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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, 1999
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
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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. [___]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant as of June 30, 1999, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $15,934,014.
There were 5,566,669 shares of Common Stock of the registrant outstanding
as of June 30, 1999.
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 8, 1999, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 1999.
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<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-K
APRIL 30, 1999
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business............................. 1
Item 2. Properties........................... 15
Item 3. Legal Proceedings.................... 15
Item 4. Submission of Matters to a Vote of
Security Holders................... 15
PART II
Item 5. Market for Registrants' Common Equity
and Related Shareholder Matters.... 16
Item 6. Selected Consolidated Financial
Data............................... 17
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Item 8. Financial Statements and
Supplementary Data................. 31
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure............... 31
PART III
Item 10. Directors and Executive Officers..... 32
Item 11. Executive Compensation............... 32
Item 12. Security Ownership of Certain
Beneficial Owners and Management... 32
Item 13. Certain Relationships and Related
Transactions....................... 32
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form
8-K................................ 32
<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 utilize off-balance sheet securitization to finance its
receivables held for investment. As of April 30, 1999, the Company had
receivables held for investment in the aggregate principal amount of
$179,807,957, having an effective yield of 16.2% and a net interest spread to
the Company of 9.7% (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.
On October 2, 1998, the Company completed the acquisition of Auto Lenders
Acceptance Corporation ("ALAC") from Fortis, Inc. Headquartered in Atlanta,
Georgia, ALAC was engaged in essentially the same business as the Company and
additionally performs servicing and collection activities on a portfolio of
receivables acquired for investment as well as on a portfolio of receivables
acquired and sold pursuant to two asset securitizations. As a result of the
acquisition, the Company increased the total dollar value on its balance sheet
of receivables, acquired an interest in certain trust certificates related to
the asset securitizations and acquired certain servicing rights along with
furniture, fixtures, equipment and technology to perform the servicing and
collection functions for the portfolio of receivables under management.
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 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 generally 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,
1999, 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
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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 12% 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 has
since expanded its dealership base into 23 additional 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, 1999, and the number of
receivables (and percentage of total receivables), outstanding as of these dates
which were originated by the Company from dealers in such state during the last
two fiscal years:
<TABLE>
<CAPTION>
RECEIVABLES HELD FOR INVESTMENT
---------------------------------------
YEAR ENDED YEAR ENDED
DATE NUMBER OF APRIL 30, 1998 APRIL 30, 1999
BUSINESS DEALERS AT ------------------ ------------------
STATES COMMENCED APRIL 30, 1999 NUMBER % NUMBER %
- ------------------------------------- --------- -------------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Texas................................ 2/89 336 5,348 42.7% 5,626 35.1%
Ohio................................. 9/94 606 2,104 16.8 3,047 19.0
Georgia.............................. 9/94 110 1,920 15.3 2,408 15.0
Oklahoma............................. 7/94 102 959 7.7 1,476 9.2
Missouri............................. 12/93 77 496 4.0 705 4.4
Michigan............................. 10/94 192 369 3.0 481 3.0
Kansas............................... 12/93 47 264 2.1 361 2.3
Virginia............................. 4/98 38 -- -- 351 2.2
North Carolina....................... 11/95 65 218 1.7 305 1.9
Tennessee............................ 11/95 40 202 1.6 199 1.2
Arizona.............................. 2/96 28 165 1.3 176 1.1
Utah................................. 10/92 63 164 1.3 156 1.0
Colorado............................. 8/94 66 156 1.3 182 1.1
All others(1)........................ -- 936 151 1.2 542 3.5
-------------- ------ --------- ------ ---------
2,706 12,516 100.0% 16,015 100.0%
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</TABLE>
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(1) Includes dealers located in California, Connecticut, Florida, Idaho, Iowa,
Illinois, Indiana, Kentucky, Nebraska, New Jersey, Pennsylvania, South
Carolina, and Washington. The aggregate receivables from the dealers in each
of these states represented less than 4% of total receivables during the
year ended April 30, 1999.
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.
In 1997, the Company established a telemarketing department to supplement
the efforts of its marketing representatives in the field. The telemarketing
staff (Dealer Service Representatives) are
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located in Houston and are primarily responsible for (i) new loan volume in
rural areas or states in which the Company cannot justify a field marketing
representative, (ii) customer service support for marketing representatives who
typically cover large geographic areas, and (iii) customer support for the bank
alliance partners (see "Dealer Financing Programs").
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
The Company originates loans primarily from two sources: (i) dealer
indirect (the "core program") and (ii) alliance referrals. The core program
generates approximately 90% of the Company's current volume and consists of
loans purchased directly from dealerships in states not covered under the
alliance agreements. Alliance referrals represent approximately 10% of current
originations and consist of applications which are declined by one of the
Company's three alliance partners (National City Bank, Citibank and Bank of
America) and forwarded to the Company for consideration.
Credit applications generated by each of the above sources are forwarded to
the Company's centralized credit department in Houston with decisions made based
on the Company's standard underwriting guidelines and credit scoring model. The
internal credit decision and acceptance process is essentially the same
regardless of the origination source. Third party originators have no credit
approval authority and are subject to individual contracts which specify the
obligations of the parties. Essentially all of the Company's receivables are
acquired on a non-recourse basis.
In addition to purchasing receivables from dealers under the core program
as they are originated, the Company has also acquired seasoned receivables in
bulk portfolio acquisitions or from other third party originators and may
continue to do so from time to time.
The Company had dealership agreements with 2,706 dealers at April 30, 1999.
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 pricing and credit terms upon
which the Company agrees to acquire receivables is governed by the Company's
credit policy and a credit score generated by the Company's proprietary,
empirical based scoring model. 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.
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 and customer interviews are conducted by 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. The Company has developed various financing
programs under
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which it approves loans that vary in pricing and loan terms depending on the
relative credit risk determined for each loan. Credit or default risk is
evaluated by the Company's loan officers in conjunction with a proprietary,
empirical based credit scoring model developed based on the Company's 10 year
database of non-prime lending results.
COLLATERAL VERIFICATION. As a condition to the purchase of each receivable
originated by the Company, the Company performs an individual audit evaluation
consisting of 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.
The Company will purchase a receivable under its core program only after receipt
and review of a satisfactory audit 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.
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.
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.
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,
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1998 1999
---------------- ----------------
Number of Receivables................ 12,516 16,015
Aggregate Principal Amount of
Receivables........................ $ 136,445,808 $ 179,807,957
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 of vehicles securing defaulted
receivables. The Company currently handles all of the disposition of repossessed
vehicles.
Servicing fees paid by the Company represent a variable cost that increases
in proportion to the volume of receivables carried. During its two fiscal years
ended April 30, 1999, the Company incurred servicing and related fees in the
amount of $1,838,002 and $2,350,741, respectively, which represented 1.5% 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, however,
reserves the right to cancel the servicing agreement at any time without
penalty.
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While the Company considers its relationship with GECC to be satisfactory,
the Company believes that an internal servicing platform provides certain
strategic and economic benefits. A desire to ultimately transition from an
external to an internal servicing platform was one of the key considerations in
the ALAC acquisition. ALAC offered the Company the ability to purchase a fully-
functioning servicing platform in significantly less time than it would have
taken it to develop such an infrastructure on its own. ALAC performed all
aspects of servicing its loans including (i) billing, collecting, accounting for
and posting all payments received directly from obligors or through its lockbox
accounts, (ii) responding to customer inquiries, (iii) taking all action
necessary to obtain and maintain the security interest granted in the
collateral, (iv) investigating delinquencies, (v) communicating with obligors to
obtain timely payments, (vi) contracting for the repossession and resale of the
collateral when necessary, and (vii) monitoring loans and the related
collateral. ALAC's loan volume combined with the Company's own volume will allow
the Company to fully leverage the acquired ALAC servicing platform while
achieving significant operating economies and cost synergies.
Subsequent to fiscal year end, the Company completed the transition of its
portfolio of receivables held for investment from GECC to its internal servicing
and collection platform. This transition effectively terminates the servicing
agreement with GECC with the exception of certain daily functions, such as
collecting and posting payments on existing accounts, which is expected to
continue for a brief period following the transition and certain ongoing
responsibilities of GECC such as forwarding information, documents or other
notices it receives with respect to the accounts of the Company.
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 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,
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1998 1999
--------- ---------
Average monthly gross income......... $ 3,449 $ 4,020
Average ratio of consumer debt to
gross income....................... 34% 32%
Average years in current
employment......................... 5 5
Average years in current residence... 6 6
Residence owned...................... 40% 44%
Residence rented..................... 52% 52%
Other residence arrangements(1)...... 8% 4%
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(1) Includes military personnel and persons residing with relatives.
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PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the non 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,
----------------------
1998 1999
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New Vehicles:
Percentage of portfolio(1)...... 29% 25%
Number of receivables
outstanding.................... 3,665 3,968
Average amount at date of
acquisition.................... $ 16,386 $ 17,027
Average term (months) at date of
acquisition(2)................. 60 60
Average remaining term
(months)(2).................... 37 37
Average monthly payment......... $415 $428
Average annual percentage
rate........................... 17.6% 17.3%
Used Vehicles:
Percentage of portfolio(1)...... 71% 75%
Number of receivables
outstanding.................... 8,851 12,047
Average age of vehicle at date
of acquisition (years)......... 2.0 2.1
Average amount at date of
acquisition.................... $ 13,474 $ 13,977
Average term (months) at date of
acquisition(2)................. 54 55
Average remaining term
(months)(2).................... 39 40
Average monthly payment......... $368 $373
Average annual percentage
rate........................... 17.9% 17.7%
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(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.
FINANCING ARRANGEMENTS
GENERAL. At the time the Company acquires receivables, they are financed
by transferring them, at an amount equal to the outstanding principal balance,
to one of two wholly-owned special-purpose financing subsidiaries, F.I.R.C, Inc.
("FIRC") or First Investors Auto Capital Corporation ("FIACC"). FIRC
maintains a $65 million revolving bank facility with Bank of America, First
Union National Bank and Wells Fargo Bank (Texas), (the "FIRC credit
facility"). FIACC maintains a $25 million commercial paper warehouse facility
with Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit
administered by First Union National Bank (the "FIACC commercial paper
facility"). Together, these two facilities provide warehouse financing for the
initial purchase of receivables. The Company selects the warehouse facility to
be utilized for a specific funding based primarily upon the remaining
availability under the respective facilities. In addition, the Company also has
a $135 million conduit finance facility with Enterprise Funding Corporation
("Enterprise"), a commercial paper conduit administered by Bank of America,
(the "FIARC commercial paper facility") which allows the Company to refinance
borrowings under the FIRC credit facility in order to maintain sufficient
capacity to acquire new receivables to a wholly-owned special-purpose financing
subsidiary, First Investors Auto Receivables Corporation ("FIARC"). Together,
these three facilities provide $225 million in financing capacity to fund the
purchase and long-term financing of receivables.
FIRC CREDIT FACILITY. As designated receivables are purchased from dealers
and transferred to FIRC, they are immediately pledged to a commercial bank that
serves as the collateral agent for
the bank lenders. The FIRC credit 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
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not in excess of the present facility limit of $65 million. 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 FIRC credit facility the Company has three interest rate options:
(i) the Bank of America 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. Collections of principal and interest on the Company's receivables 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 FIRC credit facility expires on October 15, 1999,
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 eight 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.
FIARC COMMERCIAL PAPER FACILITY. When a sufficient number of receivables
have been accumulated under the FIRC credit facility, they may be refinanced
under the FIARC 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 receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. At April 30, 1999,
the maximum borrowings available under the commercial paper facility was $135
million. The Company's interest cost is based on Enterprise's commercial paper
rates for specific maturities plus .30%. 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 they are
remitted directly to a collection account maintained by the collateral agent for
the FIARC 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 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.
In March 1999, the Company increased its commercial paper facility, with
Enterprise, which is credit enhanced by a surety bond issued by MBIA Insurance
Corporation from $105 million to $135 million. The new facility expires in March
2000. 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 seek an
extension of this arrangement prior to its expiration.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly
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secured by the receivables) to institutional or public investors. The Company is
not a guarantor of, or otherwise a party to, such commercial paper. At April 30,
1999, the maximum borrowings available under the facility were $25 million. The
Company's interest cost is based on VFCC's commercial paper rates for specific
maturities plus .55%. In addition, the Company is required to pay periodic
facility fees of .25% on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
The current term of the facility expires on December 31, 1999. If the
facility was not extended, no new receivables could be transferred to FIACC and
the receivables pledged as collateral would be allowed to amortize. The Company
presently intends to seek an extension of this arrangement prior to its
expiration.
ACQUISITION FACILITY On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC to finance the Company's acquisition of ALAC. Contemporaneously with
the Company's purchase of ALAC, ALAC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by ALAC as of the
acquisition date, (ii) ALAC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by ALAC, and (iii) certain other financial
assets, including charged-off accounts owned by ALAC as of the acquisition date.
These assets, along with a $1 million cash reserve account funded at closing,
serve as the collateral for the bridge facility. The facility bears interest at
VFCC's commercial paper rate plus 2.35% and expires on October 31, 1999. Under
the terms of the facility, all cash collections from the acquired receivables or
cash distributions to the certificate holder under the securitizations are
applied to pay ALAC a servicing fee in the amount of 3% on the outstanding
balance of all owned or managed receivables and then to pay interest on the
facility. Excess cash flow available after servicing fees and interest payments
are utilized to reduce the outstanding principal balance on the indebtedness. In
addition, one-third of the servicing fee paid to ALAC is also utilized to reduce
principal outstanding on the indebtedness. The Company is currently negotiating
with First Union to refinance the acquisition facility over an extended term
sufficient to amortize the outstanding balance of the indebtedness through
collections of the underlying receivables and trust certificates. It is
anticipated that the permanent financing will consist of issuing various
tranches of notes, to be held by VFCC, or certificates to be held by the Company
and First Union, which will contain distinct principal amortization requirements
and interest rates. The Company anticipates no material change in the weighted
average interest rate under the permanent financing. It is anticipated, however,
that in conjunction with VFCC providing the permanent financing, VFCC will
obtain a beneficial interest in certain portion of the excess cash flow
generated by the remaining assets. The amount of excess cash to be received by
First Union will vary depending upon the timing and amount of such cash flows.
To the extent that the facility is not finalized prior to the expiration date,
the Company intends to seek a short-term extension to allow for the completion
of the term financing. The Company has no reason to believe that an agreement
with VFCC will not grant such an extension or that an agreement to refinance the
bridge loan will not be reached prior to the then final maturity of the bridge
facility. If the facility were not extended, the remaining outstanding principal
balance would be due at maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $10 million working
capital line of credit with Bank of America and First Union National Bank that
is utilized for working capital and general corporate purposes. Borrowings under
this facility bear interest at the Company's option of (i) Bank of America's
prime lending rate, or (ii) a rate equal to 3.0% above the LIBOR rate for the
applicable interest period. In addition, the Company is also required to pay
period facility fees, as well as an annual agency fee. The initial expiration of
the facility was July 1998 and has been subsequently
8
<PAGE>
extended on two occasions to October 15, 1999. If the lender elected not to
renew, any outstanding borrowings would be amortized over a one-year period. The
Company presently intends to seek an extension of this arrangement prior to its
expiration.
LOAN COVENANTS. The documentation governing each of the Company's
financing arrangements contains numerous covenants relating to the Company's
business, the maintenance of credit enhancement insurance covering the
receivables (if applicable), 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 FIRC
credit facility and working capital facility or the termination of the
commercial paper facilities. 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 sources of liquidity. The Company is currently in
compliance with all covenants governing these financing arrangements.
INTEREST RATE MANAGEMENT. Since interest paid on the Company's borrowings
varies with indexed rates in the case of the FIRC credit facility and working
capital facility and varies with commercial paper rates under the two commercial
paper facilities, 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 the counter party 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 arrangements 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 Bank of America
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 7 in the Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of Bank of
America. 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 FIRC credit facility and the commercial paper
facilities.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81%; and, the second in the initial
notional amount of $24.9 million (Swap B) pursuant to which the Company's
interest rate is fixed at 5.50%. The notional amount outstanding under each swap
agreement amortizes based on an implied amortization of the hedged indebtedness.
Swap A has a final maturity of December 30, 2002 while Swap B has a final
maturity of February 20, 2000. The Company also purchased two interest rate caps
which protect the Company and the lender against any material increases in
interest rates which may adversely affect any outstanding indebtedness which is
not fully covered by the aggregate notional amount outstanding under the swaps.
The first cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 4.81%
on a notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Swap A and the
9
<PAGE>
underlying indebtedness. The interest rate cap expires December 20, 2002 and the
cost of the cap is amortized in interest expense for the period. The second cap
agreement enables the Company to receive payments from the counterparty in the
event that the one-month commercial paper rate exceeds 6% on a notional amount
that increases initially and then amortizes based on the expected difference
between the outstanding notional amount under Swap B and the underlying
indebtedness. The interest rate cap expires February 20, 2002 and the cost of
the cap is imbedded in the fixed rate applicable to Swap B.
CREDIT ENHANCEMENT -- FIRC CREDIT FACILITY. In order to obtain a lower
cost of funding, the Company has agreed under the FIRC 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, 1999, 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 3.9% 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, 1999 were
$2,510,266, $2,860,491 and $3,537,416, respectively, and accounted for 3.8%,
3.8% and 3.2% of the aggregate principal balance of the receivables acquired
during such respective periods.
Prior to establishing its relationship with National Union in March 1994,
the Company's ALPI policy was provided by another third-party insurer. 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, 1999, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $13,205,268 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$4,447,913. 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, 1999, the
Insurance Affiliate had capital and surplus of $484,679 and unencumbered cash
reserves of $1,370,296 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 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
10
<PAGE>
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 -- FIARC 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 and has been extended to March 2000. 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.
CREDIT ENHANCEMENT -- FIACC COMMERCIAL PAPER FACILITY. Under the structure
of the FIACC commercial paper facility, no third-party credit insurance or
surety bond is required. Credit enhancement is provided in the form of the 88%
advance rate and 2% cash reserve requirement.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company seeks to manage its risk of credit loss through (i) prudent
credit evaluations, (ii) risk management activities, (iii) effective collection
procedures, and (iv) by maximizing recoveries on defaulted accounts. The Company
is not exposed to credit losses on its entire receivables held for investment
portfolio due to prior business strategies that included third party insurers
and a dealer recourse program. An allowance for credit losses of $1,529,651 as a
percentage of the exposed core receivables of $179,100,018 is .9%.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of April 30, 1999, the nonaccretable loss
reserve as a percentage of Receivables Acquired for Investment was 20.6%. The
nonaccretable portion represents, at acquisition, the excess of the loan's
scheduled contractual principal and contractual interest payments over its
expected cash flows.
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<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,
-------------------------------------------
1998 1999
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days............... 178 $ 2,371 359 $ 4,554
60 - 89 days............... 45 706 50 621
90 days or more............ 131 1,987 67 963
-------- --------- -------- ---------
Total delinquencies.................. 354 $ 5,064 476 $ 6,138
======== ========= ======== =========
Total delinquencies as a percentage
of outstanding receivables......... 2.7% 2.7% 2.8% 2.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... 3.2% 2.8%
</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 total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Receivables Managed was 3.4% as of April
30, 1999.
The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Company 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 more conservative loan structures which limit loan terms and
loan-to-value ratios and 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 24 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 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,
1999, approximately 25% of the receivables that had been acquired by the Company
related to new vehicles and approximately 75% of the receivables arose from the
sale of used vehicles. Of the Company's receivables held for investment at that
date, approximately 77% 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
12
<PAGE>
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 does not use off-balance sheet financing structures for
receivables originated by the Company and therefore, recognizes interest income
on the accrual method over the life of the receivables rather than recording
gains when those receivables are sold. 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.
In connection with the acquisition of ALAC in October 1998, the Company
obtained interests in two securitizations of automobile receivables (as further
described in Note 2 in the Notes to Consolidated Financial Statements).
EMPLOYEES
The Company had 148 employees as of April 30, 1999, including 64 located at
its headquarters in Houston, 74 located at its loan servicing center in Atlanta
and 10 regional marketing representatives. 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. The Company also utilizes a number of analytical tools in
managing credit risk including an empirical scoring model, trend and
discriminant analysis and pricing models which are designed to optimize yield
given an expected default rate.
The servicing and collection platform, acquired by the Company through the
ALAC acquisition, is provided by a software package and the system is designed
to provide support for all collections and servicing activities including
billing, collection process management, account activity history, repossession
management, loan accounting information and payment posting. In January, 1999,
the Company installed an auto dialer software which interfaces with the system
and serves as an efficiency tool in the collection process.
Both the front-end and back-end platforms are highly compatible from an
integration standpoint. Once the Company begins servicing its new originations
on the Atlanta-based platform, loans will be boarded electronically following
funding to the collection system.
In addition to its two primary operating systems, the Company also utilizes
third-party software in its accounting, human resources, and data management
functions, all of which are products well known in the marketplace.
The Company's information technology group is headquartered in Atlanta with
additional personnel located in Houston. Primary responsibilities include
network administration, hardware and software maintenance and reporting. The
Company believes that its data processing and information management capacity is
sufficient to accommodate significantly increased volumes of receivables without
material additional capital expenditures for this purpose. See Management's
Discussion and Analysis -- Year 2000 Issue.
13
<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 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 also consists of a
number of both large and mid-sized independent finance companies doing business
on a local, regional or national basis including some which are affiliated with
captive finance companies or large insurance groups. Reliable data regarding the
number of such companies and their market shares is unavailable; however, the
market is highly fragmented and intensely competitive.
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 Fair
Debt Collection Practices Act, 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 and to respond to changes in applicable
requirements as they occur.
14
<PAGE>
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.
The Company's offices in suburban Houston consist of approximately 11,752
square feet on the first and seventh floor of an eight-story office building.
This space is held under a lease requiring average annual rentals of
approximately $165,000 and expiring in February 2003, with an option to renew
for five years at the market rate then prevailing.
The Company's offices in suburban Atlanta consist of approximately 30,747
square feet on the sixth and seventh floor of an eight-story office building.
This space is held under a lease requiring average annual rentals of
approximately $575,000 and expiring in December 31, 2001, with an early
termination option by either party any time on or after June 30, 2000.
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.
15
<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, 1999....................... 6 9/16 5 3/8
January 31, 1999..................... 5 3/4 4 3/4
October 31, 1998..................... 6 3/8 3 3/4
July 31, 1998........................ 7 13/16 5 7/8
April 30, 1998....................... 8 1/8 6
January 31, 1998..................... 8 6
October 31, 1997..................... 8 1/2 7 1/4
July 31, 1997........................ 7 3/4 6 3/4
As of June 30, 1999, there were approximately 40 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.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 1999, 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,
---------------------------------------------------------
1995 1996 1997 1998 1999(5)
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest income(1)............... $ 8,977 $ 14,144 $ 18,151 $ 20,049 $ 31,076
Interest expense................. 3,502 5,245 6,706 7,834 12,782
--------- ---------- ---------- ---------- ----------
Net interest income......... 5,475 8,899 11,445 12,215 18,294
Provision for credit losses(2)... 597 704 2,520 3,901 4,661
--------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit
losses.................... 4,878 8,195 8,925 8,314 13,633
--------- ---------- ---------- ---------- ----------
Loss on receivables sold with
recourse(1)................... (138) -- -- -- --
Servicing........................ -- -- -- -- 1,200
Late fees and other.............. 207 587 693 617 1,594
--------- ---------- ---------- ---------- ----------
Total other income.......... 69 587 693 617 2,794
--------- ---------- ---------- ---------- ----------
Servicing fees................... 732 1,126 1,536 1,838 2,350
Salaries and benefits............ 1,149 1,900 2,351 2,639 6,030
Other............................ 1,330 2,002 2,356 2,526 4,894
--------- ---------- ---------- ---------- ----------
Total operating expenses.... 3,211 5,028 6,243 7,003 13,274
--------- ---------- ---------- ---------- ----------
Income before provision for
income taxes.................. 1,736 3,754 3,375 1,928 3,153
Provision for income taxes....... 627 1,295 1,232 704 1,151
--------- ---------- ---------- ---------- ----------
Net income....................... $ 1,109 $ 2,459 $ 2,143 $ 1,224 $ 2,002
--------- ---------- ---------- ---------- ----------
Preferred stock dividends(3)..... (107) (50) -- -- --
--------- ---------- ---------- ---------- ----------
Net income allocable to common
shareholders before redemption
of preferred stock............ 1,002 2,409 2,143 1,224 2,002
Premium paid upon redemption of
preferred stock............... -- (160) -- -- --
--------- ---------- ---------- ---------- ----------
Net income allocable to common
shareholders after redemption
of preferred stock............ $ 1,002 $ 2,249 $ 2,143 $ 1,224 $ 2,002
========= ========== ========== ========== ==========
Basic and Diluted net income per
common share before redemption
of preferred stock(4)......... $ 0.27 $ 0.51 $ 0.39 $ 0.22 $ 0.36
========= ========== ========== ========== ==========
Basic and Diluted net income per
common share after redemption
of preferred stock(4)......... $ 0.27 $ 0.47 $ 0.39 $ 0.22 $ 0.36
========= ========== ========== ========== ==========
AS OF APRIL 30,
---------------------------------------------------------
1995 1996 1997 1998 1999(5)
--------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Receivables held for investment,
net........................... $ 63,166 $ 96,263 $ 118,299 $ 139,599 $ 183,319
Receivables acquired for
investment, net............... -- -- -- -- 41,024
Investment in trust
certificates.................. -- -- -- -- 10,755
Other assets..................... 11,468 19,397 21,444 21,654 37,711
--------- ---------- ---------- ---------- ----------
Total assets................ $ 74,634 $ 115,660 $ 139,743 $ 161,253 $ 272,809
========= ========== ========== ========== ==========
Debt:
Secured credit facilities... $ 69,664 $ 91,049 $ 112,894 $ 130,813 $ 176,549
Acquisition term facility... -- -- -- -- 55,737
Other liabilities................ 3,093 2,818 2,913 5,280 13,361
Shareholders' equity............. 1,877 21,793 23,936 25,160 27,162
--------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity...... $ 74,634 $ 115,660 $ 139,743 $ 161,253 $ 272,809
========= ========== ========== ========== ==========
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<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. 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) 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% 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.
(4) Basic and Diluted net income per common 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 outstanding, adjusted for the 3-for-1
stock split.
(5) On October 2, 1998, the Company completed the acquisition of Auto Lenders
Acceptance Corporation (ALAC) from Fortis, Inc. ALAC was engaged in
essentially the same business as the Company and additionally performs
servicing and collection activities on a portfolio of receivables for
investment as well as on a portfolio of receivables acquired and sold
pursuant to two asset securitizations. The transaction was treated as a
purchase for accounting purposes and results of operations are included in
the Company's consolidated financial statements beginning on October 2,
1998.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Net income for the year ended April 30, 1999, was $2,001,842 or $0.36 per
common share. Net income for the year ended April 30, 1998, was $1,224,369 or
$0.22 per common share. This represents an increase of 64% in net income and
earnings per common share.
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, 1999, the Company had a network of
2,706 franchised dealers in 26 states from which it purchases the receivables at
the time of origination. While the Company intends to continue to geographically
diversify its receivables portfolio, approximately 35% of receivables held for
investment by principal balance at April 30, 1999 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 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. In addition, on October 2, 1998, the Company completed the acquisition
of Auto Lenders Acceptance Corporation ("ALAC") from Fortis, Inc.
Headquartered in Atlanta, Georgia, ALAC was engaged in essentially the same
business as the Company and additionally performs servicing and collection
activities on a portfolio of receivables acquired for investment as well as on a
portfolio of receivables acquired and sold pursuant to two asset
securitizations. As as result of the acquisition, the Company increased the
total dollar value on its balance sheet of receivables, acquired an interest in
certain trust certificates and interest strips related to the asset
securitizations and acquired certain servicing rights along with furniture,
fixtures, equipment and technology to perform the servicing and collection
functions for the portfolio of receivables under management. ALAC performs
servicing and collection functions on a $105.5 million portfolio of loans,
including loans serviced for others, originated in 18 states.
19
<PAGE>
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,
------------------------
1998 1999
----------- -----------
Receivables Held for Investment:
Number.......................... 12,516 16,015
Principal balance............... $ 136,446 $ 179,808
Average principal balance of
receivables outstanding during
the twelve month period....... $ 124,436 $ 155,431
Average principal balance of
receivables outstanding during
the three month period........ $ 132,075 $ 172,287
Receivables Acquired for Investment:
Number.......................... -- 4,871
Principal balance............... -- $ 48,853
Receivables Managed:(1)
Number.......................... -- 6,461
Principal balance............... -- $ 56,614
- ------------
(1) Represents receivables previously owned by ALAC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables.
YEARS ENDED APRIL 30,
------------------------
1998 1999(2)
----------- -----------
Interest income(1)................... $ 20,049 $ 31,076
Interest expense..................... 7,834 12,782
----------- -----------
Net interest income............. $ 12,215 $ 18,294
=========== ===========
- ------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) The Receivables Acquired for Investment contributed $5,929 to interest
income, $2,975 to interest expense and $2,954 to net interest income for
fiscal 1999.
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,
--------------------
1998 1999
--------- ---------
Receivables Held for Investment:
Effective yield on
receivables(1)................. 16.1% 16.2%
Average cost of debt(2)......... 6.5 6.5
--------- ---------
Net interest spread(3).......... 9.6% 9.7%
========= =========
Net interest margin(4).......... 9.8% 9.9%
========= =========
- ------------
(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.
20
<PAGE>
The Company intends to increase its acquisition of receivables by expanding
its dealer base in existing states served, by expanding its dealer base into new
states, and by generating additional loan volume through alliances with major
banks. 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
(dollars in thousands):
YEARS ENDED
APRIL 30,
------------------------
1998 1999
----------- -----------
Receivables Held for Investment:
Principal balance, beginning of
period......................... $ 115,743 $ 136,446
Acquisitions.................... 75,249 111,060
Principal payments and
payoffs........................ (44,001) (55,509)
Defaults prior to liquidations
and recoveries (1)............. (10,545) (12,189)
----------- -----------
Principal balance, end of
period......................... $ 136,446 $ 179,808
=========== ===========
- ------------
(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 $18.3 million
in 1999, an increase of 60% and 50% when compared to amounts reported in 1997
and 1998. The increase resulted primarily from the growth of the receivables
held for investment and contributions to interest income from the receivables
acquired for investment and trust certificates.
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
the periodic changes in net interest income. The following table analyzes the
changes attributable to the principal amount and rate components of net interest
income (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------------------
1997 TO 1998 1998 TO 1999
-------------------------------- --------------------------------
INCREASE INCREASE
(DECREASE) (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>
Receivables Held for Investment:
Interest income................. $ 3,185 $(1,288) $1,897 $ 4,994 $ 104 $5,098
Interest expense................ 1,214 (87) 1,127 1,989 (16) 1,973
--------- ------- ---------- --------- ------- ----------
Net interest income............. $ 1,971 $(1,201) $ 770 $ 3,005 $ 120 $3,125
========= ======= ========== ========= ======= ==========
</TABLE>
21
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 1999, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1998
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1999 increased by $11,027, or 55%,
over 1998, primarily as a result of an increase in the average principal balance
of receivables held for investment of 25% from 1998 to 1999 and the contribution
to interest income made by the receivables acquired for investment and the trust
certificates acquired pursuant to the ALAC acquisition. In addition, the
interest income was positively influenced for the year ended April 30, 1999, by
a .1% increase in effective yield. Management attributes the increase in yield
to increases in the interest rates charged on its financing programs in the
fourth quarter and to a decrease in the percentage of receivables held for
investment on which rate participation is paid to dealers as incentive to
utilize the Company's financing programs.
INTEREST EXPENSE. Interest expense for 1999 increased by $4,948, or 63%,
over 1998. An increase in the weighted average borrowings outstanding under
secured credit facilities of 25% resulted in $1,989 of this difference. Interest
expense associated with the $75 million acquisition facility also contributed to
the increase. Weighted average cost of debt for secured credit facilities
remained flat.
NET INTEREST INCOME. Net interest income increased by $6,079 in 1999, an
increase of 50% over 1998. The increase resulted primarily from the growth in
receivables held for investment and contributions to interest income from the
receivables acquired for investment and trust certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1999
increased by $760, or 19%, over 1998, as a result of an increase in net
charge-offs from $3,884 in fiscal year 1998 to $4,330 in fiscal year 1999. The
increase in charge-offs is attributable to the growth in the receivables held
for investment, an increase in the number of loans that are seasoned nine to 24
months, which is generally where the highest percentage of repossessions occur
and lower recovery amounts on the sale of the vehicle collateral.
SERVICING INCOME. Represents servicing income received on loan receivables
previously sold by ALAC in connection with two asset securitization
transactions. Under these transactions, ALAC, as servicer, is entitled to
receive a fee of 3% on the outstanding balance of the principal balance of
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Under the terms of the
securitizations, the servicer may be removed upon breach of its obligations
under the servicing agreements, the deterioration of the underlying receivables
portfolios in violation of certain performance triggers or the deteriorating
financial condition of the servicer. Servicing income was $1,200 for the year
1999.
LATE FEES AND OTHER INCOME. Late fees and other income increased to $1,594
in 1999 from $617 in 1998 which primarily represents late fees collected from
customers on past due accounts, collections on certain ALAC assets which had
previously been charged-off by the Company and interest income earned on
short-term marketable securities and money market instruments.
SERVICING FEE EXPENSES. Servicing fee expenses increased $513, or 28%,
from 1998 to 1999. Servicing fees consist primarily of fees paid by the Company
to General Electric Credit Corporation with which the Company has a servicing
relationship on its receivables held for investment. Since these costs vary with
the volume of receivables serviced, this increase was primarily attributable to
the increase in the number of receivables serviced in the receivables held for
investment, which increased by 3,499, or 28%, from 1998 to 1999.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $2,639
in 1998 to $6,030 in 1999, an increase of $3,391 or 128%. The increase is a
result of expansion of the Company's operation as a result of an increase in its
receivables portfolio, expansion of its geographic territory and an increase in
staffing levels as a result of the acquisition of ALAC. As of April 30, 1999,
the Company had 148 employees as compared to 66 as of April 30, 1998.
22
<PAGE>
OTHER EXPENSES. Other expenses for 1999 increased 94% from 1998. The
increase is a result of an expansion of the Company's asset base and an increase
in the volume of applications for credit processed by the Company in the 1999
period versus the comparable period and operating costs associated with the
acquired company which were not applicable to the prior year period.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1999, income before
provision for income taxes increased by $1,224, or 63%, from 1998 as a result of
the positive factors discussed above.
FISCAL YEAR ENDED APRIL 30, 1998, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1997
(DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 1998 increased by $1,897, or 10%,
over 1997, primarily as a result of an increase in the average principal balance
of receivables held of 18% from 1997 to 1998 which offset a 1.0% decline in the
effective yield realized on the receivables.
INTEREST EXPENSE. Interest expense for 1998 increased by $1,127, or 17%,
over 1997. An increase in the weighted average borrowings outstanding of 18%
resulted in $1,214 of this difference. The weighted average cost of debt
remained flat and positively impacted interest expense by $87.
NET INTEREST INCOME. Net interest income increased to $12,215 in 1998, an
increase of 7% over 1997. The increase resulted primarily from the growth of the
receivables portfolio which offset a decline in the net interest spread.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 1998
increased by $1,381, or 55%, over 1997, as a result of an increase in net
charge-offs from $1,968 in fiscal year 1997 to $3,884 in fiscal year 1998. The
increase in charge-offs is attributable to the growth in the portfolio, an
increase in the number of loans that are seasoned nine to 24 months, which is
generally where the highest percentage of repossessions occur and lower recovery
amounts on the sale of the vehicle collateral. At April 30, 1998, 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. Accordingly, an
additional $250,000 incremental charge was taken in the fourth quarter to adjust
the carrying value of the repossessed inventory to better reflect the impact of
lower used car prices during the period. This resulted in a corresponding
increase in net charge-offs and provision for the period.
OTHER INCOME. For 1998, other income, which consists primarily of late
fees and interest income from short-term investments, decreased by $77, or 11%,
over 1997 primarily as a result of a decline in interest-earning investments.
SERVICING FEE EXPENSES. Servicing fee expenses increased $302, or 20%,
from 1997 to 1998. 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 1,973, or 19%, from 1997 to 1998.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from $2,351
in 1997 to $2,639 in 1998, an increase of $288 or 12%. As a percentage of
interest income, salaries and benefits increased from 13.0% in 1997 to 13.2% in
1998. 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 1998 increased 7% from 1997 primarily
due to the overall expansion of the Company's operations. As a percentage of
interest income, other operating expenses declined from 13.0% in 1997 to 12.6%
in 1998.
INCOME BEFORE PROVISION FOR INCOME TAXES. During 1998, income before
provision for income taxes decreased by $1,447, or 43%, from 1997 as a result of
the increase in provision for credit losses of $1,381 and other factors
discussed above.
23
<PAGE>
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 or other credit enhancement required by the
Company's financing programs, 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 paid $114.3 million for receivables
acquired to be held for investment for 1999 compared to $78.0 million in 1998.
The Company funds the purchase price of receivables through a combination
of two warehouse facilities. The FIRC credit facility generally permits the
Company to borrow up to the outstanding principal balance of qualified
receivables, but not to exceed $65 million. The FIACC commercial paper facility
generally allows the Company to borrow up to 88% of the outstanding principal
balance of the receivables, but not to exceed $25 million. Receivables that have
accumulated in the FIRC credit facility may be transferred to the FIARC
commercial paper facility at the option of the Company. The FIARC commercial
paper facility provides an additional financing source up to $135 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 portfolios. The Company received
such payments in the amount of $88.7 million in 1999 and $74.2 million in 1998.
Such cash flow funds repayment of amounts borrowed under the FIRC credit and
commercial paper facilities and other holding costs, primarily interest expense
and servicing and custodial fees. During fiscal years 1999 and 1998, the Company
required net cash flow, respectively, of $47.1 million and $23.6 million (cash
required to acquire receivables held for investment 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.
FIRC CREDIT FACILITY. The primary source of acquisition financing for
receivables held for investment has been through a syndicated warehouse credit
facility agented by Bank of America. The FIRC 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 $65 million. Borrowings under the FIRC 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 FIARC commercial
paper facility. The FIRC credit facility provides for a term of one year,
matures October 15, 1999, at which time the outstanding principal balance will
be payable in full, although
24
<PAGE>
there are provisions allowing the Company a period of six months to refinance
the facility in the event that it is not renewed.
The following table summarizes borrowings under the FIRC credit facility
(dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ 43,610 $ 65,000
Weighted average interest
rate(1)........................ 6.35% 5.84%
During period(2):
Maximum borrowings
outstanding.................... $ 53,270 $ 65,000
Weighted average balance
outstanding.................... 42,235 49,455
Weighted average interest
rate........................... 6.25% 6.37%
- ------------
(1) Based on interest rates, facility fees and hedge instruments applied to
borrowings outstanding at period-end.
(2) Based on month-end balances.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a $135 million commercial paper conduit facility
with Enterprise Funding Corporation ("Enterprise"), a commercial paper conduit
managed by Bank of America. Receivables that have accumulated in the FIRC credit
facility may be transferred to the FIARC 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 FIRC credit facility to the FIARC 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
FIRC credit facility. Borrowings under this commercial paper facility bear
interest at the commercial paper rate plus .30%. The current term of the FIARC
commercial paper facility expires on March 31, 2000. If the FIARC commercial
paper facility were terminated, no new receivables could be transferred from the
FIRC credit facility to Enterprise; however, the then outstanding receivables
would continue to be financed until fully amortized.
The following table summarizes borrowings under the FIARC commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ 87,203 $ 90,735
Weighted average interest
rate(1)........................ 6.17% 5.75%
During period(2):
Maximum borrowings
outstanding.................... $ 91,514 $ 98,273
Weighted average balance
outstanding.................... 78,754 88,187
Weighted average interest
rate........................... 6.57% 6.47%
- ------------
(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.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquires receivables from the Company and may borrow up to
25
<PAGE>
88% of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. The maximum borrowings available
under the facility are $25 million. The Company's interest cost is based on
VFCC's commercial paper rates for specific maturities plus 0.55%. In addition,
the Company is required to pay periodic facility fees of 0.25% on the unused
portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88% advance rate and to pay carrying costs and related
expenses, with the balance released to the Company. In addition to the 88%
advance rate, FIACC must maintain a 2% cash reserve as additional credit support
for the facility.
The current term of the FIACC commercial paper facility expires on December
31, 1999. If the facility was terminated, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize.
The following table summarizes borrowings under the FIACC commercial paper
facility (dollars in thousands):
AS OF OR FOR THE
YEARS ENDED
APRIL 30,
----------------------
1998 1999
---------- ----------
At period-end:
Balance outstanding............. $ -- $ 20,814
Weighted average interest
rate(1)........................ -- % 5.26 %
During period(2):
Maximum borrowings
outstanding.................... $ -- $ 23,716
Weighted average balance
outstanding.................... -- 14,063
Weighted average interest
rate........................... -- % 6.79 %
- ------------
(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.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC ("FIFS
Acquisition"), entered into a $75 million non-recourse bridge financing
facility with VFCC, an affiliate of First Union National Bank, to finance the
Company's acquisition of ALAC. Contemporaneously with the Company's purchase of
ALAC, ALAC transferred certain assets to FIFS Acquisition, consisting primarily
of (i) all receivables owned by ALAC as of the acquisition date, (ii) ALAC's
ownership interest in certain trust certificates and subordinated spread or cash
reserve accounts related to two asset securitizations previously conducted by
ALAC, and (iii) certain other financial assets, including charged-off accounts
owned by ALAC as of the acquisition date. These assets, along with a $1 million
cash reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus
2.35%. Under the terms of the facility, all cash collections from the
receivables or cash distributions to the certificate holder under the
securitizations are first applied to pay ALAC a servicing fee in the amount of
3% on the outstanding balance of all owned or managed receivables and then to
pay interest on the facility. Excess cash flow available after servicing fees
and interest payments are utilized to reduce the outstanding principal balance
on the indebtedness. In addition, one-third of the servicing fee paid to ALAC is
also utilized to reduce principal outstanding on the indebtedness. The bridge
facility expires on October 31, 1999. The Company is currently negotiating with
First Union to refinance the acquisition facility over an extended term
sufficient to amortize the
26
<PAGE>
outstanding balance of the indebtedness through collections of the underlying
receivables and trust certificates. It is anticipated that the permanent
financing will consist of issuing various tranches of notes, to be held by VFCC,
or certificates to be held by the Company and First Union, which will contain
distinct principal amortization requirements and interest rates. The Company
anticipates no material change in the weighted average interest rate under the
permanent financing. It is anticipated, however, that in conjunction with VFCC
providing the permanent financing, VFCC will obtain a beneficial interest in
certain portion of the excess cash flow generated by the remaining assets. The
amount of excess cash to be received by First Union will vary depending upon the
timing and amount of such cash flows. To the extent that the facility is not
finalized prior to the expiration date, the Company intends to seek a short-term
extension to allow for the completion of the term financing. The Company has no
reason to believe that an agreement with VFCC will not grant such an extension
or that an agreement to refinance the bridge loan will not be reached prior to
the then final maturity of the bridge facility. If the facility were not
extended, the remaining outstanding principal balance would be due at maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $10 million working
capital line of credit with Bank of America and First Union National Bank that
is utilized for working capital and general corporate purposes. Borrowings under
this facility bear interest at the Company's option of (i) Bank of America's
prime lending rate, or (ii) a rate equal to 3.0% above the LIBOR rate for the
applicable interest period. In addition, the Company is also required to pay
period facility fees, as well as an annual agency fee. The expiration of the
facility is October 15, 1999. If the lender elected not to renew, any
outstanding borrowings would be amortized over a one-year period. The Company
presently intends to seek an extension of this arrangement prior to its
expiration. At April 30, 1999, there was $7.2 million outstanding under this
facility.
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 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 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, 1999,
1998 and 1997 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 Bank of America
pursuant to which the Company's interest rate exposure is fixed, through January
2000, at a rate of 5.565% on a notional amount of $120 million (as further
described in Note 7 to Notes to Consolidated Financial Statements). This
agreement may be extended to January 2002, at the sole discretion of the counter
party. As a result, at April 30, 1999, the Company had converted a total of $120
million in floating rate debt
27
<PAGE>
to a fixed rate and had outstanding floating rate debt of secured credit
facilities of $56,549,417. 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 FIRC credit facility and the
commercial paper facilities.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81%; and, the second in the initial
notional amount of $24.9 million (Swap B) pursuant to which the Company's
interest rate is fixed at 5.50%. The notional amount outstanding under each swap
agreement amortizes based on an implied amortization of the hedged indebtedness.
Swap A has a final maturity of December 20, 2002 while Swap B has a final
maturity of February 20, 2000. The Company also purchased two interest rate caps
which protect the Company and the lender against any material increases in
interest rates which may adversely affect any outstanding indebtedness which is
not fully covered by the aggregate notional amount outstanding under the swaps.
The first cap agreement enables the Company to receive payments from the
counterparty in the event that the one-month commercial paper rate exceeds 4.81%
on a notional amount that increases initially and then amortizes based on the
expected difference between the outstanding notional amount under Swap A and the
underlying indebtedness. The interest rate cap expires December 20, 2002 and the
cost of the cap is amortized in interest expense for the period. The second cap
agreement enables the Company to receive payments from the counterparty in the
event that the one-month commercial paper rate exceeds 6% on a notional amount
that increases initially and then amortizes based on the expected difference
between the outstanding notional amount under Swap B and the underlying
indebtedness. The interest rate cap expires February 20, 2002 and the cost of
the cap is imbedded in the fixed rate applicable to Swap B.
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, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. The Company is not exposed to credit
losses on its entire receivables held for investment portfolio due to prior
business strategies that included third party insurers and a dealer recourse
program. An allowance for credit losses of $1,529,651 as a percentage of the
exposed core receivables of $179,100,018 is .9%.
With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of April 30, 1999, the nonaccretable loss
reserve as a percentage of Receivables Acquired for Investment was 20.6%. The
nonaccretable portion represents, at acquisition, the excess of the loan's
scheduled contractual principal and contractual interest payments over its
expected cash flows.
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.
Under its financing programs, the Company retains the credit risk
associated with the receivables acquired. Historically, the Company has
purchased 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. In addition, receivables financed under the FIARC
28
<PAGE>
and FIACC commercial paper facilities do not carry default insurance. Provisions
for credit losses of $4,661,000 and $3,900,966 have been recorded for the years
ended April 30, 1999 and 1998, 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.
The following table summarizes the status and collection experience of all
receivables acquired by the Company (dollars in thousands):
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED APRIL 30,
------------------------------------------------
1998 1999
---------------------- ----------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days....................... 178 $2,371 359 $4,554
60 - 89 days....................... 45 706 50 621
90 days or more.................... 131 1,987 67 963
-------- ---------- -------- ----------
Total delinquencies.................. 354 $5,064 476 $6,138
======== ========== ======== ==========
Total delinquencies as a percentage
of outstanding receivables......... 2.7% 2.7% 2.8% 2.4%
Net charge-offs as a percentage of
average receivables outstanding
during the period(2)............... 3.2% 2.8%
</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 total number of delinquent accounts (30 days or more) as a percentage
of the number of outstanding receivables for the Company's portfolio of
Receivables Acquired for Investment and Receivables Managed was 3.4% as of April
30, 1999.
MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the company of risk-mitigating
strategies such as hedging.
The Company's operating revenues are derived almost entirely from the
collection of interest on the receivables it retains and its primary expense is
the interest that it pays on borrowings incurred to
29
<PAGE>
purchase and retain such receivables. The Company's credit facilities bear
interest at floating rates which are reset on a short-term basis, whereas its
receivables bear interest at fixed rates which do not generally vary with
changes in interest rates. The Company is therefore exposed primarily to market
risks associated with movements in interest rates on its credit facilities. The
Company believes that it takes the necessary steps to appropriately reduce the
potential impact of interest rate increases on the Company's financial position
and operating performance.
The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Currently all of the Company's credit
facilities bear interest at floating rates tied to either a commercial paper
index or LIBOR. The Company manages this risk by converting a portion of its
floating rate debt to a fixed rate utilizing interest rate swaps which
effectively hedge the floating rate debt against an increase in market interest
rates.
As of April 30, 1999, the Company had $56.5 million of floating rate
secured debt outstanding which was not hedged by interest rate swaps. For every
1% increase in interest rates (e.g. commercial paper rates), annual after-tax
earnings would decrease by approximately $359,000, assuming the Company
maintains a level amount of floating rate debt and assuming an immediate
increase in rates.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs and microprocessors
using two digits rather than four to define the applicable year (the "Year 2000
Issue"). Such programs or microprocessors may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations leading to disruptions in the Company's activities and
operations. If the Company, or third parties with which it has a significant
relationship or upon which is relies for certain data utilized in its business
(the "Counterparties"), fail to make necessary modifications, conversions and
contingency plans on a timely basis, the Year 2000 Issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. While the Company believes its internal systems are compliant with
the Year 2000 Issue, the potential effects of the Year 2000 issue cannot be
quantified at this time because the Company cannot accurately estimate the
magnitude, duration, or nature of problems that noncompliance by the
Counterparties will have on its operations.
Although the risk is not presently quantifiable, the following disclosure
is intended to summarize the Company's actions to minimize the risk from the
Year 2000 Issue. Programs that will operate in the year 2000 unaffected by the
change in year from 1999 to 2000 are referred to herein as "year 2000
compliant".
STATE OF READINESS. The Company relies almost exclusively on third party
application software in its operations. All software applications are designed
to run on client server systems. The Company employees three major software
applications in its business: (i) a loan origination system which is utilized in
the receipt, approval and funding of receivables, (ii) a loan servicing and
collection system which is used by the Company's personnel to track and service
all active customer accounts as well as repossession and disposition activities,
and (iii) accounting systems which process all general ledger and financial
reporting activities. Each of the vendors that supply these software
applications has certified to the Company that their respective applications are
Year 2000 compliant. In addition, the Company has developed internal testing
procedures on each process and presently intends to conduct these tests prior to
August 31, 1999 to confirm the vendors' certification as to compliance.
The Company has also requested confirmation from all other Counterparties,
which an internal review indicated may be exposed to Year 2000 Issues. As of
June 23, 1999, the only material Counterparties which had not confirmed Year
2000 compliance were national banks, upon which the company relies for cash
management, lockbox and certain custodial services relating to its credit
facilities, and the credit reporting agencies upon which the Company relies in
obtaining credit histories on the loan applications it reviews for approval. All
Counterparties have assured the Company that they expect to be Year 2000
compliant prior to December 31, 1999.
30
<PAGE>
COSTS. Since the Company does not rely on internally-developed
applications, it does not currently anticipate that compliance efforts to solve
the Year 2000 issue will require additional expenditures in any material amount.
To the extent that software upgrades must be purchased in order to insure
compliance, the cost of such software will be expensed.
RISKS. The Company believes that the most reasonably likely worst case
scenario is a compliance failure by a Counterparty upon which the Company
relies. Such a failure would likely have an effect on the Company's business,
financial condition and results of operations. The magnitude of that effect
however, cannot be quantified at this time because of variables such as the type
and importance of the third party, the possible effect on the Company's
operations and the Company's ability to respond. Thus, there can be no assurance
that there will not be a material adverse effect on the Company if such third
parties do not remediate their systems in a timely manner. In addition, it is
possible that the Company would experience a failure of a non-mission critical
system for a period of time, which could result in a minor disruption in some
internal operations.
CONTINGENCY PLANS. Contingency planning is an integral part of the
Company's year 2000 readiness project. The Company has and is continuing to
develop contingency plans, which document the processes necessary to maintain
critical business functions should a significant third party system or mission
critical internal system fail. These contingency plans generally include the
repair of existing systems and, in some instances, the use of alternative
systems or procedures.
The disclosure in this section contains information regarding Year 2000
readiness which constitutes "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act. Readers are cautioned that forward-looking
statements contained in the Year 2000 Update should be read in conjunction with
the Company's disclosures under the heading "Forward Looking Information".
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates; changes in economic conditions; or increases or changes
in the competition for loans. Although the Company believes that the
expectations reflected in the forward-looking statements presented herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
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
31
<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 1999 Annual Meeting of
Shareholders expected to be held September 8, 1999, 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 1999 Annual
Meeting of Shareholders expected to be held September 8, 1999, 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 1999 Annual Meeting of Shareholders expected to be held
September 8, 1999, 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 1999 Annual Meeting of
Shareholders expected to be held September 8, 1999, 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>
<C> <S>
2.1(j) -- Stock Purchase Agreement, dated as of September 9, 1998, between First Investors Financial
Services Group, Inc. and Fortis, Inc. to purchase Auto Lenders Acceptance Corporation, a
wholly-owned subsidiary of Fortis, Inc.
3.1(a) -- Articles of Incorporation, as amended
3.2(a) -- Bylaws, as amended
4.1(a) -- Excerpts from the Articles of Incorporation, as amended (included in Exhibit 3.1).
4.3(a) -- Specimen Stock Certificate
10.5(a) -- 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(a) -- 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.
</TABLE>
32
<PAGE>
<TABLE>
<C> <S>
10.7(a) -- 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.
10.8(a) -- 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(a) -- 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(a) -- 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(a) -- Auto Loan Protection Insurance Policy dated October 13, 1992 issued by Agricultural Excess
& Surplus Insurance Company to FIRC as insured.
10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994 issued by National Union Fire
Insurance Company of Pittsburgh to FIRC as insured.
10.13(a) -- 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(a) -- Blanket Collateral Protection Insurance Policy dated October 5, 1992 issued by
Agricultural Excess & Surplus Insurance Company to FIRC as insured.
10.15(a) -- 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(a) -- 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(a) -- 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(a) -- Redemption Agreement dated as of June 8, 1995 among the Registrant and all holders of its
class of 1993 Preferred Stock.
10.21(a) -- 1995 Employee Stock Option Plan of the Registrant.
10.22(a) -- Form of Stock Option Agreement between the Registrant and Robert L. Clarke dated August 25, 1995.
10.23(b) -- 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(b) -- Employment Agreement dated as of May 1, 1996 between the Registrant and Bennie H. Duck.
10.25(b) -- 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(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated November 16, 1995.
10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise Funding Corporation and FIRC, Inc.
10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated August 7, 1996.
</TABLE>
33
<PAGE>
<TABLE>
<C> <S>
10.29(d) -- 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(d) -- Note Purchase Agreement dated as of October 22, 1996 between First Investors Auto
Receivables Corporation and Enterprise Funding Corporation.
10.31(d) -- Purchase Agreement dated as of October 22, 1996 between First Investors Financial
Services, Inc. and First Investors Auto Receivables Corporation.
10.32(d) -- 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(d) -- Servicing Agreement dated as of October 22, 1996 between First Investors Auto Receivables
Corporation and General Electric Capital Corporation.
10.34(d) -- 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(d) -- 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(d) -- 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(d) -- Amended and Restated Servicing Agreement between F.I.R.C., Inc. and General Electric Capital Corporation.
10.38(e) -- Third Amendment dated January 20, 1997 to the Employment Agreement dated as of March 20,
1992 between the Registrant and Tommy A. Moore, Jr.
10.39(f) -- First Amendment to the Amended and Restated Credit Agreement dated January 31, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.40(f) -- Second Amendment to the Amended and Restated Credit Agreement dated May 15, 1997 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.41(f) -- Employment Agreement dated July 16, 1997 between First Investors Financial Services, Inc.
and Tommy A. Moore, Jr.
10.42(f) -- Credit Agreement dated as of July 18, 1997 between First Investors Financial Services,
Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto.
10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997 by and among First Investors
(Vermont) Holdings, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto.
10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among First Investors Financial
Services, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto.
10.45(g) -- Security Agreement dated as of January 1, 1998 among First Investors Auto Capital
Corporation, First Union Capital Markets Corp., and First Investors Financial Services, Inc.
10.46(g) -- Note Purchase Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation, First Union Capital Markets Corp., the Investors, First Union National Bank,
and Variable Funding Capital Corporation.
10.47(g) -- Purchase Agreement dated as of January 1, 1998 between First Investors Financial Services,
Inc. and First Investors Auto Capital Corporation.
10.48(g) -- Servicing Agreement dated as of January 1, 1998 between First Investors Auto Capital
Corporation and General Electric Capital Corporation.
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
10.49(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Bennie H. Duck.
10.50(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Joseph A. Pisano.
10.51(i) -- Loan and Security Agreement dated as of October 2, 1998 between Variable Funding Capital
Corporation, Auto Lenders Acceptance Corporation, ALAC Receivables Corp. and FIFS
Acquisition Funding Company, L.L.C.
10.52(i) -- Custodial Agreement dated as of October 2, 1998 among Variable Funding Capital
Corporation, Norwest Bank Minnesota, NA, and Auto Lenders Acceptance Corporation.
10.53(i) -- Contract Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders
Acceptance Corporation and FIFS Acquisition Funding Company, L.L.C.
10.54(i) -- NIM Collateral Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders
Acceptance Corporation, ALAC Receivables Corporation and FIFS Acquisition Funding Company, L.L.C.
10.55(k) -- Third Amendment to the Amended and Restated Credit Agreement dated January 25, 1999 by and
among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.56(k) -- Second Amendment to the Credit Agreement dated January 25, 1999 between First Investors
Financial Services, Inc. and NationsBank of Texas, N.A., individually and as agent for the
banks party thereto.
10.57 -- Amendment Number 2 to Security Agreement dated March 31, 1999 among First Investors Auto
Receivables Corporation, Enterprise Funding Corporation, Chase Bank of Texas, National
Association, Norwest Bank Minnesota, National Association, MBIA Insurance Corporation,
NationsBank N.A., and First Investors Financial Services, Inc.
10.58 -- Amendment Number 1 to Note Purchase Agreement dated as of March 31, 1999 among First
Investors Auto Receivables Corporation and Enterprise Funding Corporation.
10.59 -- Amendment Number 1 to Insurance Agreement dated March 31, 1999 among First Investors Auto
Receivables Corporation, MBIA Insurance Corporation, First Investors Financial Services,
Inc., Auto Lenders Acceptance Corporation, Norwest Bank Minnesota, National Association
and NationsBank, N.A.
10.60 -- Servicing Agreement dated March 31, 1999 among First Investors Auto Receivables
Corporation, Norwest Bank Minnesota, National Association and Auto Lenders Acceptance Corporation.
10.61 -- Guaranty dated March 31, 1999 by First Investors Financial Services, Inc., First Investors
Auto Receivables Corporation, Auto Lenders Acceptance Corporation and Norwest Bank
Minnesota, National Association.
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
21.1(j) -- Subsidiaries of the Registrant.
</TABLE>
- ------------
<TABLE>
<C> <S>
(a) -- Exhibit previously filed with the Company's Registration Statement on Form S-1,
Registration No. 33-94336 and incorporated herein by reference.
(b) -- Exhibit previously filed on 1996 Form 10-K and incorporated herein by reference.
(c) -- Exhibit previously filed on July 31, 1996 First Quarter Form 10-Q and incorporated
herein by reference.
(d) -- Exhibit previously filed on October 31, 1996 Second Quarter Form 10-Q and incorporated
herein by reference.
(e) -- Exhibit previously filed on January 31, 1997 Third Quarter Form 10-Q and incorporated
herein by reference.
(f) -- Exhibit previously filed on July 31, 1997 First Quarter Form 10-Q and incorporated
herein by reference.
(g) -- Exhibit previously filed on January 31, 1998 Third Quarter Form 10-Q and incorporated
herein by reference.
(h) -- Exhibit previously filed on 1998 Form 10-K and incorporated herein by reference.
(i) -- Exhibit previously filed on October 31, 1998 Second Quarter Form 10-Q and incorporated
herein by reference.
(j) -- Exhibit previously filed on October 2, 1998 Form 8-K and incorporated herein by reference.
(k) -- Exhibit previously filed on January 31, 1999 Third Quarter Form 10-Q and incorporated
herein by reference.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
36
<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 23, 1999 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 23, 1999
37
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public
Accountants........................ F-2
Consolidated Balance Sheets as of
April 30, 1998 and 1999............ F-3
Consolidated Statements of Operations
for the Years Ended April 30, 1997,
1998
and 1999........................... F-4
Consolidated Statements of
Shareholders' Equity for the Years
Ended April 30, 1997,
1998 and 1999...................... F-5
Consolidated Statements of Cash Flows
for the Years Ended April 30, 1997,
1998
and 1999........................... 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, 1998 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 1999. 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, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1999
F-2
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 1998 AND 1999
1998 1999
---------------- ----------------
ASSETS
- -------------------------------------
Receivables Held for Investment,
net................................ $ 139,598,675 $ 183,318,532
Receivables Acquired for Investment,
net................................ -- 41,023,768
Investment in Trust Certificates..... -- 10,754,512
Cash and Short-Term Investments,
including restricted cash of
$3,215,540 and $7,487,636.......... 3,698,121 11,515,872
Other Receivables:
Due from servicer............... 10,229,975 14,065,957
Accrued interest................ 2,057,346 2,365,231
Assets Held for Sale................. 1,219,885 1,693,255
Other Assets:
Funds held under reinsurance
agreement..................... 2,016,682 2,620,296
Deferred financing costs and
other, net of accumulated
amortization and depreciation
of $846,250 and $1,702,088.... 1,638,947 4,898,045
Deferred income tax asset,
net........................... 298,235 553,781
Federal income tax receivable... 495,280 --
---------------- ----------------
Total assets............... $ 161,253,146 $ 272,809,249
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Debt:
Secured credit facilities....... $ 130,813,078 $ 176,549,417
Unsecured credit facility....... 2,500,000 7,235,000
Acquisition term facility....... -- 55,737,371
Other Liabilities:
Due to dealers.................. 241,988 162,081
Accounts payable and accrued
liabilities................... 2,317,840 5,633,304
Current income taxes payable.... 219,770 329,764
---------------- ----------------
Total liabilities.......... 136,092,676 245,646,937
---------------- ----------------
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............... 6,689,985 8,691,827
---------------- ----------------
Total shareholders'
equity.................. 25,160,470 27,162,312
---------------- ----------------
Total liabilities and
shareholders' equity.... $ 161,253,146 $ 272,809,249
================ ================
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, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Interest Income...................... $ 18,151,669 $ 20,049,129 $ 31,076,003
Interest Expense..................... 6,706,341 7,833,677 12,781,725
-------------- -------------- --------------
Net interest income........ 11,445,328 12,215,452 18,294,278
Provision for Credit Losses.......... 2,520,253 3,900,966 4,661,000
-------------- -------------- --------------
Net Interest Income After Provision
for Credit Losses.................. 8,925,075 8,314,486 13,633,278
-------------- -------------- --------------
Other Income:
Servicing....................... -- -- 1,199,628
Late fees and other............. 693,807 617,140 1,594,149
-------------- -------------- --------------
Total other income......... 693,807 617,140 2,793,777
-------------- -------------- --------------
Operating Expenses:
Servicing fees.................. 1,536,225 1,838,002 2,350,741
Salaries and benefits........... 2,350,986 2,639,080 6,030,007
Other........................... 2,356,316 2,526,404 4,893,800
-------------- -------------- --------------
Total operating expenses... 6,243,527 7,003,486 13,274,548
-------------- -------------- --------------
Income Before Provision for Income
Taxes.............................. 3,375,355 1,928,140 3,152,507
-------------- -------------- --------------
Provision (Benefit) for Income Taxes:
Current......................... 1,745,352 614,130 1,406,211
Deferred........................ (513,348) 89,641 (255,546)
-------------- -------------- --------------
Total provision for income
taxes................... 1,232,004 703,771 1,150,665
-------------- -------------- --------------
Net Income........................... $ 2,143,351 $ 1,224,369 $ 2,001,842
============== ============== ==============
Basic and Diluted Net Income Per
Common Share....................... $0.39 $0.22 $0.36
============== ============== ==============
</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, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
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
Net income...................... -- -- 1,224,369 1,224,369
------- ----------- -------------- --------------
Balance, April 30, 1998.............. 5,567 18,464,918 6,689,985 25,160,470
Net income...................... -- -- 2,001,842 2,001,842
------- ----------- -------------- --------------
Balance, April 30, 1999.............. $5,567 $18,464,918 $ 8,691,827 $ 27,162,312
======= =========== ============== ==============
</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, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income...................... $ 2,143,351 $ 1,224,369 $ 2,001,842
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation and
amortization expense.... 1,816,195 2,369,672 3,363,379
Provision for credit
losses.................. 2,520,253 3,900,966 4,661,000
Charge-offs, net of
recoveries.............. (1,968,383) (3,884,418) (4,329,894)
(Increase) decrease in:
Accrued interest
receivable.............. (309,407) (133,986) (307,885)
Restricted cash............ (502,243) 334,851 (145,253)
Deferred financing costs
and other............... (436,350) (664,036) (1,210,261)
Funds held under
reinsurance agreement... 267,235 546,772 (603,614)
Due from servicer.......... (3,161,034) (1,802,410) (3,835,982)
Deferred income tax asset,
net..................... (387,876) 89,641 (255,546)
Federal income tax
receivable.............. 295,523 (495,280) 495,280
Increase (decrease) in:
Due to dealers............. (463,937) (100,709) (79,907)
Accounts payable and
accrued liabilities..... 767,743 (142,845) 1,782,812
Current income taxes
payable................. (83,962) 110,298 109,994
Deferred income tax
liability, net.......... (125,472) -- --
---------------- ---------------- ----------------
Net cash provided by operating
activities................. 371,636 1,352,885 1,645,965
---------------- ---------------- ----------------
Cash Flows From Investing Activities:
Purchases of receivables held
for investment................ (68,854,056) (77,965,915) (114,309,752)
Principal payments from
receivables held for
investment.................... 45,535,622 54,397,892 67,224,322
Principal payments from
receivables acquired for
investment.................... -- -- 14,652,354
Principal payments from trust
certificates.................. -- -- 4,519,183
Acquisition of a business, net
of cash acquired.............. -- -- (76,052,178)
Purchase of furniture and
equipment..................... (82,999) (138,195) (342,949)
---------------- ---------------- ----------------
Net cash used in investing
activities.............. (23,401,433) (23,706,218) (104,309,020)
---------------- ---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from advances on --
Secured debt............... 61,419,920 68,478,349 104,853,807
Unsecured debt............. -- 2,500,000 20,435,000
Acquisition debt........... -- -- 75,000,000
Principal payments made on --
Secured debt............... (39,574,425) (50,559,402) (59,117,468)
Unsecured debt............. -- -- (15,700,000)
Acquisition debt................ -- -- (19,262,629)
---------------- ---------------- ----------------
Net cash provided by
financing activities.... 21,845,495 20,418,947 106,208,710
---------------- ---------------- ----------------
Increase (Decrease) in Cash and
Short-Term Investments............. (1,184,302) (1,934,386) 3,545,655
Cash and Short-Term Investments at
Beginning of Year.................. 3,601,269 2,416,967 482,581
---------------- ---------------- ----------------
Cash and Short-Term Investments at
End of Year........................ $ 2,416,967 $ 482,581 $ 4,028,236
================ ================ ================
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for --
Interest................... $ 6,294,815 $ 7,748,529 $ 12,196,708
Income taxes............... 1,533,791 999,112 800,937
</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, 1997, 1998 AND 1999
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors or the Company) 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), F.I.R.C., Inc. (FIRC), First Investors Auto
Capital Corporation (FIACC) and Auto Lenders Acceptance Corporation (ALAC).
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, 1999, approximately 35
percent of receivables held for investment had been originated in Texas. The
Company currently operates in 26 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.
On October 2, 1998, the Company completed the acquisition of ALAC from
Fortis, Inc. and the operations of ALAC are included in the consolidated results
of the Company since the date of acquisition. See Note 15. Headquartered in
Atlanta, Georgia, ALAC was engaged in essentially the same business as the
Company and additionally performs servicing and collection activities on a
portfolio of receivables acquired for investment as well as on a portfolio of
receivables acquired and sold pursuant to two asset securitizations. As a result
of the acquisition, the Company increased the total dollar value on its balance
sheet of receivables, acquired an interest in certain trust certificates related
to the asset securitizations and acquired certain servicing rights along with
furniture, fixtures, equipment and technology to perform the servicing and
collection functions for the portfolio of receivables under management. The
Company performs servicing and collection functions on loans originated from 18
states on a Receivables Acquired for Investment and Receivables Managed
Portfolio of $105.5 million.
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.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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. The most significant estimates used by the Company
relate to the allowance for credit losses and nonaccretable difference. See
Notes 3 and 4. 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
F-7
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were
acquired in a portfolio purchase, the Company estimates the amount and timing of
undiscounted expected future principal and interest cash flows. For certain
purchased loans, the amount paid for a loan reflects the Company's determination
that it is probable the Company will be unable to collect all amounts due
according to the loan's contractual terms. Accordingly, at acquisition, the
Company recognizes the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows as an amount that
should not be accreted. The remaining amount, representing the excess of the
loan's expected cash flows over the amount paid, is accreted into interest
income over the remaining life of the loan. Additionally, accretion of yield
expected to be paid to others is recorded as a reduction of interest income.
Over the life of the loan, the Company continues to estimate expected cash
flows. The Company evaluates whether the present value of any decrease in the
loan's actual or expected cash flows should be recorded as a loss provision for
the loan. For any material increases in estimated cash flows, the Company
adjusts the amount of accretable yield by reclassification from nonaccretable
difference. The Company then adjusts the amount of periodic accretion over the
loan's remaining life. See Note 4.
INVESTMENT IN TRUST CERTIFICATES. Through the acquisition of ALAC, the
Company obtained interests in two securitizations of automobile receivables.
Automobile receivables were transferred to a trust (ALAC Automobile Receivables
Trust), which issued notes and certificates representing undivided ownership
interests in the trusts. The Company owns trust certificates and interest-only
residuals from each of these trusts which are classified as Investment in Trust
Certificates. Additionally, the Company owns spread accounts held by the trustee
for the benefit of the trust's noteholders. Such amounts are classified as
Restricted Cash.
Trust certificates are interests in the securitized receivables which are
subordinated to the noteholders interests. These certificates represent a credit
enhancement in order for the securitization to achieve a specific rating from
the credit rating agencies.
Interest-only residuals result from excess cash flows of the
securitizations. Interest-only residuals are computed as the differential
between the weighted average interest rate earned on the automobile receivables
securitized and the rate paid to the noteholders and certificate-holders, net of
contractual servicing fees to be paid to the Company. The resulting differential
represents an asset in the period in which the automobile receivables are
securitized equal to the present value of estimated future excess interest cash
flows adjusted for anticipated prepayments and losses.
Trust certificates and interest-only residuals are valued at the present
value of expected future cash flows using discount rates that the Company
expects to yield. These discount rates are the result of the purchase price of
the interests and the expected future cash flows. Interests are recorded at
amortized cost. If actual cash flows are less than expected cash flows, the
Company will write down the value of the interests. If actual cash flows exceed
expected cash flows, additional yield will be recognized on a prospective basis.
The Company utilized prepayment speeds, loss rate and discount
F-8
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate assumptions to determine the fair value of the trust certificates and
interest-only residuals. During 1999, the assumptions used were:
RANGE
------------
Prepayment........................... .9% ABS
Loss rate............................ 15% to 15.5%
Discount rate........................ 17% to 18%
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. For receivables financed under the FIRC
credit facility, 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 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 FIRC credit facility. Once
receivables are transferred to the FIARC commercial paper facility, credit
enhancement insurance is cancelled. In addition, no default insurance is
purchased for core receivables originated and financed under the FIACC
commercial paper facility. 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 a "dealer recourse program" (see Note 3). For receivables
acquired under the dealer recourse 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.
F-9
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company, however, reserves the right to cancel the servicing
agreement at any time without penalty. 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 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 and proceeds
from sale of repossessed collateral.
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 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.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the FIRC credit facility over an 18 month period which
represents the committed term of such facility. Additionally, the Company
amortizes the costs related to the respective commercial paper facilities 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 facilities not be extended.
SERVICING INCOME. Servicing income is recognized on loan receivables
previously sold by ALAC in connection with two asset securitization
transactions. Under these transactions, ALAC, as servicer, is entitled to
receive a fee of 3% on the outstanding principal balance of securitized
receivables plus reimbursement for certain costs and expenses incurred as a
result of its collection activities. Under the terms of the securitizations, the
servicer may be removed upon breach of its obligations under the servicing
agreements, the deterioration of the underlying receivables portfolios in
violation of certain performance triggers or the deteriorating financial
condition of the servicer.
OTHER OPERATING EXPENSES. Other operating expenses include primarily
professional fees, interest expense on the Company's unsecured working capital
line of credit, service bureau fees, telephone, postage, 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
F-10
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 7). 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 losses 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.
EMPLOYEE STOCK OPTIONS. The Company accounts for its stock-based
compensation under Accounting 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. The Company has made
annual pro forma disclosures of net income and earnings per share as if the
stock based compensation awards were based on the fair value of the awards at
the date of grant. See Note 12.
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company will adopt SFAS
No. 133 effective for its fiscal year beginning May 1, 2001. Management has not
yet quantified the impact of adopting SFAS No. 133 on the consolidated financial
statements. However, the Statement could increase volatility in earnings.
INTERNAL USE SOFTWARE COSTS. In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 98-1,
"Accounting For The Costs Of Computer Software Developed Or Obtained For
Internal Use". This SOP specifies certain costs of computer software developed
or obtained for internal use that should be capitalized. The Company capitalizes
external direct costs of materials and services consumed in developing
internal-use computer software and payroll costs for employees who devote time
to developing internal-use computer software, in accordance with SOP 98-1.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of shares of common stock outstanding (see Note 12 and Note 14).
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 SHORT-TERM INVESTMENTS. The Company considers all investments
with a maturity of three months or less when purchased to be short-term
investments and treated as cash equivalents. See Note 5 for components of
restricted cash.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1997
and 1998 amounts to conform with the 1999 presentation.
F-11
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1999:
1998 1999
---------------- ----------------
Receivables.......................... $ 136,445,808 $ 179,807,957
Unamortized premium and deferred
fees................................. 4,351,412 5,040,226
Allowance for credit losses.......... (1,198,545) (1,529,651)
---------------- ----------------
Net receivables................. $ 139,598,675 $ 183,318,532
================ ================
At April 30, 1999, the weighted average remaining term of the receivable
portfolio is 45 months and the weighted average contractual interest rate is
17.4 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-
2000....................... $ 45,696,371
2001....................... 45,561,028
2002....................... 42,167,044
2003....................... 32,892,835
2004....................... 13,490,679
----------------
$ 179,807,957
================
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, 1998 and 1999,
the Company had investments in receivables pursuant to the core program with
aggregate principal balances of $134,907,079 and $179,319,373, respectively.
Activity in the allowance for credit losses for the years ended April 30,
1998 and 1999, was as follows:
1998 1999
-------------- --------------
Balance, beginning of year........... $ 1,181,997 $ 1,198,545
Provision for credit losses..... 3,900,966 4,661,000
Charge-offs, net of
recoveries.................... (3,884,418) (4,329,894)
-------------- --------------
Balance, end of year................. $ 1,198,545 $ 1,529,651
============== ==============
At April 30, 1998 and 1999, the Company had investments in receivables
pursuant to the dealer recourse program with an aggregate principal balance of
$1,538,729 and $488,584; and dealer reserves of $238,000 and $161,052. The
Company instituted a dealer recourse program in November 1992, whereby the
participating dealers were obligated for an agreed period of time, usually 12 to
18 months, to reimburse the Company for losses upon the occurrence of default by
the borrower. The Company no longer utilizes this program.
F-12
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RECEIVABLES ACQUIRED FOR INVESTMENT
Loans purchased at a discount relating to credit quality were included in
the balance sheet amounts of Receivables Acquired for Investment as follows as
of April 30, 1999:
Contractual payments receivable from
Receivables Acquired for Investment
purchased at a discount relating to
credit quality net of excess cash
flows to be sold................... $ 62,970,901
Nonaccretable difference............. (14,314,526)
Accretable yield..................... (7,632,607)
----------------
Receivables Acquired for Investment
purchased at a discount relating to
credit quality, net................ 41,023,768
================
The carrying amount of Receivables Acquired for Investment are net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
estimated that it would be unable to collect.
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
---------------- --------------
Balance at April 30, 1998............ $ -- $ --
Additions....................... 24,603,781 12,225,259
Accretion....................... -- (4,592,652)
Eliminations.................... (10,289,255) --
---------------- --------------
Balance at April 30, 1999............ $ 14,314,526 $ 7,632,607
================ ==============
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 --
2000............................... $ 19,368,917
2001............................... 19,368,917
2002............................... 15,137,878
2003............................... 9,095,189
--------------
$ 62,970,901
==============
5. RESTRICTED CASH
The components of restricted cash at April 30, 1998 and 1999, are as
follows:
1998 1999
------------- -------------
Dealer reserves (Note 3)............. $ 238,000 $ 161,052
Commercial paper facilities
compensating balances
(Note 7)........................... 1,145,912 2,794,117
Acquisition facility compensating
balance (Note 7)................... -- 3,126,843
Funds held in trust for receivable
fundings........................... 1,322,427 648,451
Warehouse credit facility account
(Note 7)........................... 251,511 437,734
Other................................ 257,690 319,439
------------- -------------
Total restricted cash........... $ 3,215,540 $ 7,487,636
============= =============
F-13
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets at April 30,
1998 and 1999, are as follows:
1998 1999
------------- -------------
Deferred financing costs, net........ $ 642,044 $ 594,596
Furniture and equipment, net......... 206,380 2,193,544
Accounts receivable.................. 27,800 1,036,586
Other, net........................... 762,723 1,073,319
------------- -------------
Total........................... $ 1,638,947 $ 4,898,045
============= =============
7. DEBT
The Company finances the acquisition of its receivables portfolio through
three 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.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been primarily provided through a syndicated warehouse
credit facility agented by Bank of America. 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. During fiscal year 1999, the FIRC credit
facility was increased to $65 million from $55 million. Borrowings under the
FIRC 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 FIRC credit facility were $43,610,000 and $65,000,000
at April 30, 1998 and 1999, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.35 percent and 5.84 percent as of such dates. The FIRC 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 FIRC credit facility expires on October 15,
1999. The Company presently intends to seek an extension of this arrangement
prior to its expiration.
FIARC 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 Bank of America. Receivables are transferred periodically from
the FIRC 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 FIRC credit facility.
On October 22, 1996, the Company completed a $105 million commercial paper
conduit financing through Enterprise which remained in effect until this
facility was increased in March 1999 to $135 million. The financing is provided
to a special-purpose, wholly-owned subsidiary of the
F-14
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, FIARC. Credit enhancement for the $135 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 .30 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. A one percent
cash reserve must be maintained as additional credit support for the facility.
The current term of the FIARC commercial paper facility expires on March 31,
2000. If the facility was not extended, receivables pledged as collateral would
be allowed to amortize; however, no new receivables would be allowed to be
transferred from the FIRC credit facility. At April 30, 1998 and 1999, the
Company had borrowings of $87,203,078 and $90,735,214, respectively, outstanding
under the commercial paper facility at weighted average interest rates,
including the effect of program fees, dealer fees and hedge instruments, as
applicable, of 6.17 percent and 5.75 percent, respectively. The Company
presently intends to seek an extension of this arrangement prior to its
expiration.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, to fund the acquisition of
additional receivables generated under certain of the Company's financing
programs. FIACC acquired receivables from the Company and may borrow up to 88%
of the face amount of receivables, which are pledged as collateral for the
commercial paper borrowings. VFCC funds the advance to FIACC through the
issuance of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 1999, the maximum
borrowings available under the facility were $25 million. The Company's interest
cost is based on VFCC's commercial paper rates for specific maturities plus .55
percent. In addition, the Company is required to pay periodic facility fees of
.25 percent on the unused portion of this facility.
As collections are received on the transferred receivables, they are
remitted to a collection account maintained by the collateral agent for the
FIACC commercial paper facility. From that account, a portion of the collected
funds are distributed to VFCC in an amount equal to the principal reduction
required to maintain the 88 percent advance rate and to pay carrying costs and
related expenses, with the balance released to the Company. In addition to the
88 percent advance rate, FIACC must maintain a 2 percent cash reserve as
additional credit support for the facility.
The current term of the FIACC commercial paper facility expires on December
31, 1999. If the facility was not extended, no new receivables could be
transferred to FIACC and the receivables pledged as collateral would be allowed
to amortize. The Company presently intends to seek an extension of this
arrangement prior to its expiration. At April 30, 1999, borrowings were
$20,814,203 under the FIACC commercial paper facility, and had a weighted
average interest rate of 5.26 percent, including the effects of program fees and
hedge instruments.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with Variable Funding Capital Corporation (VFCC), an affiliate of First Union
National Bank, to finance the Company's acquisition of ALAC. Contemporaneously
with the Company's purchase of ALAC, ALAC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by ALAC as of the
acquisition date, (ii) ALAC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by ALAC, and (iii) certain other financial
assets, including charged-off accounts owned by ALAC as of the acquisition date.
These assets, along with a $1 million
F-15
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash reserve account funded at closing serve as the collateral for the bridge
facility. The facility bears interest at VFCC's commercial paper rate plus 2.35
percent and expires on October 31, 1999. Under the terms of the facility, all
cash collections from the receivables or cash distributions to the certificate
holder under the securitizations are first applied to pay ALAC a servicing fee
in the amount of 3 percent on the outstanding balance of all owned or managed
receivables and then to pay interest on the facility. Excess cash flow available
after servicing fees and interest payments are utilized to reduce the
outstanding principal balance on the indebtedness. In addition, one-third of the
servicing fee paid to ALAC is also utilized to reduce principal outstanding on
the indebtedness. The Company is currently negotiating with First Union to
refinance the acquisition facility over an extended term sufficient to amortize
the outstanding balance of the indebtedness through collections of the
underlying receivables and trust certificates. It is anticipated that the
permanent financing will consist of issuing various tranches of notes, to be
held by VFCC, or certificates to be held by the Company and First Union, which
will contain distinct principal amortization requirements and interest rates.
The Company anticipates no material change in the weighted average interest rate
under the permanent financing. It is anticipated, however, that in conjunction
with VFCC providing the permanent financing, VFCC will obtain a beneficial
interest in certain portion of the excess cash flow generated by the remaining
assets. The amount of excess cash to be received by First Union will vary
depending upon the timing and amount of such cash flows. To the extent that the
facility is not finalized prior to the expiration date, the Company intends to
seek a short-term extension to allow for the completion of the term financing.
The Company has no reason to believe that an agreement with VFCC will not grant
such an extension or that an agreement to refinance the bridge loan will not be
reached prior to the then final maturity of the bridge facility. If the facility
were not extended, the remaining outstanding principal balance would be due at
maturity.
WORKING CAPITAL FACILITY. The Company also maintains a $10 million working
capital line of credit with Bank of America and First Union National Bank that
is utilized for working capital and general corporate purposes. Borrowings under
this facility bear interest at the Company's option of (i) NationsBank's prime
lending rate, or (ii) a rate equal to 3.0 percent above the LIBOR rate for the
applicable interest period. In addition, the Company is also required to pay
period facility fees, as well as an annual agency fee. The current term of the
$10 million facility expires on October 15, 1999, and is renewable at the option
of the lender. If the lender elected not to renew, any outstanding borrowings
would be amortized over a one-year period. The Company presently intends to seek
an extension of this arrangement prior to its expiration. At April 30, 1998 and
1999, there was $2,500,000 and $7,235,000 outstanding under this facility.
LOAN COVENANTS. The documentation governing these credit facilities
contains numerous covenants relating to the Company's business, the maintenance
of credit enhancement insurance covering the receivables (if applicable), 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 FIRC credit facility and the working
capital facility or the termination of the commercial paper facilities.
Management of the Company believes it was in compliance with all covenants at
April 30, 1999.
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
F-16
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. During the years ended April 30, 1999, 1998 and 1997 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 cost of funds during such periods.
In September 1997, the Company elected to enter into three swap agreements
having an aggregate notional amount of $120 million and fixing the Company's
weighted average interest rate at 5.63 percent. Two of these swap agreements,
having a notional amount of $90 million, were scheduled to expire in September
1998; while the remaining swap agreement, covering a notional amount of $30
million was scheduled to expire in October 1998. Under each swap agreement, Bank
of America had the option of extending the maturity for an additional two years
from the initial expiration date.
On January 14, 1998, the Company elected to terminate the three swap
agreements having an aggregate notional amount of $120 million in connection
with its decision to enter into a swap agreement with Bank of America covering a
notional amount of $120 million for an initial term of two years, expiring
January 12, 2000. Under this agreement, the Company's interest rate is fixed at
5.565 percent on the $120 million notional amount. Bank of America has the
option of extending the maturity to January 14, 2002.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81 percent; and, the second in the
initial notional amount of $24.9 million (Swap B) pursuant to which the
Company's interest rate is fixed at 5.50 percent. The notional amount
outstanding under each swap agreement amortizes based on an implied amortization
of the hedged indebtedness. Swap A has a final maturity of December 30, 2002
while Swap B has a final maturity of February 20, 2000. The Company also
purchased two interest rate caps which protect the Company and the lender
against any material increases in interest rates which may adversely affect any
outstanding indebtedness which is not fully covered by the aggregate notional
amount outstanding under the swaps. The first cap agreement enables the Company
to receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 4.81 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap A and the underlying indebtedness. The
interest rate cap expires December 20, 2002 and the cost of the cap is amortized
in interest expense for the period. The second cap agreement enables the Company
to receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 6 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap B and the underlying indebtedness. The
interest rate cap expires February 20, 2002 and the cost of the cap is imbedded
in the fixed rate applicable to Swap B.
F-17
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The temporary differences which give rise to net deferred tax assets are as
follows at April 30, 1998 and 1999, respectively:
1998 1999
------------ ------------
Deferred tax assets
Allowance for credit losses..... $ 500,660 $ 689,334
Receivables acquired for
investment, net............... -- 500,652
Accrued expenses................ 57,251 170,065
------------ ------------
557,911 1,360,051
------------ ------------
Deferred tax liabilities
Receivables held for investment,
net........................... (83,328) --
Investment in trust
certificates.................. -- (686,436)
Deferred costs, net............. (74,697) (56,634)
Internally developed software... (101,651) (63,200)
------------ ------------
(259,676) (806,270)
------------ ------------
Net deferred tax assets.............. $ 298,235 $ 553,781
============ ============
The provision (benefit) for income taxes for the years ended April 30,
1997, 1998 and 1999, consists of the following:
1997 1998 1999
------------- ----------- -------------
Current --
Federal..................... $ 1,541,900 $ 548,343 $ 1,347,472
State....................... 203,452 65,787 58,739
------------- ----------- -------------
$ 1,745,352 $ 614,130 $ 1,406,211
============= =========== =============
Deferred --
Federal..................... $ (409,156) $ 89,023 $ (255,546)
State....................... (104,192) 618 --
------------- ----------- -------------
$ (513,348) $ 89,641 $ (255,546)
============= =========== =============
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,
1997, 1998 and 1999.
1997 1998 1999
--------- --------- ---------
Income tax -- statutory rate......... 34.00% 34.00% 34.00%
State income tax, net of federal
benefit.............................. 2.50 2.50 2.10
Non-deductible expenses.............. .20 .50 .50
Tax free income...................... (.20) (1.10) (.40)
Other................................ -- .60 .30
--------- --------- ---------
Effective income tax rate....... 36.50% 36.50% 36.50%
========= ========= =========
9. CREDIT RISKS
Approximately 35 percent of the Company's receivables held for investment
by principal balance at April 30, 1999, represent receivables acquired from
dealers located in Texas. The economy of Texas is primarily dependent on
petroleum and natural gas production and sales of related supplies
F-18
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 also exposed to credit loss in the event that the
counterparties to the swap agreements described in Note 7 do not perform their
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.
10. 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, 1998 APRIL 30, 1999
------------------------------- -------------------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Financial assets --
Receivables held for investment,
net of unamortized premium and
deferred fees................. $136,445,808 $ 145,829,396 $179,807,957 $ 192,432,874
Off-balance sheet instruments --
Swap agreements................. $120,000,000 $ (152,043) $171,668,397 $ (764,778)
Cap agreements.................. $ -- $ -- $ 19,458,941 $ 483,541
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:
CASH AND SHORT-TERM INVESTMENTS, 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.
RECEIVABLES ACQUIRED FOR INVESTMENT. The carrying value approximates fair
value. The fair values were estimated by discounting expected cash flows at a
risk-adjusted rate of return deemed to
F-19
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.
INVESTMENT IN TRUST CERTIFICATES. The carrying value approximates fair
value. The fair values were determined by utilizing prepayment speeds, loss rate
assumptions and discount rate assumptions.
CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.
SWAP AGREEMENTS. The fair value approximates the payment the Company would
have to make to or receive from the swap counterparty to terminate the swap
agreements.
CAP AGREEMENTS. The fair value approximates the payment the Company would
have to make to or receive from the cap counterparty to terminate the cap
agreements.
11. 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 six months 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, 1997, 1998
and 1999.
12. SHAREHOLDERS' EQUITY
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, 1999, no shares have been issued.
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 percent 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
percent of the fair market value per share at the time of 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 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
F-20
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(the fair market value of the Common Stock on the date of grant) and the option
is exercisable in cumulative annual increments of 20 percent beginning June 20,
1997.
Effective July 15, 1997, the Compensation Committee granted options
covering a total of 58,000 shares of Common Stock to key employees of the
Company. The exercise price of these options are $7.375 per share (the fair
market value of the Common Stock on the date of grant) and the options are
exercisable in cumulative annual increments of 20 percent beginning on July 15,
1998.
Effective March 19, 1998, 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 $6.75 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 percent beginning on March 19, 1999.
A summary of the status of the Company's stock option plans for the years
ended April 30, 1997, 1998 and 1999 is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES UNDER PRICE PER
OPTION SHARE
------------ ---------
Outstanding at April 30, 1996........ 70,000 $ 11.00
Granted......................... 10,000 $ 11.00
------------
Outstanding at April 30, 1997........ 80,000 $ 11.00
Granted......................... 68,000 $ 7.29
Forfeited....................... (10,000) $ 11.00
------------
Outstanding at April 30, 1998........ 138,000 $ 9.17
Granted......................... -- $ --
Forfeited....................... (1,000) $ 7.38
------------
Outstanding at April 30, 1999........ 137,000 $ 9.18
============
Options available for future grants
at April 30, 1999.................. 183,000
============
FISCAL
-------------------------------
1997 1998 1999
--------- --------- ---------
Options exercisable at end of year... 30,000 38,000 61,400
Weighted average exercise price of
options exercisable................ $ 11.00 $ 11.00 $ 10.19
Weighted average fair value of
options granted.................... $ 5.22 $ 4.27 $ --
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF WEIGHTED REMAINING
EXERCISE AVERAGE OPTIONS OPTIONS CONTRACTUAL
PRICE EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE IN YEARS
- ------------------------------------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
$11.00 $11.00 20,000 20,000 (1)
$6.75-$11.00 $ 8.87 117,000 41,400 6.37
----------- -----------
137,000 61,400
=========== ===========
</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.
F-21
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
FISCAL
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income........................... As Reported $ 2,143,351 $ 1,224,369 $ 2,001,842
Pro Forma $ 2,104,516 $ 1,194,946 $ 1,935,771
Basic and Diluted Net Income Per
Common Share....................... As Reported $0.39 $0.22 $0.36
Pro Forma $0.38 $0.21 $0.35
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.
The following weighted-average assumptions were used:
FISCAL
--------------------
1997 1998
--------- ---------
Risk free interest rate................. 6.43% 6.06%
Expected life of options in years....... 10 10
Expected stock price volatility......... 48% 37%
Expected dividend yield................. 0% 0%
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 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.
13. COMMITMENTS AND CONTINGENCIES
COMMITMENTS TO FUND. As of April 30, 1999, the Company had unfunded
receivables in process of approximately $2.3 million.
EMPLOYMENT AGREEMENT. The Company has entered into employment agreements
with two key executives which expire in July 2000. Each agreement provides for
an annual salary plus the potential to earn an annual cash bonus to be
determined by the Compensation Committee of the Board of Directors based on the
financial results for the fiscal year then ended. In the event the executive 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.
LITIGATION. The Company from time to time becomes involved in various
routine legal proceedings which are incidental to the business. Management of
the Company vigorously defends such matters. As of April 30, 1999, management
believes there are no such legal proceedings that would have a material adverse
impact on the Company's financial position or results of operations.
F-22
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES. The Company is a party to a lease agreement for office space in
Houston that expires on February 28, 2003. The Company is party to a lease
agreement for office space in Atlanta which expires on December 31, 2001, with
an early termination option by either party anytime on or after June 30, 2000.
The Company also holds equipment under operating leases which expire in fiscal
year 2003. Rent expense for office space and other operating leases for the
years ended April 30, 1997, 1998 and 1999, was $283,463, $289,257 and $871,851,
respectively. Required minimum lease payments for the remaining terms of the
above leases are:
Year ending April 30-
2000.......................... $ 1,025,367
2001.......................... 1,027,036
2002.......................... 813,462
2003.......................... 188,101
CAPITAL LEASES. During the year ended April 30, 1999, the Company entered
into a sale-and-leaseback transaction for certain of its computer equipment at
ALAC for approximately $2.1 million. Gain on sale of this transaction was not
significant and is being amortized through the term of the lease. For accounting
purposes, the Company has treated this transaction as a capital lease in
accordance with SFAS No. 13 "Accounting for Leases" and recorded this
obligation in Accounts Payable and Accrued Liabilities. Payments are due in
monthly installments of $65,178 through 2002 with an implicit interest rate of
8.8 percent. Depreciation on the equipment has been reflected in accordance with
the Company's accounting policies.
At April 30, 1999, the aggregate amount of annual principal maturities of
the capital lease obligation are as follows:
Year Ending April 30 --
2000.......................... $ 782,137
2001.......................... 782,137
2002.......................... 456,247
-------------
2,020,521
Less -- Amounts representing
interest...................... 219,295
-------------
$ 1,801,226
=============
14. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the years ended April 30, 1997, 1998 and 1999 are
as follows:
FOR THE YEAR ENDED APRIL 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share.... 5,566,669 5,566,669 5,566,669
Effect of dilutive stock options... 312 628 27
------------ ------------ ------------
Weighted average shares outstanding
for diluted earnings per
share........................... 5,566,981 5,567,297 5,566,696
============ ============ ============
F-23
<PAGE>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At April 30, 1999, the Company had 136,973 employee stock options which
were not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the period presented.
15. BUSINESS COMBINATIONS
On October 2, 1998, the Company acquired all of the outstanding stock of
ALAC, a Delaware corporation and wholly-owned subsidiary of Fortis, Inc., for an
approximate purchase price of $74.1 million. ALAC's principal business activity
is the servicing of retail automobile sales contracts. The transaction was
treated as a purchase for accounting purposes and results of operations are
included in the Company's consolidated financial statements beginning on October
2, 1998. The net book value of the net assets acquired exceeded the purchase
price by $8.5 million. Receivables acquired for investments have been recorded
net of amounts estimated to be uncollectible over the life of the receivables.
In conjunction with the acquisition, liabilities were assumed as follows:
Receivables acquired for
investment........................... $ 55,676,122
Investment in trust certificates..... 15,273,695
Fixed assets and other............... 6,635,013
Cash paid, net of cash acquired...... (76,052,178)
----------------
Liabilities assumed.................. $ 1,532,652
================
The following unaudited pro forma summary presents information as if the
acquisition had occurred at the beginning of each fiscal year. The pro forma
information is provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined business. In preparing the pro forma data, adjustments have been made
to (i) increase the yield on Receivables Acquired for Investment based on the
discounted purchase price, (ii) increase interest expense for the financing of
the acquisition, (iii) eliminate intercompany costs, (iv) eliminate costs
incurred in preparation of the sale of ALAC, and (v) adjust the federal and
state income tax provisions based on the combined operations.
FOR THE YEAR ENDED
APRIL 30,
------------------------------
1998 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
Interest Income...................... $ 46,039,536 $ 43,076,429
Net Income (Loss).................... $ (2,022,170) $ 424,193
Basic and Diluted Net Income (Loss)
per common share..................... $ (0.36) $ 0.08
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
-----------------------------------------------------------------------
JULY 31, 1998 OCTOBER 31, 1998 JANUARY 31, 1999 APRIL 30, 1999
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Interest Income......................... $ 5,658,594 $7,258,254 $9,688,287 $8,470,868
Interest Expense........................ 2,224,471 3,191,169 4,449,019 2,917,066
Net Income.............................. 314,983 388,878 584,718 713,263
Basic and Diluted Net Income per Common
Share................................. $ 0.06 $ 0.07 $ 0.11 $ 0.12
</TABLE>
F-24
EXHIBIT 10.57
AMENDMENT NUMBER 2 TO SECURITY AGREEMENT
AMENDMENT NUMBER 2 TO SECURITY AGREEMENT (this "AMENDMENT"), dated
as of March 31, 1999 among FIRST INVESTORS AUTO RECEIVABLES CORPORATION, a
Delaware corporation, as debtor (in such capacity, the "DEBTOR"), FIRST
INVESTORS FINANCIAL SERVICES, INC., a Texas corporation, as seller (the
"SELLER"), ENTERPRISE FUNDING CORPORATION, a Delaware corpora tion (the
"COMPANY"), MBIA INSURANCE CORPORATION, a New York stock insurance company (the
"SURETY BOND PROVIDER"), NATIONSBANK, N.A., a national banking association,
individually and as Reserve Account Agent (together with its successors and
assigns in such capacity, the "Reserve Account Agent"), CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION, a national banking association ("CHASE TEXAS"), as initial
Collateral Agent, (the "INITIAL COLLATERAL AGENT"), and NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, a national banking association ("NORWEST"), as successor
collateral agent (together with its successors and assigns in such capacity, the
"SUCCESSOR COLLATERAL AGENT"), as Back-up Servicer and as Custodian, amending
that certain Security Agreement dated as of October 22, 1996, as amended prior
to the date hereof (the "SECURITY AGREEMENT").
WHEREAS, the Debtor has requested that the Security Agreement be
amended, with certain provisions relating to the Servicer to become effective
upon the Servicing Transfer (as defined in the Servicing Agreement, dated as of
March 31, 1999, among ALAC, as servicer, the Debtor, and Norwest, as Back-Up
Servicer and as Collateral Agent), to reflect the replacement of GECC as
Servicer with Auto Lenders Acceptance Corporation, a Delaware corporation;
WHEREAS, the Debtor has requested that the Security Agreement be
amended, with certain provisions relating to the Servicer to become effective
upon the Servicing Transfer, to reflect the appointment of Norwest as Collateral
Agent in replace ment of Chase Texas and to reflect the appointment of Norwest
as Back-up Servicer and as Custodian; and
WHEREAS, the Debtor has requested that the Security Agreement be
amended, effective as of the date hereof, to reflect an increase in the Facility
Limit and to modify or add certain Termination Events and Amortization Events.
NOW, THEREFORE, the parties hereby agree as follows:
<PAGE>
SECTION 1. DEFINED TERMS. As used in this Amendment, capitalized
terms shall have the same meanings assigned thereto in the Security Agreement.
SECTION 2. ADDITIONAL DEFINED TERMS. The following terms are hereby
added to Section 1.1 of the Security Agreement in appropriate alphabetical
order:
"ALAC" shall mean Auto Lenders Acceptance Corporation.
"BACK-UP SERVICING FEE" with respect to a Collection Period shall be
equal to the quotient obtained by dividing an amount equal to 0.03%
of the aggregate Principal Balance of the Receivables as of the
beginning of such Collection Period, by 12.
"CHANGE IN CONTROL" shall mean the occurrence of any of the
following: (a) any Person shall, at any time following the Closing
Date, acquire 51% or more of the total outstanding shares of First
Investors Financial Ser vices Group, Inc.; (b) any Person shall, at
any time following the Closing Date, acquire directly or indirectly
51% or more of the voting control with respect to the total
outstanding shares of First Investors Financial Services Group,
Inc.; (c) First Investors Financial Services Group, Inc. shall cease
to own, directly or indirectly, 51% or more of the total outstanding
shares of the Seller or ALAC; or (d) First Investors Financial
Services Group, Inc. shall not have directly or indirectly 51% or
more of the voting control with respect to the total outstanding
shares of the Seller or ALAC.
"CUSTODIAN FILES" shall have the meaning set forth in Section 2.13
of the Servicing Agreement.
"NORWEST" means Norwest Bank Minnesota, National Association.
"SERVICING FEE" with respect to a Collection Period shall be equal
to the quotient obtained by dividing an amount equal to 2.5% of the
aggregate Principal Balance of the Receivables as of the beginning
of such Collec tion Period, by 12.
"SERVICING TRANSFER" shall have the meaning set forth in the
Servicing Agreement.
2
<PAGE>
SECTION 3. AMENDMENT TO DEFINED TERMS.
(a) The definition of "Available Collections" is hereby deleted and
replaced with the following:
""AVAILABLE COLLECTIONS" shall mean, with respect to each Remittance
Date, all Collections received by the Servicer, from whatever
source, during or with respect to the prior Collection Period."
(b) The definition of "Facility Limit" is hereby deleted and
replaced with the following:
""FACILITY LIMIT" shall mean $135,000,000."
(c) The definition of "Servicer" is hereby deleted and replaced with
the following:
""SERVICER" shall mean ALAC as servicer under the Servicing
Agreement or any successor Servicer acceptable to the Surety Bond
Provider."
(d) The definition of "Servicer Event of Default" is hereby deleted
and replaced with the following:
""SERVICER EVENT OF DEFAULT" means a "Servicer Termination Event" as
defined in the Servicing Agreement."
(e) The definition of "Servicing Agreement" is hereby deleted and
replaced with the following:
""SERVICING AGREEMENT" shall mean the Servicing Agreement, dated as
of March 31, 1999, among ALAC, as servicer, the Debtor, and Norwest,
as Back-Up Servicer and as Collateral Agent, as such agreement may
be amended, modified and supplemented from time to time (but only
with the consent of the Surety Bond Provider)."
(f) The definition of "FIARC Event of Default" is hereby deleted.
(g) The definition of "Termination Date" is hereby amended to delete
"October 22, 1997" and replace it with "March 17, 2000".
3
<PAGE>
SECTION 4. AMENDMENT TO SECTION 2.1. The third paragraph of Section
2.1 of the Security Agreement is hereby deleted and replaced with the following:
"In connection with the grant of the security interest pursuant to
this Section 2.1, the Debtor agrees to direct ALAC as Servicer, on
or prior to the Servicing Transfer, to indicate, on or prior to the
Servicing Transfer, clearly and unambiguously in its computer files
described in the preceding paragraph that an undivided interest in
the Receivables created in connec tion with the Receivables has been
pledged to the Collateral Agent pursu ant to this Agreement. The
Debtor shall deliver to the Collateral Agent a computer file or
microfiche list containing a true and complete list of all such
Receivables, identified by account number and principal balance as
of the end of the Collection Period ending immediately prior to the
Servic ing Transfer. Such file or list shall be marked as the
Receivable Schedule and EXHIBIT B to this Agreement, delivered to
the Collateral Agent as confidential and proprietary information,
and is hereby incorporated into and made a part of this Agreement.
The Debtor agrees to deliver to the Collateral Agent at such times
as requested by the Collateral Agent in connection with a
third-party's request to review EXHIBIT B, as provided in the
financing statement filed by the Collateral Agent under the UCC, a
computer file or microfiche list containing a true and complete list
of all Receivables, including all Receivables created on or after
the Cut-Off Date, in existence as of the later of (w) the last day
of the prior Collection Period, (x) the most recent Addition Date or
(y) the most recent Removal Date by account number and by Principal
Balance as of such day or date. Such updated and revised file or
list shall be marked as the Receivable Schedule and EXHIBIT B to
this Agreement, delivered to the Collateral Agent as confidential
and proprietary information, shall replace the previously delivered
Receivable Schedule identified as EXHIBIT B, and shall be
incorporated into and made a part of this Agreement. The Debtor
agrees to direct the Servicer, by the end of each Collection Period
to indicate clearly and unambiguously in its computer files that an
undivided interest in the Receivables has been pledged to the
Collateral Agent pursuant to this Agreement."
SECTION 5. AMENDMENT TO SECTION 3.1(Q). Section 3.1(q) of the
Security Agreement is hereby deleted and replaced with the following:
4
<PAGE>
"(q) The Seller has provided to the Collateral Agent the sole
original counterpart of such Receivable as amended, and the related
title document or the application for title document, previously in
the possession of the Seller.
SECTION 6. AMENDMENT TO SECTION 3.2(L)(I). Section 3.2(l)(i) of the
Security Agreement is hereby deleted and replaced with the following:
"(i) NOTICE OF TERMINATION EVENT, AMORTIZATION EVENT, WIND-DOWN
EVENT, POTENTIAL TERMINATION EVENTS, POTENTIAL AMORTIZATION EVENT OR
POTENTIAL WIND-DOWN EVENT. As soon as possible and in any event
within five days of becoming aware of the occurrence of each
Termination Event, Amorti zation Event, Wind-Down Event, or each
Potential Termination Event, Potential Amortization Event or
Potential Wind-Down Event hereunder, or each Servicer Event of
Default under the Servicing Agreement, a state ment of the chief
financial officer or chief accounting officer of the Debtor setting
forth details of such Termination Event, Amortization Event,
Wind-Down Event, Potential Termination Event, Potential Amortization
Events or Potential Wind-Down Event or Servicer Event of Default and
the action which the Debtor proposes to take with respect thereto."
SECTION 7. AMENDMENT TO SECTION 4.1. Section 4.1 of the Security
Agreement is hereby deleted and replaced with the following:
"SECTION 4.1. SERVICING. (a) Pursuant to the Servicing Agreement,
the Debtor has contracted with Auto Lenders Acceptance Corporation
("ALAC") to act as servicer to manage, collect and administer each
of the Receivables. Until such time as ALAC is terminated as
servicer under the Servicing Agreement, references to the Servicer
herein shall refer to ALAC as servicer under the terms of the
Servicing Agreement. In the event of a Servicer Event of Default
pursuant to Section 5.01 of the Servicing Agreement, the Debtor,
shall upon the written direction of the Surety Bond Provider, or
may, with the consent of the Surety Bond Provider, terminate ALAC as
Servicer thereunder, but in any event shall notify Moody's and S&P
of such Servicer Event of Default. Upon the termination of ALAC as
servicer of the Receivables pursuant to Section 5.01 of the
Servicing Agreement, a successor servicer shall be appointed
pursuant to the terms of the Servicing Agreement and all references
herein to the Servicer shall be deemed to refer to such successor
servicer.
5
<PAGE>
(b) There shall be established on the Closing Date and maintained,
for the benefit of the Secured Parties, in the trust department of
the Collateral Agent, a segregated account (the "COLLECTION
ACCOUNT"), bearing a desig nation clearly indicating that all of the
funds deposited therein are held for the benefit of the Secured
Parties. Funds on deposit in the Collection Account (other than
investment earnings) shall be invested by the Collat eral Agent at
the direction of the Debtor in Eligible Investments that will mature
so that such funds will be available prior to the next succeeding
Remittance Date, except that in the case of funds representing
Collections with respect to a succeeding Collection Period, such
Eligible Investments may mature so that such funds will be available
no later than the Business Day prior to the Remittance Date for such
Collection Period. Any funds on deposit in the Collection Account to
be so invested shall be invested solely in Eligible Investments. On
each Remittance Date, all interest and earnings (net of losses and
investment expenses) on funds on deposit in the Collection Account
shall be available to make any payments required hereunder and shall
be distributed pursuant to the priorities set forth in Section 5.1.
(c) The Debtor shall cause the Servicer under the Servicing
Agreement to deposit all Collections in the Collection Account no
later than the close of business on the Business Day following
receipt thereof by the Servicer."
SECTION 8. AMENDMENT TO SECTION 4.2. The introductory paragraph of
Section 4.2 of the Security Agreement is hereby deleted and replaced with the
following:
"At any time following the designation of a Servicer (other than
ALAC) pursuant to Section 4.1 hereof and Section 2.01 at the
Servicing Agree ment as a result of the occurrence of a Servicer
Event of Default pursuant to Section 5.01 of the Servicing
Agreement:"
SECTION 9. AMENDMENT TO SECTION 4.4. Section 4.4 of the Security
Agreement is hereby deleted and replaced with the following:
"SECTION 4.4 MONTHLY DEBTOR'S CERTIFICATE. On each Determination
Date, the Debtor shall deliver or cause the Servicer to deliver to
the Administrative Agent, the Surety Bond Provider and the
Collateral Agent a certificate, signed by the Debtor and the
Servicer, in substantially the
6
<PAGE>
form of Exhibit A-1 to the Servicing Agreement (the "MONTHLY
DEBTOR'S CERTIFICATE") for the related Collection Period. The
Company shall provide (or cause the Administrative Agent to provide)
to the Debtor, by the 10th day of the calendar month following the
Collection Period to which such Monthly Debtor's Certificate
relates, information relating to the amount of each obligation of
the Company which comprises Carrying Costs for such Collection
Period. The Monthly Debtor's Certificate shall specify whether a
Termination Event, an Amortization Event or Wind-Down Event is
deemed to have occurred with respect to the Collection Period
preceding such Determination Date. Upon receipt of the Monthly
Debtor's Certificate, the Collateral Agent shall rely (and shall be
fully protected in so relying) on the information contained therein
for the purposes of making distributions and allocations as provided
for herein."
SECTION 10. AMENDMENT TO SECTION 5.1. (a) Section 5.1(a)(ii) of the
Security Agreement is hereby deleted and replaced with the following:
"(ii) FIRST, to pay to the Collateral Agent all fees and expenses
due pursuant to Section 7.2 (a) hereof, SECOND, to the Servicer the
Servicing Fee due with respect to the related Collection Period and
an amount equal to the amount of expenses due to be reimbursed
pursuant to this Section 5.1(a)(ii) to the Servicer as provided in
Section 2.11(b) of the Servicing Agreement, and THIRD to the suc
cessor Servicer an amount not in excess of $50,000 in payment of any
transition expenses of such successor Servicer under the Servicing
Agreement due to be reimbursed by the Debtor;"
(b) Section 5.1(a)(xi) of the Security Agreement is hereby deleted
and replaced with the following:
"(xi) FIRST, to the Servicer in payment of all expenses of the
Servicer under the Servicing Agreement due to be reimbursed by the
Debtor and not paid on such Remittance Date as a result of the
limitation set forth in clause SECOND of Section 5.1(a)(ii), and
SECOND, to the successor Servicer all expenses of the successor
Servicer due to be reimbursed and not paid under clause THIRD of
Section 5.1(a)(ii); and THIRD, all remaining amounts shall be
distributed by the Collateral Agent to a bank account designated by
the Debtor for further distribution."
7
<PAGE>
SECTION 11. AMENDMENTS TO SECTION 6.1. (a) Section 6.1(g) of the
Security Agreement is hereby deleted and replaced with the following:
"(g) there shall be an unwaived and uncured default by the
Seller, the Servicer or the Debtor under any material agreement for
borrowed money to which the Seller, the Servicer or the Debtor is a
party or there shall be a Servicer Event of Default under the
Servicing Agreement;"
(b) Section 6.1(m) of the Security Agreement is hereby deleted and
replaced with the following:
"(m) (i) a final judgment for the payment of money in excess
of $1,000,000 shall have been rendered against the Seller or any of
its affili ates by a court of competent jurisdiction and the Seller
or such affiliate(s) shall not have either: (1) discharged or
provided for the discharge of such judgment in accordance with its
terms, or (2) perfected a timely appeal of such judgment and caused
the execution thereof to be stayed (by supersedeas or otherwise)
during the pendency of such appeal or (ii) the Seller shall have
made payments of amounts in excess of $1,000,000 in settlement of
any litigation;
(c) Section 6.1(n) of the Security Agreement is hereby deleted and
replaced with the following:
"(n) the weighted average APR of the Loans is less than
17.25%;"
(d) The Termination Event set forth in Section 6.1(s) of the
Security Agreement is hereby deleted and replaced with the following:
"(s) [Reserved]."
(e) The following subsections are hereby added to Section 6.1 of the
Security Agreement in appropriate alphabetical order:
"(x) a Change of Control occurs;"
"(y) First Investors Financial Services Group, Inc.'s GAAP equity as
a percentage of its on-balance portfolio falls below 10% measured as
of the
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end of each fiscal quarter of First Investors Financial Services
Group, Inc., beginning with the fiscal quarter ending July 31,
1999;"
"(z) First Investors Financial Services Group, Inc.'s EBITDA
Coverage Ratio, measured on a rolling six-month basis as of the end
of each fiscal quarter of First Investors Financial Services Group,
Inc. (beginning with the fiscal quarter ending July 31, 1999), falls
below 1.3 to 1;."
SECTION 12. AMENDMENTS TO SECTION 6.3. (a) Section 6.3(b) of the
Security Agreement is hereby deleted and replaced with the following:
"(b) The Seller fails to maintain a working capital facility of at
least $10,000,000;"
(b) Section 6.3(d) is hereby deleted and replaced with the
following:
"(d) the departure of any two of the following executives from
the Seller: Tommy Moore, Joseph Pisano and Bennie Duck, if a replace
ment for such individual(s) acceptable to the Surety Bond Provider
is not appointed within 90 days;"
(c) Section 6.3(e) of the Security Agreement is hereby deleted and
replaced with the following:
"(e) ALAC, as Servicer, is no longer obligated to service
new Loans originated by the Seller;"
SECTION 13. NEW SECTION 7.8. There is hereby added to the Security
Agreement a new Section 7.8 which is as follows:
"Section 7.8 DOCUMENTS HELD BY THE COLLATERAL AGENT; INDICATION OF
DEBTOR OWNERSHIP; INSPECTION AND RELEASE OF RECEIVABLE FILES.
(a) The Collateral Agent, effective upon the Servicing Transfer, is
hereby irrevocably appointed as agent of the Secured Parties to hold
and maintain physical possession of the Custodian Files in
accordance with this Agreement and the Servicing Agreement and the
Collateral Agent hereby accepts such appointment. The Custodian
Files are to be delivered to the Collateral Agent by or on behalf of
the Debtor within two (2)
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Business Days preceding the Servicing Transfer or date of a
Subsequent Funding, as the case may be, with respect to each
Receivable on the date of the Servicing Transfer or the date of a
Subsequent Funding.
(b) Within five (5) Business Days of its receipt of the original
retail installment sale or loan contract and security agreements,
the Collateral Agent shall stamp each such retail installment sale
or loan contract and security agreement with language substantially
as follows: This contract has been assigned to First Investors Auto
Receivables Corporation (the "Debtor") and the Debtor has granted
all of its right, title and interest in this contract to the
Collateral Agent for the benefit of the Secured Parties.
(c) The Collateral Agent shall within five (5) Business Days after
receipt, review 100% of the Custodian Files to verify the presence
of the original retail installment sale or loan contract and an
original Certificate of Title with respect to each Receivable. In
the event that the Collateral Agent discovers an exception to any of
the above items, the Collateral Agent shall within five (5) Business
Days after each Collection Period with respect to each of the
foregoing inspections performed by the Collat eral Agent during such
Collection Period, deliver a written notice to the Rating Agencies,
the Back-Up Servicer, the Seller, the Debtor and the Surety Bond
Provider, specifying which of the above items have not been received
by the Collateral Agent with respect to each Receivable added to the
Collateral during such Collection Period and any preceding
Collection Period. With respect to any Receivable for which any of
the foregoing documents has not been delivered to the Collateral
Agent or corrected before delivery by the Collateral Agent of a
written notice with respect to such Custodian File, the Debtor shall
remove or cause the removal of the related Receivable from the
Collateral, and the Debtor shall cause the Seller to acquire and
repurchase, respectively, such Receivable from the Collateral and
deposit the Repurchase Price in the Collection Account. Other than
the reviews set forth in this paragraph, the Collateral Agent shall
have no duty or obligation to review any of the Custodian Files.
(d) The Collateral Agent agrees to maintain the Custodian Files
which are delivered to it at the Corporate Trust Offices of the
Collateral Agent as shall from time to time be identified to the
Surety Bond Provider and the Noteholder by written notice delivered
promptly but in no event later than 20 days after any change in
location. Subject to the foregoing, the Collat eral Agent may
temporarily move individual Custodian Files or any portion thereof
without notice as necessary to allow the Servicer to con duct
collection and other servicing activities in accordance with its cus
tomary practices and procedures. The Debtor shall cause the Servicer
and each successor Servicer to take whatever actions are required
subject to the other provisions of this Agreement, including, but
not limited to, the filing of financing statements, as a result of
relocating the Custodian Files, if any, to maintain the perfection
of the Collateral Agent's right, title and interest in and to the
Receivables and the Custodian Files.
(e) The Collateral Agent shall have and perform the following powers
and duties:
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(i) hold the Custodian Files for the benefit of the
Secured Parties, and maintain a current inventory
thereof;
(ii) carry out such policies and procedures in accordance
with its customary actions with respect to the
handling and custody of the Custodian Files so that
the integrity and physical possession of the Custodian
Files will be main tained; and
(iii) promptly release the original retail installment
sale or loan contract evidencing a Receivable or the
original certificate of title to a Financed Vehicle
then held by it to the Servicer upon receipt of a
written request for release of documents certified by
an officer of the Servicer, sub stantially in the form
of Exhibit C to the Servicing Agree ment, with respect
to the matters therein; provided, how ever that the
Collateral Agent shall be deemed to have received
proper instructions with respect to the Custodian
Files upon its receipt of written instructions from
the Servicer in the form of Exhibit C to the Servicing
Agreement."
SECTION 14. EXHIBIT H. Exhibit H to the Security Agreement, and the
description thereof in the table of exhibits, is hereby deleted and replaced
with "[Reserved]."
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<PAGE>
SECTION 15. THE COLLATERAL AGENT. (a) Effective upon the Servicing
Transfer, Chase Texas hereby resigns from its position as Collateral Agent under
the Security Agreement, and the Debtor, the Seller, the Surety Bond Provider,
the Company and NationsBank hereby consent to such resignation.
(b) Effective upon the Servicing Transfer, the Secured Parties
hereby appoint Norwest as successor Collateral Agent under the Security
Agreement and Norwest accepts such appointment.
(c) Effective upon the Servicing Transfer, Chase Texas hereby
assigns all right, title and interest in and to the Collateral to Norwest, in
its capacity as Successor Collateral Agent, and hereby agrees to take any and
all actions necessary or reasonably requested by the Secured Parties in order to
effectuate such assignment.
(d) All notices required to be given to Norwest in its capacity as
Successor Collateral Agent shall be directed as follows:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth & Marquette
Minneapolis, Minnesota 55479-0070
Attention: Corporate Trust Services - Asset-Backed Administration
Telecopy: (612) 667-3539
Confirmation: (612) 667-1117
SECTION 16. CHANGE IN ADDRESS OF THE COMPANY. Effective upon the
date hereof, the address of the Company set forth in Section 8.1 of the Security
Agree ment is hereby deleted and replaced with the following:
Enterprise Funding Corporation
c/o Global Securitization Services, LLC
25 West 43rd St., Suite 704
New York, New York 10036
Attention: Kevin Burns
Telecopy: (212) 302-8767
Confirmation: (212) 302-8331
SECTION 17. EFFECTIVENESS. The provisions of this Amendment shall
not become effective until such time as the Servicing Transfer (as defined in
the Servic ing Agreement) shall have occurred; provided, however, that the
following provisions of this Amendment shall become effective as of the date
hereof: the definition of "Change of Control" in Section 2, Section 3(b),
Section 3(g), Sections 11(a), (b), (c) and (e), Sections 12(a) and (b) and
Sections 16 through 21.
SECTION 18. LIMITED SCOPE. This amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Company, the Debtor, the Seller, the Collateral
Agent, the Reserve Account Agent, or the Surety Bond Provider under the Security
Agreement.
12
<PAGE>
SECTION 19. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 20. SEVERABILITY; COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 21. RATIFICATION. Except as expressly affected by the
provisions hereof, the Security Agreement as amended shall remain in full force
and effect in accordance with its terms and is hereby ratified and confirmed by
the parties hereto. On and after the date hereof, each reference in the Security
Agreement to "this Agreement", "hereunder", "herein" or words of like import
shall mean and be a reference to the Security Agreement as amended by this
Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment Number 2 as of the date first written above.
FIRST INVESTORS AUTO RECEIVABLES
CORPORATION, as Debtor
By: ___________________________________________
Name:
Title:
FIRST INVESTORS FINANCIAL
SERVICES, INC.
as Seller
By: ___________________________________________
Name:
Title:
<PAGE>
MBIA INSURANCE CORPORATION
as Surety Bond Provider
By: ___________________________________________
Name:
Title:
<PAGE>
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION
as initial Collateral Agent
By: ___________________________________________
Name:
Title:
<PAGE>
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
as successor Collateral Agent
By: ___________________________________________
Name:
Title:
<PAGE>
NATIONSBANK N.A.
individually and as Reserve Account Agent
By: ___________________________________________
Name:
Title:
<PAGE>
ENTERPRISE FUNDING CORPORATION,
as Company
By: ___________________________________________
Name:
Title:
EXHIBIT 10.58
AMENDMENT NUMBER 1 TO NOTE PURCHASE AGREEMENT
AMENDMENT NUMBER 1 TO NOTE PURCHASE AGREEMENT (this "AMENDMENT"),
dated as of March 31, 1999 among FIRST INVESTORS AUTO RECEIVABLES CORPORATION, a
Delaware corporation, as issuer (in such capacity, the "ISSUER") and ENTERPRISE
FUNDING CORPORATION, a Delaware corporation (the "COMPANY"), amending that
certain Note Purchase Agreement dated as of October 22, 1996, as amended prior
to the date hereof (the "NOTE PURCHASE AGREEMENT").
WHEREAS, the Issuer has requested that the Note Purchase Agreement
be amended to reflect an increase in the Facility Amount; and
WHEREAS, the Transaction Documents require the consent of the Surety
Bond Provider to this amendment of the Note Purchase Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. DEFINED TERMS. As used in this Amendment, capitalized
terms shall have the same meanings assigned thereto in the Note Purchase
Agreement.
SECTION 2. AMENDMENT TO DEFINITIONS. (a) The definition of "Facility
Limit" is hereby deleted and replaced with the following:
""FACILITY LIMIT" shall mean shall mean $135,000,000."
(b) The definition of "Insurance Agreement" is hereby deleted and
replaced with the following:
""INSURANCE AGREEMENT" shall mean the Insurance Agreement dated as
of October 1, 1996 between the Issuer, the Seller, the Collateral
Agent, the Reserve Account Agent and the Surety Bond Provider as
such agreement may be amended, modified and supplemented from time
to time."
SECTION 3. AMENDMENT TO EXHIBIT A. Exhibit A is hereby deleted and
replaced with Exhibit A attached hereto.
<PAGE>
SECTION 4. CONDITIONS PRECEDENT. This Amendment shall not become
effective until the Company shall have received the following, each of which
shall be in form and substance satisfactory to the Company:
(a) A copy of the resolutions of the Board of Directors of the
Issuer, certified by its Secretary approving the execution, delivery and
performance by the Issuer of this Amendment and the Note;
(b) The Restated Certificate of Incorporation of the Issuer,
certified by the Secretary of State or other similar official of the
Issuer's jurisdiction of incorporation dated a date reasonably prior to
the date hereof;
(c) A Good Standing Certificate for the Issuer issued by the
Secretary of State or a similar official of such Person's jurisdiction of
incorporation and certificates of qualification as a foreign corporation
issued by the Secretaries of State or other similar officials of each
jurisdic tion where such qualification is material to the transactions
contemplated by this Amendment and the Transaction Documents to which the
Issuer is a party, in each case, dated a date reasonably prior to the date
hereof;
(d) A Certificate of a Vice President or more senior officer
of the Issuer certifying that the representations and warranties of the
Issuer contained in the Note Purchase Agreement (other than any such
representations or warranties that, by their terms, are specifically made
as of a date other than the date hereof) are correct on and as of the date
hereof as though made on and as of the date hereof;
(e) An opinion of Buck, Keenan & Owens, LLP, counsel to the
Issuer, in form and substance acceptable to the Company and its counsel,
addressing certain corporate and enforceability matters relating to the
Note, this Amendment and the Note Purchase Agreement as amended hereby;
(f) An executed replacement Note (the "REPLACEMENT NOTE") (in
substantially the form called for by the Note Purchase Agree ment) in a
principal amount equal to the Facility Limit as increased hereby, in
replacement of the original Note (the "ORIGINAL NOTE");
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<PAGE>
(g) An executed endorsement to the Surety Bond acknowl edging
the increase in the Facility Limit provided for herein; and
(h) An executed copy of this Amendment.
SECTION 5. CHANGE IN ADDRESS OF THE COMPANY. Effective upon the date
hereof, the address of the Company set forth in Section 5.1 of the Note Purchase
Agreement is hereby deleted and replaced with the following:
Enterprise Funding Corporation
c/o Global Securitization Services, LLC
25 West 43rd St., Suite 704
New York, New York 10036
Attention: Kevin Burns
Telephone: (212) 302-8331
Telecopy: (212) 302-8767
SECTION 6. REPRESENTATIONS AND WARRANTIES. The Issuer hereby makes
to the Company on and as of the date hereof, the following representations and
warran ties:
(a) AUTHORITY. The Issuer has the requisite corporate power
and authority to execute and deliver this Amendment and to perform
its obligations hereunder and under the Note Purchase Agreement (as
amended hereby). The execution, delivery and performance by the
Issuer of this Amendment and the performance of the Note Purchase
Agreement (as amended hereby) have been duly approved by all
necessary corporate action and no other corporate proceedings are
necessary to consummate such transactions;
(b) ENFORCEABILITY. This Amendment has been duly executed and
delivered by the Issuer. Each of the Note Purchase Agreement (as
amended hereby) and the Note delivered in connection herewith is the
legal, valid and binding obligation of the Issuer enforceable
against the Issuer in accordance with its terms, and is in full
force and effect; and
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Issuer contained in the Note Purchase Agreement
(other than any such representations or warranties that, by their
terms, are specif ically made as of a date other than the date
hereof) are correct on and as of the date hereof as though made on
and as of the date hereof.
SECTION 7. RETURN OF ORIGINAL NOTE. The Company shall, upon receipt
of the Replacement Note, return the Original Note to the Issuer for
cancellation.
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<PAGE>
SECTION 8. LIMITED SCOPE. This amendment is specific to the circum
stances described above and does not imply any future amendment or waiver of
rights allocated to the Company under the Note Purchase Agreement.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 10. SEVERABILITY; COUNTERPARTS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 11. RATIFICATION. Except as expressly affected by the
provisions hereof, the Note Purchase Agreement as amended shall remain in full
force and effect in accordance with its terms and is hereby ratified and
confirmed by the parties hereto. On and after the date hereof, each reference in
the Note Purchase Agreement to "this Agreement", "hereunder", "herein" or words
of like import shall mean and be a reference to the Note Purchase Agreement as
amended by this Amendment.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment Number 1 as of the date first written above.
FIRST INVESTORS AUTO RECEIVABLES
CORPORATION, as Issuer
By: ___________________________________________
Name:
Title:
ENTERPRISE FUNDING CORPORATION,
as Company
By: ___________________________________________
Name:
Title:
Consented to this __ day of March, 1999:
MBIA INSURANCE CORPORATION
By: ____________________________
Name:
Title:
EXHIBIT 10.59
EXECUTION
COPY
- --------------------------------------------------------------------------------
MBIA INSURANCE CORPORATION,
as Surety
FIRST INVESTORS AUTO RECEIVABLES CORPORATION,
as Transferor
FIRST INVESTORS FINANCIAL SERVICES, INC.,
as Seller
AUTO LENDERS ACCEPTANCE CORPORATION,
as Servicer
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
as Successor Collateral Agent, Back-up Servicer and Custodian
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Initial Collateral Agent
and
NATIONSBANK, N.A.,
as Reserve Account Agent
AMENDMENT NO. 1 TO
INSURANCE AGREEMENT
First Investors Auto Receivables Corporation Revolving
Automobile Receivables Financing Facility
Dated as of March 31, 1999
- ------------------------------------------------------------------------------
<PAGE>
AMENDMENT NO. 1 TO INSURANCE AGREEMENT
THIS AMENDMENT NO. 1 TO INSURANCE AGREEMENT ("Amendment") amends that
Insurance Agreement dated as of October 1, 1996 (the "Insurance Agreement") by
and among MBIA Insurance Corporation, as Surety, First Investors Auto
Receivables Corporation, as Transferor, First Investors Financial Services,
Inc., as Seller, Chase Bank of Texas (formerly known as Texas Commerce Bank,
National Association), as Collateral Agent, and NationsBank, N.A., as Reserve
Account Agent. This Amendment is dated as of March 31, 1999 by and among MBIA
INSURANCE CORPORATION (the "Surety"), FIRST INVESTORS AUTO RECEIVABLES
CORPORATION, in its capacity as transferor (the "Transferor"), FIRST INVESTORS
FINANCIAL SERVICES, INC., in its capacity as seller (the "Seller"), CHASE BANK
OF TEXAS, NATIONAL ASSOCIATION, as initial Collateral Agent (the "Initial
Collateral Agent"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, in its
capacity as successor Collateral Agent (the "Successor Collateral Agent"), in
its capacity as back-up servicer (the "Back-up Servicer"), and in its capacity
as Custodian (the "Custodian"), AUTO LENDERS ACCEPTANCE CORPORATION, in its
capacity as successor servicer (the "Servicer") and NATIONSBANK, N.A., in its
capacity as Reserve Account Agent (the "Reserve Account Agent").
RECITALS:
WHEREAS, the Transferor, Enterprise Funding Corporation (the "Company"),
the Reserve Account Agent, the Initial Collateral Agent, the Surety and the
Seller entered into a Security Agreement (as defined herein) dated as of October
22, 1996 (as amended and supplemented from time to time, the "Security
Agreement"), pursuant to which, among other things, the Transferor granted a
security interest in certain collateral as more fully described therein to the
Collateral Agent thereunder for the benefit of the Company and the Surety, to
secure payments under the Note, the Security Agreement, the Note Purchase
Agreement and this Agreement.
WHEREAS, the Surety issued its Surety Bond (as defined below) at the
request of the Transferor and the Seller, which guarantees payment of Insured
Amounts (as defined in the Surety Bond), upon such terms and conditions as were
mutually agreed upon by the parties and subject to the terms and conditions of
the Surety Bond.
WHEREAS, the servicing of the Receivables will be transferred from General
Electric Capital Corporation to the Servicer, pursuant to the Servicing Transfer
(as defined in the Servicing Agreement) and the Servicer will perform its
servicing duties pursuant to a Servicing Agreement dated as of March 31, 1999
among the Successor Collateral Agent, the Back-up Servicer, the Transferor and
the Servicer.
WHEREAS, the parties hereto desire to amend the Insurance Agreement as an
inducement for the Surety to deliver its consent to the Servicing Transfer and
related documents.
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<PAGE>
WHEREAS, the Transferor, the Company, the Reserve Account Agent, the
Initial Collateral Agent, the Successor Collateral Agent, the Surety and the
Seller are entering into an Amendment No. 2 to Security Agreement dated as of
March 31, 1999, pursuant to which the parties thereto are amending certain
provisions to reflect the Servicing Transfer and certain other matters.
WHEREAS, Section 6.01 of the Insurance Agreement provides that the
Insurance Agreement may be amended with the consent of each of the parties
thereto.
NOW, THEREFORE, in consideration of the premises and of the agreements
herein contained, the Servicer, the Back-up Servicer, the Surety, the
Transferor, the Seller, the Initial Collateral Agent, the Successor Collateral
Agent and the Reserve Account Agent agree as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.01. GENERAL DEFINITIONS. Capitalized terms used in this
Agreement but not otherwise defined herein will have the meanings ascribed to
such terms in the Insurance Agreement.
SECTION 1.02. ADDITIONAL DEFINED TERMS. The following terms are hereby
added to Article I of the Insurance Agreement in appropriate alphabetical order:
"Amendments" shall mean this Amendment, Amendment No. 1 to Note Purchase
Agreement, Amendment No. 2 to Security Agreement, the Servicing Agreement,
Amendment No. 2 to Purchase Agreement and the Guaranty.
"Guaranty" means the Guaranty dated as of March 31, 1999 among the Seller,
the Transferor, the Servicer, the Collateral Agent and the Back-up Servicer.
"Required Rating" shall mean, with respect to a Cap Counterparty, the
rating assigned to the long-term debt obligations of such Cap Counterparty by
each of S&P and Moody's as of the date of this Amendment.
SECTION 1.03. AMENDMENT TO DEFINED TERMS. The following definitions in Article I
of the Insurance Agreement are hereby amended to read as follows (solely for
convenience, added language is italicized and deleted language has been stricken
through):
(a) "Agreement" means the Insurance Agreement dated as of October
22, 1996, AS AMENDED AND SUPPLEMENTED, AND including any additional
amendments or any supplements hereto as herein permitted.
(b) "Financial Statements" means the balance sheets and the
statements of income, retained earnings and cash flows and notes thereto
of FIFSG prepared on a consolidated basis and furnished on behalf of the
Seller AND THE SERVICER to the Surety pursuant to Section 2.02(c) AND
2.05(C) hereof.
(c) "Security Agreement" means the Security Agreement dated as of
October 22, 1996, among the Company, the Transferor, the Surety, the
Seller, the Reserve Account Agent and the Collateral Agent, AS AMENDED,
INCLUDING AS AMENDED BY THE AMENDMENT NO. 2 TO SECURITY AGREEMENT DATED AS
OF MARCH 31, 1999 BY AND AMONG THE TRANSFEROR, THE COMPANY, THE RESERVE
ACCOUNT AGENT, THE BACK-UP SERVICER, THE COLLATERAL AGENT, THE SURETY AND
THE SELLER, AND AS THE SAME MAY BE FURTHER AMENDED AND SUPPLEMENTED AS
PROVIDED THEREIN.
(d) "Servicing Agreement" shall MEAN THE SERVICING AGREEMENT DATED
MARCH 31, 1999, AMONG THE SERVICER, THE TRANSFEROR, THE COLLATERAL AGENT
AND THE BACK-UP SERVICER.
(e) "Transaction Documents" means this Agreement, THE GUARANTY, the
Interest Rate Cap, the Note Purchase Agreement, the Servicing Agreement,
the Security Agreement, the Purchase Agreement, any Originator Agreement
and the Note.
ARTICLE II
AMENDMENTS TO OPERATIVE PROVISIONS
SECTION 2.01. COLLATERAL AGENT. All references in the Agreement to the
"Collateral Agent" shall be deemed to refer to (i) prior to the Servicing
Transfer, the Initial Collateral Agent and (ii) on and after the date of the
Servicing Transfer, to the Successor Collateral Agent, in its capacity as
Collateral Agent, Back-up Servicer and Custodian.
SECTION 2.02. AMENDMENTS TO SECTION 2.01. Section 2.01(h) of the Agreement
is hereby amended as follows (solely for convenience, added language is
italicized and deleted language has been stricken through):
"(h) FINANCIAL STATEMENTS. The Financial Statements of FIFSG,
copies of which the Seller has caused to be furnished to the Surety
on behalf of the SELLER AND THE SERVICER, (i) are, as of the dates
and for the periods referred to therein, complete and correct in all
material respects, (ii) present fairly the financial condition and
results of operations of the companies reported therein as of the
dates and for the periods indicated and (iii) have been prepared in
accordance with generally accepted accounting principles
consistently applied, except as noted therein and subject to
year-end adjustments with respect to interim statements. Since the
date of the most recent Financial Statements, there has been no
material adverse change in such condition or operations. Except as
disclosed in the Financial Statements, neither the Seller NOR THE
SERVICER, is not subject to any contingent liabilities or
commitments that, individually or in the aggregate, have a
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material possibility of causing a material adverse change in
respect of the Seller OR THE SERVICER."
SECTION 2.03. AMENDMENTS TO SECTION 2.02. Section 2.02(o) of the Agreement
is hereby amended as follows (solely for convenience, added language is
italicized and deleted language has been stricken through):
"(o) NOTICES UNDER THE INTEREST RATE CAP AND THE NOTE PURCHASE
AGREEMENT. The Transferor shall promptly forward to the Surety a copy of
each notice or other communication received by the Transferor or sent by
the Transferor with respect to the Interest Rate Cap and the Note Purchase
Agreement. THE TRANSFEROR SHALL PROMPTLY FORWARD TO THE SURETY A COPY OF
EACH EXECUTED INTEREST RATE CAP ENTERED INTO BY THE TRANSFEROR."
SECTION 2.04. AMENDMENTS TO SECTION 2.03. Section 2.03(e) of the Agreement
is hereby amended as follows (solely for convenience, added language is
italicized and deleted language has been stricken through):
"(e) INTEREST RATE CAP. The Transferor will not enter into ANY
Interest Rate Cap until SUCH Interest Rate Cap AND THE CAP COUNTERPARTY
HAVE been approved in form and substance and in writing by the Surety;
provided, however, that MBIA's prior written consent to the Cap
Counterparty shall not be required if (A) the Cap Counterparty is any of
the following: (i) NationsBanc Capital Markets; (ii) Bank of America;
(iii) Wells Fargo Bank; or (iv) First Union Capital Markets, Inc.; and (B)
such Cap Counterparty referenced in (A) has not been downgraded by either
of S&P or Moody's below its Required Rating. The Transferor shall not
agree to any changes to ANY Interest Rate Cap unless the Surety shall have
previously given its consent. The Transferor shall take or refrain from
taking any action, and exercise or refrain from exercising any rights of
the Transferor under ANY Interest Rate Cap, in the manner directed by the
Surety."
SECTION 2.05. ADDITION OF SECTION 2.04. Section 2.04 is hereby added to
the Insurance Agreement in appropriate numerical order as follows:
"SECTION 2.04. REPRESENTATIONS AND WARRANTIES OF THE SERVICER.
As of the date of the Amendment, the Servicer represents, warrants and
covenants as follows:
(a) DUE ORGANIZATION AND QUALIFICATION. The Servicer is a
corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction. The Servicer is duly qualified to do
business, is in good standing and has obtained all necessary licenses,
permits, charters, registrations and approvals (together, "approvals")
necessary for the conduct of its business as currently conducted and the
performance of its obligations under the Transaction Documents, in each
jurisdiction in which the failure to be so qualified or to obtain such
approvals would render any Transaction Document
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unenforceable in any respect or would have a material adverse effect upon
the Transaction.
(b) POWER AND AUTHORITY. The Servicer has all necessary corporate or
other power and authority to conduct its business as currently conducted
and to execute, deliver and perform its obligations under the Transaction
Documents and to consummate the Transaction.
(c) DUE AUTHORIZATION. The execution, delivery and performance of
the Transaction Documents by the Servicer has been duly authorized by all
necessary corporate action and do not require any additional approvals or
consents, or other action by or any notice to or filing with any Person,
including, without limitation, any governmental entity or any partners or
stockholders, which have not previously been obtained or given by the
Servicer.
(d) NONCONTRAVENTION. Neither the execution and delivery of the
Transaction Documents by the Servicer, the consummation of the
transactions contemplated thereby nor the satisfaction of the terms and
conditions of the Transaction Documents:
(i) conflicts with or results in any breach or violation of
any provision of the certificate of incorporation or bylaws or other
organizational document of the Servicer or any law, rule,
regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to the Servicer or
any of its material properties, including regulations issued by an
administrative agency or other governmental authority having
supervisory powers over the Servicer;
(ii) constitutes a default by the Servicer under or a breach
of any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which the Servicer is a party or by which
any of its properties, which are individually or in the aggregate
material to the Servicer, is or may be bound or affected; or
(iii) results in or requires the creation of any lien upon or
in respect of any assets of the Servicer.
(e) LEGAL PROCEEDINGS. There is no action, proceeding or
investigation by or before any court, governmental or administrative
agency or arbitrator against or affecting the Servicer or any of its
subsidiaries, or any properties or rights of the Servicer or any of its
subsidiaries, pending or, to the Servicer's knowledge after reasonable
inquiry, threatened, which, in any case, could reasonably be expected to
result in a material adverse effect upon the Servicer's ability to perform
its respective obligations under the Transaction Documents or have a
material adverse effect upon the Surety.
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(f) VALID AND BINDING OBLIGATIONS. The Transaction Documents (other
than the Note), when executed and delivered by the Servicer, will
constitute the legal, valid and binding obligations of the Servicer,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and
general equitable principles and public Surety Bond considerations as to
rights of indemnification for violations of federal securities laws.
(g) FINANCIAL STATEMENTS. The Servicer hereby represents and
warrants that: (a) the financial statements of FIFSG, copies of which have
been furnished to the Surety, (i) are, as of the dates and for the periods
referred to therein, complete and correct in all material respects, (ii)
present fairly the financial condition and results of operations of FIFSG
as of the dates and for the periods indicated and (iii) have been prepared
in accordance with generally accepted accounting principles consistently
applied, except as noted therein (subject as to interim statements to
normal year-end adjustments); (b) since the date of the most recent
financial statements, there has been no material adverse change in respect
of such operations or financial condition; and (c) except as disclosed in
the financial statements, the Servicer is not subject to any contingent
liabilities or commitments that, individually or in the aggregate, have a
material possibility of causing a material adverse change in respect of
the Servicer.
(h) COMPLIANCE WITH LAW, ETC. No practice, procedure or policy
employed, or proposed to be employed, by the Servicer in the conduct of
its business violates any law, regulation, judgment, agreement, order or
decree applicable to it that, if enforced, could reasonably be expected to
result in a material adverse effect upon the Servicer's ability to perform
its respective obligations under the Transaction Documents or have a
material adverse effect upon the Surety.
(i) TAXES. The Servicer and the Servicer's parent company or
companies have filed prior to the date hereof all federal and state tax
returns that are required to be filed and paid all taxes, including any
assessments received by them that are not being contested in good faith,
to the extent that such taxes have become due, except for any failures to
file or pay that, individually or in the aggregate, would not result in a
material adverse change with respect to the Servicer.
(j) ACCURACY OF INFORMATION. Neither the Transaction Documents, nor
other information relating to the Receivables or related assets, the
operations of the Servicer (including servicing or origination of loans)
or the financial condition of the Servicer (collectively, the
"Documents"), as amended, supplemented or superseded, furnished to the
Surety by the Servicer contain any statement of a material fact by the
Servicer which was untrue or misleading in any material adverse respect
when made. The Servicer has no knowledge or circumstances that could
reasonably be expected to cause a material adverse change with respect to
the Servicer. Since the furnishing of the Documents, there has been no
change nor any development or event involving a prospective change known
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to the Servicer that would render any of the Documents untrue or
misleading in a material respect.
(k) TRANSACTION DOCUMENTS. Each of the representations and
warranties of the Servicer contained in the Transaction Documents is true
and correct in all material respects, and the Servicer hereby makes each
such representation and warranty to, and for the benefit of, the Surety as
if the same were set forth in full herein.
(l) SOLVENCY. The Servicer is solvent and will not be rendered
insolvent by the Transaction and, after giving effect to the Transaction,
the Servicer will not be left with an unreasonably small amount of capital
with which to engage in its business, nor does the Servicer intend to
incur, or believe that it has incurred, debts beyond its ability to pay as
they mature. The Servicer does not contemplate the commencement of
insolvency, bankruptcy, liquidation or consolidation proceedings or the
appointment of a receiver, liquidator, conservator, trustee or similar
official in respect of the Servicer or any of its assets.
(m) PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Servicer is located in Georgia."
SECTION 2.06 ADDITION OF SECTION 2.05. Section 2.05 is hereby added to the
Insurance Agreement in appropriate numerical order as follows:
"SECTION 2.05. AFFIRMATIVE COVENANTS OF THE SERVICER. The Servicer hereby
agrees that during the Term of this Agreement, unless the Surety shall otherwise
expressly consent in writing:
(a) COMPLIANCE WITH AGREEMENTS AND APPLICABLE LAWS. The Servicer
shall not be in default under the Transaction Documents and shall comply
with all material requirements of any law, rule or regulation applicable
to it. The Servicer shall not agree to any amendment to or modification of
the terms of any Transaction Documents or its organizational documents
(including without limitation, its articles of incorporation and bylaws)
unless the Surety shall have otherwise consented.
(b) CORPORATE EXISTENCE. The Servicer its successors and assigns,
shall maintain its corporate or other existence and shall at all times
continue to be duly organized under the laws of its jurisdiction of
incorporation or formation and duly qualified and duly authorized (as
described in subsections 2.04(a), (b) and (c) hereof) and shall conduct
its business in accordance with the terms of its certificate of
incorporation and bylaws or other formation documents.
(c) THE SERVICER TO PROVIDE FINANCIAL STATEMENTS; ACCOUNTANTS'
REPORTS; OTHER INFORMATION. The Servicer shall keep or cause to be kept in
reasonable detail books and records of account of the Servicer's, and its
consolidated subsidiaries', assets and
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business, including, but not limited to, books and records relating
to the Transaction. The Servicer shall furnish or cause to be furnished to
the Surety:
(i) FINANCIAL STATEMENTS. All reports, Financial Statements,
Officer's Certificates and reviews required to be furnished under
Article II of the Servicing Agreement and Section 2.02(c) of this
Agreement, including, without limitation, annual audited and
quarterly unaudited financial statements of FIFSG and its
consolidated subsidiaries.
(ii) INITIAL AND CONTINUING REPORTS. The Servicer shall
deliver to the Surety the Monthly Servicer Report required by
Section 2.02(c) of the Servicing Agreement. Such Monthly Report
shall include, among other things, the outstanding Notional Amount
of each Interest Rate Cap, and, to the extent that the Floating
Rate, with respect to any Interest Rate Cap exceeds the Cap Rate for
the related Collection Period, the termination value of the related
Interest Rate Cap.
All financial statements specified in clause (i) above shall
be furnished in consolidated form for FIFSG and its subsidiaries.
The Surety agrees that it and its agents, accountants and
attorneys shall keep confidential all financial statements, reports
and other information delivered by the Servicer pursuant to this
subsection 2.05(c) to the extent provided in subsection 2.05(e)
hereof.
(d) ACCESS TO RECORDS; DISCUSSIONS WITH OFFICERS AND ACCOUNTANTS.
The Servicer shall, upon the reasonable request of the Surety, permit the
Surety or its authorized agents:
(i) to inspect its books and records as they may relate to the
Note, the obligations of such party under the Transaction Documents,
and the Transaction;
(ii) to discuss the affairs, finances and accounts of the
Servicer with the chief operating officer and the chief financial
officer of the Servicer, and
(iii) with the Servicer's consent, which consent shall not be
unreasonably withheld, to discuss the affairs, finances and accounts
of the Servicer with such company's independent accountants,
provided that an officer of the company shall have the right to be
present during such discussions.
Such inspections and discussions shall be conducted during
normal business hours and shall not unreasonably disrupt the
business of the Servicer. The books and records of the Servicer will
be maintained at the address of the Servicer designated herein for
receipt of notices, unless the Servicer shall otherwise advise the
parties hereto in writing.
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(e) CONFIDENTIALITY. The Surety agrees that it and its shareholders,
directors, agents, accountants and attorneys shall keep confidential any
matter of which it becomes aware through such inspections or discussions
(unless readily available from public sources), except as may be otherwise
required by regulation, law or court order or requested by appropriate
governmental authorities or as necessary to preserve its rights or
security under or to enforce the Transaction Documents, provided that the
foregoing shall not limit the right of the Surety to make such information
available to its regulators, securities rating agencies, reinsurers,
credit and liquidity providers, counsel and accountants. If the Surety is
requested or required (by oral questions, interrogatories, requests for
information or documents subpoena, civil investigative demand or similar
process) to disclose any information of which it becomes aware through
such inspections or discussions, the Surety will promptly notify the
Servicer of such request(s) so that the Servicer may seek an appropriate
protective order and/or waive the Surety's compliance with the provisions
of this Agreement. If, in the absence of a protective order or the receipt
of a waiver hereunder, the Surety is, nonetheless, in the opinion of its
counsel, compelled to disclose such information to any tribunal or else
stand liable for contempt or suffer other censure or significant penalty,
the Surety may disclose such information to such tribunal that the Surety
is compelled to disclose, provided that a copy of all information
disclosed is provided to the Servicer, promptly upon such disclosure.
(f) NOTICE OF MATERIAL EVENTS. The Servicer shall be obligated
promptly to inform the Surety in writing of the occurrence of any of the
following to the extent any of the following relate to it:
(i) the submission of any claim or the initiation or threat of
any legal process, litigation or administrative or judicial
investigation, or rule making or disciplinary proceeding by or
against the Servicer that could result in a material adverse effect
upon the Servicer's ability to perform its respective obligations
under the Transaction Documents or have a material adverse effect
upon the Surety, or the promulgation of any proceeding or any
proposed or final rule which would result in a material adverse
effect upon the Servicer's ability to perform its respective
obligations under the Transaction Documents or have a material
adverse effect upon the Surety;
(ii) any change in the location of the Servicer's principal
offices or any change in the location of the Servicer's books and
records;
(iii) the occurrence of any Event of Default, Potential
Termination Event, Termination Event, Potential Amortization Event,
Amortization Event, Potential Wind-Down Event, Wind-Down Event,
Servicer Event of Default or of any event that would result in a
material adverse effect upon the Servicer's ability to perform its
respective obligations under the Transaction Documents or have a
material adverse effect upon the Surety;
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(iv) the commencement of any proceedings by or against the
Servicer under any applicable bankruptcy, reorganization,
liquidation, rehabilitation, insolvency or other similar law now or
hereafter in effect or of any proceeding in which a receiver,
liquidator, conservator, trustee or similar official shall have
been, or may be, appointed or requested for the Servicer or any of
its assets; or
(v) the receipt of notice that (A) the Servicer is being
placed under regulatory supervision, (B) any license, permit,
charter, registration or approval necessary for the conduct of the
Servicer's business is to be, or may be suspended or revoked, or (C)
the Servicer is to cease and desist any practice, procedure or
Surety Bond employed by the Servicer in the conduct of its business,
and such cessation may result in a material adverse effect upon the
Servicer's ability to perform its respective obligations under the
Transaction Documents or have a material adverse effect upon the
Surety.
(g) FINANCING STATEMENTS AND FURTHER ASSURANCES. The Servicer will
cause to be filed all necessary financing statements or other instruments,
and any amendments or continuation statements relating thereto, necessary
to be kept and filed in such manner and in such places as may be required
by law to preserve and protect fully the interest of the Collateral Agent
(on behalf of the Secured Parties) in the Collateral. The Servicer shall,
upon the request of the Surety, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, within
ten days of such request, such amendments hereto and such further
instruments and take such further action as may be reasonably necessary to
effectuate the intention, performance and provisions of the Transaction
Documents. In addition, the Servicer agrees to cooperate with Standard &
Poor's and Moody's in connection with any review of the Transaction that
may be undertaken by Standard & Poor's and Moody's after the date hereof.
(h) MAINTENANCE OF LICENSES. The Servicer or any successors thereof
shall maintain all licenses, permits, charters and registrations which are
material to the conduct of its business.
(i) THIRD-PARTY BENEFICIARY. The Servicer agrees that the Surety
shall have all rights of a third-party beneficiary in respect of each
Transaction Document to which it is a party and hereby incorporates and
restates their representations, warranties and covenants as set forth
therein for the benefit of the Surety.
(j) AMENDMENTS. The Servicer will provide the Surety with written
notice of any change or amendment to any Transaction Document as currently
in effect and the Servicer agrees that it will not make any change or
amendment to any Transaction Document without the prior written consent of
the Surety thereto.
(k) MAINTENANCE OF COLLATERAL. On or before each April 15, beginning
in 2000, so long as the Note is outstanding, the Servicer shall furnish,
or cause to be furnished, to the Surety and the Collateral Agent an
officers' certificate either stating that
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such action has been taken with respect to the recording, filing,
rerecording and refiling of any financing statements and continuation
statements as is necessary to maintain the interest of the Collateral
Agent created by the Security Agreement with respect to the Collateral and
reciting the details of such action or stating that no such action is
necessary to maintain such interests. Such officers' certificate shall
also describe the recording, filing, rerecording and refiling of any
financing statements and continuation statements that will be required to
maintain the interest of the Collateral Agent (on behalf of the Secured
Parties) in the Collateral until the date such next officers' certificate
is due. The Servicer will use its best efforts to cause any necessary
recordings or filings to be made with respect to the Collateral.
(l) CLOSING DOCUMENTS. The Servicer shall provide or cause to be
provided to the Surety an executed original copy of each document executed
in connection with the Servicing Transfer within 30 days after the date of
such closing.
(m) PREFERENCE AMOUNTS. With respect to any Preference Amount (as
defined In the Surety Bond), the Servicer shall provide to the Surety upon
the request of the Surety:
(i) a certified copy of the final nonappealable order of a
court having competent jurisdiction ordering the recovery by a
trustee in bankruptcy as voidable preference amounts included in
previous payments to any Insured Party pursuant to the United States
Bankruptcy Code;
(ii) an opinion of counsel satisfactory to the Surety, and
upon which the Surety shall be entitled to rely, stating that such
order is final and is not subject to appeal;
(iii) an assignment in such form as reasonably required by the
Surety, irrevocably assigning to the Surety all rights and claims of
the Servicer, the Collateral Agent and any Insured Party relating to
or arising under the Transaction Documents against the debtor which
made such preference payment or otherwise with respect to such
preference amount; and
(iv) appropriate instruments to effect (when executed by the
affected party) the appointment of the Surety as agent for the
Collateral Agent and any Insured Party in any legal proceeding
relating to such preference payment being in a form satisfactory to
the Surety.
(n) YEAR 2000 PROGRAM. The Servicer has taken all steps necessary
and appropriate to prevent any material difficulties in its computer and
information systems arising from or in connection with the information
processing challenges associated with the Year 2000, and will provide to
the Surety such information and reports as the Surety may reasonably
request from time to time with respect to such steps as have or will be
taken with respect thereto."
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SECTION 2.07. ADDITION OF SECTION 2.06 TO THE INSURANCE AGREEMENT. Section
2.06 is hereby added to the Insurance Agreement in appropriate numerical order
as follows:
"SECTION 2.06. NEGATIVE COVENANTS OF THE SERVICER. The Servicer
hereby agrees that during the Term of this Agreement, unless the Surety
shall otherwise expressly consent in writing:
(a) IMPAIRMENT OF RIGHTS. The Servicer shall not take any action, or
fail to take any action, if reasonably requested by the Surety, if such
action or failure to take action may interfere with the enforcement of any
rights of the Surety under or with respect to the Transaction Documents.
The Servicer shall give the Surety written notice of any such action or
failure to act on the earlier of: (i) the date upon which any publicly
available filing or release is made with respect to such action or failure
to act or (ii) promptly prior to the date of consummation of such action
or failure to act. The Servicer shall furnish to the Surety all
information requested by it that is reasonably necessary to determine
compliance with this paragraph.
(b) WAIVER, AMENDMENTS, ETC. Except in accordance with the
Transaction Documents, the Servicer shall not waive, modify or amend, or
consent to any waiver, modification or amendment of, any of the terms,
provisions or conditions of the Transaction Documents without the consent
of the Surety.
(c) RECEIVABLES; POLICIES. Except as otherwise permitted in the
Security Agreement, the Servicer shall not alter or amend any Receivable,
its credit policies, its collection policies or its charge-off policies in
a manner that materially adversely affects the Surety unless the Surety
shall have previously given its consent, which consent shall not be
unreasonably withheld.
(d) TRANSACTION DOCUMENTS. The Servicer will not at any time in the
future deny that the Transaction Documents constitute the legal, valid and
binding obligations of the Servicer."
SECTION 2.08. ADDITION OF THE SERVICER TO CERTAIN PROVISIONS. The words
"the Servicer" are hereby added following the phrase "the Transferor" in each
place such phrase appears in the following sections of the Insurance Agreement:
Sections 3.04(a), (except 3.04(a)(vi)); 3.04(d), 3.04(f), 3.05, 3.06, 4.01,
4.02, 4.03, 4.04, 5.01(except 5.01(c) and (e)), 5.02(a)(iii), 5.03, 6.05 and
6.06.
SECTION 2.09. ADDITION OF SECTION 3.01A. Section 3.01A is hereby added to
the Insurance Agreement in appropriate numerical order as follows:
"SECTION 3.01A. CONDITIONS PRECEDENT TO SERVICING TRANSFER. The
Surety hereby consents, subject to the conditions set forth herein, to the
Servicing Transfer. The Transferor and the Seller shall have complied with
the terms and satisfied the conditions precedent set forth below:
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(a) Receipt by the Surety of a fully executed copy of the
Amendments;
(b) Receipt by the Surety of the following opinions of counsel:
(i) The law firm of Buck, Keenan & Owens shall have issued its
favorable opinion, in form and substance acceptable to the Surety
and its counsel, regarding and the validity and enforceability of
the Amendments against the Transferor, the Servicer and the Seller,
and in-house counsel to the Collateral Agent shall have issued its
favorable opinion, in form and substance acceptable to the Surety
and its counsel, regarding and the validity and enforceability of
the Amendments against the Collateral Agent;
(ii) The law firm of Buck, Keenan & Owens shall have issued
its favorable opinions, in form and substance acceptable to the
Surety and its counsel and substantially similar to such opinion
given on the Closing Date, regarding the perfection of the
Collateral Agent's interest in the Receivables; and
(iii) The Surety shall have received such other opinions of
counsel, in form and substance acceptable to the Surety and its
counsel, addressing such other matters as the Surety may reasonably
request;
(c) Receipt of confirmation from Standard & Poor's and Moody's that
the rating of the Facility following the Servicing Transfer and without
regard to the Surety Bond is at least BBB- and Baa3, respectively;
(d) The representations and warranties of the parties hereto set
forth or incorporated by reference in this Amendment shall be true and
correct as of the date hereof;
(e) The Servicer will cause FIFSG to furnish a certificate to the
Surety to the effect that (i) the Financial Statements which have been
furnished to the Surety are, as of the date thereof, complete and correct
in all material respects; present fairly the financial condition of FIFSG
on a consolidated basis as of the date thereof; and have been prepared in
accordance with generally accepted accounting principles consistently
applied (except as noted therein and subject to year-end adjustments for
interim statements) and (ii) there has been no material adverse change in
such conditions or operations;
(f) Delivery of such other documents, customary closing
certificates, instruments, approvals or opinions and compliance with such
requirements and conditions as are reasonably requested by the Surety;
(g) No suit, action or other proceeding, investigation or
injunction, or final judgment relating thereto, shall be pending or
threatened before any court or governmental agency in which it is sought
to restrain or prohibit or to obtain damages or other relief in connection
with the Amendments or the consummation of the Servicing Transfer;
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(h) No statute, rule, regulation or order shall have been enacted,
entered or deemed applicable by any government or governmental or
administrative agency or court that would make the transactions
contemplated by any of the Amendments illegal or otherwise prevent the
consummation thereof; and
(i) No fact or event which results, or which with notice or the
passage of time, or both, would result in a Termination Event,
Amortization Event, Wind-Down Event or Event of Default shall have
occurred.
SECTION 2.10. AMENDMENTS TO SECTION 3.07.
(a) Section 3.07(b) of the Agreement is hereby amended as follows
(solely for convenience, added language is italicized and deleted language
has been stricken through):
"(b) ANYTHING in subsection 3.07(a) hereof to the contrary
notwithstanding, the Surety shall be entitled to reimbursement from
(I) the Seller (i) for payments made under the Surety Bond arising
as a result of the Transferor's failure to repurchase any Receivable
required to be repurchased pursuant to Section 3.1 of the Security
Agreement, or Section 3.02 of the Servicing Agreement, or the
Seller's failure to repurchase any Receivable required to be
repurchased pursuant to Section 6.2 of the Purchase Agreement and
(ii) FROM THE SERVICER for payments made under the Surety Bond,
arising as a result of the Servicer's failure to deposit into the
Collection Account any other amount required to be so deposited
pursuant to the Security Agreement, together with interest on any
and all amounts remaining unreimbursed (to the extent permitted by
law, if in respect to any unreimbursed amounts representing
interest) from the date such amounts became due until paid in full
(after as well as before judgment), at a rate of interest equal to
the Late Payment Rate."
(b) Section 3.07(e) of the Agreement is hereby amended as follows
(solely for convenience, added language is italicized and deleted language
has been stricken through):
"(e) The Seller, THE SERVICER and the Reserve Account Agent,
as the case may be, and in each case as to matters concerning
itself, agree to pay to the Surety as follows: with respect to the
Seller, interest on any and all amounts described in subclauses (b),
(c), (f) and (g) and with respect to the Reserve Account Agent,
interest on any and all amounts described in subclause (d) of this
Section 3.07 from the date payable or paid by such party until
payment thereof in full, payable to the Surety at the Late Payment
Rate per annum."
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(c) Section 3.07(f) of the Agreement is hereby amended as follows
(solely for convenience, added language is italicized and deleted language
has been stricken through):
"(f) The Collateral Agent, THE SERVICER, the Seller and the
Transferor agree to pay to the Surety as follows: any payments made
by the Surety on behalf of, or advanced to, the Collateral Agent,
THE SERVICER, the Seller or the Transferor, as the case may be,
consisting of any amounts payable by the Collateral Agent, THE
SERVICER, the Seller or the Transferor pursuant to the Transaction
Documents."
ARTICLE III
MISCELLANEOUS
SECTION 3.01. NOTICES. The following modifications are hereby made to
Section 6.01 of the Insurance Agreement as follows:
(a) The notice address for Texas Commerce Bank is hereby deleted.
(b) The following notice addresses are hereby added:
"To the Collateral Agent, Back-up Servicer and Custodian:
Norwest Bank Minnesota, National Association
Corporate Trust Services-Asset-Backed Administration
Norwest Center
Sixth & Marquette
Minneapolis, MN 55479-0070
Telecopy No.: (612) 667-3539
Confirmation: (612) 667-1117"
To the Servicer:
Auto Lenders Acceptance Corporation
c/o First Investors Financial Services Group, Inc.
Suite 710
675 Bering Drive
Houston, TX 77057
Attention: Tommy A. Moore, Jr.
Telecopy No.: 713-977-0657
Confirmation: 713-977-2600
To the Noteholder:
Enterprise Funding Corporation
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c/o Global Securitization Services, LLC
25 West 43rd St., Suite 704
New York, NY 10036
Attention: Kevin Burns
Telecopy No.: (212) 302-8767
Confirmation: (212)302-8331
SECTION 3.02. COUNTERPARTS. This Amendment may be executed in counterparts
by the parties hereto, and each such counterpart shall be considered an original
and all such counterparts shall constitute one and the same instrument.
SECTION 3.03. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAW PRINCIPLES THEREOF.
SECTION 3.04. LIMITED SCOPE. This Amendment is specific to the
circumstances described above and does not imply any future amendment or waiver
of rights allocated to the Surety under the Insurance Agreement.
SECTION 3.05. RATIFICATION. Except as expressly affected by the provisions
hereof, the Insurance Agreement as amended shall remain in full force and effect
in accordance with its terms and is hereby ratified and confirmed by the parties
hereto. On and after the date hereof, each reference in the Insurance Agreement
to "this Agreement", "hereunder", "herein" or words of like import shall mean
and be a reference to the Insurance Agreement as amended by this Amendment and
any reference to "the parties hereto", "no party hereto" or words of like import
shall be deemed to include all of the parties to this Amendment.
SECTION 3.06. NOTICE TO RATING AGENCIES. Promptly after the execution of
this Amendment, the Seller shall mail an executed copy of this Amendment to the
Rating Agencies. By execution of this Amendment, the parties acknowledge receipt
of notice of this Amendment.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS]
16.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all
as of the day and year first above mentioned.
MBIA INSURANCE CORPORATION
By _________________________________________
Title: _____________________________________
FIRST INVESTORS AUTO RECEIVABLES
CORPORATION, as Transferor
By _________________________________________
Title: _____________________________________
FIRST INVESTORS FINANCIAL SERVICES,
INC., as Seller
By _________________________________________
Title: _____________________________________
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Successor Collateral Agent,
Back-up Servicer and Custodian
By _________________________________________
Title: _____________________________________
NATIONSBANK, N.A., as Reserve Account Agent
By _________________________________________
Title: _____________________________________
AUTO LENDERS ACCEPTANCE
CORPORATION, as Servicer
By _________________________________________
Title: _____________________________________
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CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Initial Collateral Agent
By _________________________________________
Title: _____________________________________
EXHIBIT 10.60
SERVICING AGREEMENT
by and among
First Investors Auto Receivables Corporation
as Debtor
Norwest Bank Minnesota, National Association
as Back-up Servicer and Collateral Agent
and
Auto Lenders Acceptance Corporation
as Servicer
Dated as of
March 31, 1999
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Article I
DEFINITIONS
Section 1.01. Defined Terms...............................................
Article II
ADMINISTRATION AND SERVICING OF RECEIVABLES
Section 2.01. Appointment and Duties of the Back-up Servicer and
the Servicer................................................
Section 2.02. Collection of Receivable Payments; Defaulted
Receivables; Reporting Obligations..........................
Section 2.03. Realization Upon Receivables................................
Section 2.04. Physical Damage Insurance...................................
Section 2.05. Maintenance of Security Interests in Financed
Vehicles and Receivables....................................
Section 2.06. Covenants of Servicer; Notices..............................
Section 2.07. Repurchase of Receivables Upon Breach.......................
Section 2.08. Servicing Fee; Back-up Servicing Fee........................
Section 2.09. Annual Statement as to Compliance...........................
Section 2.10. Financial Statements; Annual Servicing Review...............
Section 2.11. Costs and Expenses..........................................
Section 2.12. Responsibility for Insurance Policies; Processing
of Claims Under Insurance Policies; Daily Records
and Reports.................................................
Section 2.13. Delivery of Documents to Collateral Agent...................
Section 2.14. Conveyance of Copies of Documents to the Servicer;
Indication of Debtor Ownership..............................
Section 2.15. Possession of Servicer Files................................
Section 2.16. Processing of Information...................................
Section 2.17. Warranties and Representations With Respect to
Compliance with Law and Enforcement.........................
Section 2.18. Standard of Care............................................
Section 2.19. Records.....................................................
Section 2.20. Inspection..................................................
Section 2.21. Enforcement.................................................
Section 2.22. Payment in Full on Receivable...............................
Section 2.23. Duties of Back-up Servicer..................................
Section 2.24. Assumption of Duties by Back-up Servicer....................
Section 2.25. Fidelity Bond...............................................
Section 2.26. Responsibilities of Back-up Servicer and Servicer
Section 2.27. Re-Liening..................................................
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Article III
ACCOUNTS; COLLECTIONS
Section 3.01. Accounts....................................................
Section 3.02. Collections.................................................
Section 3.03. Collection Account and Acknowledgement Letter...............
Article IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Representations and Warranties of the Servicer..............
Section 4.02. Representations and Warranties of the Back-up
Servicer....................................................
Section 4.03. Representations and Warranties of the Debtor................
Section 4.04. Survival of Representations and Warranties..................
Section 4.05. Merger or Consolidation of, or Assumption of the
Obligations of, or Resignation of Servicer..................
Article V
DEFAULT, REMEDIES AND INDEMNITY
Section 5.01. Termination Event...........................................
Section 5.02. Remedies....................................................
Section 5.03. Indemnity by the Servicer...................................
Section 5.04. Liability of the Back-up Servicer...........................
Section 5.05. Notification to Noteholder..................................
Section 5.06. Waiver of Termination Events................................
Section 5.07. Survival....................................................
Section 5.08. Servicer and Back-up Servicer Not to Resign.................
Article VI
TERMINATION OF AGREEMENT
Section 6.01. Term........................................................
Section 6.02. Effect of Termination.......................................
Section 6.03. Transfer of Servicing.......................................
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Article VII
MISCELLANEOUS PROVISIONS
Section 7.01. Amendment...................................................
Section 7.02. Waivers.....................................................
Section 7.03. Notices.....................................................
Section 7.04. Severability of Provisions..................................
Section 7.05. Rights Cumulative...........................................
Section 7.06. No Offset...................................................
Section 7.07. Inspection and Audit Rights.................................
Section 7.08. Powers of Attorney..........................................
Section 7.09. Assignment and Binding Effect...............................
Section 7.10. Captions....................................................
Section 7.11. Counterparts................................................
Section 7.12. Governing Law...............................................
Section 7.13. Parties.....................................................
Section 7.14. Relationship of the Parties.................................
Section 7.15. No Bankruptcy Petition Against the Debtor...................
Section 7.16. Third Party Beneficiaries...................................
Section 7.17. Other Agreements............................................
Section 7.18. Procedure for Indemnification...............................
Section 7.19. Reports to Holders..........................................
Section 7.20. Purchase and Subsequent Pledge..............................
EXHIBIT A-1 Monthly Servicer Report
EXHIBIT A-2 Officer's Certificate
EXHIBIT B Monthly Back-up Servicer Report
EXHIBIT C Forms of Late Notices Sent to Obligors Re: Delinquencies
EXHIBIT D Request for Release of Receivables File
EXHIBIT E [ ]'s Credit Policy
EXHIBIT F [ ]'s Collection Policy
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SERVICING AGREEMENT
This Servicing Agreement ("Servicing Agreement") is made as of the 31st
day of March, 1999, by and among First Investors Auto Receivables Corporation, a
Delaware corporation, as debtor (the "Debtor"), Norwest Bank Minnesota, National
Association, a national banking association, as back-up servicer (the "Back-up
Servicer") and as collateral agent (the "Collateral Agent"), and Auto Lenders
Acceptance Corporation, a Delaware corporation, as servicer ("the Servicer").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed thereto in that certain Security Agreement dated as of October 22, 1996
among the Debtor, Enterprise Funding Corporation ("the Company"), the Collateral
Agent, NationsBank, N.A., as Reserve Account Agent, MBIA Insurance Corporation
(the "Surety Bond Provider"), and First Investors Financial Services, Inc. (the
"Seller"), and as amended by that certain Amendment Number 1 to the Security
Agreement dated as of August 25, 1997 and that certain Amendment Number 2 to the
Security Agreement dated as of March 31, 1999 (hereafter as such agreement may
have been, or may from time to time be, amended, supplemented or otherwise
modified, the "Security Agreement").
PRELIMINARY STATEMENT
WHEREAS, pursuant to the Security Agreement and the Note Purchase
Agreement, the Debtor has issued the Note to the Company; and
WHEREAS, the Surety Bond Provider has issued its Surety Bond to provide
for the full and timely payment of all amounts of interest due on and principal
of the Note; and
WHEREAS, the Seller has acquired and will acquire certain Receivables
secured by security interests in Financed Vehicles; and
WHEREAS, pursuant to the Purchase Agreement, the Seller has absolutely
assigned and will absolutely assign Receivables to the Debtor from time to time;
and
WHEREAS, pursuant to the Security Agreement, the Debtor has pledged and
will pledge, among other things, the Receivables to the Collateral Agent for the
benefit of the Noteholder and the Surety Bond Provider; and
WHEREAS, pursuant to the terms of the Security Agreement, the Seller is
obligated to deliver or cause to be delivered to the Collateral Agent, the
documents to be included in the Custodian
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Files, which are to be held by the Collateral Agent in its capacity as custodian
pursuant to the terms of the Security Agreement; and
WHEREAS, the Debtor, the Collateral Agent, the Back-up Servicer and the
Servicer desire to enter into this Servicing Agreement pursuant to which the
Servicer and the Back-up Servicer will perform the duties as described herein.
NOW THEREFORE, in consideration of the covenants and conditions contained
in this Servicing Agreement, the parties, intending to be legally bound, hereby
agree as follows:
ARTICLE I.
DEFINITIONS
1.01. DEFINED TERMS. Capitalized and defined terms used but not defined in
this Servicing Agreement shall have the respective meanings assigned to them in
the Security Agreement, unless the context otherwise requires, and the
definitions of such terms are equally applicable both to the singular and plural
forms of such terms and to the masculine, feminine and neuter genders of such
terms.
"BACK-UP SERVICING FEE" shall have the meaning set forth in Section
2.08(a) hereof.
"COLLECTION ACCOUNT DEPOSITORY" shall mean the depository for the
Collection Account established pursuant to Section 4.1 of the Security
Agreement.
"COLLECTION POLICY" shall mean the Servicer's statement of policies
and procedures for the collection of Receivables in form and substance
acceptable to the Surety Bond Provider.
"CUSTODIAN" shall mean the Collateral Agent in its capacity
as custodian of the Custodian Files.
"CUSTODIAN FILES" shall have the meaning set forth in Section
2.13 hereof.
"ELIGIBLE SERVICER" shall mean the Servicer, the Back-up Servicer or
any entity which, at the time of its appointment as Servicer, (a) is legally
qualified and has the capacity to service the Receivables, (b) has demonstrated
(except that, with respect to the Back-up Servicer, the demonstration required
by this clause
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shall not apply) the ability to professionally and competently service a
portfolio of motor vehicle retail installment obligations in accordance with
high standards of skill and care and (c) is approved in writing by the Surety
Bond Provider. The determination of the qualifications specified in subsections
(a) and (b) of this definition shall be made by the Collateral Agent with the
prior written approval of the Surety Bond Provider.
"EXTENSION" shall have the meaning set forth in Section
2.02(a) hereof.
"FIFSGI" shall mean First Investors Financial Services
Group, Inc., a Texas corporation.
"GECC" and "GECC AGREEMENT" shall have the meanings set forth in
Section 2.01(g) hereof.
"INSURANCE POLICIES" means insurance policies covering the Financed
Vehicles or the Obligors, including VSI Insurance.
"MONTHLY SERVICER REPORT" shall mean the monthly report provided by
the Servicer as contemplated by Section 2.02(c) hereof.
"MOODY'S" shall mean Moody's Investors Service, Inc.
"RATING AGENCIES" shall mean Moody's and S&P.
"S&P" shall mean Standard & Poor's Ratings Services, a division of
McGraw-Hill Companies.
"SERVICING FEE" shall have the meaning set forth in Section
2.08(a) hereof.
"SERVICER FILES" shall have the meaning set forth in Section
2.15 hereof.
"SERVICER TERMINATION EVENT" shall have the meaning set forth in
Section 5.01 hereof.
"SUBSERVICER" shall have the meaning set forth in Section
2.01(g) hereof.
"SUBSERVICING AGREEMENT" shall have the meaning set forth in
Section 2.01(g) hereof.
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"SUCCESSOR SERVICER" shall mean the Back-up Servicer or any other
Eligible Servicer who succeeds to the authority, power, obligations and
responsibilities of the Servicer hereunder in accordance with the provisions of
Article V hereof.
"SUCCESSOR BACK-UP SERVICER" shall mean any Eligible Servicer who
succeeds to the authority, power, obligations and responsibilities of the
Back-up Servicer hereunder in accordance with the provisions of Article V
hereof.
"SURETY DEFAULT" shall have the meaning ascribed to it in the
Insurance Agreement.
"TRANSACTION DOCUMENTS" shall mean this Servicing Agreement,
the Security Agreement, the Purchase Agreement, the Note Purchase
Agreement, the Note and the Insurance Agreement.
ARTICLE II.
ADMINISTRATION AND SERVICING OF RECEIVABLES
2.01. APPOINTMENT AND DUTIES OF THE BACK-UP SERVICER AND THE SERVICER.
(a) The Debtor hereby appoints Norwest Bank Minnesota, National
Association as Back-up Servicer and Auto Lenders Acceptance Corporation as
Servicer. The Back-up Servicer and the Servicer shall perform the services
required of each pursuant to the terms of this Servicing Agreement. In
performing their respective duties hereunder, the Back-up Servicer and Servicer
shall have full power and authority to do or cause to be done any and all things
in connection with such servicing and administration which either may deem
necessary or desirable, within the terms of this Servicing Agreement.
(b) As of the date of this Servicing Agreement, each of the Back-up
Servicer and the Servicer is, and shall remain, for so long as it is acting as
Back-up Servicer or Servicer, an Eligible Servicer.
Compensation and expense reimbursement payable to the Back-up
Servicer and Servicer under this Servicing Agreement shall be payable from the
Collections as defined in the Security Agreement pursuant to the priority of
payment set forth in Section 5.1 of the Security Agreement, and except as
provided herein or in the Security Agreement, none of the Debtor, the Surety
Bond
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Provider, the Collateral Agent or the Noteholder will have any liability to the
Back-up Servicer or the Servicer with respect thereto; provided, however, that
the Debtor shall remain liable to the extent of funds available pursuant to
Section 5.1(xi) of the Security Agreement (and not from any other source) for
any fees, expenses and indemnities due and payable to the Servicer and any fees,
expenses and indemnities due and payable to the Back-up Servicer which have not
been paid from the Collections.
(c) The Surety Bond Provider, or if a Surety Default has occurred
and is continuing, the Collateral Agent at the direction of the Noteholder,
shall be entitled to terminate the services of the Servicer or the Back-up
Servicer under this Servicing Agreement, upon the occurrence of a Servicer
Termination Event, in each case in accordance with the terms and conditions
hereof; provided, however, that in the event of termination of the Servicer, the
Back-up Servicer shall act directly as Servicer unless a different Successor
Servicer is appointed in accordance herewith and, with prior written notice to
the Rating Agencies, the Surety Bond Provider shall direct the Debtor to enter
into a servicing agreement with such Successor Servicer (that shall be an
Eligible Servicer) acceptable to the Rating Agencies and the Surety Bond
Provider and which will be bound by the terms of such servicing agreement. In
the event of termination of the Back-up Servicer or the Successor Servicer, the
Surety Bond Provider, or if a Surety Default has occurred and is continuing, the
Collateral Agent at the direction of the Noteholder shall appoint a Successor
Servicer or a Successor Back-up Servicer, as the case may be, and shall direct
the Debtor to enter into a servicing agreement with a Successor Back-up Servicer
(that shall be an Eligible Servicer) or Servicer (that shall be an Eligible
Servicer), as the case may be, which will be bound by the terms of such
servicing agreement.
(d) Other than as set forth in Section 7.16 below, this Servicing
Agreement shall be deemed to be among the Back-up Servicer, the Collateral
Agent, the Servicer and the Debtor; the Surety Bond Provider and the Noteholder
shall not be deemed parties hereto and neither the Surety Bond Provider, the
Collateral Agent nor the Noteholder shall have any obligations, duties or
liabilities with respect to the Back-up Servicer or the Servicer except as set
forth herein and in the Security Agreement. In the Security Agreement, the
Debtor has agreed that the Collateral Agent, in its name or (to the extent
required by law) in the name of the Debtor, may (but is not required to) enforce
all rights of the Debtor and all obligations of the Servicer and the Back-up
Servicer under, and shall be entitled to all benefits of, this Servicing
Agreement for and on behalf of the Noteholder and the Surety Bond Provider,
whether or not the Debtor is in default
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thereunder. The Servicer, in making collections of Receivable payments pursuant
to Section 2.02 hereof, shall be acting as agent for the Collateral Agent, and
shall be deemed to be holding such funds in trust on behalf of, and as agent
for, the Collateral Agent.
(e) In the event the Back-up Servicer shall for any reason no longer
be acting as such (including by reason of a Servicer Termination Event as
specified in Section 5.01 hereof), the Successor Back-up Servicer shall
thereupon assume all of the rights and obligations of the outgoing Back-up
Servicer under this Servicing Agreement. In such event, the Successor Back-up
Servicer shall be deemed to have assumed all of the outgoing Back-up Servicer's
interest herein and to have replaced the outgoing Back-up Servicer as a party to
this Servicing Agreement to the same extent as if this Servicing Agreement had
been assigned to the Successor Back-up Servicer, except that the outgoing
Back-up Servicer shall not thereby be relieved of any liability or obligations
on its part under this Servicing Agreement arising prior to such replacement.
The outgoing Back-up Servicer shall, at the reasonable expense of the Debtor
pursuant to the priority of payment set forth in Section 5.1 of the Security
Agreement, deliver to the Successor Back-up Servicer all documents and records
relating to this Servicing Agreement and the Receivables then being serviced
hereunder and an accounting of amounts collected and held by it and otherwise
use its best efforts to effect the orderly and efficient transfer of this
Servicing Agreement to the Successor Back-up Servicer. Compensation and expense
reimbursement of the outgoing Back-up Servicer shall be payable through the date
that the outgoing Back-up Servicer ceases to render services.
(f) The Debtor shall, at its own expense, duly and punctually
perform and observe its obligations to the Back-up Servicer and the Servicer
under this Servicing Agreement in accordance with the terms hereof. In addition,
promptly following a request from the Collateral Agent to do so and at the
Debtor's own expense, the Debtor shall take all such lawful action as the
Collateral Agent (which shall so request if directed by the Noteholder, with the
consent of the Surety Bond Provider, to do so) may request to compel or secure
the performance and observance by the Back-up Servicer and the Servicer of each
of its respective obligations to the Debtor under or in connection with this
Servicing Agreement, in accordance with the terms hereof, and in effecting such
request shall exercise any and all rights, remedies, powers and privileges
lawfully available to the Debtor under or in connection with this Servicing
Agreement to the extent and in the manner directed by the Collateral Agent,
including, without limitation, the transmission of notices of default on the
part of
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the Back-up Servicer or the Servicer hereunder and the institution of legal or
administrative actions or proceedings to compel or secure performance by the
Back-up Servicer or the Servicer of its respective obligations under this
Servicing Agreement.
(g) The Servicer or the Back-up Servicer, if applicable, may enter
into one or more subservicing agreements (each, a "Subservicing Agreement") with
one or more Subservicers (each, a "Subservicer") for the servicing and
administration of certain of the Receivables; provided that, unless the Surety
Bond Provider otherwise agrees in writing, the only servicing functions that may
be performed by Subservicers of the initial Servicer are (i) sending "welcome
letters" to new Obligors, (ii) sending payment coupons to each Obligor on a
monthly basis, (iii) receipt and posting of all payments received with respect
to the Receivables, (iv) tracking of Obligor compliance with physical damage
insurance, (v) repossessing Financed Vehicles, (vi) preparing Financed Vehicles
for sale and representing the Servicer throughout the related vehicle auction
process and (vii) other functions pursuant to any other Subservicing Agreement
approved in writing by the Surety Bond Provider. References in this Servicing
Agreement to actions taken or to be taken by the Servicer in servicing the
Receivables include actions taken or to be taken by a Subservicer on behalf of
the Servicer. Each Subservicing Agreement will be upon such terms and conditions
as are not inconsistent with this Servicing Agreement and as the Servicer and
the Subservicer have agreed. The Servicer and a Subservicer may enter into
amendments thereto; provided, however, that any such amendments shall be
consistent with and not violate the provisions of this Servicing Agreement. As
of the date hereof, it is acknowledged that Receivables heretofore pledged by
the Debtor pursuant to the Security Agreement (as well as any Additional
Receivables pledged hereafter pursuant to the Security Agreement at any time
prior to the Servicing Transfer, as defined below) (the "Prior Receivables") are
being serviced or may hereafter be serviced by General Electric Capital
Corporation ("GECC") pursuant to that certain Servicing Agreement dated as of
October 22, 1996 between the Debtor and GECC, as amended (the "GECC Agreement").
Accordingly, the parties hereto agree that, any other provision hereof to the
contrary notwithstanding, (i) such arrangement shall continue until the
servicing of such Receivables is transferred to the Servicer in connection with
the termination of the GECC Agreement (the "Servicing Transfer"), (ii) Auto
Lenders Acceptance Corporation shall not service any Receivables hereunder until
such Servicing Transfer, (iii) no such Servicing Transfer shall occur unless the
prior written consent of the Surety Bond Provider has been obtained, and (iv)
only until such Servicing Transfer, any other provision hereof to the contrary
notwithstanding and only with
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respect to the Prior Receivables, the GECC Agreement shall be deemed a
Subservicing Agreement and GECC shall be deemed a Subservicer for all purposes
of this Servicing Agreement.
(h) The Back-up Servicer may be removed by the Surety Bond Provider
or, if a Surety Default has occurred and is continuing, by the Collateral Agent
at the direction of the Noteholder, with or without cause upon thirty days'
written notice to the Back-up Servicer; provided, however, that (A) such removal
may be made immediately and shall not require notice if: (i) the Back-up
Servicer shall consent to the appointment of a conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets and
liabilities, or similar proceedings of or relating to the Back-up Servicer or
relating to all or substantially all of its property; or (ii) a decree or order
of a court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities, or
similar proceedings, or for the winding up or liquidation of its affairs shall
have been entered against the Back-up Servicer, and such decree or order shall
have remained in force undischarged or unstayed for a period of 60 days; or
(iii) the Back-up Servicer shall become insolvent or admit in writing its
inability to pay its debts generally as they become due, file a petition to take
advantage of any applicable debtor relief laws, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations; or
(iv) a petition is filed against the Back-up Servicer seeking relief under any
applicable debtor relief laws of the United States or any state or other
competent jurisdiction, and such petition, order, judgment or decree shall have
remained in force undischarged or unstayed for a period of 60 days after its
entry; and (B) such removal shall not be effective unless and until a Successor
Back-up Servicer is appointed by the Surety Bond Provider or, if a Surety
Default has occurred and is continuing, by the Collateral Agent at the direction
of the Noteholder; provided, that the Back-up Servicer may petition a court of
competent jurisdiction to appoint a Successor Back-up Servicer if one is not
chosen within 60 days.
2.02. COLLECTION OF RECEIVABLE PAYMENTS; DEFAULTED RECEIVABLES; REPORTING
OBLIGATIONS.
(a) The Servicer shall be responsible for collection of payments
called for under the terms and provisions of the Receivables, as and when the
same shall become due. The Servicer, consistent with the standard of care set
forth in Section 2.18, shall service, manage, administer and make collections on
the Receivables on behalf of the Debtor and shall have full power and
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authority, acting alone and/or through Subservicers as provided in Section
2.01(g), to do any and all things which it may deem necessary or desirable in
connection therewith which are consistent with this Servicing Agreement. The
Servicer may extend the then-current maturity date of any Receivable by one
month (an "Extension"); provided however, that (i) no Extension may be granted
with respect to any Receivable unless at least six scheduled payments have been
received with respect to such Receivable; (ii) Extensions may be granted in the
aggregate for no more than one month for each twelve months of the original term
of a Receivable, and (iii) Extensions may be granted no more than twice for
periods of one month each during the preceding twelve calendar months. The
Servicer may in its discretion waive any late payment charge or any other fees
that may be collected in the ordinary course of servicing a Receivable. In no
event shall the principal balance of a Receivable be reduced, except in
connection with a settlement in the event the Receivable becomes a Defaulted
Receivable. The Servicer shall also enforce all rights of the Debtor under the
Originator Agreements including, but not limited to, the right to require an
Originator to repurchase Receivables for breaches of representations and
warranties made by the respective Originators.
(b) If the full amount of a scheduled payment due under a Receivable
is not timely received, the Servicer shall make reasonable and customary efforts
to collect such Receivable in accordance with this Servicing Agreement and the
procedures set forth in the Collection Policy. The Servicer shall use its best
efforts, consistent with the standard of care set forth in Section 2.18 hereof,
to collect funds on a Defaulted Receivable; such collections shall be deposited
into the Collection Account by the close of business on the Business Day
following receipt thereof.
(c) The Servicer shall (i) subsequent to the Servicing Transfer,
provide monthly reports substantially in the form of Exhibit A-1 hereto, each
under a certificate substantially in the form of Exhibit A-2 hereto, to the
Collateral Agent, and (ii) prior to the Servicing Transfer and with respect to
the Prior Receivables, provide, or cause to be provided, to the Collateral Agent
the monthly reports described in Section 4.09 of the GECC Agreement.Subsequent
to the Servicing Transfer, the Servicer shall also provide, by mail and
facsimile transmission, copies of such reports and certificates to the Back-up
Servicer, the Surety Bond Provider, the Noteholder, the Rating Agencies and any
other Persons identified on a list provided to the Servicer, as such list may be
amended from time to time, regarding (i) payments received from or on behalf of
the Obligors and deposited to the Collection Account (identified in Section 3.03
hereof) representing collections with
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respect to the Receivables, (ii) other amounts received with respect to the
Receivables, including Liquidation Proceeds or the proceeds of repurchases under
the Purchase Agreement, (iii) other matters relating to the Receivables
including delinquencies, repossessions and filing and payment of claims under
Insurance Policies, (iv) financial information used to calculate whether certain
Termination Events or Amortization Events have occurred, (v) certain items
relating to any outstanding Interest Rate Cap, and (vi) other items reflected on
Exhibit A-1. Such reports shall be delivered to the parties specified above no
later than the fifteenth calendar day after the end of each Collection Period.
(d) The Back-up Servicer shall provide monthly reports to the
Collateral Agent, and the Collateral Agent shall provide copies of such reports
to the Rating Agencies, the Surety Bond Provider, the Noteholder, the Debtor and
any other Persons identified on a list provided to the Back-up Servicer, as such
list may be amended from time to time, substantially in the form of Exhibit B
hereto. Such report shall be dated as of the Determination Date for each
Remittance Date and delivered to the Collateral Agent on or before the close of
business on the fourth Business Day preceding such Remittance Date.
(e) The Servicer shall, upon request, promptly, but no later than
two Business Days after receipt of such request provide, or cause to be
provided, to the Back-up Servicer and the Surety Bond Provider copies of all
monthly bank statements, notices, reports or other documents received from the
Collateral Agent and from the Collection Account Depository regarding funds held
in or transferred to or from all applicable accounts.
(f) Within ten calendar days following the last day of each
Collection Period, the Servicer shall forward to the Back-up Servicer, via
reputable overnight courier or electronic transmission, a computer diskette in a
format mutually acceptable to the Servicer and the Back-up Servicer, of its
computerized records reflecting (i) all collections received during such
Collection Period with respect to the Receivables, (ii) the Principal Balance of
the Receivables as of the last day of the Collection Period, (iii) information
as of the last day of such Collection Period regarding the number of Defaulted
Receivables, (iv) the number of repossessed Financed Vehicles and the number of
sales of repossessed Financed Vehicles as of the last day of such Collection
Period and (v) all other information necessary for the Back-up Servicer to
perform its duties under Section 2.23. Promptly upon discovery by the Back-up
Servicer or receipt by the Back-up Servicer of notice of a Servicer Termination
Event with respect to the Servicer, the Back-up Servicer shall input such
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information onto its computer system so that such information is immediately
available to the Back-up Servicer.
2.03. REALIZATION UPON RECEIVABLES.
(a) Unless otherwise contemplated by the Collection Policy, in the
event a Receivable becomes or is reasonably anticipated to become a Defaulted
Receivable, the Servicer, itself or through the use of independent contractors
or agents shall, consistent with the standard of care set forth in Section 2.18,
repossess or otherwise convert the ownership of the Financed Vehicle securing
such Receivable. In accordance with the priority of payment set forth in Section
5.1 of the Security Agreement, all costs and expenses incurred by the Servicer
in connection with the repossession of the Financed Vehicles securing such
Receivables shall be reimbursed to the Servicer from the Collection Account on
the Remittance Date relating to the Collection Period in which the Servicer
delivered to the Collateral Agent an itemized statement of such costs and
expenses. Notwithstanding the foregoing and consistent with the terms of this
Servicing Agreement, the Servicer shall not be obligated to repossess or take
any action with respect to a Defaulted Receivable if, in its reasonable judgment
consistent with the servicing standards specified in Section 2.18, the
Liquidation Proceeds are expected to be less than the costs and expenses of such
repossession or action.
(b) The Servicer, itself or through the use of independent
contractors or agents to the extent allowed by Section 2.01(g), shall follow
practices consistent with the standard of care set forth in Section 2.18,
including the Collection Policy, in its servicing of automotive receivables,
which may include selling the Financed Vehicle, or requesting a Subservicer to
sell the Financed Vehicle, at public or private sale; provided, however, that
the Servicer, itself or through the use of independent contractors or agents to
the extent allowed by Section 2.01(g), shall, in accordance with its Collection
Policy, maximize the sales proceeds for each repossessed Financed Vehicle. The
foregoing shall be subject to the provision that, in any case in which the
Financed Vehicle shall have suffered damage, the Servicer shall not expend funds
for the repair or the repossession of such Financed Vehicle unless the Servicer
shall determine in its discretion that such repair or repossession should
increase the Liquidation Proceeds by an amount greater than the amount of such
expenses.
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2.04. PHYSICAL DAMAGE INSURANCE.
(a) The Servicer, itself or through the use of independent
contractors or agents to the extent allowed by Section 2.01(g), in accordance
with the standard of care set forth in Section 2.18, shall, upon receipt of
notice that an Obligor's physical damage insurance covering the Financed Vehicle
has lapsed or is otherwise not in force, send written notice to such Obligor
stating that such Obligor is required to maintain physical damage insurance
covering the Financed Vehicle throughout the term of the Receivable.
(b) In the event of any physical loss or damage to a Financed
Vehicle from any cause, whether through accidental means or otherwise, the
Servicer shall have no obligation to cause the affected Financed Vehicle to be
restored or repaired. However, the Servicer shall comply with the provisions of
any insurance policy or policies directly or indirectly related to any physical
loss or damage to a Financed Vehicle.
(c) The Servicer will administer the filing of claims under the
Insurance Policies as described under Section 2.12 hereof.
2.05. MAINTENANCE OF SECURITY INTERESTS IN FINANCED VEHICLES AND
RECEIVABLES.
(a) The Debtor hereby directs the Servicer to (i) take or cause to
be taken such steps as are necessary, in accordance with the standard of care
set forth in Section 2.18, to maintain perfection of the security interest
created by any Receivable covering a Financed Vehicle which has been relocated
in such a manner as to require such steps, and (ii) within two Business Days of
its receipt thereof forward to the Collateral Agent, on behalf of the Debtor,
via reputable overnight courier, any certificate of title to a Financed Vehicle
received by the Servicer for any reason with respect to a Financed Vehicle
relating to a Receivable serviced hereunder.
(b) The Servicer shall, at the direction of the Debtor, the Surety
Bond Provider or the Collateral Agent (which shall so direct if directed by the
Noteholder to do so), take any action necessary to preserve and protect the
security interests of the Debtor and the Collateral Agent in the Receivables,
including any action specified in any opinion of counsel delivered to the
Servicer.
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2.06. COVENANTS OF SERVICER; NOTICES.
(a) The Servicer shall (i) not release any Financed Vehicle securing
any Receivable from the security interest granted therein by such Receivable in
whole or in part except in the event of payment in full by the Obligor
thereunder or upon transfer of the Financed Vehicle to a successor purchaser
following repossession by the Servicer or a Subservicer, (ii) not impair the
rights of the Debtor, the Noteholder, the Surety Bond Provider or the Collateral
Agent in the Receivables, (iii) not increase the number of scheduled payments
due under a Receivable except as permitted herein, (iv) prior to the payment in
full, not sell, pledge, assign, or transfer to any other Person, or grant,
create, incur, assume, or suffer to exist any Lien on any Receivable pledged to
the Collateral Agent or any interest therein, (v) immediately notify the Debtor,
the Back-up Servicer, the Surety Bond Provider and the Collateral Agent of the
existence of any Lien on any Receivable (other than the Lien of the Collateral
Agent) if the Servicer has actual knowledge thereof, (vi) defend the right,
title, and interest of the Debtor, the Noteholder, the Surety Bond Provider and
the Collateral Agent in, to and under the Receivables pledged to the Collateral
Agent, against all claims of third parties claiming through or under the
Servicer, (vii) deposit into the Collection Account all payments received by the
Servicer with respect to the Receivables in accordance with this Servicing
Agreement, (viii) comply in all respects with the terms and conditions of this
Servicing Agreement relating to the obligation of the Debtor to remove
Receivables from the Collateral pursuant to the Security Agreement, and the
obligation of the Seller to reacquire the Receivables from the Debtor pursuant
to the Purchase Agreement, (ix) promptly notify the Debtor, the Back-up
Servicer, the Surety Bond Provider and the Collateral Agent of the occurrence of
any Servicer Termination Event and any breach by the Servicer of any of its
covenants or representations and warranties contained herein, (x) promptly
notify the Debtor, the Surety Bond Provider, the Back-up Servicer and the
Collateral Agent of the occurrence of any event which, to the knowledge of the
Servicer, would require that the Debtor make or cause to be made any filings,
reports, notices, or applications or seek any consents or authorizations from
any and all government agencies, tribunals, or authorities in accordance with
the UCC and any state vehicle license or registration authority as may be
necessary or advisable to create, maintain, and protect a first-priority
security interest of the Collateral Agent in, to, and on the Financed Vehicles
and a first-priority security interest of the Collateral Agent in, to, and on
the Receivables pledged to the Collateral Agent, (xi) take all reasonable action
necessary to maximize the returns pursuant to the Insurance Policies, (xii)
deliver or cause to be delivered to
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the Debtor the Receivable Schedule no later than two Business Days preceding any
Addition Date, and (xiii) deliver or cause to be delivered to the Collateral
Agent within two Business Days preceding any Addition Date, the documents to be
included in the Custodian Files with respect to the Receivables pledged on such
Addition Date.
(b) The Servicer shall, within three Business Days of its receipt
thereof, respond to reasonable written directions or written requests for
information that the Debtor, the Collateral Agent, the Noteholder or the Surety
Bond Provider might have with respect to the administration of the Receivables.
(c) The Servicer will promptly advise the Debtor, the Surety Bond
Provider, the Back-up Servicer and the Collateral Agent of any inquiry received
from an Obligor which requires the consent of the Debtor or the Collateral
Agent. Inquiries requiring consent of the Debtor or the Collateral Agent may
include, but are not limited to, inquiries about settlement of any unasserted
claim or defense, or compromise of any amount an Obligor owes.
(d) The Servicer will not make any material change to the Collection
Policy with respect to the Receivables without the consent of the Surety Bond
Provider, which consent shall not be unreasonably withheld.
2.07. REPURCHASE OF RECEIVABLES UPON BREACH. The Servicer shall inform the
Debtor, the Surety Bond Provider, the Collateral Agent, the Noteholder and the
Back-up Servicer promptly, in writing, upon the discovery of the occurrence of
any Repurchase Event (as defined in Section 6.2 of the Purchase Agreement);
provided, however, that the Servicer shall have no duty to investigate or
determine the existence of any breach except as specified herein. Unless waived
by the Surety Bond Provider, the Servicer shall deliver to the Debtor a written
demand to cause the Seller to reacquire the affected Receivable as provided in
the Purchase Agreement. The sole remedy of the Debtor, the Collateral Agent, the
Surety Bond Provider (except as otherwise provided in the Insurance Agreement),
or the Noteholder against the Seller with respect to any receivable shall be the
repurchase thereof as provided in the Purchase Agreement.
2.08. SERVICING FEE; BACK-UP SERVICING FEE.
(a) Pursuant to the Security Agreement, the Debtor has agreed to
cause the Collateral Agent to pay out of monthly collections with respect to the
Receivables to the Back-up Servicer and the Servicer each a monthly servicing
fee ("Back-up Servicing
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Fee" and "Servicing Fee," respectively) with respect to each Receivable serviced
under this Servicing Agreement; provided, however, that the Debtor hereby agrees
not to amend or consent to any amendment of any provision of the Security
Agreement relating to compensation of the Back-up Servicer or the Servicer
without the prior written consent of such Person and the Surety Bond Provider.
(b) The Back-up Servicing Fee with respect to each Collection Period
shall be equal to the quotient obtained by dividing (i) 0.03% of the aggregate
Principal Balance of all Receivables being serviced hereunder as of the
beginning of such Collection Period, by (ii) 12. The Back-Up Servicer shall also
be entitled to reimbursement of its conversion costs and other transition
expenses associated herewith (not to exceed $50,000 in the aggregate). The
Back-up Servicing Fee with respect to a Collection Period shall be due on the
succeeding Remittance Date. In the event the initial Back-up Servicer becomes a
Successor Servicer pursuant to this Servicing Agreement, the Back-up Servicer
shall be paid a fee not to exceed the greater of (i) the Servicing Fee or (ii)
the current market rate at the time for servicing receivables similar in nature
to the Receivables. Such current market rate shall be determined by taking the
lowest of three servicing bids obtained by the Back-up Servicer from third party
servicers selected by the Back-up Servicer and approved by the Surety Bond
Provider.
(c) The Servicing Fee with respect to each Collection Period shall
be equal to the quotient obtained by dividing (i) 2-1/2% of the aggregate
Principal Balance of all Receivables being serviced hereunder as of the
beginning of such Collection Period, by (ii) 12. The Servicing Fee with respect
to a Collection Period shall be due on the succeeding Remittance Date. In the
event this Servicing Agreement is terminated on a date other than the last day
of a Collection Period or a Receivable is designated to be no longer outstanding
for purposes of this Servicing Agreement, then the Servicing Fee for such period
or with respect to such Receivable, as the case may be, shall be determined on a
pro rata basis.
2.09. ANNUAL STATEMENT AS TO COMPLIANCE. The Servicer shall deliver to the
Collateral Agent, and the Collateral Agent shall deliver to the Debtor, the
Back-up Servicer, the Noteholder, the Surety Bond Provider, the Rating Agencies
and any Persons identified on a list provided to the Servicer, as such list may
be amended from time to time, on or before July 31 of each year beginning July
31, 2000, an Officer's Certificate, dated effective as of the preceding April
30, stating that (i) a review of the activities of the Servicer during the
preceding 12-month period (or
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such shorter period, as is applicable) and of its performance under this
Servicing Agreement during such period has been made under such officer's
supervision, (ii) based on such review, the Servicer has fulfilled all its
obligations under this Servicing Agreement throughout such period, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to such officer and the nature and status thereof and the
remedies therefor being pursued; and (iii) to the best of such officer's
knowledge, each Subservicer has fulfilled its obligations under its Subservicing
Agreement in all material respects, or if there has been a material default in
the fulfillment of such obligations, specifying such default known to such
officers and the nature and status thereof. This Section shall not apply to the
Back-up Servicer acting as Servicer.
2.10. FINANCIAL STATEMENTS; ANNUAL SERVICING REVIEW.
(a) The Servicer, shall deliver, in duplicate, to the Rating
Agencies, the Noteholder, the Surety Bond Provider, the Back-up Servicer, the
Collateral Agent and any other Persons identified on a list provided to the
Servicer, as such list may be amended from time to time:
(i) as soon as available, but in no event later than 45 days
after the end of each fiscal quarter of FIFSGI (commencing with the quarter
ending July 31, 1999), an unaudited consolidated balance sheet and income
statement (prepared in accordance with generally accepted accounting principles
applied on a consistent basis, and subject to year end adjustments) for FIFSGI
covering the preceding quarter, in each case certified by the chief financial
officer of FIFSGI to be true, accurate and complete copies of such financial
statements; and
(ii) on or before ninety (90) days after the end of each
fiscal year of FIFSGI (commencing with the fiscal year ending April 30, 1999)
the consolidated financial statements of FIFSGI containing a report of a firm of
independent public accountants selected by FIFSGI to the effect that such firm
has examined the books and records of FIFSGI and that, on the basis of such
examination conducted in compliance with generally accepted audit standards,
such financial statements accurately reflect the financial condition of FIFSGI,
in each case certified by the chief financial officer of FIFSGI, to be true,
accurate and complete copies of such financial statements.
(b) The Servicer will cause the same firm of independent public
accountants which prepared the audited financial statements pursuant to
paragraph (a)(ii) of this Section to deliver to the
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Rating Agencies, the Noteholder, the Surety Bond Provider, the Back-up Servicer,
the Collateral Agent and any Persons identified on a list provided to the
Servicer, as such list may be amended from time to time, upon receipt of such
covenants and representations from such Persons as the independent public
accountants may require, and as soon as practicable, but in any event within 120
days after the end of each fiscal year, an annual review of the Servicer's
procedures and operations in form and substance reasonably satisfactory to the
Surety Bond Provider, prepared by such firm of independent public accountants,
dated as of April 30 of each year beginning April 30, 2000 and substantially
stating to the effect that (i) such accountants have examined the accounts and
records of the Servicer relating to the Collateral and the conveyed property in
all similar asset-based financing transactions sponsored by the Debtor or an
affiliate thereof (which records shall be described in one or more schedules to
such statement), (ii) such firm has compared the information contained in
certain Monthly Servicer Reports (and similar reports for other similar
asset-based financing transactions sponsored by the Debtor or an affiliate
thereof) delivered in the relevant period with information contained in the
accounts and records or other relevant source documents for such period, and
(iii) on the basis of the procedures performed, whether the information examined
and contained in such Monthly Servicer Reports (and similar reports for such
other similar asset-based financing transactions) delivered on the relevant
period reconciles and agrees with the information contained in the accounts and
records or other relevant source documents except for such exceptions as such
independent public accountants believe to be immaterial and such other
exceptions as shall be set forth in such statement.
2.11. COSTS AND EXPENSES.
(a) Except as set forth in Section 2.11(b) below, all costs and
expenses incurred by the Servicer in carrying out its duties hereunder, fees and
expenses of independent public accountants with respect to preparation of the
financial statements and reports described in Section 2.10(b) and (c) and all
other fees and expenses (including all fees and expenses arising as a result of
the occurrence of a Re-Liening Trigger) not expressly permitted pursuant to the
priorities of Section 5.1 of the Security Agreement to be for the account of the
Debtor, shall be paid or caused to be paid by the Servicer out of the
compensation to be paid to the Servicer pursuant to Section 2.08.
(b) During the term of this Servicing Agreement, the Servicer shall
be reimbursed pursuant to Section 5.1 of the Security Agreement for actual
out-of-pocket costs and expenses
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incurred in connection with the sale or other disposal of a Financed Vehicle or
collection of amounts due with respect to a Receivable including, but not
limited to, the following (to the extent such cost or expense relates to the
sale or other disposal or collection of amounts due with respect to a Receivable
or a Financed Vehicle):
(i) Any compensation paid to outside legal counsel retained to
protect the interests of the Debtor, the Collateral Agent, the Surety Bond
Provider or the Noteholder in the assets administered under this Servicing
Agreement as the Servicer deems necessary in accordance with its normal
procedures, provided that any such compensation paid under this clause (i) shall
not exceed $10,000 per annum, with any such compensation in excess of such
limitation being paid pursuant to Section 5.1(xi) of the Security Agreement;
(ii) Any compensation paid to independent repossessors,
auctioneers or appraisers and any direct out of pocket expenses arising from or
related to realization of the Receivables administered under this Servicing
Agreement;
(iii) Any sales, franchise, income, excise, personal property
or other taxes arising from or related to any Receivables administered under
this Servicing Agreement;
(iv) Any parking or other fees, insurance, title or similar
fees arising from or related to any Receivables administered under this
Servicing Agreement;
(v) Any expenses for special forms and materials, freight,
tapes, communications, lock-box and other bank service charges, and other
expenses approved by the Debtor; and
(vi) Any expenses and fees paid to outside accountants in
connection with the procedures required to be performed pursuant to Section
2.10(b) hereof, provided that any such fees and expenses paid under this clause
(vi) shall not exceed $10,000 per annum, with any such fees and expenses in
excess of such limitation being paid pursuant to Section 5.1(xi) of the Security
Agreement.
2.12. RESPONSIBILITY FOR INSURANCE POLICIES; PROCESSING OF CLAIMS UNDER
INSURANCE POLICIES; DAILY RECORDS AND REPORTS.
(a) The Servicer, on behalf of the Debtor, will
administer and enforce all rights and responsibilities of the
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holder of the Receivables provided for in the Insurance Policies
relating to the Receivables.
(b) The Servicer will administer the filings of claims under the
Insurance Policies by filing the appropriate notices related to claims,
including initial notices of loss, as well as claims with the respective
carriers or their authorized agents all in accordance with the terms of the
Insurance Policies. The Servicer shall use reasonable efforts to file such
claims on a timely basis after obtaining knowledge of the events giving rise to
such claims, subject to the servicing standard set forth in Section 2.18 hereof.
The Servicer will utilize such notices, claim forms and claim procedures as are
required by the respective insurance carriers.
The Servicer shall not be required to pay any premiums or, other
than administering the filing of claims and performing reporting requirements
specified in the Insurance Policies in connection with filing such claims,
perform any obligations of the named insured under such Insurance Policies. The
Servicer shall not be responsible to the Debtor, the Surety Bond Provider, the
Noteholder or the Collateral Agent (i) for any act or omission to act done in
order to comply with the requirements or satisfy any provisions of the Insurance
Policies or (ii) for any act, absent willful misconduct or negligence, or
omission to act done in compliance with this Servicing Agreement. In the case of
any inconsistency between this Servicing Agreement and the terms of any
Insurance Policy, the Servicer shall comply with the latter. A copy of any claim
shall be furnished to the Surety Bond Provider upon the Surety Bond Provider's
request.
2.13. DELIVERY OF DOCUMENTS TO COLLATERAL AGENT. The Servicer shall
deliver or cause to be delivered all of the following documents with respect to
the Receivables in its possession to the Collateral Agent via reputable
overnight courier service for receipt by the Collateral Agent within two (2)
Business Days preceding the applicable Addition Date:
(a) the sole original counterpart of the retail installment contract
or promissory note and security agreement evidencing each such Receivable and
any and all amendments thereto; and
(b) (i) the original certificate of title or copies of
correspondence to the appropriate State title registration agency, and all
enclosures thereto, for issuance of the original certificate of title or (ii) if
the appropriate State title registration agency issues a letter or other form of
evidence of
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lien in lieu of a certificate of title, the original lien entry letter or form
or copies of correspondence to such State title registration agency, and all
enclosures thereto, for issuance of the original lien entry letter or form (the
items in (a) - (b) are collectively referred to as the "Custodian Files").
While in its possession, the Servicer shall hold the Custodian Files
in trust on behalf of the Collateral Agent and shall only check out the
Custodian Files with a Request for Release of Receivable File in the form of
Exhibit C hereto.
2.14. MAINTENANCE OF COPIES OF DOCUMENTS BY THE SERVICER.
(a) The Servicer shall maintain legible copies (in electronic or
hard-copy form, in the discretion of the Servicer) or originals of the following
documents in its files with respect to each Receivable and the Financed Vehicle
related thereto:
(i) application of the Obligor for credit;
(ii) a copy (but not the original) of the retail installment
contract or promissory note and security agreement and any amendments thereto,
provided, however, that the Servicer shall deliver any original amendments to
the retail installment contract or promissory note and security agreement to the
Collateral Agent immediately following execution thereof;
(iii) a copy (but not the original) of a certificate of title
with a lien notation or an application therefor;
(iv) a certificate of insurance or application therefor with
respect to the Financed Vehicle securing the Receivable;
(v) a copy of the proof of income and references, credit
report and approval sheet utilized by the Seller in the underwriting of the
Receivable;
(vi) the invoice for the Financed Vehicle (in the case of a
new vehicle) or the bookout sheet (in the case of a used vehicle);
(vii) Obligor's order for the Financed Vehicle, together with
proof (if any) of downpayment;
(viii) a copy of the service contract, if any, on the Financed
Vehicle;
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(ix) a copy of the credit life insurance policy, if any, and
the credit disability insurance policy, if any, on the Obligor relating to the
Financed Vehicle; and
(x) such other documents as the Servicer may reasonably
request in order to accomplish its duties under this Servicing Agreement.
(b) The Servicer shall keep books and records, satisfactory to the
Surety Bond Provider, pertaining to each Receivable and shall make periodic
reports in accordance with this Servicing Agreement. Such records may not be
destroyed or otherwise disposed of except as provided herein and as allowed by
applicable laws, regulations or decrees. All documents, whether developed or
originated by the Servicer or not, reasonably required to document or to
properly administer any loan shall remain at all times the property of the
Debtor and shall be held in trust by the Servicer. The Servicer shall not
acquire any property rights with respect to such records, and shall not have the
right to possession of them except as subject to the conditions stated in this
Servicing Agreement. The Servicer shall bear the entire cost of restoration in
the event any Servicer Files (as defined below) shall become damaged, lost or
destroyed while in the Servicer's possession or control.
2.15. POSSESSION OF SERVICER FILES. Unless otherwise specified herein, the
Servicer shall maintain physical possession of the instruments and documents
listed in paragraph 2.14(a) above; such other instruments or documents that
modify or supplement the terms or conditions of any of the foregoing; and, all
other instruments, documents, correspondence and memoranda generated by or
coming into the possession of the Servicer (including, but not limited to,
insurance premium receipts, ledger sheets, payment records, insurance claim
files, correspondence and current and historical computerized data files) that
are required to document or service any Receivable. Collectively, all of the
documents described in this Section 2.15 with respect to a Receivable are
referred to as the "Servicer Files". The Servicer hereby agrees that the
computer files and other physical records of the Receivables maintained by the
Servicer will bear an indication reflecting that the Receivables are owned by
the Debtor and pledged to the Collateral Agent for the benefit of the Noteholder
and the Surety Bond Provider and that all Servicer Files shall remain the
property of the Debtor and shall be held in trust by the Servicer. The Servicer
shall respond to all third party inquiries concerning ownership of the
Receivables by indicating that the Receivables have been assigned by the Seller
to Debtor and pledged to the
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Collateral Agent for the benefit of the Noteholder and the Surety Bond Provider.
2.16. PROCESSING OF INFORMATION. Information with respect to each
Receivable is to be recorded into the Servicer's loan management and accounting
system.
2.17. WARRANTIES AND REPRESENTATIONS WITH RESPECT TO COMPLIANCE WITH LAW
AND ENFORCEMENT.
(a) The Debtor hereby represents to the Servicer, based on certain
representations the Seller has made to the Debtor concerning the Receivables in
the Purchase Agreement, and on which representations the Debtor has relied in
acquiring the Receivables and with respect to the pledge of the Receivables to
the Collateral Agent, that each Receivable and the sale of the related Financed
Vehicle complied at the time it was originated or made and on the applicable
Addition Date, as the case may be, does comply in all material respects with all
requirements of applicable federal, state and local laws, and regulations
thereunder.
(b) The Servicer warrants, represents and covenants that in the
event that the Servicer realizes upon any Receivable, the methods utilized by
the Servicer to realize upon such Receivable or otherwise enforce any provisions
of the Receivable, will not subject the Servicer, the Debtor, the Noteholder,
the Surety Bond Provider or the Collateral Agent to liability under any federal,
state or local law, and that such enforcement by the Servicer will be conducted
in accordance with the provisions of this Servicing Agreement and the standard
of care set forth in Section 2.18 hereof including the Collection Policy.
2.18. STANDARD OF CARE. In performing its duties and obligations hereunder
and in administering and enforcing the Insurance Policies relating to the
Receivables pursuant to this Servicing Agreement, the Servicer will comply with
all applicable state and federal laws and shall service and administer the
Receivables by employing such procedures (including collection procedures) and
degree of care, in each case consistent with prudent industry standards, as are
customarily employed by the Servicer in servicing and administering motor
vehicle retail installment sales contracts and notes owned or serviced by the
Servicer comparable to the Receivables. In performing such duties, so long as
Auto Lenders Acceptance Corporation is the Servicer (i) it shall comply with the
Collection Policy, and (ii) it shall not make any material amendment to such
Collection Policy without the prior written consent of the Surety Bond Provider
which consent shall not be unreasonably withheld; provided, however, that
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notwithstanding the foregoing, the Servicer shall not, except pursuant to a
judicial order from a court of competent jurisdiction, or as otherwise required
by applicable law or regulation, release or waive the right to collect the
unpaid balance on any Receivable. In performing its duties and obligations
hereunder, the Servicer shall comply with all applicable federal and state laws
and regulations, shall maintain all state and federal licenses and franchises
necessary for it to perform its servicing responsibilities hereunder, and shall
not impair the rights of the Debtor, the Surety Bond Provider or the Collateral
Agent on behalf of the Noteholder in the Collateral.
2.19. RECORDS. The Servicer shall maintain or cause to be maintained such
books of account and other records as will enable the Debtor and the Surety Bond
Provider to determine the status of each Receivable and any Insurance Policy
relating thereto.
2.20. INSPECTION.
(a) At all times during the term hereof, the Servicer shall afford
the Debtor, the Surety Bond Provider, the Noteholder, the Back-up Servicer and
the Collateral Agent and their authorized agents, upon three Business Days'
prior written notice, reasonable access during normal business hours to the
Servicer's records and files relating to the Receivables and the Collateral and
will cause its personnel to assist in any examination of such records by the
Debtor, the Surety Bond Provider, the Noteholder, the Back-up Servicer or the
Collateral Agent, and will permit such parties to discuss the affairs, finances
and accounts of the Servicer with the chief operating officer and chief
financial officer of the Servicer. The examination referred to in this Section
2.20 will be conducted in a manner which does not unreasonably interfere with
the Servicer's normal operations or customer or employee relations. Without
otherwise limiting the scope of the examination the Debtor, the Surety Bond
Provider, the Noteholder, the Back-up Servicer or the Collateral Agent may,
using generally accepted audit procedures, verify the status of each Receivable
and review the Servicer Files and records relating thereto for conformity to
Monthly Servicer Reports prepared pursuant to Section 2.02(c) and compliance
with the standards represented to exist as to each Receivable in this Servicing
Agreement. Nothing herein shall require the Debtor, the Surety Bond Provider,
the Noteholder, the Back-up Servicer or the Collateral Agent to conduct any
inspection pursuant to this Section. Such parties may, with the Servicer's
consent, which shall not be unreasonably withheld or delayed, discuss the
affairs, finances and accounts of the Servicer with the Servicer's independent
accountants, provided that an officer of the
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Servicer shall have the right to be present during such discussions.
(b) At all times during the term hereof, the initial Servicer shall
keep available at its office located at 300 Interstate North, Atlanta, Georgia
30559 (or such other location as to which it shall give written notice to the
Collateral Agent, the Noteholder and the Surety Bond Provider), for inspection
by the Debtor, the Surety Bond Provider, the Back-up Servicer, the Collateral
Agent and Noteholder a copy of the Receivables Schedule, as amended.
(c) All information obtained by the Debtor, the Surety Bond
Provider, the Back-up Servicer or the Collateral Agent regarding the Obligors
and the Receivables, whether upon exercise of its rights under this Section 2.20
or otherwise, shall be maintained by the Debtor, the Surety Bond Provider, the
Back-up Servicer or the Collateral Agent in confidence and shall not be
disclosed to any other person, except as otherwise required by applicable law or
regulation.
(d) The Servicer will, at the Debtor's, the Noteholder's or the
Surety Bond Provider's request, provide the Debtor, the Noteholder or the Surety
Bond Provider with a data extract disk of portfolio information.
(e) The Servicer and the Secured Parties and their agents and
representatives shall at all times have full and free access during normal
business hours to all computer tapes, books, correspondence and records of the
Back-up Servicer insofar as they relate to the Receivables and the Surety Bond
Provider and its agents and representatives may examine the same, take extracts
therefrom and make photocopies thereof, and the Back-up Servicer agrees to
render to the Servicer, the Surety Bond Provider or its agents and
representatives at the Back-up Servicer's cost and expense such clerical and
other assistance as may be reasonably requested with regard thereto. The Secured
Parties each agree that all such information, practices, books, correspondence
and records are to be regarded as confidential information and that (a) it shall
retain in strict confidence and shall use its best efforts to ensure that its
representatives retain in strict confidence and will not disclose without the
prior written consent of the Back-up Servicer any or all of such information
practices, books, correspondence and records furnished to it and (b) it will
not, and it will use its best efforts (in the case of the Surety Bond Provider,
consistent with Section 2.02 of the Insurance Agreement) to ensure that its
agents and representatives will not, make any use whatsoever (other than for
purposes contemplated by this
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Agreement) of any of such information practices, computer tapes books,
correspondence and records without the prior written consent of the Back-up
Servicer, unless such information (i) is generally available to the public, (ii)
is required by law, regulation, or court order to be disclosed or is requested
by any governmental authority having authority over the Secured Parties, or is
necessary to preserve any of the Secured Parties' rights under or to enforce any
provision of the Security Agreement, or (iii) is required by the Rating Agencies
in connection with their rating of the related Commercial Paper or the implied
rating of the facility.
2.21. ENFORCEMENT.
(a) The Servicer will, consistent with the standard of care required
by Section 2.18 hereof, act with respect to the Receivables and the Insurance
Policies in such manner as will, in the reasonable judgment of the Servicer,
maximize the amount to be received by the Collateral Agent with respect thereto.
(b) The Servicer shall to the extent consistent with the servicing
standards set forth in Section 2.18, including the Collection Policy, or at the
written direction of the Surety Bond Provider sue to enforce or collect upon the
Receivables and the Insurance Policies (including unpaid claims), in its own
name, if possible, or as agent for the Debtor or the Collateral Agent. If the
Servicer commences a legal proceeding to enforce a Receivable or an Insurance
Policy, the act of commencement shall be deemed to be an automatic assignment of
the Receivable and the related rights under the Insurance Policies by the Debtor
to the Servicer for purposes of collection only. If, however, in any enforcement
suit or legal proceeding it is held that the Servicer may not enforce a
Receivable or an Insurance Policy on the grounds that it is not a real party in
interest or a holder entitled to enforce the Receivable or the Insurance Policy,
the Debtor shall, at the Servicer's request, assign the Receivable or the
Insurance Policy to the Servicer to the limited extent necessary to enforce the
Receivable or the Insurance Policy, or take such steps as the Debtor deems
necessary to enforce the Receivable or the Insurance Policy, including bringing
suit in its name.
(c) The Servicer shall exercise any rights of recourse against third
persons that exist with respect to any Receivable in accordance with the
standard of care required by Section 2.18 hereof. In exercising such recourse
rights, the Servicer is hereby authorized on the Debtor's behalf to reassign the
Receivable and to deliver the certificate of title to the Financed Vehicle to
the person against whom recourse exists at the price set forth in the document
creating the recourse.
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(d) The Servicer may grant to the Obligor on any Receivable that has
been repaid in full any rebate, refund or adjustment that the Servicer in good
faith believes is required because of prepayment in full of the Receivable, and
may deduct the amount of any such rebate, refund or adjustment from the amount
otherwise payable by the Servicer into the Collection Account. The Servicer may
not permit any rescission or cancellation of any Receivable nor may it take any
action with respect to any Receivable or Insurance Policy which would materially
impair the rights of the Collateral Agent, the Surety Bond Provider or the
Noteholder therein or in the proceeds thereof.
2.22. PAYMENT IN FULL ON RECEIVABLE. Upon payment in full on any
Receivable, the Servicer shall notify the Collateral Agent prior to the next
succeeding Determination Date by a certificate and Request for Release of
Receivable File substantially in the form of Exhibit C hereto (which certificate
shall include a statement of an officer of the Servicer to the effect that all
amounts received in connection with such payment in full which are required to
be deposited in the Collection Account pursuant to Sections 3.02 and 3.03 hereof
have been so deposited).
2.23. DUTIES OF BACK-UP SERVICER.
(a) The Back-up Servicer will perform the services set forth in this
Section 2.23 which shall not be delegated to the Servicer. The Back-up Servicer
shall, unless it is prohibited as a matter of law, as evidenced by an opinion of
counsel provided for in Section 5.08 and unless a different Successor Servicer
is appointed by the Surety Bond Provider, service the Receivables upon receipt
of written notice of a Servicer Termination Event by the Servicer under this
Servicing Agreement. The Back-up Servicer will, on a periodic basis, perform the
functions specified in this Section 2.23, provided that the Back-up Servicer
shall be entitled to request of and receive from the Collateral Agent and the
Servicer, as appropriate, all information necessary to conduct tests or make
reports in a timely manner as specified below and, except as otherwise specified
herein, the Back-up Servicer shall be entitled to assume for all purposes that
the information received by it is true, correct and complete, and the Back-up
Servicer shall be fully protected in relying upon such information without any
independent investigation or audit to prove the facts stated therein. The
Back-up Servicer shall utilize such methods as it deems reasonable and necessary
to reconcile information provided by the Servicer with the cash balances held by
the Collateral Agent.
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(b) Prior to each Remittance Date, the Back-up Servicer shall review
the Monthly Servicer Report related thereto and shall:
(i) determine that such Monthly Servicer Report is
complete on its face;
(ii) review the amounts on deposit in the Collection Account
against the monthly distribution amounts set forth in such Monthly Servicer
Report and reasonably determine whether the amount on deposit is sufficient to
pay such distribution amounts; and
(iii) determine the amount on deposit in the Reserve Account.
(c) The Back-up Servicer shall, within 30 days of the receipt
thereof, load the computer tape or diskette received from the Servicer pursuant
to Section 2.02(f) hereof, and confirm that such computer tape or diskette is in
readable form and calculate and confirm the aggregate Principal Balance of
Receivables as of the most recent Remittance Date.
In addition, the Back-up Servicer shall confirm that the Delinquency
Ratio, Average Delinquency Ratio and Net Default Ratio as set forth in the
Monthly Servicer Report, are accurate based solely on a comparison to the
computer tape referred to above.
(d) In the event of any discrepancy between the information set
forth in subparagraphs (b) and (c), as calculated by the Servicer, from that
determined or calculated by the Back-up Servicer, the Back-up Servicer shall
promptly notify the Servicer, the Collateral Agent, the Noteholder and the
Surety Bond Provider of such discrepancy. If within ten days of such notice
being provided to the Servicer, the Back-up Servicer and the Servicer are unable
to resolve such discrepancy, the Back-up Servicer shall promptly notify the
Rating Agencies, the Surety Bond Provider, the Collateral Agent, the Noteholder
and any other Persons identified on a list provided to the Back-up Servicer, as
such list may be amended from time to time, of such discrepancy.
(e) Other than as specifically set forth elsewhere in this Servicing
Agreement, the Back-up Servicer shall have no obligation to supervise, verify,
monitor or administer the performance of the Servicer and shall have no
liability for any action taken or omitted by the Servicer.
(f) The Back-up Servicer shall consult fully with the Servicer as
may be necessary from time to time to perform or carry out the Back-up
Servicer's obligations hereunder, including the
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obligation, if requested by the Surety Bond Provider, to succeed at any time to
the duties and obligations of the Servicer as servicer under Section 5.02
hereof.
2.24. ASSUMPTION OF DUTIES BY BACK-UP SERVICER. At any time following the
assumption of duties of the Servicer by the Back-up Servicer or the designation
of a Successor Servicer pursuant to section 2.01(c), the Servicer shall, at the
Collateral Agent's or the Surety Bond Provider's request, (A) assemble all of
the records relating to the Collateral including all Receivable Files, and shall
make the same available to the Collateral Agent and the Surety Bond Provider at
a place selected by the Collateral Agent and the Surety Bond Provider or its
designee, and (B) segregate all cash, checks and other instruments received by
it from time to time constituting collections of Collateral in a manner
acceptable to the Collateral Agent and the Surety Bond Provider and shall
promptly upon receipt but no later than one Business Day after receipt, remit
all such cash, checks and instruments, duly endorsed or with duly executed
instruments of transfer, to the Collection Account Depository or its designee.
2.25. ERRORS AND OMISSIONS INSURANCE. The Servicer has obtained, and shall
continue to maintain in full force and effect, errors and omissions insurance
and employee theft insurance of a type and in such amount as is customary for
servicers engaged in the business of servicing automobile receivables. The scope
of such insurance coverage shall include the acts and omissions of Subservicers
or, if that is not the case with respect to any Subservicer, the Servicer shall
require such Subservicer to maintain such insurance or a bond substantially
equivalent thereto. Annually and more frequently upon request of the Debtor, the
Surety Bond Provider, the Collateral Agent or the Back-up Servicer, the Servicer
shall cause to be delivered to the Collateral Agent a certification evidencing
coverage under such insurance. Any such insurance shall not be canceled or
modified in a materially adverse manner without thirty days' prior written
notice to the Debtor, the Surety Bond Provider, the Collateral Agent, the
Noteholder and the Rating Agencies. No provision of this Section 2.25 requiring
the maintenance of insurance shall diminish or relieve the Servicer from its
duties and obligations as set forth in this Servicing Agreement.
2.26. RESPONSIBILITIES OF BACK-UP SERVICER AND SERVICER. Neither the
Back-up Servicer nor the Servicer shall have any duties, obligations or
responsibilities other than those specifically expressed and set forth herein
and no implied obligations of the Back-up Servicer or the Servicer shall be read
into this Servicing Agreement. Neither the Back-up Servicer nor
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the Servicer nor any of their respective directors, officers, agents or
employees shall be liable to any person, including, without limitation, the
Servicer or the Back-up Servicer, as the case may be, or the Debtor, the Surety
Bond Provider, the Collateral Agent or the Noteholder in connection with this
Servicing Agreement, except for the breach of any of its representations and
warranties or obligations under this Servicing Agreement or for the negligence,
bad faith or willful misconduct of the Back-up Servicer or the Servicer, as the
case may be, or any of their respective officers, directors, agents or
employees. The Back-up Servicer may rely on and shall be protected in acting
upon, or in refraining from acting in accordance with, any resolution, officer's
certificate, certificate of auditors or any other certificate, instrument,
opinion, report, notice, request, consent, order, appraisal, bond or other paper
or document reasonably believed by it to be genuine and correct and to have been
signed or presented by the proper person or persons. Without limiting the
foregoing, the Back-up Servicer (i) may consult, at its expense, with legal
counsel (including the Collateral Agent's or the Back-up Servicer's),
independent public accountants and other experts selected by it with reasonable
care and shall not be liable for any action reasonably taken or omitted to be
taken by it in accordance with the advice of such counsel, accountants or
experts, (ii) shall not be responsible to the Debtor, the Surety Bond Provider,
the Servicer, the Collateral Agent or any other person for any recitals,
statements, warranties or representations made in or in connection with this
Servicing Agreement, the Transaction Documents or any other agreement, document
or instrument executed in connection therewith by any other person, (iii) shall
not be responsible for the actions or omissions of any other person, including,
without limitation, the Servicer, the Seller, the Debtor, the Surety Bond
Provider, the Collateral Agent and the Noteholder unless such act or omission
was caused by an act or omission of the Back-up Servicer, (iv) except as
provided in this Servicing Agreement or any Transaction Document, shall not have
any duty to ascertain or to inquire as to the performance or observance of any
of the terms, covenants or conditions of the Security Agreement or any other
Transaction Document on the part of any person, or to inspect the property
(including the books and records) of the Seller, the Surety Bond Provider, the
Debtor or the Servicer, (v) except as otherwise provided herein, shall not be
charged with the knowledge of any breach of representation or warranty by any
other Person, or the failure of any other Person to comply with its obligations,
hereunder or under any other Transaction Document, or of the occurrence of any
Servicer Termination Event unless a responsible officer of the Back-up Servicer
has received written notice of the same from the Servicer, the Surety Bond
Provider or the Collateral Agent, as the case may
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be, or otherwise has actual knowledge of such breach or Servicer Termination
Event, (vi) shall not be responsible to any Person for the due execution,
legality, validity and enforceability against the other parties of this
Servicing Agreement, and (vii) shall incur no liability under or in respect of
this Servicing Agreement by acting upon any notice (including notice by
telephone), consent, certificate or other instrument or writing (which may be
telex or telecopy) reasonably believed by it to be genuine and signed, sent or
communicated by the proper party or parties.
It is agreed and understood that the Back-up Servicer is responsible
for providing the services described in Section 2.23 only in accordance with the
information as shall have been timely supplied to it by the Servicer, the
Collateral Agent or the Collection Account Depository, as the case may be. The
Back-up Servicer shall incur no liability for any failure by the Servicer, the
Collateral Agent or the Collection Account Depository to furnish information
required of it, nor shall the Back-up Servicer be responsible for the content or
accuracy of any information provided to it by any such Person, unless required
by the Transaction Documents to do so. Except as may be expressly provided
herein or in the Security Agreement, the Back-up Servicer shall have no duty to
supervise, investigate or audit any records or activities of the Servicer with
respect to the servicing of the Collateral. The Back-up Servicer shall have no
responsibility or liability for any acts or omissions of the Servicer with
respect to the Collateral.
The Back-up Servicer shall not be required to expend or risk its own
funds or otherwise incur financial liability in the performance of any of its
duties hereunder, or in the exercise of any of its rights or powers, if the
repayment of such funds or adequate written indemnity against such risk or
liability is not reasonably assured to it in writing prior to the expenditure or
risk of such funds or incurrence of financial liability.
2.27. RE-LIENING. Upon the occurrence of a Re-Liening Trigger, the Surety
Bond Provider may instruct the Collateral Agent and the Servicer to take or
cause to be taken such actions as may, in the judgment of the Surety Bond
Provider or its counsel, be necessary to perfect or re-perfect the security
interests in the Financed Vehicles in the name of the Collateral Agent by
amending the title documents relating to such Financed Vehicles or by such other
reasonable means as may, in the judgment of the Surety Bond Provider or its
counsel, be necessary or prudent. The Collateral Agent and the Servicer shall
take or cause to be taken such actions. The Servicer hereby agrees to pay for
all Re-Liening Expenses related to such perfection or re-perfection and to take
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all action necessary therefor, including the preparation, execution and delivery
of all such documents as may be requested by the Collateral Agent or the
Servicer in connection therewith. The Servicer shall on the date hereof grant to
the Collateral Agent an irrevocable power of attorney, pursuant to which the
Servicer shall appoint the Collateral Agent as its attorney-in-fact, such
appointment being coupled with an interest, to take any and all steps required
to be performed by it pursuant to this Section 2.27 including execution of
certificates of title or any other documents in the name and stead of the
Servicer. If at any time a Person other than Auto Lenders Acceptance Corporation
becomes the Servicer, Auto Lenders Acceptance Corporation shall grant to such
Successor Servicer, promptly after its appointment as such, a power of attorney
as described in the preceding sentence.
ARTICLE III.
ACCOUNTS; COLLECTIONS
3.01. ACCOUNTS. There has been established pursuant to the Security
Agreement the Collection Account in the name of the Collateral Agent for the
benefit of the Noteholder and the Surety Bond Provider.
3.02. COLLECTIONS.
(a) The Servicer shall remit or cause a Subservicer to remit first,
to a lockbox account maintained with the Collection Account Depository and
second, to the Collection Account described in Section 3.03 hereof, and to no
other account, as soon as practicable, but in no event later than the Collection
Account Depository's close of business on the Business Day after receipt thereof
in the lockbox, all Collections received during the Collection Period, in
respect of a Receivable being serviced by the Servicer, and all payments or
other amounts, if any, made by or on behalf of an Obligor or received by the
Servicer with respect to any Receivable.
(b) With respect to checks or drafts (i) issued by an insurer for
payment of loss on Receivables, (ii) made payable to the named insured, the
Collateral Agent or any other Person, and (iii) received by the Servicer, the
Servicer shall take all necessary action to document the receipt of each such
draft on the day of receipt thereof and forward the original draft by reputable
overnight courier to the Collateral Agent at the address set forth in Section
7.03 hereof for receipt by the Collateral Agent on the following Business Day
for immediate endorsement and return to the Servicer via overnight courier.
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3.03. COLLECTION ACCOUNT AND ACKNOWLEDGEMENT LETTER.
(a) The trust department of the Collateral Agent is hereby
designated as the initial Collection Account Depository with respect to the
Receivables serviced under this Servicing Agreement. The Debtor shall provide
thirty days' notice to the Servicer, the Collateral Agent, the Surety Bond
Provider and the Back-up Servicer of its appointment of a successor Collection
Account Depository which shall be acceptable to the Rating Agencies, the Surety
Bond Provider and the Collateral Agent and which shall hold the Collection
Account under the terms and conditions outlined herein and in the Security
Agreement.
(b) Except as otherwise provided herein, the Servicer shall deposit
or cause to be deposited into the Collection Account all amounts (including late
payments) remitted by Obligors to the Servicer under the terms of the
Receivables within one Business Day after receipt thereof by the lockbox;
provided, however, that the Servicer shall be entitled to reimbursement of all
amounts remitted by or on behalf of the Obligors to the Servicer under the terms
of, or with respect to, the Receivables, which amounts represent late fees or
prepayment charges, including administrative fees or similar charges allowed by
applicable law.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
4.01. REPRESENTATIONS AND WARRANTIES OF THE SERVICER. The initial Servicer
hereby represents, warrants and covenants to the Back-up Servicer, the Debtor,
the Surety Bond Provider, the Noteholder and the Collateral Agent that as of the
date of this Servicing Agreement and, for so long as the initial Servicer shall
continue to act as Servicer hereunder:
(a) The Servicer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware;
(b) All necessary corporate, regulatory or other similar action has
been taken to authorize and empower the Servicer and the officers or
representatives acting on the Servicer's behalf, and the Servicer has full power
and authority to execute, deliver and perform this Servicing Agreement;
(c) This Servicing Agreement has been duly authorized, executed and
delivered by the Servicer and the performance and compliance with the terms of
this Servicing Agreement will not
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violate the Servicer's certificate of incorporation or bylaws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach of, any Transaction
Document or any other contract, loan, lease, credit agreement or any other
agreement or instrument to which the Servicer is a party or which may be
applicable to the Servicer or any of its assets;
(d) The Servicer is duly licensed and qualified to perform the
functions specified herein and this Servicing Agreement constitutes a valid,
legal and binding obligation of the Servicer, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and other laws affecting the enforcement of creditors' rights generally and to
general principles of equity;
(e) The Servicer is not in violation of, and the execution, delivery
and performance of this Servicing Agreement by the Servicer will not constitute
a violation with respect to any order or decree of any court or any order,
regulation or demand of any federal, state, municipal or governmental agency,
which violation might have consequences that would materially and adversely
affect the condition (financial or other) or operations of the Servicer or its
properties or might have consequences that would affect the performance of its
duties hereunder;
(f) No proceeding of any kind, including but not limited to
litigation, arbitration, judicial or administrative, is pending or threatened
against or contemplated by the Servicer which would under any circumstance have
an adverse effect on the execution, delivery, performance or enforceability of
this Servicing Agreement;
(g) No information, officer's certificate or statement furnished in
writing or report delivered to the Collateral Agent, the Debtor, the Surety Bond
Provider, the Back-up Servicer or the Noteholder by the Servicer required under
this Servicing Agreement contains any untrue statement of a material fact or
omits a material fact necessary to make the information, certificate, statement
or report not misleading; provided, that the Servicer makes no representation or
warranty with respect to any information incorporated into or forming the basis
of any officer's certificate, information, statement or report provided by the
Servicer that is provided to the Servicer by any other Person;
(h) The Servicer has the knowledge, the experience and the systems,
financial and operational capacity available to timely perform each of its
obligations hereunder; and
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(i) The Servicer has, with respect to the Receivables, complied in
all material respects with the Collection Policy.
4.02. REPRESENTATIONS AND WARRANTIES OF THE BACK-UP SERVICER. The Back-up
Servicer hereby represents, warrants and covenants to the Debtor, the Surety
Bond Provider, the Noteholder, the Servicer and the Collateral Agent that as of
the date hereof or as of such date specifically provided herein:
(a) The Back-up Servicer is a national banking association duly
organized, validly existing and authorized to engage in a banking business under
the federal laws of the United States of America;
(b) All necessary corporate, regulatory or other action has been
taken to authorize and empower the Back-up Servicer and the officers or
representatives acting on the Back-up Servicer's behalf to perform and comply
with the Back-up Servicer's obligations under this Servicing Agreement, and the
Back-up Servicer has full power and authority, to execute, deliver and perform
this Servicing Agreement;
(c) The execution and delivery of this Servicing Agreement by the
Back-up Servicer and its performance and compliance with the terms of this
Servicing Agreement will not violate the Back-up Servicer's articles of
association or bylaws or constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, or result in the
breach of, any material contract, security agreement, loan, credit agreement or
any other agreement or instrument to which the Back-up Servicer is a party or
which may be applicable to the Back-up Servicer or any of its assets;
(d) This Servicing Agreement constitutes a legal, valid and binding
obligation of the Back-up Servicer, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the enforcement of creditors' rights generally and
to general principles of equity;
(e) The Back-up Servicer is not in violation of, and the execution,
delivery and performance of this Servicing Agreement by the Back-up Servicer
will not constitute a violation with respect to, any applicable order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or governmental agency, which violation might have consequences that would
materially and adversely affect the condition (financial or other) or operations
of the Back-up Servicer or its properties or
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might have consequences that would materially adversely affect the performance
of its duties hereunder;
(f) No proceeding of any kind, including but not limited to
litigation, arbitration, judicial or administrative, is pending or, to the
knowledge of the Back-up Servicer, contemplated or threatened against the
Back-up Servicer which would under any circumstance have an adverse effect on
the execution, delivery, performance or enforceability of this Servicing
Agreement by or against the Back-up Servicer; and
(g) No certificate of an officer of the Back-up Servicer, statement
of the Back-up Servicer furnished in writing or report of the Back-up Servicer
delivered to the Debtor, the Surety Bond Provider, the Collateral Agent, the
Servicer or any Noteholder by the Back-up Servicer required under this Servicing
Agreement contains any untrue statement of a material fact or omits a material
fact necessary to make the officer's certificate, statement or report not
misleading; provided, that the Back-up Servicer makes no representation or
warranty with respect to any information incorporated into or forming the basis
of any certificate, statement or report that is provided to the Back-up Servicer
by any other Person.
4.03. REPRESENTATIONS AND WARRANTIES OF THE DEBTOR. The Debtor hereby
represents, warrants and covenants to the Back-up Servicer, the Servicer, the
Noteholder, the Surety Bond Provider and the Collateral Agent that as of the
date of this Servicing Agreement or as of such date specifically provided
herein:
(a) The Debtor is a corporation duly organized and validly existing
under the laws of the State of Delaware and has full power and authority to
execute and deliver this Servicing Agreement and to perform the terms and
provisions hereof;
(b) The execution, delivery and performance by the Debtor of this
Servicing Agreement have been duly authorized by all necessary action by the
Debtor, do not require any approval or consent of any Person, do not and will
not conflict with any material provision of the certificate of incorporation of
bylaws of the Debtor, and do not and will not conflict with or result in a
breach which would constitute a material default under any agreement binding
upon or applicable to it or such of its property which is material to it, or any
law or governmental regulation or court decree applicable to it or such material
property, and this Servicing Agreement is the legal, valid and binding
obligation of the Debtor enforceable in accordance with its terms except as the
same may be limited by insolvency, bankruptcy, reorganization or
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other laws relating to or affecting the enforcement of creditors' rights or by
general equity principles; and
(c) No litigation or administrative proceeding of or before any
court, tribunal or governmental body is presently pending, or to the knowledge
of the Debtor threatened, against the Debtor or its properties or with respect
to this Servicing Agreement, which, if adversely determined would, in the
opinion of the Debtor, have a material adverse effect on the transactions
contemplated by this Servicing Agreement.
4.04. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in this Article IV are continuous and shall survive the
date of this Servicing Agreement. Upon discovery by any of the Debtor, the
Collateral Agent, the Back-up Servicer or the Servicer of a breach of any of the
foregoing representations and warranties, the party discovering such breach
shall give prompt written notice to the other parties hereto, including the
Surety Bond Provider and the Collateral Agent.
4.05. MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE OBLIGATIONS OF, OR
RESIGNATION OF SERVICER. Any Person (a) into which the Servicer may be merged or
consolidated, (b) which may result from any merger or consolidation to which the
Servicer shall be a party, (c) which may succeed to the properties and assets of
the Servicer substantially as a whole, or (d) which may succeed to the duties
and obligations of the Servicer under this Servicing Agreement following the
resignation of the Servicer subject to Section 2.01 hereof, which Person
executes an agreement of assumption to perform every obligation of the Servicer
hereunder, shall, with the prior written consent of the Surety Bond Provider, be
the successor to the Servicer under this Servicing Agreement without further act
on the part of any of the parties to this Servicing Agreement; provided,
however, that (i) prior written notice of such merger, consolidation or
assumption of liabilities shall be delivered by the Servicer to the Surety Bond
Provider and the Noteholder, (ii) immediately after giving effect to such
transaction, no Servicer Termination Event (as defined in Section 5.01), and no
event which, after notice or lapse of time, or both, would become a Servicer
Termination Event shall have occurred or be continuing, (iii) no Termination
Event, Wind-Down Event, Amortization Event or Re-Liening Trigger would occur as
a result of such merger, consolidation or assumption of liability, (iv) the
Servicer shall have delivered to the Debtor, the Surety Bond Provider, the
Back-up Servicer, the Noteholder and the Collateral Agent an officer's
certificate and an opinion of counsel each stating that such consolidation,
merger, succession or resignation
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and such agreement of assumption comply with this Section 4.05 and that all
conditions precedent provided for in this Servicing Agreement relating to such
transaction have been complied with and (v) the Servicer shall have delivered to
the Debtor, the Surety Bond Provider, the Back-up Servicer and the Collateral
Agent an opinion of counsel either (A) stating that, in the opinion of such
counsel, all financing statements, continuation statements and amendments and
notations on certificates of title thereto have been executed and filed that are
necessary fully to preserve and protect the interest of the Debtor, the
Noteholder, the Surety Bond Provider and the Collateral Agent in the Receivables
and the Financed Vehicles, and reciting the details of such filings, or (B)
stating that, in the opinion of such counsel, no such action shall be necessary
to preserve and protect such interest.
ARTICLE V.
DEFAULT, REMEDIES AND INDEMNITY
5.01. SERVICER TERMINATION EVENTS. Any of the following acts or
occurrences shall constitute a "Servicer Termination Event" under this Servicing
Agreement:
(a) any failure by the Servicer to make any payment, transfer or
deposit to the Collateral Agent on the date such payment, transfer or deposit is
required to be made;
(b) any failure by the Servicer or Back-up Servicer to provide any
notices to the Collateral Agent and the Surety Bond Provider pursuant to this
Servicing Agreement relating to the transfer or calculation of funds;
(c) failure on the part of the Servicer or Back-up Servicer to duly
observe or perform in any material respect any other covenants or agreements of
the Servicer or Back-up Servicer, respectively, set forth in this Servicing
Agreement; or the Servicer or the Back-up Servicer shall assign its respective
duties hereunder (except as expressly permitted herein);
(d) any representation, warranty or certification made by the
Servicer or Back-up Servicer or any successor to either in this Servicing
Agreement, or any certificate delivered pursuant to this Servicing Agreement,
shall prove to have been incorrect when made, which has a material adverse
effect on the Noteholder or the Surety Bond Provider;
(e) the Servicer or Back-up Servicer shall consent to the
appointment of a conservator or receiver or liquidator in any
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insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the Servicer or Back-up Servicer,
respectively, or of or relating to all or substantially all of their respective
properties; or a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Servicer or
Back-up Servicer or Successor Servicer or Successor Back-up Servicer and such
decree or order shall have remained in force undischarged or unstayed for a
period of 60 days; or the Servicer or Back-up Servicer or any successor to
either shall admit in writing its inability to pay its debts generally as they
become due, file or have filed against it a petition or commence an action to
take advantage of any applicable insolvency or reorganization statute, make any
assignment for the benefit of its creditors or voluntarily suspend payment of
its obligations;
(f) the Servicer or the Back-up Servicer or any successor to either
shall fail to be an Eligible Servicer as determined by the Surety Bond Provider;
(g) the Servicer makes any material changes to its Collection Policy
with respect to the Receivables without the consent of the Surety Bond Provider,
which consent shall not be unreasonably withheld; or
(h) a Termination Event (as defined in the Security Agreement)
occurs which has not been waived by the Surety Bond Provider or, if a Surety
Default has occurred and is continuing, the Noteholder.
5.02. REMEDIES.
(a) If a Servicer Termination Event shall occur and be continuing,
the Surety Bond Provider (or, if a Surety Default shall have occurred and be
continuing, either the Collateral Agent (to the extent an officer of the
Collateral Agent has actual knowledge thereof), the Debtor, or Noteholder), by
notice given in writing to the Servicer or the Back-up Servicer, as the case may
be ("Termination Notice") (with copies to the Collateral Agent and the Debtor if
given by the Surety Bond Provider or Noteholder), may terminate all of the
rights and obligations of the Servicer or the Back-up Servicer, as the case may
be, under this Servicing Agreement (except as set forth in Section 5.03). On or
after the receipt by the Servicer of such Termination Notice, all authority,
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power, obligations and responsibilities of the Servicer under this Servicing
Agreement, whether with respect to the Receivables, or otherwise, automatically
shall pass to, be vested in and become obligations and responsibilities of the
Back-up Servicer (or such other Successor Servicer appointed in accordance
herewith); provided, however, that the Successor Servicer shall have no
liability with respect to any obligation which was required to be performed by
the terminated Servicer prior to the date that the Successor Servicer becomes
the Servicer or any claim based on any alleged action or inaction of the
terminated Servicer. The Successor Servicer is authorized and empowered by this
Agreement to execute and deliver, on behalf of the terminated Servicer, as
attorney-in-fact or otherwise, any and all documents and other instruments and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such Termination Notice, whether to complete the transfer and
endorsement of the Receivables and related documents to show the Debtor or the
Collateral Agent as lienholder or secured party on the related title documents,
or otherwise. The terminated Servicer agrees to cooperate with the Successor
Servicer in effecting the termination of the responsibilities and rights of the
terminated Servicer under this Servicing Agreement, including, without
limitation, the transfer to the Successor Servicer for administration by it of
all cash amounts that shall at the time be held by the terminated Servicer for
deposit, or have been deposited by the terminated Servicer, in the Collection
Account or thereafter received with respect to the Receivables and the delivery
to the Successor Servicer of all Servicer Files, collection records and a
computer tape in readable form as of the most recent Business Day containing all
information necessary to enable the Back-up Servicer or other Successor
Servicer, as the case may be, to service the Receivables. If requested by the
Surety Bond Provider, the Successor Servicer shall direct the Obligors then
making payments directly to the Servicer to make all payments under the
Receivables directly to the Successor Servicer (in which event the Successor
Servicer shall process all such payments in accordance with Section 3.03(b)), or
to a lockbox established by the Successor Servicer at the direction of the
Surety Bond Provider. The terminated Servicer shall grant the Debtor, the
Collateral Agent, the Noteholder, the Successor Servicer and the Surety Bond
Provider reasonable access to the terminated Servicer's premises at the
terminated Servicer's expense. Subject to Section 2.08(b), the Successor
Servicer shall be entitled to be reimbursed pursuant to Section 5.1(xi) of the
Security Agreement for reasonable costs incurred by it in connection with a
transfer of servicing from the Servicer to such Successor Servicer.
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(b) On and after the time the Servicer receives a Termination Notice
pursuant to Section 5.02(a), the Back-up Servicer (unless the Surety Bond
Provider shall have exercised its option pursuant to the following paragraph to
appoint an alternate Successor Servicer) shall be the successor in all respects
to the Servicer in its capacity as servicer under this Servicing Agreement and
the transactions set forth or provided for in this Servicing Agreement, and
shall be subject to all the rights, responsibilities, restrictions, duties,
liabilities and termination provisions relating thereto placed on the Servicer
by the terms and provisions of this Servicing Agreement except as otherwise
stated herein. The Debtor and such successor shall take such action, consistent
with this Servicing Agreement, as shall be necessary to effectuate any such
succession. If a Successor Servicer is acting as Servicer hereunder, it shall
only be subject to termination under Section 5.02 upon the occurrence of any
Servicer Termination Event with respect to such Successor Servicer.
(c) On and after the receipt by the terminated Servicer of a
Termination Notice pursuant to this Section 5.02, the terminated Servicer shall
continue to perform all servicing functions under this Servicing Agreement until
the date specified in the Termination Notice. The Surety Bond Provider may
exercise at any time its right to appoint as Successor Back-up Servicer or as
Successor Servicer a Person other than the Person serving as Collateral Agent or
Back-up Servicer, as the case may be, at the time, and (without limiting the
Surety Bond Provider's obligations under the Surety Bond with respect to the
Note) shall have no liability to the Debtor, the Collateral Agent, the Person
then serving as Back-up Servicer, any Noteholder or any other Person if it does
so. If a Successor Servicer is not chosen within 90 calendar days after the
receipt by the Servicer of the Termination Notice, the Back-up Servicer shall
act as Successor Servicer unless it is legally unable to do so, in which event
the outgoing Servicer shall continue to act as Servicer until a successor has
been appointed and accepted such appointment. If the Back-up Servicer shall be
legally unable to act as Servicer, and a Surety Default shall have occurred and
be continuing, the Back-up Servicer, the Collateral Agent, the Noteholder or the
Debtor may petition a court of competent jurisdiction to appoint an Eligible
Servicer as the Successor Servicer. Notwithstanding the above, no provision of
this Servicing Agreement shall be construed as relieving the Back-up Servicer of
its obligation to succeed as Successor Servicer upon the termination of the
Servicer pursuant to this Section 5.02 or the resignation of the Servicer
pursuant to Section 5.08. If, upon the termination of the Servicer pursuant to
this Section 5.02 or the resignation of the Servicer pursuant to Section 5.08,
the Surety Bond Provider appoints a Successor Servicer other than the
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Back-up Servicer, the Back-up Servicer shall not be relieved of its duties as
Back-up Servicer hereunder. Within 30 days of termination of the Servicer, if
such termination causes a change in the address to which Obligor payments are to
be sent, the Successor Servicer shall send, or cause to be sent, to each
Obligor, a written notice of the name and mailing address of the Successor
Servicer to which payments on the Receivables are to be made.
(d) The Surety Bond Provider or, if a Surety Default has occurred
and is continuing, the Collateral Agent with approval of the Noteholder shall as
promptly as possible appoint a Successor Back-up Servicer following delivery of
a Termination Notice with respect to the Back-up Servicer. If the Surety Bond
Provider shall fail to approve a Successor Back-up Servicer within 30 days of
the date of a Termination Notice, the Collateral Agent may petition a court of
competent jurisdiction for the appointment of a Successor Back-up Servicer.
Notwithstanding the above, the Collateral Agent shall, if it is legally unable
so to act, petition a court of competent jurisdiction to appoint any Eligible
Servicer as the Successor Back-up Servicer hereunder.
(e) Upon its appointment, the Successor Servicer or Successor
Back-up Servicer, as the case may be, shall be the successor in all respects to
the terminated Servicer or Back-up Servicer, as the case may be, with respect to
servicing functions under this Servicing Agreement and shall be subject to all
the responsibilities, duties and liabilities (arising on and after the time of
such appointment except for liability arising from the condition of the
Servicer's records at the time the servicing duties are transferred to the
Back-up Servicer or other Successor Servicer or for actions or omissions of
other Persons) relating thereto placed on the Servicer or Back-up Servicer,
respectively, by the terms and provisions hereof (except as otherwise provided
in this Servicing Agreement with respect to the Back-up Servicer acting as
Servicer), and all references in this Servicing Agreement to the Servicer or
Back-up Servicer shall be deemed to refer to the Successor Servicer or Successor
Back-up Servicer unless the context otherwise requires.
(f) In connection with such appointment and assumption, the Back-up
Servicer may make such arrangements for the compensation of itself and the
Successor Servicer out of collections of Receivable payments, as it and such
Successor Servicer shall agree; provided, however, that no such compensation
shall be in excess of the Back-up Servicing Fees and Servicing Fees permitted to
the Back-up Servicer and the Servicer, respectively, pursuant to this Servicing
Agreement without the approval of the
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Surety Bond Provider or, if a Surety Default has occurred and is continuing, the
Noteholder.
5.03. INDEMNITY BY THE SERVICER. The Servicer shall be liable to the
Debtor, the Surety Bond Provider, the Collateral Agent, the Noteholder and the
Back-up Servicer (collectively, the "Indemnified Parties") to the extent of the
following:
(a) The Servicer shall indemnify, defend and hold harmless the
Indemnified Parties and any of the officers, directors, employees and agents of
the Indemnified Parties from and against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, arising out of or resulting from the use,
ownership or operation by the Servicer or any affiliate thereof of a Financed
Vehicle.
(b) The Servicer shall indemnify, defend and hold harmless the
Indemnified Parties and any of the officers, directors, employees and agents of
the Indemnified Parties from and against any and all costs, expenses, losses,
claims, damages and liabilities to the extent that such cost, expense, loss,
claim, damage or liability arose out of, or was imposed upon any such Person
through the breach of this Servicing Agreement by the Servicer, the negligence,
misfeasance or bad faith of the Servicer in the performance of its duties under
this Servicing Agreement or by reason of reckless disregard of its obligations
and duties under this Servicing Agreement.
(c) The Servicer shall be strictly accountable for all payments
actually received on the Receivables.
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH
SECTION 5.03 LIABILITIES AND COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN
WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED,
IN WHOLE OR IN PART BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY
INDEMNIFIED PARTY.
5.04. LIABILITY OF THE BACK-UP SERVICER. The Back-up Servicer shall not be
liable to the Servicer, the Debtor, the Surety Bond Provider, the Collateral
Agent or the Noteholder (i) by reason of any act, contract or transaction
performed in good faith by the Back-up Servicer pursuant to this Servicing
Agreement nor shall it be liable for any loss resulting therefrom or for any
lost profit derived therefrom or any errors in judgment, so long as such act,
contract or transaction shall, at the time at which it was performed or entered
into, have been reasonable and prudent under the circumstances and shall have
conformed in all material respects
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to the express provisions of this Servicing Agreement or (ii) for any action
taken or for errors in judgment committed directly resulting from fraud,
negligence or willful misconduct of the Seller, the Debtor, the Servicer, the
Surety Bond Provider, the Collateral Agent or the Noteholder.
5.05. NOTIFICATION TO NOTEHOLDER. Upon discovery of the occurrence of any
Servicer Termination Event, after the expiration of any applicable grace period,
the Servicer or the Back-up Servicer shall give written notice of the occurrence
of a Servicer Termination Event to the Surety Bond Provider or, if a Surety
Default has occurred and is continuing, to the Noteholder, and unless the Surety
Bond Provider or, if a Surety Default has occurred and is continuing, the
Noteholder, gives written notice to the Servicer or the Back-up Servicer, as the
case may be, within seven Business days of receipt of such notice from the
Servicer or the Back-up Servicer that the Surety Bond Provider or the
Noteholder, as the case may be, have waived such Servicer Termination Event, the
Servicer or the Back-up Servicer, as the case may be, shall then give notice in
writing to the Collateral Agent, the Surety Bond Provider, the Rating Agencies,
the Debtor and any other Persons identified on a list provided to the Servicer
or the Back-up Servicer, as the case may be, as such list may be amended from
time to time, and the Collateral Agent shall give notice to the Noteholder. Upon
any termination or appointment of a Successor Servicer or Successor Back-up
Servicer pursuant to this Article V, the Collateral Agent shall give prompt
written notice thereof to the Noteholder at its address as provided in the Note
Purchase Agreement.
5.06. WAIVER OF TERMINATION EVENTS. The Surety Bond Provider or, if a
Surety Default has occurred and is continuing, the Noteholder may, waive any
Servicer Termination Event. Upon any such waiver of a Servicer Termination
Event, such default shall cease to exist, and any default arising therefrom
shall be deemed to have been remedied for every purpose of this Servicing
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon except to the extent expressly so waived.
5.07. SURVIVAL. The agreements in Section 5.03 shall survive the
termination of the Security Agreement and the payment in full of the Note.
5.08. SERVICER AND BACK-UP SERVICER NOT TO RESIGN. Subject to the
provisions of Section 5.02, neither the Servicer nor the Back-up Servicer shall
resign from the obligations and duties imposed on it by this Servicing Agreement
as Servicer or Back-up
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Servicer except upon a determination that by reason of a change in legal
requirements the performance of its duties under this Servicing Agreement would
cause it to be in violation of such legal requirements in a manner which would
have a material adverse effect on the Servicer or the Back-up Servicer, as the
case may be, and the Surety Bond Provider does not elect to waive the
obligations of the Servicer or the Back-up Servicer, as the case may be, to
perform the duties which render it legally unable to act or to delegate those
duties to another Person. Any such determination permitting the resignation of
the Servicer or Back-up Servicer shall be evidenced by an opinion of counsel to
such effect delivered and acceptable to the Debtor, the Collateral Agent, and
the Surety Bond Provider. No resignation of the Servicer shall become effective
until the Back-up Servicer or an entity acceptable to the Surety Bond Provider
shall have assumed the responsibilities and obligations of the Servicer. No
resignation of the Back-up Servicer shall become effective until an entity
acceptable to the Surety Bond Provider shall have assumed the responsibilities
and obligations of the Back-up Servicer; provided, however, that in the event a
successor Back-up Servicer is not appointed within 60 days after the Back-up
Servicer has given notice of its resignation and has provided the opinion of
counsel required by this Section 5.08, the Back-up Servicer may petition a court
of competent jurisdiction for its removal.
ARTICLE VI.
TERMINATION OF AGREEMENT
6.01. TERM. This Servicing Agreement shall remain in effect until
termination of the Security Agreement.
6.02. EFFECT OF TERMINATION. Upon termination of this Servicing Agreement,
the Servicer shall, at the direction of the Debtor, promptly return all Servicer
Files and any related files and correspondence in its possession as are related
to the management of the Receivables and the services provided hereunder.
6.03. TRANSFER OF SERVICING. Upon termination of this Servicing Agreement,
the Servicer shall cooperate in the transfer of the Servicer Files. Any matters
pending at the effective termination date will continue to be processed in an
orderly and timely fashion; it being intended, however, that responsibility for
the Receivables shall transfer as quickly as practicable and in any event within
thirty days after the termination date.
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ARTICLE VII.
MISCELLANEOUS PROVISIONS
7.01. AMENDMENT. This Servicing Agreement may only be amended by mutual
written consent of the parties hereto and with the prior written consent of the
Surety Bond Provider and the Noteholder. No amendment made to the Purchase
Agreement or the Security Agreement, without the Back-up Servicer's or the
Servicer's written consent, shall be effective as to the Back-up Servicer or the
Servicer, respectively, to the extent such amendment is disadvantageous in any
respect to the Back-up Servicer or the Servicer, respectively. The Rating
Agencies and any other Persons identified on a list provided to the Debtor, as
such list may be amended from time to time, shall be given by the Debtor prior
notice of any proposed amendment to the Servicing Agreement, the Purchase
Agreement or the Security Agreement and, upon any such amendment, shall promptly
be provided by the Debtor a copy of any such amendment.
7.02. WAIVERS. The provisions of this Servicing Agreement may only be
waived by written consent of the Surety Bond Provider or, if a Surety Default
has occurred and is continuing, the Noteholder, and the parties hereto. The
failure of any party at any time to require performance by the other of any
provision of this Servicing Agreement shall in no way affect that party's right
to enforce such provision, nor shall the waiver by any party of any breach of
any provision of this Servicing Agreement be taken or held to be a waiver of any
further breach of the same provision or any other provision.
7.03. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered personally or mailed by
first-class registered or certified mail, postage prepaid, or by telephonic
facsimile transmission and overnight delivery service, postage prepaid, in any
case addressed as follows:
To the Servicer:
Auto Lenders Acceptance Corporation
c/o First Investors Financial Services, Inc.
675 Bering, Suite 710
Houston, Texas 77057
Attention: Bennie H. Duck
Telephone: (713) 977-2600
Fax: (713) 260-0028
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To the Collateral Agent/Back-up Servicer:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0070
Attention: Corporate Trust Services
Telephone: (612) 667-3539
Fax: (612) 667-1117
To the Debtor:
First Investors Auto Receivables Corporation
675 Bering, Suite 710
Houston, Texas 77057
Attention: Tommy A. Moore, Jr.
Telephone: (713) 977-2600
Fax: (713) 260-0028
To the Rating Agencies:
Moody's Investors Service, Inc.
99 Church Street
New York, New York 10007
Attention: Ann Rutledge
Phone: (212) 553-4421
Fax: (212) 553-3856
Standard & Poor's
26 Broadway, 15th Floor
New York, New York 10004-1064
Attention: Violet Diamant
Phone: (212) 208-8078
Fax: (212) 208-0030
To the Surety Bond Provider:
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Insured Portfolio Management-
Structured Finance (IPM-SF)
Phone: (914) 273-4545
Fax: (914) 765-3810
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To the Noteholder:
Enterprise Funding Corporation
c/o Global Securitization Services, LLC
25 West 43rd Street, Suite 704
New York, New York 10036
Attention: Kevin Burns
Phone: (212) 302-8331
Fax: (212) 302-8767
Such notice, request, consent or other communication shall be deemed given when
so delivered, or if mailed, two days after deposit with the U.S. Postal Service.
7.04. SEVERABILITY OF PROVISIONS. If one or more of the provisions of this
Servicing Agreement shall be held invalid for any reason, such provisions shall
be deemed severable from the remaining provisions of this Servicing Agreement
and shall in no way affect the validity or enforceability of such remaining
provisions. To the extent permitted by law, the parties hereto hereby waive any
law which renders any provision of this Servicing Agreement prohibited or
unenforceable.
7.05. RIGHTS CUMULATIVE. All rights and remedies under this Servicing
Agreement are cumulative, and none is intended to be exclusive of another. No
delay or omission in insisting upon the strict observance or performance of any
provision of this Servicing Agreement, or in exercising any right or remedy,
shall be construed as a waiver or relinquishment of such provision, nor shall it
impair such right or remedy. Every right and remedy may be exercised from time
to time and as often as deemed expedient.
7.06. NO OFFSET. Prior to the termination of this Servicing Agreement, the
obligations of the Back-up Servicer and the Servicer under this Servicing
Agreement shall not be subject to any defense, counterclaim or right of offset
which the Back-up Servicer or the Servicer may have against the other or against
the Debtor, the Seller, the Surety Bond Provider, any Noteholder or the
Collateral Agent, whether in respect of this Servicing Agreement, any Receivable
or otherwise.
7.07. INSPECTION AND AUDIT RIGHTS. The Servicer agrees that, upon prior
written notice, it will permit the Debtor, the Surety Bond Provider, the
Noteholder or the Collateral Agent and their respective representatives, during
the Servicer's normal business hours, to examine the Servicer Files, all the
books of account, records, reports and other papers of the Servicer relating to
the Receivables, to make copies and extracts therefrom, to cause
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such books to be audited by independent public accountants selected by the
Debtor, and to discuss its affairs, finances and accounts relating to the
Receivables with its officers, employees and independent certified public
accountants, all at such reasonable times and as often as may be reasonably
requested. Any expense incident to the exercise by the Debtor, the Surety Bond
Provider or the Collateral Agent of any right under this paragraph 7.07 shall be
borne by the Servicer. The Servicer shall allow such examination within two
Business Days of receipt of the required notice if so requested by the
requesting party.
7.08. POWERS OF ATTORNEY. The Debtor shall, from time to time, provide to
the employees of the Servicer and the Collateral Agent limited, revocable powers
of attorney or other such written authorizations as may be appropriate to enable
the Servicer and the Collateral Agent to perform its respective obligations
under this Servicing Agreement and the Security Agreement; provided however,
that the Debtor shall not be required to provide such powers with respect to any
matter for which the Debtor does not have authority to perform itself.
7.09. ASSIGNMENT AND BINDING EFFECT. Except with respect to the pledge of
its rights under this Servicing Agreement by the Debtor to the Collateral Agent
pursuant to the Security Agreement and as expressly provided herein, this
Servicing Agreement may be assigned only with the written consent of the parties
hereto and the Surety Bond Provider or, if a Surety Bond Provider Default has
occurred and is continuing, the Noteholder; however, in the event of an
assignment, all provisions of this Servicing Agreement shall be binding upon and
inure to the benefit of the respective successors and assigns of the parties
hereto.
7.10. CAPTIONS. The article, paragraph and other headings contained in
this Servicing Agreement are for reference purposes only, and shall not limit or
otherwise affect the meaning hereof.
7.11. COUNTERPARTS. This Servicing Agreement may be executed in any number
of counterparts, each of which counterparts shall be deemed to be an original,
and such counterparts shall constitute but one and the same instrument.
7.12. GOVERNING LAW. This Servicing Agreement shall be deemed entered into
under and shall be governed by and interpreted in accordance with the laws of
the State of New York, except to the extent that it is mandatory that the laws
of some other jurisdiction apply.
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7.13. PARTIES. Except as set forth in Section 7.16 hereof, this Servicing
Agreement shall inure solely to the benefit of and shall be binding upon the
parties hereto, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any equitable
right, remedy or claim under or in respect of or by virtue of this Servicing
Agreement or any provision contained herein.
7.14. RELATIONSHIP OF THE PARTIES. The relationship of the parties to this
Servicing Agreement is that of independent contractors. Neither this Servicing
Agreement nor any of the activities contemplated hereby shall be deemed to
create any partnership, joint venture, agency or employer/employee relationship
among the Back-up Servicer, the Servicer and the Debtor.
7.15. NO BANKRUPTCY PETITION AGAINST THE DEBTOR. The Back-up Servicer, the
Servicer and the Collateral Agent agree that, prior to the date that is one year
and one day after the payment in full of the Note, none of them will institute
against the Debtor, or join any other Person in instituting against the Debtor
or the Company, any bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings or other proceedings under the laws of the United States
or any state of the United States. This Section 7.15 shall survive the
termination of this Servicing Agreement.
7.16. THIRD PARTY BENEFICIARIES. This Servicing Agreement shall inure to
the benefit of the Noteholder and the Surety Bond Provider and their respective
successors and assigns. Without limiting the generality of the foregoing, all
covenants and agreements in this Servicing Agreement which expressly confer
rights upon the Surety Bond Provider or the Noteholder shall be for the benefit
of and run directly to them, and each shall be entitled to rely on and enforce
such covenants to the same extent as if it were a party hereto. Notwithstanding
the foregoing, the Noteholder shall have no rights to enforce the provisions of
this Servicing Agreement so long as there is no Surety Default that is
continuing.
7.17. OTHER AGREEMENTS. The Servicer and the Back-up Servicer will not be
obligated or bound by any provision or term of any other agreement, including
the Security Agreement and the Purchase Agreement, except to the extent, and
only to the extent, expressly stated herein or therein.
7.18. PROCEDURE FOR INDEMNIFICATION. Notwithstanding
anything to the contrary in this Servicing Agreement, in the event
that a Person is entitled to indemnification pursuant to the terms
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of this Servicing Agreement, such Person (hereinafter called the "Indemnified
Party") shall promptly notify the person against whom such indemnity may be
sought (hereinafter called the "Indemnifying Party") in writing and the
Indemnifying Party, upon request of the Indemnified Party, shall retain counsel
reasonably satisfactory to the Indemnified Party or, at the Indemnified Party's
option, such Indemnified Party may select its own counsel with the consent of
the Indemnifying Party, which consent shall not be unreasonably withheld or
delayed, to represent the Indemnified Party and any others the Indemnified Party
may designate in such proceeding and shall pay the reasonable fees and
disbursements of such counsel related to such proceeding. It is understood that
the Indemnifying Party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm at any one time (in addition to any
local counsel) for all such Indemnified Parties (unless necessary because of
conflicts of interest), and all such fees and expenses shall be reimbursed as
they are incurred. Such firm shall be designated in writing by the Indemnified
Party. The Indemnifying Party shall not be liable for any settlement of any
proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed, but if settled with such consent or if there
be an adverse final judgment, the Indemnifying Party agrees to indemnify the
Indemnified Party from and against any loss or liability by reason of such
settlement or judgment.
7.19. REPORTS TO NOTEHOLDER. Any report, notice or financial statement
delivered pursuant to this Servicing Agreement by the Servicer or the Back-up
Servicer to the Noteholder shall be provided by such Persons to the Noteholder
at the address last provided to the Servicer or the Back-up Servicer by the
Collateral Agent or such Noteholder.
7.20. PURCHASE AND SUBSEQUENT PLEDGE. The Servicer hereby acknowledges
that the Debtor will acquire the Receivables and the other items included in the
Collateral pursuant to the Purchase Agreement and will pledge the Receivables
and the other items included in the Collateral along with certain of the
Debtor's rights under this Servicing Agreement and the Purchase Agreement to the
Collateral Agent for the benefit of the Secured Parties pursuant to the terms of
the Security Agreement, and that the representations and warranties contained in
the Purchase Agreement, this Servicing Agreement and the Security Agreement and
the rights of the Debtor under the Security Agreement, this Servicing Agreement
and the Purchase Agreement are intended to benefit the Noteholder and the Surety
Bond Provider.
51
<PAGE>
7.21. EXERCISE OF RIGHTS BY SURETY BOND PROVIDER. All rights granted to
the Surety Bond Provider pursuant to this Servicing Agreement shall terminate
during the pendency of a payment default by the Surety Bond Provider under the
Surety Bond or during the pendency of a Surety Insolvency (as defined in the
Insurance Agreement as in effect on the date hereof) and during such time the
Surety Bond Provider's rights may be exercised by the Noteholder, PROVIDED,
HOWEVER, the Surety Bond Provider's rights shall be reinstated in full,
immediately upon the cure of such default or insolvency.
IN WITNESS WHEREOF, the Debtor, the Back-up Servicer, the Servicer and the
Collateral Agent have caused this Servicing Agreement to be duly executed by
their respective authorized officers as of the date and year first above
written.
First Investors Auto Receivables
Corporation, as Debtor
By: ________________________________
Bennie H. Duck, Vice President
Norwest Bank Minnesota, National
Association, as Back-up Servicer
By: ________________________________
Printed Name:_______________________
Title: _____________________________
Norwest Bank Minnesota, National
Association, as Collateral Agent
By: ________________________________
Printed Name:_______________________
Title: _____________________________
Auto Lenders Acceptance Corporation,
as Servicer
By: ________________________________
Bennie H. Duck, Vice President
52
EXHIBIT 10.61
EXECUTION COPY
GUARANTY
THIS GUARANTY (this "Guaranty") is entered into as of March 31, 1999, by
First Investors Financial Services, Inc. (the "Guarantor"), First Investors Auto
Receivables Corporation (the "Transferor"), Auto Lenders Acceptance Corporation
("ALAC"), and Norwest Bank Minnesota, National Association, as Back-up Servicer
(the "Back-up Servicer") and as Collateral Agent (as successor to Chase Bank of
Texas, predecessor Collateral Agent) on behalf of the Noteholders and the Surety
(as defined herein) (the "Collateral Agent").
WHEREAS, the Guarantor has sold certain Receivables, and will sell
additional Receivables, along with its security interest in each Financed
Vehicle to the Transferor pursuant to the Receivables Purchase Agreement dated
as of October 22, 1996 as amended and supplemented by and between the Guarantor
and the Transferor wherein the Guarantor has made certain representations and
warranties.
WHEREAS, pursuant to that certain Servicing Agreement dated as of March
31, 1999 (the "Servicing Agreement") by and among the Transferor, ALAC, as
Servicer and the Collateral Agent, as Collateral Agent and Back-up Servicer,
ALAC shall agree to perform certain servicing obligations.
WHEREAS, pursuant to that certain Security Agreement dated as of October
22, 1996 between the Transferor, MBIA Insurance Corporation, as Surety Bond
Provider (the "Surety"), the Guarantor, as Seller, NationsBank, N.A., as Reserve
Account Agent (the "Reserve Account Agent"), Enterprise Funding Corporation, as
Company (the "Company") and the Collateral Agent (as amended and supplemented,
the "Security Agreement"), the Transferor pledged the Receivables and its
security interest in the Financed Vehicles to the Collateral Agent to secure the
Note issued pursuant to the Security Agreement.
WHEREAS, the Surety issued its surety bond (the "Surety Bond") pursuant to
the Insurance Agreement dated as of October 1, 1996, by and among the Surety,
the Seller, the Transferor, the Guarantor, the Collateral Agent and the Reserve
Account Agent, as amended by the Amendment No. 1 to Insurance Agreement dated as
of March 31, 1999 (as amended, the "Insurance Agreement") by and among the
Surety, ALAC, as Servicer, the Seller, the Transferor, the Guarantor, the
Collateral Agent, the Back-up Servicer and the Reserve Account Agent.
WHEREAS, the Guarantor will receive substantial direct and indirect
benefits from the transactions contemplated by the Receivables Purchase
Agreement, the Note Purchase Agreement, the Servicing Agreement, the Security
Agreement and the Insurance Agreement (the "Transaction Documents").
<PAGE>
WHEREAS, it is a condition precedent to the Surety's consent to the
Servicing Transfer that the Guarantor execute this Guaranty and deliver it to
the Collateral Agent;
NOW, THEREFORE, in consideration of the consent to the Servicing Transfer
and the execution of the documents relating thereto by the Surety and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the Guarantor, the parties hereto agree as follows:
Section 1. DEFINITIONS. Unless otherwise defined in this Guaranty, all
defined terms used in this Guaranty shall have the meanings ascribed to such
terms in the Insurance Agreement.
Section 2. GUARANTY OF OBLIGATIONS. The Guarantor hereby (with respect to
its payment obligations, to the extent not otherwise paid pursuant to Section
5.1 of the Security Agreement): (a) absolutely, irrevocably and unconditionally
guarantees the full and timely payment and performance of all obligations of
ALAC as Servicer under the Servicing Agreement and other Transaction Documents
to which ALAC is a party including, without limitation, (i) the servicing and
collecting of the Receivables pursuant to the Servicing Agreement, (ii) the
making of deposits and remittances into the Collection Account when required to
be made in accordance with the terms of the Servicing Agreement and (iii) the
payment of all amounts, reimbursements and indemnities payable by ALAC pursuant
to the Servicing Agreement and the other Transaction Documents to which ALAC is
a party; (b) absolutely, irrevocably and unconditionally agrees to pay and
guarantees the full and timely payment of all reasonable cost and expenses
(including, without limitation, attorneys' fees and legal expenses) associated
with the transition of servicing from ALAC, as Servicer, to a successor Servicer
pursuant to the terms of the Servicing Agreement; (c) absolutely, irrevocably
and unconditionally agrees to pay and guarantees the full and timely payment of
all costs and expenses (including, without limitation, attorneys' fees and legal
expenses) associated with the re-liening of the Financed Vehicles pursuant to
the terms of the Servicing Agreement; (d) absolutely, irrevocably and
unconditionally agrees to pay and guarantees the full and timely payment of all
litigation costs and expenses (including, without limitation, attorneys' fees
and legal expenses) of ALAC and its affiliates in connection with or arising out
of the Servicing Transfer; (e) absolutely, irrevocably and unconditionally
agrees to pay and guarantees the full and timely payment of all state taxes
imposed on ALAC in connection with the Servicing Agreement; (f) absolutely,
irrevocably and unconditionally agrees to pay and guarantees the full and timely
payment of all losses, damages, claims, defenses, liabilities, costs and
expenses (including, without limitation, attorneys' fees and legal expenses) of
the Transferor, the Collateral Agent, the Noteholder and the Surety for
enforcement against ALAC of any obligations of ALAC under the Transaction
Documents to which it is a party; (g) absolutely, irrevocably and
unconditionally agrees to pay and guarantees the full and timely payment of all
losses, damages, claims, defenses, liabilities, costs and expenses (including,
without limitation, attorneys' fees and legal expenses) of the Transferor, the
Collateral Agent, the Noteholder and the Surety arising out of, or resulting
from, any litigation, proceedings, investigations, determinations, settlements
or rulings over ALAC or its properties that (1) assert the invalidity of any of
the Transaction Documents with respect to ALAC or the Guarantor, (2) seek to
prevent or void with respect to ALAC any of the transactions
2
<PAGE>
contemplated by the Transaction Documents or (3) affect the performance by ALAC
of any of its obligations under the Transaction Documents or affect the validity
or enforceability thereof; (h) absolutely, irrevocably and unconditionally
agrees to pay and guarantees the full and timely payment of all losses, damages,
claims, defenses, liabilities, costs and expenses (including, without
limitation, attorneys' fees and legal expenses) of the Transferor, the
Collateral Agent, the Noteholder and the Surety arising out of, or resulting
from, the negligence, misfeasance or bad faith of ALAC to the extent not
recovered from ALAC pursuant to Section 7.18 of the Servicing Agreement or
Section 3.04 of the Insurance Agreement. The obligations under this Section 2
shall be referred to herein as the "Obligations."
The Guarantor shall have no obligation to guaranty any obligations of any
Person other than ALAC, including without limitation any obligation of the
Obligors under the Receivables.
Section 3. UNCONDITIONAL; IRREVOCABILITY. (a) This is an absolute,
unconditional and continuing guaranty of payment and performance of all
Obligations, and the Guarantor agrees that its obligations under this Guaranty
shall be irrevocable. The dissolution, insolvency or adjudication of bankruptcy
of the Guarantor shall not revoke this Guaranty.
(b) No act or thing need occur to establish the liability or obligation of
the Guarantor hereunder, and no act or thing, except full payment, discharge and
performance of all Obligations, shall in any way exonerate the Guarantor
hereunder or modify, reduce, limit or release the liability of Guarantor
hereunder. The Guarantor waives all presentments, demands for performance,
notices of dishonor and notices of acceptance of this Guaranty. The Collateral
Agent or the Surety shall not be required first to resort to payment of the
Obligations by ALAC or other Person, or their properties, before enforcing this
Guaranty. Until payment in full of the Obligations, the Obligations of the
Guarantor under this Guaranty shall not be affected, modified or impaired upon
the happening from time to time of any event, including, without limitation, the
events described in Section 4 herein, whether or not with notice to or the
consent of the Guarantor.
(c) The Guarantor further agrees that, if any payment applied by
Collateral Agent to the Obligations is thereafter set aside, recovered,
rescinded or required to be returned for any reason (including, without
limitation, the bankruptcy, insolvency or reorganization of ALAC or any other
obligor), the Obligations to which such payment was applied shall for the
purpose of this Guaranty be deemed to have continued in existence,
notwithstanding such payment, and this Guaranty shall be enforceable as to such
Obligations as fully as if such payment had never been made. The provisions of
this Section 3(c) hereof shall survive any termination of this Guaranty.
Section 4. CONTINUATION AND VALIDITY OF OBLIGATIONS. The liability of the
Guarantor shall not be affected or impaired by any of the following events: (a)
the validity, enforceability, discharge, disaffirmance, settlement or compromise
(by any Person, including a trustee in bankruptcy or other similar official) of
the Obligations or of the Transaction Documents, (b) the absence of any attempt
to collect the Obligations from ALAC or any guarantor or other Person, (c) the
waiver or consent by the Collateral Agent, the Surety, the Noteholder or any
other Person
4
<PAGE>
with respect to any provision of any instrument or agreement evidencing the
Obligations, any delay or lack of diligence in the enforcement of the
Obligations, or any failure to institute proceedings, file a claim, give any
required notices or otherwise protect the Obligations, (d) any change of the
time, manner or place of payment or performance, or any other term of any of the
Obligations, (e) any law, regulation or order of any jurisdiction affecting any
term of any of the Obligations or rights of the Collateral Agent or the Surety
with respect thereto, (f) the failure by the Collateral Agent to take any steps
to perfect and maintain perfected its interest in the Receivables, Financed
Vehicles or other property acquired by the Collateral Agent from the Transferor
or any security or collateral related to the Obligations, (g) the commencement
of any bankruptcy, insolvency or similar proceeding with respect to ALAC or the
Transferor or any other affiliate of ALAC, (h) any full or partial release of,
compromise or settlement with, or agreement not to sue, ALAC or any guarantor or
other person liable in respect of any Obligations, (i) any release, surrender,
cancellation or other discharge of any evidence of the Obligations or the
acceptance of any instrument in renewal or substitution therefor, (j) any
collection, sale, lease or disposition of, or any other enforcement of or
realization on, any Receivable or Financed Vehicle, (k) any assignment, pledge
or other transfer of the Obligations or any evidence thereof, (l) any acceptance
of collateral security, guarantors, accommodation parties or sureties for any or
all Obligations, (m) any change in the existing relationship between the
Guarantor and ALAC including, without limitation, any sale or other transfer of
the stock of ALAC by the Guarantor or (n) any legal or equitable discharge or
defense of the Guarantor. To the full extent permitted by applicable law, the
Guarantor waives any and all defenses and discharges available to a surety,
guarantor or accommodation co-obligor.
Section 5. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents
and warrants to the Collateral Agent, the Noteholder, ALAC and the Surety as
follows:
(a) ORGANIZATION, ETC. The Guarantor is a corporation duly
organized, validly existing and in good standing under the laws of the
state of Texas and has full corporate power, authority and legal right to
own or lease all of its properties and assets, to carry on its business as
it is now being conducted and to execute, deliver and perform this
Guaranty. The Guarantor is duly qualified as a foreign corporation in good
standing under the laws of each other jurisdiction in which the nature of
its business requires such qualification and in which failure to so
qualify would render this Guaranty unenforceable or would have an adverse
effect on the Guarantor's ability to perform its obligations under this
Guaranty.
(b) AUTHORIZATION/VALID AGREEMENT. The Guarantor has the power and
authority to execute and deliver this Guaranty and to carry out its terms.
The execution, delivery and performance of this Guaranty have been duly
authorized by all required corporate or other action on the part of the
Guarantor, and this Guaranty constitutes the legal, valid and binding
obligation of the Guarantor, enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, conservatorship, receivership, liquidation or other
similar laws affecting the enforcement of creditors' rights generally and
by general equitable principles.
(c) NO CONFLICTS. The execution, delivery and performance by the
Guarantor of this Guaranty does not and will not (i) contravene its
articles of incorporation or bylaws, (ii) violate any provision of, or
require any filing, registration, consent or approval under, any law,
rule, regulation, order, writ, judgment, injunction, decree, determination
or award presently in effect having applicability to the Guarantor, (iii)
result in a breach of or constitute a default or require any consent under
any indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Guarantor is a party or by which it or its
properties may be bound or affected or (iv) result in, or require, the
creation or imposition of any lien upon or with respect to any of the
properties now owned or hereafter acquired by the Guarantor.
(d) NO PROCEEDINGS. There are no proceedings or investigations
pending, or, to the best knowledge of the Guarantor, threatened against
the Guarantor before any governmental authority (i) asserting the
invalidity of this Guaranty, (ii) seeking to prevent the consummation of
the transactions contemplated by this Guaranty, (iii) seeking any
determination or ruling that would adversely affect the performance by the
Guarantor of its obligations under this Guaranty or (iv) seeking any
determination or ruling that would adversely affect the validity or
enforceability of this Guaranty.
(e) NO CONSENTS. No consent, approval, authorization or order of or
declaration, filing or registration with any governmental authority or
other Person is required in connection with the execution, delivery or
performance of this Guaranty, except such as have been duly made or
obtained.
(f) BENEFITS. The Guarantor has a direct and substantial economic
interest in ALAC and expects to derive substantial benefits, directly and
indirectly therefrom and from the transaction described in the Transaction
Documents, any loans, credit transactions, financial accommodations,
discounts, purchases of property and other transactions and events
resulting in the creation of Obligations, and this Guaranty shall be
effective and enforceable by the Collateral Agent and the Surety without
regard to the receipt, nature or value of any such benefits.
Section 6. INDEPENDENT OBLIGATIONS. The obligations of the Guarantor
hereunder are undertaken as primary obligor and independently of, the
obligations of ALAC, or any other obligor, guarantor or Person, and action or
actions may be brought or prosecuted directly against the Guarantor whether or
not action is brought first or at all against ALAC or any other obligor,
guarantor or Person, against any collateral security or any other circumstance
whatsoever, and whether or not ALAC, or any other obligor, guarantor or Person
is joined in any such action or actions, or any claims or demands are made or
are not made, or any action is taken on or against ALAC, any other obligor,
guarantor or Person or any collateral security or otherwise.
Section 7. WAIVERS. The Guarantor waives any and all defenses, claims,
setoffs and discharges of ALAC, or any other obligor, pertaining to the
Obligations. Without limiting the
5
<PAGE>
generality of the foregoing or any other provision hereof, to the fullest extent
permitted by applicable law, the Guarantor hereby waives: (a) any defense
arising by reason of any invalidity or unenforceability of ALAC's obligations in
respect of the Transaction Documents, any manner in which the Collateral Agent,
the Surety or the Noteholders have exercised (or not exercised) any rights and
remedies under the Transaction Documents, or any cessation from any cause
whatsoever of the liability of ALAC or any other obligor, guarantor or Person;
(b) all presentments, demands for performance, notices of nonperformance,
protests, notices of protest, notices of dishonor and notices of acceptance of
the Transaction Documents; (c) any release of any of the Collateral provided
under the Security Agreement or other Transaction Documents; (d) notice of any
indulgences, extensions, consents or waivers given to ALAC or any other obligor,
guarantor or Person, notice of the occurrence of any default or Servicer
Termination Event under the Servicing Agreement, any default or Event of Default
under the Security Agreement or default or event of default under any of the
other Transaction Documents, or other notice of any kind whatsoever; (e) any
right or claim of right to cause the Collateral Agent, the Surety or the
Noteholders to proceed against ALAC or any other obligor, guarantor or Person in
any particular order, to proceed against or exhaust any collateral security held
by the Collateral Agent, the Surety or the Noteholders at any time or to pursue
any other right or remedy whatsoever at any time; (f) any requirement of
diligence or promptness on the Collateral Agent's, the Surety's or Noteholder's
part in (X) making any claim or demand on or commencing suit against ALAC or any
other obligor, guarantor or Person, and (Y) otherwise enforcing the Collateral
Agent's, the Surety's or Noteholder's rights in respect of the Servicing
Agreement or the other Transaction Documents; (g) any defense of waiver,
release, discharge in bankruptcy, statute of limitations, res judicata, statute
of frauds, anti-deficiency statute, fraud, usury, illegality or unenforceability
which may be available to ALAC or any other person liable in respect of any
Obligations, or any setoff available against the Collateral Agent or the Surety
to ALAC or any other such person, whether or not on account of a related
transaction and (h) any duty of the Collateral Agent, the Surety or Noteholders
to advise the Guarantor of any information known to the Collateral Agent, the
Surety or Noteholders regarding the financial condition of ALAC or any other
circumstance, it being agreed that the Guarantor assumes responsibility for
being and keeping informed of such condition or any such circumstance.
Without limiting the generality of the foregoing, to the fullest extent
permitted by applicable law, the Guarantor specifically waives all defenses the
Guarantor may have based upon any election of remedies by the Collateral Agent,
the Surety or the Noteholders which destroys the Guarantor's rights to proceed
against ALAC or any other obligor, guarantor or Person for reimbursement,
contribution or otherwise, including any loss of rights that it may suffer by
reason of any rights, powers, remedies or defenses of ALAC in connection with
any laws limiting, qualifying or discharging indebtedness of or remedies against
ALAC, and the Guarantor hereby agrees not to exercise or pursue, so long as any
of the Obligations remain unsatisfied, any right to reimbursement, subrogation,
or contribution from ALAC in respect of payments hereunder.
Section 8. SIGNIFICANCE OF WAIVERS. The Guarantor represents, warrants and
agrees that each of the waivers set forth herein are made with the Guarantor's
full knowledge of its
6
<PAGE>
significance and consequences, with the understanding that events giving rise to
any defense waived may diminish, destroy or otherwise adversely affect rights
which the Guarantor otherwise may have against ALAC or any other obligor,
guarantor or Person, or against collateral, and that under the circumstances the
waivers are reasonable.
Section 9. REIMBURSEMENT. The Guarantor shall pay or reimburse the
Collateral Agent and the Surety for all costs and expenses (including reasonable
attorneys' fees and legal expenses) incurred by Collateral Agent or the Surety
in connection with the protection, defense or enforcement of this Guaranty in
any litigation or bankruptcy or insolvency proceedings.
Section 10. CUMULATIVE LIABILITY. The liability of the Guarantor under
this Guaranty is in addition to and shall be cumulative with all other
liabilities of Guarantor as guarantor, surety, endorser, accommodation
co-obligor or otherwise of any Obligations, without any limitation as to amount.
Section 11. NONPETITION COVENANT. The Guarantor shall not petition or
otherwise invoke the process of any court or government authority for the
purpose of commencing or sustaining a case against the Transferor under any
federal or state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Transferor or any substantial part of its respective property, or
ordering the winding up or liquidation of the affairs of the Transferor.
Section 12. AMENDMENTS. This Guaranty may not be waived, modified,
amended, terminated, released or otherwise changed except by a writing signed
parties hereto, with the prior written consent of the Surety.
Section 13. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Section 14. JURISDICTION; JURY TRIAL WAIVER; AGENT FOR SERVICE OF PROCESS.
The parties hereto hereby irrevocably submit to the jurisdiction of the United
States District Court for the Southern District of New York and any court in the
State of New York located in the City and County of New York, and any appellate
court from any thereof, in any action, suit or proceeding brought against it and
to or in connection with this Guaranty or the transactions contemplated
hereunder or for recognition or enforcement of any judgment, and the parties
hereto hereby irrevocably and unconditionally agree that all claims in respect
of any such action or proceeding may be heard or determined in such New York
state court or, to the extent permitted by law, in such federal court. The
parties hereto agree that a final judgment in any such action, suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. To the extent
permitted by applicable law, the parties hereto hereby waive and agree not to
assert by way of motion, as a defense or otherwise in any such suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
such courts, that the suit, action or proceeding is brought in an inconvenient
forum, that the
7
<PAGE>
venue of the suit, action or proceeding is improper or that the related
documents or the subject matter thereof may not be litigated in or by such
courts. The parties hereby waive trial by jury.
Section 15. COUNTERPARTS. This Guaranty may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be an original, but all such
counterparts together shall constitute but one and the same instrument.
Section 16. SEVERABILITY. Any invalidity or unenforceability of any
provision or application of this Guaranty shall not affect other lawful
provisions and application hereof, and to this end the provisions of this
Guaranty are declared to be severable.
Section 17. BENEFITS; THIRD-PARTY BENEFICIARY. This Guaranty shall be
effective as of the date hereof, without further act, condition or acceptance by
the Collateral Agent or ALAC, shall be binding upon the Guarantor and the
successors and assigns of the Guarantor and shall inure to the benefit of the
Collateral Agent, the Noteholder, ALAC, the Transferor and the Surety and its
participants, successors and assigns. The Surety and the Noteholder shall each
be an express third-party beneficiary to this Guaranty and entitled to rely on
and enforce such provisions to the same extent as if it were a party hereto.
Section 18. TERMINATION. This Guaranty shall terminate upon the payment in
full of the Obligations; provided, however, that the provisions of Section 3(c)
hereof shall survive any termination of this Guaranty.
Section 19. EFFECT. The guaranty of the Guarantor hereunder is limited to
the Obligations as expressly provided herein, and no provision hereof shall,
expressly or by implication, be construed (i) as a guaranty or assumption by the
Guarantor of any indebtedness of the Transferor under the Note, or (ii) as a
modification in any respect of the limitation on recourse with respect to such
indebtedness as provided in Section 5.8 of the Note Purchase Agreement.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, this Guaranty has been duly executed by the parties
hereto as of the date and year first above written.
FIRST INVESTORS FINANCIAL SERVICES, INC.,
as Guarantor
By_______________________________________
Title____________________________________
FIRST INVESTORS AUTO RECEIVABLES
CORPORATION, as Transferor
By_______________________________________
Title____________________________________
AUTO LENDERS ACCEPTANCE CORPORATION
By_______________________________________
Title____________________________________
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Collateral Agent
By_______________________________________
Title____________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 11,515,872
<SECURITIES> 0
<RECEIVABLES> 184,848,183
<ALLOWANCES> 1,529,651
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 272,809,249
<CURRENT-LIABILITIES> 0
<BONDS> 232,286,788
0
0
<COMMON> 5,567
<OTHER-SE> 27,162,312
<TOTAL-LIABILITY-AND-EQUITY> 272,809,249
<SALES> 31,076,003
<TOTAL-REVENUES> 31,076,003
<CGS> 12,781,725
<TOTAL-COSTS> 12,781,725
<OTHER-EXPENSES> 13,274,548
<LOSS-PROVISION> 4,661,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,152,507
<INCOME-TAX> 1,150,665
<INCOME-CONTINUING> 2,001,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,001,842
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
