 1,613,953 1,923,360
Assets Held for Sale................. 1,912,050 1,072,463
Other Assets:
Funds held under reinsurance
agreement..................... 2,830,689 2,563,454
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $446,603 and $553,143...... 828,613 1,101,947
Deferred income tax asset,
net........................... -- 387,876
Federal income tax receivable... 295,523 --
---------------- ----------------
Total assets............... $ 115,659,868 $ 139,743,086
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -------------------------------------
Debt:
Secured credit facilities....... $ 91,048,636 $ 112,894,131
Other Liabilities:
Due to dealers.................. 806,634 342,697
Accounts payable and accrued
liabilities................... 1,692,942 2,460,685
Current income taxes payable.... 193,434 109,472
Deferred income tax liability,
net........................... 125,472 --
---------------- ----------------
Total liabilities.......... 93,867,118 115,806,985
---------------- ----------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.001 par value,
10,000,000 shares
authorized, 5,566,669 and
5,566,669 issued
and outstanding............... 5,567 5,567
Additional paid-in capital...... 18,464,918 18,464,918
Retained earnings............... 3,322,265 5,465,616
---------------- ----------------
Total shareholders'
equity.................. 21,792,750 23,936,101
---------------- ----------------
Total liabilities and
shareholders' equity.... $ 115,659,868 $ 139,743,086
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Interest Income...................... $ 8,977,224 $ 14,143,871 $ 18,151,669
Interest Expense..................... 3,501,736 5,245,356 6,706,341
------------- -------------- --------------
Net interest income........ 5,475,488 8,898,515 11,445,328
Provision for Credit Losses.......... 597,130 704,000 2,520,253
------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 4,878,358 8,194,515 8,925,075
------------- -------------- --------------
Other Income (Loss):
Loss on receivables sold with
recourse...................... (138,600) -- --
Late fees and other............. 207,359 586,792 693,807
------------- -------------- --------------
Total other income......... 68,759 586,792 693,807
------------- -------------- --------------
Operating Expenses:
Servicing fees.................. 732,493 1,125,520 1,536,225
Salaries and benefits........... 1,148,520 1,899,970 2,350,986
Other........................... 1,330,401 2,002,113 2,356,316
------------- -------------- --------------
Total operating expenses... 3,211,414 5,027,603 6,243,527
------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 1,735,703 3,753,704 3,375,355
------------- -------------- --------------
Provision (Benefit) for Income Taxes:
Current......................... 712,066 1,018,459 1,745,352
Deferred........................ (85,359) 276,665 (513,348)
------------- -------------- --------------
Total provision for income
taxes................... 626,707 1,295,124 1,232,004
------------- -------------- --------------
Net Income........................... $ 1,108,996 $ 2,458,580 $ 2,143,351
------------- -------------- --------------
Preferred Stock Dividends............ (107,333) (50,033) --
------------- -------------- --------------
Net Income Allocable to Common
Shareholders before Redemption of
Preferred Stock.................... 1,001,663 2,408,547 2,143,351
Premium Paid Upon Redemption of
Preferred Stock.................... -- (160,000) --
------------- -------------- --------------
Net Income Allocable to Common
Shareholders after Redemption of
Preferred Stock.................... $ 1,001,663 $ 2,248,547 $ 2,143,351
============= ============== ==============
Net Income Per Common Share before
Redemption of Preferred Stock...... $0.27 $0.51 $0.39
============= ============== ==============
Net Income Per Common Share after
Redemption of Preferred Stock...... $0.27 $0.47 $0.39
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1993 ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1994.............. $800,000 $3,667 $ -- $ 72,055 $ 875,722
Net income...................... -- -- -- 1,108,996 1,108,996
Preferred stock dividends....... -- -- -- (107,333) (107,333)
---------- ------- ----------- ------------- --------------
Balance, April 30, 1995.............. 800,000 3,667 -- 1,073,718 1,877,385
Issuance of 1,900,000 common
shares, net of issuance
costs......................... -- 1,900 18,464,918 -- 18,466,818
Redemption of preferred stock... (800,000) -- -- (160,000) (960,000)
Preferred stock dividends....... -- -- -- (50,033) (50,033)
Net income...................... -- -- -- 2,458,580 2,458,580
---------- ------- ----------- ------------- --------------
Balance, April 30, 1996.............. -- 5,567 18,464,918 3,322,265 21,792,750
Net income...................... -- -- -- 2,143,351 2,143,351
---------- ------- ----------- ------------- --------------
Balance, April 30, 1997.............. $ -- $5,567 $18,464,918 $ 5,465,616 $ 23,936,101
========== ======= =========== ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ---------------- ----------------
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net income...................... $ 1,108,996 $ 2,458,580 $ 2,143,351
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense.... 753,246 1,144,981 1,816,195
Provision for credit
losses.................. 597,130 704,000 2,520,253
Charge-offs, net of
recoveries.............. (187,130) (603,873) (1,968,382)
(Increase) decrease in:
Accrued interest
receivable.............. (467,533) (892,199) (309,407)
Restricted cash............ (1,838,802) 11,372 (502,243)
Deferred financing costs
and other............... (237,312) (278,988) (436,351)
Funds held under
reinsurance agreement... (1,445,091) (1,385,598) 267,235
Due from servicer.......... (1,834,063) (1,923,305) (3,161,034)
Deferred income tax asset,
net..................... (85,359) 231,420 (387,876)
Federal income tax
receivable.............. -- (295,523) 295,523
Increase (decrease) in:
Due to dealers............. 581,040 (472,876) (463,937)
Accounts payable and
accrued liabilities..... 516,849 539,452 767,743
Due to shareholders........ 3,333 (46,667) --
Current income taxes
payable................. 401,548 (419,896) (83,962)
Deferred income tax
liability, net.......... -- 125,472 (125,472)
-------------- ---------------- ----------------
Net cash provided by (used in)
operating activities....... (2,133,148) (1,103,648) 371,636
-------------- ---------------- ----------------
Cash Flows From Investing Activities:
Purchase of receivables......... (48,962,538) (68,738,319) (68,854,056)
Principal payments from
receivables................... 20,782,607 33,171,742 45,535,622
Purchase of furniture and
equipment..................... (57,510) (87,832) (82,999)
-------------- ---------------- ----------------
Net cash used in investing
activities.............. (28,237,441) (35,654,409) (23,401,433)
-------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 48,423,682 58,365,425 61,419,920
Unsecured debt............. 1,333,755 -- --
Principal payments made on --
Secured debt............... (19,862,115) (31,980,322) (39,574,425)
Unsecured debt............. (3,250,000) (5,000,000) --
Proceeds from issuance of notes
payable to shareholders....... 5,000,000 -- --
Proceeds from issuance of common
stock, net of issuance
costs......................... -- 18,466,818 --
Redemption of preferred stock... -- (960,000) --
Preferred stock dividends
paid.......................... (104,000) (50,033) --
-------------- ---------------- ----------------
Net cash provided by
financing activities.... 31,541,322 38,841,888 21,845,495
-------------- ---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. 1,170,733 2,083,831 (1,184,302)
Cash and Short-Term Investments at
Beginning of Year.................. 346,705 1,517,438 3,601,269
-------------- ---------------- ----------------
Cash and Short-Term Investments at
End of Year........................ $ 1,517,438 $ 3,601,269 $ 2,416,967
============== ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for --
Interest................... $ 3,235,129 $ 5,153,027 $ 6,294,815
Income taxes............... 311,719 1,654,100 1,533,791
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995, 1996 AND 1997
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) was established to serve as a holding company for First Investors
Financial Services, Inc. (FIFS) and FIFS's wholly owned subsidiaries, First
Investors Insurance Company (FIIC), First Investors Auto Receivables Corporation
(FIARC), and F.I.R.C., Inc. (FIRC). First Investors, together with its
subsidiaries, is hereinafter referred to as the Company.
FIFS began operations in May 1989 and 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 April 30, 1997, approximately 45
percent of receivables held for investment had been originated in Texas. The
Company currently operates in 17 states.
FIIC was organized under the captive insurance company laws of the state of
Vermont for the purpose of reinsuring certain credit enhancement insurance
policies which have been written by unrelated third party insurance companies.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of First Investors and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECEIVABLES HELD FOR INVESTMENT. The Company acquires receivables from
dealers under two primary programs, one involving recourse to the dealer and the
other a non-recourse program (see Note 3). The basis in the receivables includes
the costs to acquire the receivables from the dealer, plus any fees paid related
to the purchase of the receivables.
Receivables are generally acquired from dealers at a premium or discount
from the principal amounts financed by the borrower. This premium or discount is
negotiated by the Company and the dealers. Included in the carrying amount of
receivables is the insurance premium paid to third-party insurers, net of any
premiums ceded to FIIC for reinsurance. The Company amortizes the difference
between the principal balance of the receivables and its carrying amount over
the expected remaining life of the receivables using the interest method.
INCOME RECOGNITION. The Company accrues interest income monthly based upon
contractual terms using the effective interest method. Interest income also
includes additional amounts received upon early payoffs of certain receivables
attributable to the difference between the principal balance of the receivables
calculated using the Rule of 78's method and the principal balance of the
receivables calculated using the effective interest method. If a dealer
participates in the receivable, the Company recognizes interest income net of
the dealer participation. When a receivable becomes two months past due, income
accrual is suspended until the payments become current. Other income relates
primarily to late charge fees and is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES. 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 and dealer reserves
absorbed substantially all credit losses. In April 1994, the
F-7
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company established a captive insurance subsidiary to reinsure the credit
enhancement insurance coverage. The credit enhancement insurance coverage for
all receivables acquired in March 1994 and thereafter has been reinsured by
FIIC. Beginning in October 1996 all receivables recorded by the Company were
covered by credit enhancement insurance, while pledged as collateral for the
warehouse credit facility. Once receivables are transferred to the commercial
paper facility, credit enhancement insurance is cancelled. Accordingly, the
Company is exposed to credit losses for all receivables either reinsured by FIIC
or uninsured and provides an allowance for such losses.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. In making this estimate, management
segregates the receivables acquired under its "core program" from receivables
acquired under its "participating program". For receivables acquired under the
participating program, the Company recovers actual losses from direct dealer
reimbursements and from dealer reserves. Management analyzes the core program
receivable portfolio characteristics as compared to its underwriting criteria,
delinquency and repossession statistics, historical loss experience, size,
quality and concentration characteristics of the receivable portfolio, as well
as external factors such as future economic outlooks.
Most of the automobile purchasers in the sub-prime market segment are
hourly wage-earners with little or no personal savings. In most cases such
purchasers' ability to remit payments as required by the terms of the
receivables is entirely dependent on their continued employment and stability of
household and medical expenses. Job losses or events which cause a significant
increase in household or medical expenses could result in defaults on their
consumer debts. A prolonged economic recession resulting in widespread
unemployment in this wage-earning sector could cause a significant rise in
delinquencies and charge-offs, which would adversely affect the Company.
Although the Company considers its allowance to be adequate, there can be no
assurance that it would suffice in the event of a sustained period of economic
distress. 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, they are reported in earnings in the period they
become known.
SERVICING AGREEMENT. The Company has entered into a servicing agreement
with General Electric Capital Corporation (GECC) which terminates on October 31,
2000, subject to earlier termination depending on the outcome of annual pricing
renegotiations. In the event the GECC agreement were to terminate, GECC would
remain obligated to continue to service existing receivables through their
maturities. Under this agreement, GECC is responsible for (i) receipt, review
and verification of all collateral and documentation requirements, (ii)
establishment and administration of payment and collection schedules and (iii)
repossession and disposition of vehicles securing defaulted receivables.
Servicing fees are paid to GECC monthly based on the number of receivables being
serviced during the period, and GECC is entitled to reimbursement for certain
expenses relating primarily to liquidation of collateral. Due from servicer
primarily represents unremitted principal and interest payments.
FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial
assurance for the third party insurance company it reinsures by maintaining
premiums ceded to it in a restricted trust account for the benefit of the third
party insurance company. The reinsurance agreement provides, among other things,
that the funds held can be withdrawn by the third party insurance company due to
an insolvency of the Company or to reimburse the third party insurance company
for the Company's share of losses paid by the third party insurance company
pursuant to the reinsurance agreement.
ASSETS HELD FOR SALE. GECC commences repossession procedures against the
underlying collateral when it and the Company determine that collection efforts
are likely to be unsuccessful. Upon
F-8
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repossession, the receivable is written down to the estimated fair value of the
collateral, less the cost of disposition and plus the expected recoveries from
third-party insurers, through a charge to the allowance for credit losses.
Additionally, the repossessed collateral is reclassified to assets held for
sale.
LOSS ON RECEIVABLES SOLD WITH RECOURSE. Through October 1992, the business
strategy of the Company had been to acquire, pool and sell receivables to
third-party investors with recourse. The sale and any related gain or loss was
recognized when such receivables were delivered to an investor. Gains (losses)
on sales of receivables to investors represent the difference between the sales
proceeds received from the investor, adjusted for the reserves provided for
probable losses, if any, estimated expenses and the carrying amount of the
receivables. The liability for probable losses under recourse provisions, if
any, was estimated at the time of sale, and reserves were provided. At April 30,
1997, the Company has no remaining recourse obligations with respect to
receivables previously sold.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the warehouse credit facility over an 18 month period which
represents the committed term of such facility. Additionally, the Company
amortizes the costs related to the commercial paper facility over the estimated
average life of the receivables financed as the provisions of such facility
provide that receivables assigned to such facility would be allowed to amortize
should the facility not be extended.
OTHER OPERATING EXPENSES. Other operating expenses include primarily
professional fees, interest expense on the Company's unsecured line of credit
and notes payable to shareholders, service bureau fees, and rent.
INCOME TAXES. The Company follows Statement of Financial Accounting
Standards (SFAS) No. 109, which prescribes that deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that includes the enactment
date.
INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest
rate swap and cap agreements to manage the exposure of floating interest rates
under the terms of its credit facilities (see Note 6). The Company endeavors to
maintain the effectiveness of the interest rate swap or cap agreements by
selecting products with dollar denominated notional principal amounts, LIBOR
rate indices and interest reset periods similar to its credit facilities. The
differentials paid or received on interest rate agreements are accrued and
recognized currently as adjustments to interest expense. Premiums paid or
received on these agreements, if any, are amortized to interest expense over the
term of the related agreement. Gains and lossses on early terminations of
interest rate swap and cap agreements are included in the carrying amount of the
related debt and amortized as yield adjustments over the estimated remaining
term of the swap.
ACCOUNTING POLICY FOR EMPLOYEE STOCK OPTIONS. In October 1995, the
Financial Accounting Standards Board issued SFAS No. 123, a new standard on
accounting for stock based compensation. SFAS No. 123 encourages companies to
account for stock based compensation awards based on the fair value of the
awards at the date they are granted. The resulting compensation cost would be
shown as an expense in the statement of operations. Companies can choose not to
apply the new accounting method and continue to apply current accounting
requirements; however, disclosure will be required as to what net income and
earnings per share would have been had the new accounting method been followed.
The Company accounts for its stock-based compensation under Accounting
F-9
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees." Under this accounting method, no compensation expense is recognized
in the consolidated statements of operations if no intrinsic value of the option
exists at the date of grant. While the Company has not adopted SFAS No. 123 for
accounting purposes; it has made annual pro forma disclosures of its effects
(see Note 11).
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders after preferred dividends, if any, and
in the case of the year ended April 30, 1996, the premium paid to the holders of
the 1993 preferred stock upon its redemption, divided by the weighted average
number of shares of common stock outstanding, adjusted for a 3-for-1 stock split
(see Note 11). The weighted average common shares outstanding for the year ended
April 30, 1995, was 3,666,669; for the year ended April 30, 1996, was 4,756,833;
and for the year ended April 30, 1997, was 5,566,669.
In February 1997 the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". The Company plans to adopt SFAS No. 128 in Fiscal
1998 and does not anticipate the impact will be material to the Company's
calculation of earnings per share.
FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciable assets are amortized using the
straight-line method over the estimated useful lives (two to five years) of the
respective assets.
CASH AND CASH EQUIVALENTS. The Company considers all investments with a
maturity of three months or less when purchased to be cash equivalents.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995
and 1996 amounts to conform with the 1997 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
The receivables generally have terms of 36 to 60 months and are
collateralized by the underlying vehicles. Net receivable balances consisted of
the following at April 30, 1996 and 1997:
1996 1997
-------------- ----------------
Receivables.......................... $ 94,357,356 $ 115,742,904
Unamortized premium and deferred
fees................................. 2,535,863 3,738,156
Allowance for credit losses.......... (630,127) (1,181,997)
-------------- ----------------
Net receivables................. $ 96,263,092 $ 118,299,063
============== ================
At April 30, 1997, the weighted average remaining term of the receivable
portfolio is 43 months and the weighted average contractual interest rate is
18.0 percent. Principal payments expected to be received on the receivable
portfolio, assuming no defaults and that payments are received in accordance
with contractual terms, are summarized in the following table. Receivables may
pay off prior to contractual due dates, primarily due to defaults and early
payoffs.
Year ending April 30-
1998....................... $ 29,439,524
1999....................... 30,636,514
2000....................... 29,148,481
2001....................... 20,272,171
2002....................... 6,246,214
----------------
$ 115,742,904
================
F-10
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORE PROGRAM. Under the core program, the Company has nonexclusive
agreements with dealerships which may be terminated at any time by either party.
These agreements, which contain customary representations and warranties
concerning title to the receivables sold, validity of the liens on the
underlying vehicles and compliance with applicable laws and other matters, do
not guarantee collectability solely because of payment default. At April 30,
1996 and 1997, the Company had investments in receivables pursuant to the core
program with aggregate principal balances of $84,320,446 and $111,605,087,
respectively.
Activity in the allowance for credit losses for the years ended April 30,
1996 and 1997, was as follows:
1996 1997
------------ --------------
Balance, beginning of year........... $ 530,000 $ 630,127
Provision for credit losses.......... 704,000 2,520,253
Charge-offs, net of recoveries....... (603,873) (1,968,383)
------------ --------------
Balance, end of year................. $ 630,127 $ 1,181,997
============ ==============
PARTICIPATING PROGRAM. The Company instituted a dealer recourse program in
November 1992, whereby the participating dealers are obligated for an agreed
period of time, usually from 12 to 18 months, to reimburse the Company for
losses upon the occurrence of default by the borrower. The Company was
reimbursed by participating dealers for $60,931, $54,568 and $14,631 of losses
incurred during the three years ended April 30, 1997, respectively. At April 30,
1996 and 1997, the Company had investments in receivables pursuant to the dealer
recourse program with aggregate principal balances of $9,605,834 and $4,058,972,
respectively. A specified portion of the purchase price, generally from 5
percent to 7 percent, is set aside in a reserve account to secure performance of
the dealer's obligations. In exchange for such obligation, the dealers are
entitled to the excess cash flows above a specified yield guaranteed to the
Company. During the three years ended April 30, 1997, excess interest of
$447,468, $211,507 and $73,669, respectively, were remitted to the dealers
pursuant to this program. Pursuant to the various receivables purchase
agreements, the dealers (either automatically or, in some cases, at their
election) are released from the repurchase obligation after a specified period
has elapsed and certain conditions are met. Amounts held in the dealer reserve
account exceeding a specified percentage, generally 7 percent, are then released
to the dealer, with the balance available for the benefit of the Company in the
event losses are incurred on the pool of receivables originally subject to the
recourse provisions. Any funds remaining in the reserve account upon payoff of
all receivables in a pool are remitted to the dealer. Such funds have been
reported in the accompanying consolidated balance sheets as restricted cash (see
Note 4) and due to dealers. The Company believes the dealers subject to the
recourse provisions have the intent and ability to honor such provisions, and
the amount of the dealer reserve held in trust when the dealers are released
from the recourse obligation are adequate to cover possible credit losses on
receivables acquired pursuant to the participating program. Accordingly, the
Company has determined that an allowance for credit losses is not necessary on
the receivables subject to the dealer participating program. The following table
summarizes activity in the dealer reserves for the years ended April 30, 1996
and 1997:
1996 1997
------------- -------------
Balance, beginning of year........... $ 1,218,531 $ 765,504
Additions............................ 83,606 18,220
Charges to dealer reserve account.... (464,318) (441,740)
Amounts remitted to dealers.......... (72,315) (2,382)
------------- -------------
Balance, end of year................. $ 765,504 $ 339,602
============= =============
F-11
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PORTFOLIO ACQUISITIONS. In addition to acquiring receivables directly from
dealers under the core program and the participating program, the Company may
also acquire receivables directly from other investors or originators. At April
30, 1996 and 1997, the Company had receivables with aggregate principal balances
of $431,076 and $78,845 which were acquired in portfolio transactions.
RECEIVABLES REPURCHASED FROM RELATED PARTIES. During fiscal 1995,
receivables with an aggregate principal balance of $110,100 were repurchased
from shareholders of the Company for $248,700. Such receivables had originally
been sold with recourse to unrelated investors to yield guaranteed rates from
11.25 percent to 11.50 percent. Shareholders of the Company subsequently
purchased such receivables from the third-party investor, and the guaranteed
yield was renegotiated to 9.50 percent. The amount paid by the Company
represents the principal balance of the receivables plus the outstanding
recourse obligation which arose upon the initial sale of the receivables to
unrelated investors. A loss of $138,600 was recognized when amounts estimated to
be received from future payments on such receivables were determined not to be
sufficient to repay the recourse obligation over the receivables' estimated
remaining term.
4. RESTRICTED CASH
The components of restricted cash for the years ended April 30, 1996 and
1997, are as follows:
1996 1997
------------- -------------
Dealer reserves (Note 3)............. $ 765,504 $ 339,602
Commercial paper facility
compensating balance
(Note 6)........................... 942,176 882,568
Funds held in trust for receivable
fundings........................... 914,217 1,718,358
Warehouse credit facility account
(Note 6)........................... 418,522 351,522
Other................................ 7,729 258,341
------------- -------------
Total restricted cash........... $ 3,048,148 $ 3,550,391
============= =============
5. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets for the years
ended April 30, 1996 and 1997, are as follows:
1996 1997
----------- -------------
Deferred financing costs, net........ $ 150,589 $ 374,384
Furniture and equipment, net......... 116,583 141,125
Organization costs and other, net.... 561,441 586,438
----------- -------------
Total........................... $ 828,613 $ 1,101,947
=========== =============
6. DEBT
The Company finances the acquisition of its receivables portfolio primarily
through two related credit facilities. The Company's credit facilities provide
for one year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. Substantially
all receivables retained by the Company are pledged as collateral for the credit
facilities.
WAREHOUSE CREDIT FACILITY. The acquisition of the receivables has been
financed initially through a syndicated warehouse credit facility managed by
NationsBank of Texas, N.A. (NationsBank).
F-12
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The warehouse credit facility was entered into in October 1992 and provided for
maximum borrowings of the lesser of the borrowing base or $25 million and is
structured to permit additional increases in the maximum borrowings allowable
through further syndication as the needs of the Company require. The borrowing
base is defined as the sum of the principal balance of the receivables pledged
and the amount on deposit in an escrow account. The Company is required to
maintain a reserve account equal to the greater of one percent of the principal
amount of receivables financed or $250,000. At April 30, 1995 the warehouse
credit facility had been expanded to provide for borrowings of the lesser of the
borrowing base or $45 million through a $20 million participation by The
Sumitomo Bank, Limited. During fiscal year 1996, the warehouse credit facility
was increased to $55 million through a $10 million participation by Wells Fargo
Bank (Texas). Borrowings under the warehouse credit facility bear interest at a
rate selected by the Company at the time of the advance of either the base rate,
defined as the higher of the prime rate or the federal funds rate plus .5
percent, the LIBOR rate plus .5 percent, or a rate agreed to by the Company and
the banks. The facility also provides for the payment of a fee of .25 percent
per annum based on the total committed amount.
Borrowings under the warehouse credit facility were $41,470,000 and
$49,650,000 at April 30, 1996 and 1997, respectively, and had weighted average
interest rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.41 percent and 6.31 percent as of such dates. The warehouse
credit facility provides for a term of one year at which time the outstanding
principal balance will be payable in full, although there are provisions
allowing the Company a period of six months to refinance the facility in the
event that it is not renewed. The current term of the warehouse credit facility
expires on April 15, 1998.
COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility through
Enterprise Funding Corporation (Enterprise), a commercial paper conduit
administered by NationsBank, N.A. On June 24, 1996, the commercial paper
facility was increased from $50 million to $75 million. Receivables are
transferred periodically from the warehouse credit facility to Enterprise
through the assignment of an undivided interest in a specified group of
receivables. Enterprise issues commercial paper (indirectly secured by the
receivables), the proceeds of which are used to repay the warehouse credit
facility. Borrowings under the commercial paper facility bear interest at the
commercial paper rate plus .6 percent. Additionally, the agreement provides for
the payment of a program fee of .05 percent monthly, an unused program fee of
.25 percent per annum of the undrawn balance and a dealer fee equal to .06
percent of the face amount of commercial paper issued.
On October 22, 1996, an existing $75 million commercial paper conduit
facility which was provided by Enterprise to another special-purpose,
wholly-owned subsidiary of the Company, F.I.R.C., Inc. was terminated and the
Company completed a $105 million commercial paper conduit financing through
Enterprise. The financing was provided to a special-purpose, wholly-owned
subsidiary of the Company, First Investors Auto Receivables Corporation. Credit
enhancement for the new $105 million facility is provided to the commercial
paper investors by a surety bond issued by MBIA Insurance Corporation.
Borrowings under the commercial paper facility bear interest at the commercial
paper rate plus a borrowing spread equal to .25 percent per annum. Additionally,
the agreement provides for additional fees based on the unused amount of the
facility and dealer fees associated with the issuance of the commercial paper. A
surety bond premium equal to .35 percent per annum is assessed based on the
outstanding borrowings under the facility. The commercial paper facility has
been initially provided for a term of one year, expiring October 21, 1997. 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. At April 30, 1996 and 1997, the
Company had borrowings of $49,578,636 and $63,244,131, respectively, outstanding
under
F-13
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the commercial paper facility at weighted average interest rates, including the
effect of program fees, dealer fees and hedge instruments, as applicable, of
6.21 percent and 6.09 percent, respectively.
LOAN COVENANTS. The documentation governing both the warehouse credit
facility and the commercial paper facility contains numerous covenants relating
to the Company's business, the maintenance of credit enhancement insurance
covering the receivables, the observance of certain financial covenants, the
avoidance of certain levels of delinquency experience and other matters. The
breach of these covenants, if not cured within the time limits specified, could
precipitate events of default that might result in the acceleration of the
warehouse credit facility or the termination of the commercial paper facility.
Management of the Company believes it was in compliance with all covenants at
April 30, 1997.
HEDGE INSTRUMENTS. The Company's earnings are directly dependent on its
ability to maintain a sufficient net interest spread between its fixed portfolio
yield and its floating cost of funds. Accordingly, increases in the interest
rates of the Company's borrowings could have an adverse impact on the Company's
earnings. The Company has entered into various interest rate swap and cap
agreements to minimize the adverse impact of increasing interest rates on its
earnings by converting the floating rate exposure of the debt to a fixed rate.
There can be no assurance, however, that this strategy will consistently or
completely offset adverse interest rate movements. Furthermore, while the
Company believes that this strategy will enable it to achieve a sufficient net
interest spread, it precludes the Company from realizing higher earnings from
decreases in the interest rates of its credit facilities.
In May, 1995, the Company entered into a swap agreement with NationsBank
covering a notional amount of $25 million for an initial term of one year. Under
the agreement, the Company pays a fixed rate of 5.74 percent times the notional
amount and receives an amount equal to the then current one-month LIBOR rate
times the notional amount. In June, 1995, the Company entered into a swap
agreement with NationsBank which provides for a notional amount of $40 million
and a term of one year. Under this agreement, the Company pays a fixed rate of
5.55 percent times the notional amount and receives an amount equal to the
one-month LIBOR rate times the notional amount. In November, 1995, the Company
entered into a third swap agreement with NationsBank covering a notional amount
of $20 million. Under the terms of the agreement, the Company pays a fixed rate
equal to 5.69 percent times the notional amount and receives an amount equal to
the the then current one-month LIBOR rate times the notional amount. This
agreement expires in November, 1998. The $25 million swap and the $40 million
swap expired in May and June, 1996, respectively.
In August 1996, the Company elected to terminate the $20 million swap in
connection with its decision to enter into a swap agreement with NationsBank
covering a notional amount of $100 million for an initial term of one year.
Under the agreement, the Company pays a fixed rate of 5.545 percent times the
notional amount and receives an amount equal to the then current one-month LIBOR
rate times the notional amount. This agreement may be extended to August 1999,
at the sole discretion of NationsBank. The Company received proceeds of $100,000
upon the termination of the $20 million swap.
NOTES PAYABLE TO SHAREHOLDERS. In April 1995, First Investors issued
promissory notes aggregating $5,000,000 to certain directors and principal
shareholders of the Company (and certain of their family members). The notes
bore interest payable quarterly at the rate of 15 percent per annum and were
ratably secured by the pledge of all of the common stock of FIFS. The notes were
prepaid in full with a portion of the proceeds of the offering of the Company's
Common Stock in October 1995 (see Note 11).
F-14
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The temporary differences which give rise to net deferred tax assets and
liabilities are as follows at April 30, 1996 and 1997, respectively:
1996 1997
------------ ------------
Deferred tax assets
Allowance for credit losses..... $ 80,973 $ 459,562
Accrued expenses................ 100,235 80,617
Other........................... 6,701 34,669
------------ ------------
187,909 574,848
------------ ------------
Deferred tax liabilities
Receivables held for
investment.................... (177,624) (58,505)
Deferred costs, net............. (98,915) (111,559)
Interest rate swap.............. (36,842) (16,908)
------------ ------------
(313,381) (186,972)
------------ ------------
Net deferred tax assets
(liabilities)...................... $ (125,472) $ 387,876
============ ============
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Management
believes a valuation allowance is not necessary at April 30, 1997.
The provision (benefit) for income taxes for the years ended April 30,
1995, 1996 and 1997, consists of the following:
1995 1996 1997
----------- ------------- -------------
Current --
Federal........................ $ 622,350 $ 883,581 $ 1,541,900
State.......................... 89,716 134,878 203,452
----------- ------------- -------------
$ 712,066 $ 1,018,459 $ 1,745,352
=========== ============= =============
Deferred --
Federal........................ $ (75,382) $ 281,920 $ (409,156)
State.......................... (9,977) (5,255) (104,192)
----------- ------------- -------------
$ (85,359) $ 276,665 $ (513,348)
=========== ============= =============
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the years ended April 30,
1995, 1996 and 1997.
1995 1996 1997
------ ------ ---------
Income tax -- statutory rate......... 34.00% 34.00% 34.00%
State income tax, net of federal
benefit.............................. 2.75 2.28 2.50
Expenditures deducted for tax,
capitalized for books.............. -- (1.99) --
Other................................ (.64) .21 --
------ ------ ---------
Effective income tax rate....... 36.11% 34.50% 36.50%
====== ====== =========
8. CREDIT RISKS
Approximately 45 percent of the Company's receivables by principal balance
at April 30, 1997, represent receivables acquired from dealers located in Texas.
The economy of Texas is primarily
F-15
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dependent on petroleum and natural gas production and sales of related supplies
and services, petrochemical operations, light and medium manufacturing
operations, agribusiness and tourism. Job losses in any or all of these primary
economic segments of the Texas economy may result in a significant increase in
delinquencies or defaults in the Company's receivable portfolio. While the
receivables are secured by vehicles, the Company has recourse to reserve
accounts and dealers for losses on certain receivables and the Company has
third-party default insurance for receivables originated prior to April 1994,
there can be no assurance that such remedies would mitigate additional credit
losses.
The Company is exposed to credit loss in the event that the counterparty to
the swap agreements does not perform its obligations. The terms of the Company's
interest rate agreements provide for settlement on a monthly basis and
accordingly, any credit loss due to non-performance of the counterparty would be
limited to the amount due from the counterparty for the month non-performance
occurred. The Company would be exposed to adverse interest rate fluctuations
following any such non-performance. While management believes that it could
enter into interest rate swap agreements with other counterparties to
effectively manage such rate exposure, there is no assurance that it would be
able to enter interest rate agreements on comparable terms as those of its
present agreements.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and estimated fair
values of the Company's financial instruments for those financial instruments
whose carrying amounts differ from their estimated fair values. SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments," defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
shown in the table are included in the balance sheet under the indicated
captions.
<TABLE>
<CAPTION>
APRIL 30, 1996 APRIL 30, 1997
----------------------------- -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Financial assets --
Receivables held for investment,
net of unamortized premium and
deferred fees................. $ 94,357,356 $107,514,773 $ 115,742,904 $125,637,331
Off-balance sheet instruments --
Swap agreements................. -- 199,556 -- 75,105
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:
CASH, RESTRICTED CASH, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES. The carrying amounts approximate fair value because of the short
maturity and market interest rates of those instruments.
RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by
discounting expected cash flows at a risk-adjusted rate of return deemed to be
appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
F-16
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SWAP AGREEMENTS. The fair value approximates the payment the Company would
have made to or received from the swap counterparty to terminate the swap
agreements.
10. DEFINED CONTRIBUTION PLAN
Effective May 1, 1994, the Company adopted a participant-directed 401(k)
retirement plan (the 401(k)) for its employees. An employee becomes eligible to
participate on May 1 or November 1 immediately following the employee's
attaining age 21 and completing one year of service. The Company pays the
administrative expenses of the 401(k), and at the discretion of the Board of
Directors, may make contributions to the 401(k). The Company did not make any
contributions to the 401(k) during the fiscal years ended April 30, 1995, 1996
and 1997.
11. SHAREHOLDERS' EQUITY
PREFERRED STOCK. The nonvoting cumulative preferred stock had a par value
of $1.00 per share and was entitled to receive cumulative cash dividends of $.07
per share on May 31, 1995, and on the last day of each succeeding November and
May thereafter. The nonvoting cumulative preferred stock was redeemable at the
option of the Company, either in whole or in part, upon receiving written
consent of the holders of at least 65 percent of the shares. In May 1995, the
Board of Directors approved the redemption of the nonvoting cumulative preferred
stock for $960,000 plus dividends accruing through the date of redemption. The
premium of $160,000 over the stated redemption price was consideration for the
holders' consent for the redemption and was recorded as a reduction of retained
earnings. Proceeds from the offering of Common Stock were used to redeem all of
the outstanding nonvoting cumulative preferred stock.
In June 1995, the shareholders approved a new series of preferred stock
(New Preferred Stock) with a $1.00 par value, and authorized 1,000,000 shares.
As of April 30, 1997, no shares have been issued.
COMMON STOCK. In June 1995, the Company increased the authorized shares of
Common Stock to 10 million shares. On June 7, 1995, the Company paid a 3-for-1
stock split, effected in the form of a stock dividend. Shareholders' equity has
been restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from retained earnings to Common Stock the par value
of the additional shares arising from the split. In addition, all references in
the financial statements to number of shares and per share amounts of the
Company's Common Stock have been restated.
On October 4, 1995, the Company issued 1,900,000 common shares through a
public offering, resulting in net proceeds (after deducting issuance costs) of
$18,466,818. The proceeds of the offering were used to, among other things,
repay debt to certain shareholders of $5,000,000 plus accrued interest and to
redeem the cumulative preferred stock at a redemption price, including premium,
of $960,000 plus accrued dividends.
STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the
Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered
by the Compensation Committee of the Board of Directors and provides that
options may be granted to officers and other key employees for the purchase of
up to 300,000 shares of Common Stock, subject to adjustment in the event of
certain changes in capitalization. Options may be granted either as incentive
stock options (which are intended to qualify for certain favorable tax
treatment) or as non-qualified stock options.
The Compensation Committee selects the persons to receive options and
determines the exercise price, the duration, any conditions on exercise and
other terms of the options. In the case of options intended to be incentive
stock options, the exercise price may not be less than 100% of the fair market
value per share of Common Stock on the date of grant. With respect to
non-qualified stock options, the exercise price may be fixed as low as 50% of
the fair market value per share at the time of
F-17
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant. In no event may the duration of an option exceed 10 years and no option
may be granted after the expiration of 10 years from the adoption of the Plan.
The exercise price of the option is payable in full upon exercise and
payment may be in cash, by delivery of shares of Common Stock (valued at their
fair market value at the time of exercise), or by a combination of cash and
shares. At the discretion of the Compensation Committee, options may be issued
in tandem with stock appreciation rights entitling the option holder to receive
an amount in cash or in shares of Common Stock, or a combination thereof, equal
in value to any increase since the date of grant in the fair market value of the
Common Stock covered by the option.
Effective with the Company's issuance of common stock on October 4, 1995,
the Compensation Committee granted options covering a total of 50,000 shares of
Common Stock to six officers and key employees of the Company. In each case, the
exercise price is equal to $11.00 per share, the initial public offering price,
and the options vest in cumulative annual increments of 20 percent beginning on
October 3, 1996.
Effective June 20, 1996, the Compensation Committee granted an option
covering 10,000 shares of Common Stock to an officer of the Company. The
exercise price of this option is $11.00 per share (the fair market value of the
Common Stock on the date of grant) and the option is exercisable in cumulative
annual increments of 20% beginning June 20, 1997.
In August 1995, the Company granted a non-qualified stock option, covering
20,000 shares of Common Stock, to a Director who is neither an officer nor an
employee. This option is not issued under the Plan. The option is exercisable in
whole at any time or in part from time to time at an exercise price of $11.00
per share.
A summary of the status of the Company's stock option plans for the years
ended April 30, 1996 and 1997 is presented below:
OPTION
SHARES UNDER PRICE RANGE
OPTION PER SHARE
------------ -----------
Outstanding at April 30, 1995........ --
Granted.............................. 70,000 $ 11.00
------------
Outstanding at April 30, 1996........ 70,000
Granted.............................. 10,000 $ 11.00
------------
Outstanding at April 30, 1997........ 80,000
============
Options available for future grants
at April 30, 1997.................... 240,000
============
FISCAL
--------------------
1996 1997
--------- ---------
Options exercisable at end of year... 20,000 30,000
Weighted average exercise price of
options exercisable.................. $ 11.00 $ 11.00
Weighted average fair value of
options granted...................... $ 5.01 $ 5.22
F-18
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED REMAINING
EXERCISE AVERAGE OPTIONS OPTIONS CONTRACTUAL
PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
------------ -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$11.00 $11.00 20,000 20,000 (1)
$11.00 $11.00 60,000 10,000 9.25
----------- -----------
80,000 30,000
=========== ===========
</TABLE>
- - ------------
(1) The option will terminate one year after the Director ceases to be a member
of the Board of Directors, except that in the event of the Director's death
while serving as a Director the option would be exercisable by his heirs or
representatives of his estate for a period of two years after date of death.
The Company accounts for these plans under APB Opinion No. 25 under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
FISCAL
----------------------------
1996 1997
------------- -------------
Net Income.......................... As Reported $ 2,458,580 $ 2,143,351
Pro Forma $ 2,367,967 $ 2,104,516
Net Income Per Common Share before
Redemption of Preferred Stock..... As Reported $ 0.51 $ 0.39
Pro Forma $ 0.49 $ 0.38
Net Income Per Common Share after
Redemption of Preferred Stock..... As Reported $ 0.47 $ 0.39
Pro Forma $ 0.45 $ 0.38
Because the SFAS No. 123 method of accounting is not required to be applied
to options granted prior to May 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
For nonpublic entities, SFAS No. 123 states that the value of stock options
is estimated at its minimum value which is equal to the current stock price less
the present value of the exercise price for a stock that does not pay dividends.
This value can be estimated based on the same factors used for a public entity,
except that a nonpublic entity need not consider the expected volatility of its
stock over the option's expected life. The fair value of each option is
estimated on the date of grant using the Black-Scholes option pricing model
except that a nonpublic entity need not consider the expected volatility of its
stock of the option's expected life. The following weighted-average assumptions
were used:
Risk free interest rate................. 6.43%
Expected life of options in years....... 10
Expected stock price volatility(1)...... 48%
Expected dividend yield................. 0%
- - ------------
(1) Volatility used in 1997 stock option grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock
F-19
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
12. COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO FUND. As of April 30, 1997, the Company had unfunded
receivables in process of approximately $1.4 million.
EMPLOYMENT AGREEMENT. In March 1992, First Investors entered into an
employment agreement with its president which expired in March 1997. The
agreement provided for an annual salary and an annual incentive bonus not to
exceed 5 percent of pretax income. In the event the president is terminated for
any reason other than death, disability, mutual agreement or conduct of a
material illegal act, he is entitled to a sum equal to the annual salary for the
remaining term of the agreement.
LEASES. The Company is a party to a lease agreement for office space which
began on June 1, 1992, and was amended on November 8, 1993, October 26, 1994,
and October 10, 1995, to include additional office space. The lease expires on
November 17, 1999. The Company also holds equipment under operating leases which
expire in fiscal year 1998. Rent expense for office space and other operating
leases for the years ended April 30, 1995, 1996 and 1997, was $154,412, $251,881
and $283,463, respectively. Required minimum lease payments for the remaining
term of the above leases are:
Year ending April 30-
1998.......................... $ 231,326
1999.......................... 122,656
2000.......................... 62,030
2001.......................... --
2002.......................... --
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 5,967,358
<SECURITIES> 0
<RECEIVABLES> 119,481,060
<ALLOWANCES> 1,181,997
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 139,743,086
<CURRENT-LIABILITIES> 0
<BONDS> 112,894,131
0
0
<COMMON> 5,567
<OTHER-SE> 23,930,534
<TOTAL-LIABILITY-AND-EQUITY> 139,743,086
<SALES> 18,151,669
<TOTAL-REVENUES> 18,151,669
<CGS> 6,706,341
<TOTAL-COSTS> 6,706,341
<OTHER-EXPENSES> 6,243,527
<LOSS-PROVISION> 2,520,253
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,375,355
<INCOME-TAX> 1,232,004
<INCOME-CONTINUING> 2,143,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,143,351
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
</TABLE>
