Back to GetFilings.com
================================================================================
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
------------------------------
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.
================================================================================
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
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
1
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:
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 %
- ------------------------------------- --------- -------------- ------ --------- ------ ---------
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%
============== ====== ========= ====== =========
- ------------
(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
2
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
3
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,
----------------------------------
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.
4
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,
--------------------
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%
- ------------
(1) Includes military personnel and persons residing with relatives.
5
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
---------- ----------
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%
- ------------
(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
6
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
7
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
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
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
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.
11
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):
AS OF OR FOR THE YEARS ENDED APRIL 30,
-------------------------------------------
1998 1999
-------------------- --------------------
NUMBER NUMBER
OF LOANS AMOUNT(1) OF LOANS AMOUNT(1)
-------- --------- -------- ---------
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%
- ------------
(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
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
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
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
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
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).
YEARS ENDED APRIL 30,
---------------------------------------------------------
1995 1996 1997 1998 1999(5)
--------- ---------- ---------- ---------- ----------
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
========= ========== ========== ========== ==========
(FOOTNOTES ON FOLLOWING PAGE)
17
- ------------
(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
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
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
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):
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
--------- ------- ---------- --------- ------- ----------
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
========= ======= ========== ========= ======= ==========
21
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
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
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
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
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
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
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 i