ITEM 1. BUSINESS
GENERAL
First Investors Financial Services Group, Inc. (the "Company") is a consumer finance company engaged in both the purchase of receivables originated by franchised automobile dealers and originating loans directly to consumers in connection with the sale of new and late-model used vehicles. The Company specializes in lending to consumers with impaired credit profiles. The Company does not utilize off-balance sheet securitization to finance its Receivables Held for Investment. As of April 30, 2002, the Company had Receivables Held for Investment in the aggregate principal amount of $212,926,747, having an effective yield of 15.4 percent and a net interest spread to the Company of 9.6 percent (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 First Investors Servicing Corporation ("FISC"), formally known as Auto Lenders Acceptance Corporation, from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC 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. non-prime). The non-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 percent of the receivables owned by the Company at April 30, 2002, and no dealer or group of related dealers originated more than 5 percent of the receivables held by the Company at that date. The volume and frequency of receivable purchases from particular dealers vary widely with the size of the dealerships as well as market and competitive factors in the various dealership locations.
LOCATION OF DEALERS. Approximately 22 percent of the dealers with whom the Company has agreements are located in Texas, where the Company has operated since 1989. The Company's expansion beyond Texas began in 1992 and today the Company operates in 27 states.
The following table summarizes, with respect to each state in which the Company operates, the number of receivables (and percentage of total receivables), outstanding which were originated by the Company from dealers in such state during the last two fiscal years:
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(1) Includes dealers located in Arizona, Connecticut, Iowa, Idaho, Maryland, Nebraska, Nevada, Oregon, South Carolina and Utah.
MARKETING REPRESENTATIVES. The Company utilizes a system of regional marketing representatives to recruit, enroll and to provide new dealers with the Company's underwriting guidelines and credit policies 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 sales and 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 sales representatives) is located in Houston and is
primarily responsible for new loan volume in rural areas or states in which the Company cannot justify a field marketing representative.
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.
FINANCING PROGRAMS
The Company originates loans from two sources: (i) dealer indirect (the "core program"), and (ii) consumer direct utilizing direct marketing. The core program generates approximately 93 percent of the Company's current origination volume and consists of loans purchased directly from dealerships in states in which the Company operates. Consumer direct originations contribute approximately 7 percent of originations and involve applications for credit obtained through direct marketing efforts from consumers who are seeking to acquire a vehicle or refinance an existing automobile loan.
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 that 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 or making loans directly to consumers, 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 active dealership agreements with 1,452 dealers at April 30, 2002. These are non-exclusive agreements terminable at any time by either party and they require no specific volume levels. 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 that do not conform to these warranties, the dealers do not guarantee collectibility or obligate themselves to repurchase receivables solely because of payment default. 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 and the Company's assessment of relative credit risk. 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.
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 or with individuals to whom the Company lends directly. The Company has developed various financing programs under 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 13 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 loan servicing is as important as sound credit evaluation for purposes of assuring the integrity of a receivable.
From its inception in 1989 until July 1999, the Company had a servicing relationship with General Electric Capital Corporation ("GECC") an affiliate of General Electric Corporation. The division of GECC which serviced the Company's receivables operates primarily as a servicer of automobile installment loans and is one of the largest such servicers in the United States. The Company's relationship with GECC was governed by a servicing agreement entered into in October 1992 although the Company had done business with GECC under previous agreements since 1989. Under the agreement, GECC was responsible for all aspects of loan servicing and collections with the exception of the disposition of repossessed vehicles, which was the responsibility of the Company.
Servicing fees paid by the Company to GECC represented a variable cost that increased in proportion to the volume of receivables carried. In July 1999, the Company elected to terminate the servicing agreement with GECC in connection with the transfer of the servicing and collection activities on the receivables to the Company's internal servicing and collection platform. No servicing fees were incurred during the two fiscal years ended April 30, 2001 and 2002.
PORTFOLIO CHARACTERISTICS
GENERAL. In selecting receivables for inclusion in its portfolio, the Company seeks to identify potential borrowers 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 make loans 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:
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(1) Includes military personnel and persons residing with relatives.
PORTFOLIO PROFILE. In order to manage the risks associated with the relatively high yields available in the 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:
- ---------- (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 a wholly-owned special-purpose financing subsidiary, F.I.R.C., Inc. ("FIRC"). FIRC maintains a $50 million revolving bank facility with First Union National Bank, (the "FIRC credit facility"). In addition, a wholly-owned special-purpose financing subsidiary, First Investors Auto Receivables Corporation ("FIARC") has a $150 million conduit finance facility with Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit administered by First Union Securities, (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. Together, these warehouse credit facilities provide $200 million in
financing capacity to fund the purchase and long-term financing of receivables. When necessary, the Company will transfer receivables from the warehouse credit facilities and issue additional term notes.
FIRC CREDIT FACILITY. As designated receivables are originated by the Company and transferred to FIRC, they are immediately pledged to a commercial bank that serves as the collateral agent for the bank lender. 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 not in excess of the present facility limit of $50 million. Uninsured losses on receivables, or certain other events adversely affecting the collectibility 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 First Union prime rate in effect from time to time, (ii) a rate equal to ..5 percent 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 collection reserves. The pledge of all of the receivables financed, a cash reserve account and all of the capital stock of FIRC secure this facility. 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 December 5, 2002, at which time, should the facility not be renewed, the outstanding borrowings would be converted to a term loan facility that would mature six months thereafter and amortize monthly in accordance with the borrowing base with any remaining balance due at maturity. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
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 94 percent of the aggregate principal balance of the receivables transferred. The remaining 6 percent of funds required to repay borrowings under the FIARC credit facility are advanced by the Company in the form of an equity contribution to FIARC. VFCC funds the advance to FIARC through the issuance, by an affiliate of VFCC, 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, 2002, the maximum borrowings available under the commercial paper facility were $150 million. The Company's interest cost is based on VFCC's commercial paper rates for specific maturities plus .30 percent. 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 VFCC in an amount equal to the principal reduction required to maintain the 94 percent advance rate and to pay carrying costs and related expenses, with the balance released to the Company. In addition to the 94 percent advance rate, FIARC must maintain a 1 percent cash reserve as additional credit support for the facility.
The FIARC commercial paper facility expired on January 12, 2002. In conjunction with the renewal of the facility to January 13, 2003 the facility commitment was assigned from Enterprise Funding Corporation, a commercial paper conduit administered by Bank of America, to VFCC. No other material changes were made to the facility in conjunction with the assignment to VFCC.
If the facility had not been extended beyond the maturity date, receivables pledged as collateral would be allowed to amortize; however, no new receivables would be allowed to transfer from the FIRC credit facility. The
Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, a wholly-owned special-purpose financing subsidiary, First Investors Auto Capital Corporation ("FIACC"), entered into a $25 million commercial paper conduit facility with Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit administered by First Union National Bank (the "FIACC commercial paper facility"), 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 percent 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 Company's interest cost is based on VFCC's commercial paper rates for specific maturities plus .55 percent.
At April 30, 2002, borrowings were $2,603,433 under the FIACC commercial paper facility, and had a weighted average interest rate of 5.79 percent, including the effects of program fees and hedge instruments. At April 30, 2001, borrowings were $10,400,901, and had a weighted average interest rate of 5.56 percent, including the effects of program fees and hedge instruments. The current term of the FIACC commercial paper facility expires on March 11, 2003. If the facility were not renewed on or prior to the maturity date, the outstanding balance under the facility would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1997-1 (the "ALAC 97-1 Securitization"). Accordingly, the Company acquired $8,110,849 in outstanding receivables from the trust and borrowed $6,408,150 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456 of the trust certificates. On March 15, 2001, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1998-1 (the "ALAC 98-1 Securitization"). Accordingly, the Company acquired $9,257,612 in outstanding receivables from the trust and borrowed $7,174,509 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,997,615 in senior notes and redeem $1,946,178 of the Trust Certificates. The receivables purchased were used as collateral to secure the FIACC borrowing with any residual cash flow generated by the receivables pledged to the partnership. As a result of utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company has elected to utilize the FIACC commercial paper facility solely as the financing source for the repurchases and does not expect to utilize the facility to finance Receivables Held for Investment. As FIACC borrowings support a liquidating portfolio, no excess borrowing capacity exists as of April 30, 2002.
TERM NOTES. On January 29, 2002, the Company, through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002-A Auto Trust") completed the issuance of $159,036,000 of 3.46% percent Class A asset-backed notes ("2002-A Term Notes"). The initial pool of automobile receivables transferred to the 2002-A Auto Trust totaled $135,643,109, which were previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In addition to the issuance of the 2002-A Class A Notes, the 2002-A Auto Trust also issued $4,819,000 in Class B Notes which were retained by the Company and pledged to secure the Working Capital Facility as further described below. Proceeds from the issuance, which totaled $159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be used for future loan originations; (ii) repay all outstanding borrowings under the FIARC commercial paper facility, (iii) reduce the outstanding borrowings under the FIRC credit facility, (iv) pay transaction
fees related to the 2002-A Term Note issuance, and (v) fund a cash reserve account of 2 percent or $2,712,862 of the initial receivables pledged which will serve as a portion of the credit enhancement for the transaction. The $25,000,000 pre-fund amount has been completely utilized to fund originations and no cash balances remain as of April 30, 2002. The 2002-A Class A Term Notes bear interest at 3.46 percent and require monthly principal reductions sufficient to reduce the balance of the 2002-A Class A Term Notes to 97 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2002-A Term Notes is December 15, 2008. The Class B Notes do not bear interest but require principal reductions sufficient to reduce the balance of the Class B Notes to 3 percent of the outstanding balance of the underlying receivables pool. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2002-A Class A Notes. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool plus 2 percent of the original balance of receivables transferred under the pre-funding provision. Further enhancement is provided through an initial 1 percent overcollateralization which is required to be increased to 3 percent through excess monthly principal and interest collections. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
On January 24, 2000, the Company, through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("2000-A Auto Trust") completed the issuance of $167,969,000 of 7.174 percent asset-backed notes ("2000-A Term Notes"). A pool of automobile receivables totaling $174,968,641, which were previously owned by FIRC, FIARC and FIACC, secures the 2000-A Term Notes. Proceeds from the issuance, which totaled $167,967,690 were used to repay all outstanding borrowings under the FIARC and FIACC commercial paper facilities, to reduce the outstanding borrowings under the FIRC credit facility, to pay transaction fees related to the 2000-A Term Note issuance and to fund a cash reserve account of 2 percent or $3,499,373 which will serve as a portion of the credit enhancement for the transaction. The 2000-A Term Notes bear interest at 7.174 percent and require monthly principal reductions sufficient to reduce the balance of the 2000-A Term Notes to 96 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2000-A Term Notes is February 15, 2006. As of April 30, 2001 and 2002, the outstanding principal balances on the 2000-A Term Notes were $84,925,871 and $40,162,801, respectively. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2000-A Term Note holders. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool and a 4 percent over-collateralization requirement. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
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 FISC. Contemporaneously with the Company's purchase of FISC, FISC transferred certain assets to FIFS Acquisition, consisting primarily of (i) all receivables owned by FISC as of the acquisition date, (ii) FISC's ownership interest in certain trust certificates and subordinated spread or cash reserve accounts related to two asset securitizations previously conducted by FISC, and (iii) certain other financial assets, including charged-off accounts owned by FISC 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 bore interest at VFCC's commercial paper rate plus 2.35 percent and expired August 14, 2000. 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 FISC a servicing fee in the amount of 3 percent on the outstanding balance of all owned or managed receivables and then to pay interest on the facility. Excess cash flow available after servicing fees and interest payments are utilized to reduce the outstanding principal balance on the indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union to refinance the acquisition facility. Under the agreement, a partnership was created in which FIFS Acquisition serves as the general partner and contributed its assets for a 70 percent interest in the partnership and First Union Investors, Inc., an affiliate of First Union, serves as the limited partner with a 30 percent interest in the partnership (the "Partnership"). Pursuant to the refinancing, the Partnership issued Class A Notes in the amount of $19,204,362 and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were used to retire the acquisition debt. The Class A Notes bear interest at VFCC's commercial paper rate plus 0.95 percent per annum and amortize on a monthly basis by an amount necessary to reduce the Class A Note balance as of the payment date to 75 percent of the outstanding principal balance of Receivables Acquired for Investment, excluding Receivables Acquired for Investment that are applicable to FIACC,
as of the previous month end. The Class B Notes bear interest at VFCC's commercial paper rate plus 5.38 percent per annum and amortize on a monthly basis by an amount which varied based on excess cash flows received from Receivables Acquired for Investment after payment of servicing fees, trustee and back-up servicer fees, Class A Note interest and Class A Note principal, plus collections received on the Trust Certificates. The outstanding balance of the Class A Notes was $3,670,765 as of April 30, 2002 and had a weighted average interest rate of 5.76 percent, including the effects of program fees and hedge instruments. At April 30, 2001, the outstanding balance of the Class A Notes was $11,126,050 and had a weighted average interest rate of 6.26 percent, including the effects of program fees and hedge instruments. The Class B Notes were paid in full on September 15, 2000. After the Class B Notes were paid in full, all cash flows received after payment of Class A Note principal and interest, servicing fees and other costs, are distributed to the Partnership for subsequent distribution to the partners based upon the respective partnership interests. The amount of the partners' cash flow will vary depending on the timing and amount of residual cash flows. Beginning in November 2001, the partnership used excess cash flow to retire additional Class A Note principal thus no further partnership distributions will be paid until the Class A Notes are retired. The Company is accounting for First Union's limited partnership interest in the Partnership as a minority interest.
The Class A Notes mature on March 11, 2003. If the Class A Notes are not renewed on or prior to the maturity date, the outstanding balance under the notes would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the notes from the lender prior to maturity. Management considers its relationship with the lender to be satisfactory and has no reason to believe that the notes will not be renewed. If the notes were not renewed, however, or if material changes were made to the terms and conditions, it could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million working capital line of credit with Bank of America and First Union National Bank that was utilized for working capital and general corporate purposes. The facility was increased from $10 million to $13.5 million in December 1999 and was scheduled to mature on December 22, 2000. Effective December 22, 2000, the $13.5 million in outstandings were refinanced through the issuance of a $13.5 million term loan. Under the terms of the facility, provided by Bank of America and First Union, the term loan would be repaid in quarterly installments of $675,000 beginning on March 31, 2001. In addition to the scheduled principal payments, the term loan also requires additional principal payments of $300,000 in June and December under certain conditions relating to the size of Bank of America's portion of the outstanding balance. Pursuant to this requirement, the Company paid $300,000 to Bank of America effective June 30, 2001. The remaining unpaid balance of the term loan is due at maturity on December 22, 2001. Pricing under the facility is based on the LIBOR rate plus 3 percent. The term loan was secured by all unencumbered assets of the Company, excluding receivables owned and financed by wholly-owned, special-purpose subsidiaries of the Company and is guaranteed by First Investors Financial Services Group, Inc. and all subsidiaries that are not special-purpose subsidiaries. In consideration for refinancing the working capital facility, the Company paid each lender an upfront fee and issued warrants to each lender to purchase, in aggregate, 167,001 shares of the Company's common stock at a strike price of $3.81 per share. The warrants expire on December 22, 2010. On December 22, 2000, the warrant value of $175,000 was estimated based on the expected difference between financing costs with and without the warrants. These costs were included as deferred financing costs and were to be amortized through the maturity date of the debt. In addition, if certain conditions were met, the Company agreed to issue additional warrants to Bank of America to acquire up to a maximum of 47,945 additional shares of stock at a price equal to the average closing price for the immediately preceding 30 trading days prior to each grant date which is June 30, 2001 and December 31, 2001. Pursuant to this requirement, the Company issued 36,986 warrants to Bank of America at a strike price of $3.56 per share on June 30, 2001. All other terms and conditions of the warrants were identical to the warrants issued in December 2000. The amount of warrants if any, to be issued on December 31, 2001 was to be determined by the outstanding balance owing to Bank of America under of the term loan. In no event, however, could the additional warrants issued on December 31, 2001 exceed 10,959. The fair value of the warrants issued on June 30, 2001 of $38,757 is included as deferred financing costs and amortized through the maturity date of the debt. At April 30, 2001, there was $12,825,000 outstanding under this facility.
On December 6, 2001, the Company entered into an agreement with First Union National Bank to refinance the $11,175,000 outstanding balance of the working capital term loan and increase the size of the facility to $13.5 million. The renewal facility was provided to a special-purpose, wholly-owned subsidiary of the Company, First Investors Residual Funding LP. Upon the issuance of the 2002-A Term Notes on January 29, 2002, a portion of this
facility was converted to a $4.5 million term loan tranche which amortizes monthly as principal payments are collected under the 2002-A Term Note facility. The monthly principal amortization must be sufficient to reduce the amounts outstanding under the term loan tranche of this facility to no greater than 3 percent of the outstanding receivables securing the 2002-A Term Note transaction. The term loan tranche of this working capital facility will be evidenced by the Class B Notes issued in conjunction with the 2002-A Auto Trust financing. This principal repayment requirement replaces the current $675,000 per quarter and the additional $600,000 per annum required under the previous facility. The remaining $9 million of the $13.5 million working capital facility revolves monthly in accordance with a borrowing base consisting of the overcollateralization amount and reserve accounts for each of the Company's other credit facilities. The new facility is secured solely by the residual cash flow and cash reserve accounts related to the Company's warehouse credit facilities, the acquisition facility and the existing and future term note facilities. This compares to the previous requirement that all assets of the Company, excluding receivables owned and financed by special purpose subsidiaries, secure the indebtedness. Pricing under the facility was not changed. The maturity of the facility was extended to December 5, 2002. In the event that the facility is not renewed at maturity, residual cash flows from the various receivables financing transactions will be applied to amortize the debt over the remaining life of the underlying receivables. Further, as a result of the refinancing, the Company is not obligated to issue additional warrants covering 10,959 shares of the Company's common stock to Bank of America on December 31, 2001. At April 30, 2002, there was $11,798,520 outstanding under this facility. In conjunction with the refinancing, the Company repaid the working capital term loan and entered into the new working capital facility. Consequently, $554,896 of deferred financing costs and warrants were written off.
The Company intends to seek a renewal of the working capital facility from its lender prior to maturity. Should the facility not be renewed, the outstanding balance of the receivables would be amortized in accordance with the borrowing base. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
SHAREHOLDER LOANS - On December 3, 2001 the Company entered into an agreement with one of its existing shareholders and a member of its Board of Directors under which the Company may, from time to time, borrow up to $2.5 million. The proceeds of the borrowings will be utilized to fund certain private and open market purchases of the Company's common stock pursuant to a Stock Repurchase Plan authorized by the Board of Directors and for general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10 percent per annum. The facility is unsecured and expressly subordinated to the Company's senior credit facilities. The facility matures on December 3, 2008 but may be repaid at any time unless the Company is in default on one of its other credit facilities. As of April 30, 2002, $525,000 was outstanding under this facility.
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 covering 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 was not in default with respect to any covenants governing these financing arrangements at April 30, 2002.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear interest at floating interest rates which are reset on a short-term basis while the secured Term Notes bear interest at a fixed rate of interest. The Company's receivables bear interest at fixed rates that do not generally vary with changes in market interest rates. Since a primary contributor to the Company's profitability is its ability to manage its net interest spread, the Company seeks to maximize the net interest spread while minimizing exposure to changes in interest rates. In connection with managing the net interest spread, the Company may periodically enter into interest rate swaps or caps to minimize the effects of market interest rate fluctuations on the net interest spread. To the extent that the Company has outstanding floating rate borrowings or has elected to convert a portion of its borrowings from fixed rates to floating rates, the Company will be exposed to fluctuations in short-term interest rates.
In connection with the issuance of the 2000-A Term Notes, the Company entered into a swap agreement with Bank of America pursuant to which the Company pays a floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent and receives a fixed rate of 7.174 percent from the counterparty. The initial notional amount of the swap was $167,969,000, which amortizes in accordance with the expected amortization of the Term Notes. Final maturity of the swap was August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap at no material gain or loss and enter into a new swap under which the Company would pay a fixed rate of 6.30 percent on a notional amount of $100 million. Under the terms of the swap, the counterparty had the option of extending the swap for an additional three years to mature on April 15, 2004 at a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised its extension option.
On June 1, 2001, the Company entered into interest rate swaps with an aggregate notional amount of $100 million and a maturity date of April 15, 2004. Under the terms of these swaps, the Company will pay a floating rate based on one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to enter into these swap agreements to offset the uneconomic position of the existing fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization and the financing of that repurchase through the FIACC subsidiary on September 15, 2000, FIACC entered into an interest rate swap agreement with First Union under which FIACC pays a fixed rate of 6.76 percent as compared to the one month commercial paper index rate. The initial notional amount of the swap is $6,408,150, which amortizes monthly in accordance with the expected amortization of the FIACC borrowings. The final maturity of the swap was December 15, 2001. On March 15, 2001, in connection with the repurchase of the ALAC 1998-1 Securitization and the financing of that purchase through the FIACC subsidiary, the Company and the counterparty modified the existing interest rate swap increasing the notional amount initially to $11,238,710 and reducing the fixed rate from 6.76 percent to 5.12 percent. The new notional amount is scheduled to amortize monthly in accordance with the expected principal amortization of the underlying borrowings. The expiration date of the swap was changed from December 15, 2001 to September 1, 2002.
On October 2, 1998, in connection with the $75 million acquisition facility, the Company, through FIFS Acquisition, entered into a series of hedging instruments with First Union National Bank designed to hedge floating rate borrowings under the acquisition facility against changes in market rates. Accordingly, the Company entered into two interest rate swap agreements, the first in the initial notional amount of $50.1 million (Swap A) pursuant to which the Company's interest rate is fixed at 4.81 percent; and, the second in the initial notional amount of $24.9 million (Swap B) pursuant to which the Company's interest rate is fixed at 5.50 percent. The notional amount outstanding under each swap agreement amortizes based on an implied amortization of the hedged indebtedness. Swap A has a final maturity of December 20, 2002 while Swap B matured on 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 that is not fully covered by the aggregate notional amount outstanding under the swaps. The first cap agreement (Class A Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper rate exceeds 4.81 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap A and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is amortized in interest expense for the period. The second cap agreement (Class B Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper rate exceeds 6 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap B and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is imbedded in the fixed rate applicable to Swap B. Pursuant to the refinance of the acquisition facility on August 8, 2000, the Class B Cap was terminated and the notional amounts of the Swap A and Class A Cap were adjusted downward to reflect the lower outstanding balance of the Class A Notes. The amendment or cancellation of these instruments resulted in a gain of $418,609. This derivative net gain is being amortized over the life of the initial derivative instrument. In addition, the two remaining hedge instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated the three interest rate swaps and one interest rate cap with an aggregate notional value of $130,165,759 as cash flow hedges as defined under SFAS No. 133. Accordingly, any changes in the fair value of these instruments resulting from the mark-to-market process are recorded as unrealized gains or losses and reflected as an increase or reduction in shareholders' equity through other comprehensive income (loss). In connection with the decision to enter into the $100 million floating rate swaps on June 1, 2001, the Company elected to change the designation of the $100 million fixed rate swap and not account for the instrument as a hedge under SFAS No. 133. As a result, the change in fair value of both swaps is reflected in net earnings for the period subsequent to May 31, 2001. In conjunction with this designation and the adoption of SFAS 133 and SFAS 138, the Company recorded a transition adjustment in the aggregate amount of $(2,501,595), net of a tax benefit of $1,437,925, as a reduction to shareholders' equity and recorded a corresponding liability to reflect the fair market value of the derivatives as of May 1, 2001. The equity adjustment is classified as other comprehensive income (loss) and the derivative liability is classified in the interest rate derivative positions liability. Over a period ending April 2004, the maturity date of the final swap, the Company will reclassify into earnings substantially all of the transition adjustment originally recorded.
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. Solely at its expense, the Company carries these coverages 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, 2002, 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 percent 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, 2002 were $5,344,975, $3,413,186 and $2,382,031, respectively, and accounted for 3.8 percent, 3.0 percent and 3.1 percent 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 percent 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 percent 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, National Union pays it after the claim is processed, and National Union is then reimbursed in full by the Insurance Affiliate. As of April 30, 2002, gross premiums had been ceded to the Insurance Affiliate by National Union in the amount of $24,345,460 and, since its formation, the Insurance Affiliate reimbursed National Union for aggregate reinsurance claims in the amount of $6,976,127. 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, 2002, the Insurance Affiliate had capital and surplus of $1,814,379 and unencumbered cash reserves of $1,082,138 in addition to the $2,656,433 trust account.
The ALPI coverage as well as the Insurance Affiliate's 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 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. Enhancement for the FIARC commercial paper facility is provided by a surety bond issued by MBIA Insurance Corporation. The surety bond provides payment of principal and interest to VFCC in the event of payment default by FIARC. MBIA is paid a surety premium equal to 0.35 percent per annum on the average outstanding borrowings under the facility. The surety bond is issued for a term to coincide with the facility. Termination of the surety bond would result in default under the FIARC commercial paper facility.
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 overcollateralization and a 2 percent cash reserve requirement.
CREDIT ENHANCEMENT -- TERM NOTES. A surety bond issued by MBIA Insurance Corporation enhances the 2000-A Term Notes issued in January 2000 and the 2002-A Term Notes issued in January 2002. The surety bond provides payment of principal and interest to the noteholders in the event of payment default by the 2000-A Trust and the 2002-A Trust. MBIA is paid a surety premium equal to 0.35 percent per annum on the outstanding balance of the 2000-A and 2002-A Term Notes. The surety bond was issued for the term of the underlying notes, which mature on February 15, 2006 and December 15, 2008, for the 2000-A Term Notes and 2002-A Term Notes, respectively.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may be adversely affected by nonperforming receivables. The Company seeks to manage its risk of credit loss through (i) prudent credit evaluations, (ii) risk management activities, (iii) effective collection procedures, and (iv) by maximizing recoveries on defaulted loans. The allowance for credit losses of $2,338,625 as of April 30, 2002 and $2,688,777 as of April 30, 2001 as a percentage of Receivables Held for Investment of $212,926,747 as of April 30, 2002 and $244,684,343 as of April 30, 2001 was 1.1 percent.
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, 2002 and April 30, 2001, the nonaccretable loss reserve as a percentage of Receivables Acquired for Investment was 14.6% and 8.6%, respectively. The nonaccretable portion represents the excess of the loan's scheduled contractual principal and interest payments over its expected cash flows. The increase as of April 30, 2002 is related to an additional reserve provided by the third quarter write down of $1.3 million related to increasing the cumulative loss rate in the cash flow projections. This write down occurred due to higher severity and frequency of losses realized to date and to reserve for higher expected potential losses. The Company also reclassifies accretable yield and nonaccretable difference as assumptions are updated. For the year ended April 30, 2002, the increase in accretable yield is primarily due to increasing the expected term of the remaining cash flow in order to allow for collections on charged off receivables. By extending the cash flow projection model life, accretable yield must be increased to provide for future income.
The Company considers a loan to be delinquent when the borrower fails to make a scheduled payment of principal and interest. Accrual of interest is suspended when the payment from the borrower is over 90 days past due. Generally, repossession procedures are initiated 90 to 120 days after the payment default.
The Company retains the credit risk associated with the receivables acquired. The Company purchases credit enhancement insurance from third party insurers which covers the risk of loss upon default and certain other risks. Until March 1994, such insurance absorbed substantially all credit losses. In April 1994, the Company established a captive insurance subsidiary to reinsure certain risks under the credit enhancement insurance coverage for all receivables acquired in March 1994 and thereafter. In addition, receivables financed under the Auto Trust, FIARC and FIACC commercial paper facilities do not carry default insurance. Provisions for credit losses of $8,940,601 and $8,351,234 have been recorded for the twelve months ended April 30, 2002 and April 30, 2001, respectively.
The Company calculates the allowance for credit losses in accordance with SFAS 5, "Accounting for Contingencies". SFAS 114, "Accounting for Creditors for Impairment of a Loan" does not apply to the Company since the Receivables Held for Investment are comprised of a large group of smaller balance homogenous loans.
The Company applies a systematic methodology in order to determine the amount of the allowance for credit losses. The specific methodology utilized is a six-month migration analysis whereby the Company compares the aging status of each loan from six months prior to the aging loan status as of the reporting date. These factors are then applied to the aging status of each loan at the reporting date in order to calculate the number of loans that are expected to migrate to impaired status. The estimated number of impairments is then multiplied by estimated loss per loan, which is based on historical information. The computed reserve is then compared to the amount recorded for adequacy. The Company compares the six-month result to prior six-month periods to compare trends and evaluate any other internal or external factors that may affect collectibility. The allowance for credit losses is based on estimates and qualitative evaluations and ultimate losses will vary from current estimates. These estimates are reviewed periodically and as adjustments, either positive or negative, become necessary, are reported in earnings in the period they become known.
For Receivables Acquired for Investment, nonaccretable difference represents contractual principal and interest payments the Company will be unable to collect. The Company analyzes the composition of these liquidating portfolios in order to estimate a future loss rate. Criteria evaluated include delinquencies, historical charge offs, recovery rates, portfolio seasoning and economic conditions. A cash flow model that considers term, interest rate, loss rate, prepayment rate and recovery rate is consistently applied to project expected cash flows. The difference between expected cash flows and total contractual principal and interest payments is the nonaccretable difference. During the third quarter of the year ended April 30, 2002, the Company increased the cumulative loss rates on the warehouse and FIACC portfolios by 1.44% and ..42%, respectively. The total increase to nonaccretable difference of $1,288,885 relates to the recessionary environment and the impact it has on customers' ability to maintain comparable paying employment. Additionally, the effective decrease in prices of new automobiles through incentive programs offered by captives contributed to decreasing prices and demands for used vehicles. This results in lower recovery rates realized through repossessions. The collateral comprising the Receivables Acquired for Investment is at higher risk as it is primarily older model used cars with higher mileage. The increase in accretable yield results from increasing the expected term of the remaining cash flow in order to allow for collections on charged off receivables. By extending the cash flow projection model life, accretable yield must be increased to provide for future income.
The following table sets forth certain information regarding the Company's delinquency and charge-off experience over its last two fiscal years (dollars in thousands):
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 Securitized Receivables was 11.3 percent and 6.0 percent as of April 30, 2002, and 2001, respectively.
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, 2002, approximately 20 percent of the receivables that had been acquired by the Company related to new vehicles and approximately 80 percent of the receivables arose from the sale of used vehicles.
SECURITIZATION
Many finance companies similar to the Company engage in "securitization" transactions whereby receivables are pooled and conveyed to a trust or other special purpose entity, with interests in the entity being sold to investors. As the pooled receivables amortize, finance charge collections are passed through to the investors at a specified rate for the life of the pool and an interest in collections exceeding the specified rate is retained by the sponsoring finance company. For accounting purposes, the sponsor often recognizes as revenue the discounted present value of this excess 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 off-balance sheet securitization transactions resulting in gains on sale of receivables.
In connection with the acquisition of FISC 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). The outstanding balance of the receivables sold pursuant to these two securitizations were repurchased by the Company in September 2000 and March 2001, respectively, and are now reflected in Receivables Acquired for Investment.
EMPLOYEES
The Company had 150 employees as of April 30, 2002, including 39 located at its headquarters in Houston, 105 located at its loan servicing center in Atlanta and 6 regional marketing representatives. The Company's employees are covered by group health insurance, but the Company has no pension, profit-sharing or other material benefit programs. Effective May 1, 1994, the Company adopted a participant-directed 401(k) retirement plan for its
employees. An employee becomes eligible to participate in the plan immediately upon employment. The Company pays the administrative expenses of the 401(k) plan. The Company also matches a percentage of each participant's voluntary contributions up to a maximum voluntary contribution of 3 percent of the participant's compensation. In fiscal years 2002 and 2001, the Company recorded matching contributions to the 401(k) plan of $30,265 and $32,932, respectively. Prior to fiscal year 2000, no matching contributions were made. Effective April 28, 1998, the Company established a participant-directed Deferred Compensation Plan for certain executive officers of the Company. Under the terms of the Deferred Compensation Plan, the participants may elect to make contributions to the plan that exceeds amounts allowed under the Company's 401(k) plan. The Company pays the administrative expenses of the Deferred Compensation Plan. As of April 30, 2002 and 2001, the amounts invested under the Deferred Compensation Plan totaled $256,876 and $527,958, respectively. 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 is provided by a third party application service provider through which the Company accesses a mainframe system which 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. The Company pays a monthly usage fee to the service provider based on the number of accounts serviced. The Company also utilizes auto dialer software that 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 with all loans boarded electronically following funding from the origination system 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 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.
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 non-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 non-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 in states in which the Company conducts material business 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.
ITEM 2.
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 12,369 square feet on the seventh floor of an eight-story office building. This space is held under a lease requiring average annual rentals of approximately $209,000 and expiring on February 28, 2005, with an option to renew for five years at the market rate then prevailing.
The Company's offices in suburban Atlanta consist of approximately 27,467 square feet on the third and fourth floor of a four-story office building. This space is held under a lease requiring average annual rentals of approximately $566,000 and expiring on June 30, 2007, with an option to renew for two consecutive five-year periods at the market rate then prevailing.
The Company owns no real property.
ITEM 3.
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.
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.
PART II
ITEM 5.
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.
As of July 1, 2002, 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.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for the five fiscal years ended April 30, 2002, 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).
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(1) On October 2, 1998, the Company completed the acquisition of FISC. FISC 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL
Net loss for the year ended April 30, 2002, was $(309,012) or $(0.06) per common share. Net income for the year ended April 30, 2001, was $51,646 or $0.01 per common share. The results for fiscal year 2002 were negatively impacted by a third quarter $1,260,000 loss, or $882,000 net of minority interest, on the Receivables Acquired for Investment due to an increase in projected loss rates. Additionally, during the third quarter, the Company amortized deferred financing costs and warrants of $602,162 related to restructuring of debt facilities. The results for fiscal 2001 include the effects of $1.6 million in pre-tax, non-cash charges in the fourth quarter. See Results of Operations.
OVERVIEW
The Company is a consumer finance company engaged in both the purchase of receivables originated by franchised automobile dealers and originating loans directly to consumers in connection with the sale of new and late-model used vehicles. The Company specializes in lending to consumers with impaired credit profiles. At April 30, 2002, the Company had a network of 1,452 franchised dealers in 27 states from which it regularly purchases receivables at the time of origination. The Company also originates loans directly through consumers utilizing the Internet and direct marketing. While the Company intends to continue to geographically diversify its receivables portfolio, approximately 26 percent of Receivables Held for Investment at April 30, 2002 represent receivables acquired from dealers or originated to consumers located in Texas.
The primary source of the Company's revenues is 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 First Investors Financial Servicing Corporation ("FISC") formally known as Auto Lenders Acceptance Corporation, from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC 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 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. FISC performs servicing and collection functions on a $221 million portfolio of loans originated in 31 states.
The following table summarizes the Company's receivables and net interest income for the last two fiscal years (dollars in thousands):
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- ---------- (1) Amounts shown are net of amortization of premium and deferred fees. (2) Amounts shown for the year ended April 30, 2002 and April 30, 2001 reflect $709 and $1,215, respectively, in interest income related to minority interest. (3) Includes facility fees and fees on the unused portion of the credit facilities.
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 Held for Investment and the Company's average cost of debt utilized to fund these receivables, and its net interest margin (averages based on month-end balances):
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(1) Represents interest income as a percentage of average Receivables Held for Investment outstanding. (2) Represents interest expense as a percentage of average debt outstanding. (3) Represents yield on Receivables Held for Investment less average cost of debt. (4) Represents net interest income as a percentage of average Receivables Held for Investment outstanding.
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 by increasing direct to consumer lending. 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):
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 was $23.8 million in 2002, a decrease of 2 percent when compared to amounts reported in 2001 and flat compared to amounts reported in 2000.
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):
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 2002, COMPARED TO FISCAL YEAR ENDED APRIL 30, 2001 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 2002 decreased $6,818, or 15 percent, over 2001, primarily as a result of a decrease in the average principal balance of Receivables Held for Investment of 8 percent from 2001 to 2002 and a decrease in the effective yield from 16.1% for 2001 to 15.4% in 2002. Additionally the interest income on Receivables Acquired for Investment and Investment in Trust Certificates decreased by 39 percent. The decrease in interest income on Receivables Acquired for Investment and Investment in Trust Certificates is attributable to a 60 percent decline in the average principal balances of the Receivables Acquired for Investment and Investment in Trust Certificates for 2002 as compared to 2001.
INTEREST EXPENSE. Interest expense for 2002 decreased by $6,431, or 32 percent, over 2001. A decrease in the weighted average borrowings outstanding under credit and term facilities of 9 percent resulted in $1,802 of this difference. These facilities are used to fund Receivables Held for Investment. The weighted average cost of debt to fund Receivables Held for Investment decreased to 5.8 percent for the year ended April 30, 2002 compared to 7.6 percent for the year ended April 30, 2001 accounting for $4,117 of the difference. Included in the decrease is the 2001 write off of $230 of deferred financing costs related to a reduction in the FIACC borrowing capacity. Lastly, the interest expense on the Receivables Acquired for Investment decreased $512 primarily resulting from a decrease in the weighted average borrowings outstanding of 42 percent.
NET INTEREST INCOME. Net interest income decreased by $387 in 2002, a decrease of 2 percent over 2001. Decreases in interest income from the Receivables Held for Investment and Receivables Acquired for Investment and Investment in Trust Certificates were offset by savings in interest expense on the Receivables Acquired for Investment and Investment in Trust Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2002 increased by $589, or 7 percent, over 2001. The provision is affected by a) the amount of net charge offs, b) changes in the portfolio size, and c) changes in the target percentage of overall allowance to outstanding receivables. Net charge offs increased from $7,796 in fiscal 2001 to $9,291 in fiscal 2002 due to an increase in the frequency of repossessions and lower recovery rates from the sales of repossessed vehicles. The higher frequency is directly related to the weakened economic conditions and the resulting inability of certain customers to maintain comparable employment. Lower recovery rates on repossessions are due to an increase in supply of used vehicles and increased incentives for new vehicles which decreased the demand and price for used vehicles. Offsetting the increase in the charge offs was the provision impact of a declining portfolio. Based primarily on historical loss experience of various aging categories, the Company provides a reserve equal to 1.1% of the outstanding principal balance of Receivables Held for Investment. Since the average portfolio size has decreased during fiscal 2002, a lower provision expense was incurred. Lastly, in fiscal 2001, the provision expense increased from .9% to 1.1% of outstanding principal balance of Receivables Held for Investment or $430. The increase was made in light of the slowdown in economic growth and softness in the
employment rate. This increased the provision expense in 2001 and also contributed an offsetting effect to the higher charge offs when comparing total 2002 expense to 2001.
LOSS ON RECEIVABLES ACQUIRED FOR INVESTMENT AND TRUST CERTIFICATES. The loss in fiscal year 2002 increased to $1,260 from $400 for fiscal 2001. During the third quarter of fiscal 2002 a loss of $1,260 was recorded on the Receivables Acquired for Investment and Investment in Trust Certificates. These assets are comprised of loans previously originated by Auto Lenders Acceptance Corporation and include a portfolio of warehouse loans and a portfolio of loans that were previously securitized. The securitized loans were subsequently redeemed and funded through the FIACC credit facility. The 2002 loss is due to a ..42%, or $334, and 1.44%, or $954, increase in the cumulative loss rate for the FIACC and warehouse portfolios, respectively. The increase in the cumulative loss rates was necessary due to the higher loss frequency and severity in these portfolios. These loans are secured by older vehicles which typically experience a larger drop in value in a weak auction market. The fiscal 2001 writedown of $400 was recorded on the ALAC Automobile Receivables Trust 1998-1 and was due to an increase in the cumulative loss rate of .81%. The increase in the loss rate was necessary due to estimated future losses exceeding losses that were previously projected due to softened economic conditions and lower recovery rates on the collateral. The loss to the Company, net of minority interest, is $882 and $280 for fiscal 2002 and 2001, respectively.
SERVICING INCOME. Servicing income represents amounts received on loan receivables previously sold by FISC in connection with two asset securitization transactions. Under these transactions, FISC, as servicer, is entitled to receive a fee of 3 percent on the outstanding principal balance of the securitized receivables plus reimbursement for certain costs and expenses incurred as a result of its collection activities. One securitization was called September 15, 2000 and the other was called March 15, 2001, when the underlying receivables were repurchased. Subsequent to the call date, no further servicing income is earned.
LATE FEES AND OTHER INCOME. Late fees and other income primarily represents late fees collected from customers on past due accounts, collections on certain FISC assets which had previously been charged off by the Company, and interest income earned on short-term marketable securities and money market instruments. Late fees and other income decreased to $1,810 in 2002 from $2,563 in 2001 or a 29% decrease. The decrease is primarily due to lower reinvestment rates earned on restricted cash balances. In addition to the declining reinvestment rates, the reinvestment income was also negatively impacted by the smaller portfolio.
UNREALIZED LOSS ON INTEREST RATE DERIVATIVE POSITIONS. In conjunction with the adoption of SFAS 133, the Company is required to report the fair value of interest rate derivative positions. Unrealized losses are primarily related to mark to market movements in the $100 million 6.42% pay fixed swap versus movements in the $100 million 5.025% receive floating swap. These two derivatives will not directly offset over the remaining term due to interest rate fluctuations between periods.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs decreased to $8,041 in 2002 from $9,389 in 2001. The decrease is primarily due to reduced headcount needs related to lower originations and a lower managed portfolio.
OTHER INTEREST EXPENSE. Other interest expense decreased $526, or 40 percent, for the year ended April 30, 2002 over the year ended April 30, 2001. The decrease is principally related to a decrease in the average borrowings outstanding under the working capital facility of 9 percent and a 34 percent reduction in the interest rate.
OTHER EXPENSES. Other expenses decreased $232 or 3% percent in fiscal 2002 primarily due to decreases in telephone expense and lease expense of $388 and $180, respectively, offset by increases in depreciation and amortization of $160 and third party service bureau fees of $159. Telephone expense decreased from 2001 to 2002 due to lower long distance rates and a smaller portfolio. Lease expense decreased primarily due to the completion of an operating lease in 2002. Amortization increased due to amortization of deferred financing costs and stock warrants related to the term loan working capital facility restructured with Bank of America on December 22, 2001. Amortization of these fees and warrants were $686 higher in 2002 compared to 2001. Included in this increase is $555 of amortization related to the termination of the term loan working capital facility with Bank of America on December 6, 2001. A new term loan facility with First Union National Bank was entered into on December 6, 2001 in order to refinance the outstanding borrowings and increase the size of the facility. Depreciation decreased by
$526 in 2002 compared to 2001 related to a write off of capitalized software in 2001 and the completion of a capital lease amortization in mid 2002. In December 2000 in order to increase the stability of operations, the Company migrated to a third party service bureau which became the primary system for collecting and servicing the managed loan portfolio. After conversion and testing, the Company abandoned the use of internal software and expensed $274 of unamortized amounts. Additionally, in November 2001, the Company completed the amortization of a capital lease used to acquire assets in conjunction with the purchase of FISC. Consequently, expenses for 2002 were $250 less than 2001 as related to the capital lease. Third party service bureau fees increased as the Company began using the third party provider in December 2000, thus only five months of expenses were incurred in 2001 compared to a full year for 2002.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During 2002, income before provision for income taxes and minority interest decreased by $1,061, or 118 percent from 2001 as a result of the factors discussed above.
FISCAL YEAR ENDED APRIL 30, 2001, COMPARED TO FISCAL YEAR ENDED APRIL 30, 2000 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for 2001 increased by $4,089, or 10 percent over 2000, primarily as a result of an increase in the average principal balance of Receivables Held for Investment of 19 percent from 2000 to 2001 offset by the decrease in interest income on Receivables Acquired for Investment and Investment in Trust Certificates of 36 percent. The decrease in interest income on Receivables Acquired for Investment and Investment in Trust Certificates is attributable to a 52 percent decline in the average principal balances of the Receivables Acquired for Investment and Investment in Trust Certificates for 2001 as compared to 2000.
INTEREST EXPENSE. Interest expense for 2001 increased by $3,631, or 22 percent, over 2000. An increase in the weighted average borrowings outstanding under credit and term facilities of 23 percent resulted in $3,174 of this difference. These facilities are used to fund Receivables Held for Investment. The weighted average cost of debt to fund Receivables Held for Investment increased to 7.6 percent for the year ended April 30, 2001 compared to 6.7 percent for the year ended April 30, 2000 accounting for $2,321 of the difference. Contributing to this increase is the write off of $230 of deferred financing costs related to a reduction in the FIACC borrowing capacity. Conversely, the interest expense on the Receivables Acquired for Investment decreased $1,864 primarily resulting from a decrease in the weighted average borrowings outstanding of 49 percent.
NET INTEREST INCOME. Net interest income increased by $458 in 2001, an increase of 2 percent over 2000. Increases in net interest income from the Receivables Held for Investment were offset by decreases in the Receivables Acquired for Investment and Investment in Trust Certificates.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2001 increased by $1,937, or 30 percent, over 2000, as a result in the growth of Receivables Held for Investment and the increase in the allowance for credit losses to 1.1 percent of outstanding receivables in 2001 compared to .9 percent of outstanding receivables for 2000. The increase of $430 was made in light of the recent slowdown in economic growth and softness in the employment rate. Net charge-offs increased from $5,810 in fiscal 2000 to $7,796 in fiscal 2001, due to the increase in Receivables Held for Investment and a higher charge-off rate due to a slight increase in the repossession rate and lower repossession recoveries.
LOSS ON TRUST CERTIFICATES. During the fourth quarter of fiscal 2001 a loss of $400 was recorded on the ALAC Automobile Receivables Trust 1998-1 related to an increase in the cumulative loss rate of .81%. The increase in the loss rate was necessary due to estimated future losses exceeding losses that were previously projected. Losses were negatively impacted by higher frequency and severity than originally anticipated due to softened economic conditions and lower recovery rates on the collateral. The loss to the Company, net of the minority interest, is $280.
SERVICING INCOME. Servicing income represents amounts received on loan receivables previously sold by FISC in connection with two asset securitization transactions. Under these transactions, FISC, as servicer, is entitled to receive a fee of 3 percent on the outstanding principal balance of the securitized receivables plus reimbursement for certain costs and expenses incurred as a result of its collection activities. Servicing income decreased 65 percent for fiscal 2001 as compared to fiscal 2000. This decrease results from the declining principal balance of the securitized
receivables as well as liquidation of the securitizations. One securitization was called September 15, 2000 and the other was called March 15, 2001, when the underlying receivables were repurchased. Subsequent to the call date, no further servicing income is earned.
LATE FEES AND OTHER INCOME. Late fees and other income primarily represents late fees collected from customers on past due accounts, collections on certain FISC assets which had previously been charged off by the Company, and interest income earned on short-term marketable securities and money market instruments. Late fees and other income decreased to $2,563 in 2001 from $2,728 in 2000 mainly attributable to lower late fees as a result of the call of the two securitizations. Under the servicing agreement, fees collected were paid to the Company as additional servicing compensation. After the call, fees collected are recorded as part of accretable yield in the Receivables Acquired for Investment.
SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the Company to General Electric Credit Corporation with which the Company had a servicing relationship on its Receivables Held for Investment. Effective July 6, 1999, the Company began servicing its portfolio in-house and terminated the General Electric arrangement. Thus, beginning in July 1999, the Company incurred no third party servicing expenses.
SALARIES AND BENEFIT EXPENSES. Salaries and benefits decreased from $9,413 in 2000 to $9,389 in 2001. The decrease is a result of decreasing staff levels in light of the decline in the Company's managed receivables portfolio. The majority of the decrease occurred in the fourth quarter 2001.
OTHER INTEREST EXPENSE. Other interest expense increased $157, or 14 percent, for the year ended April 30, 2001 over the year ended April 30, 2000. The increase is principally related to an increase in the average borrowings outstanding under the working capital facility of 23 percent.
OTHER EXPENSES. Other expenses increased $1,192 or 21 percent in fiscal 2001. The increase is largely due to $696 in non-recurring charges primarily related to the write-off of certain unamortized software costs, professional fees that were incurred during the period, and other non-cash costs. In December 2000 and in order to increase the stability of operations, the Company migrated to a third party service bureau which became the primary system for collecting and servicing the managed loan portfolio. After conversion and testing, the Company abandoned the use of internal software and expensed $274 of unamortized software costs. The Company also expensed $120 of capitalized bank fees related to a search for possible equity or debt investors. The project did not yield acceptable pricing for the Company and the project was abandoned and expensed. Also included in the non-recurring charges was $227 of repossession related expenses. Prior to December 2000, repossession related expenses were written off upon sale of the collateral. Beginning in December 2000 and in conjunction with converting to the third party service bureau, the new policy is to expense repossession related expenses upon repossession of the collateral. Expenses for fiscal 2001 were also reflective of a full year of servicing costs related to Receivables Held for Investment, which were converted from a third-party servicer in July 1999.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During 2001, income before provision for income taxes and minority interest decreased by $3,771, or 81 percent from 2000 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH FLOWS. The Company's business requires significant cash flow to support its operating activities. The principal cash requirements include (i) amounts necessary to acquire receivables from dealers and fund required reserve accounts, (ii) amounts necessary to fund premiums for credit enhancement insurance or other credit enhancement required by the Company's financing programs, and (iii) amounts necessary to fund costs to retain receivables, primarily interest expense. 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. The Company paid $78 million for receivables acquired to be held for investment for 2002 compared to $115 million in 2001.
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 $50 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 $150 million. Additionally, the Company has transferred receivables from the warehouse credit facilities and issued Term Notes. Substantially all of the Company's receivables are pledged to collateralize these credit facilities and Term Notes.
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 $126.2 million in 2002 and $122.3 million in 2001. 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 the fiscal year 2002, the Company's collections on Receivables Held for Investment exceeded cash required to purchase Receivables Held for Investment by $12.9 million. During the fiscal year 2001, the Company required net cash of $32.7 million as the receivable purchases exceeded the portfolio collections. The Company has relied on borrowed funds to provide the source of cash flow in periods of growth. As of April 30, 2002, the Company has $170.4 million of available capacity in the warehouse credit facilities to fund future growth.
In addition to the excess cash flow generated from the principal and interest collections on the receivables portfolio, the Company collects servicing fees funded from each of the credit facilities. Servicing fees range from 2% to 2.5% of the outstanding principal balance of the loans. Excess cash flows and servicing fees are received after month end but relate to the prior month activity. Thus upon filing of the monthly servicing statements, a portion of the restricted cash is converted to cash available to fund operations. At April 30, 2002 and 2001, the Company's unencumbered cash was $585,727 and $1,011,249, respectively. Excess cash and servicing fees collected after month end but related to the prior month activity totaled $1,845,664 and $1,943,605 as of April 30, 2002 and 2001, respectively. The decrease in available cash is primarily due to the declining portfolio's effect on excess cash and servicing fees. Management believes the unencumbered cash and cash inflows are adequate to fund cash requirements for operations.
CAPITALIZATION. The Company has financed its acquisition of such receivables primarily through these types of credit facilities since 1992. 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 and the issuance of secured term notes 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 initial acquisition financing for receivables has been provided through a syndicated warehouse credit facility agented by First Union National Bank. The borrowing base is defined as the sum of the principal balance of the receivables pledged and the amount on deposit with the Company to fund receivables to be acquired. The Company is required to maintain a reserve account equal to the greater of one percent of the principal amount of receivables financed or $250,000. Borrowings under the FIRC credit facility bear interest at a rate selected by the Company at the time of the advance of either the base rate, defined as the higher of the prime rate or the federal funds rate plus .5 percent, the LIBOR rate plus .5 percent, or a rate agreed to by the Company and the banks. The facility also provides for the payment of a fee of .25 percent per annum based on the total committed amount.
On November 14, 2001, the facility was renewed to December 7, 2001. On December 7, 2001, the Company entered into an agreement with First Union National Bank to extend the maturity date of the facility until December 5, 2002. In conjunction with this renewal, First Union assumed the role of agent and increased its commitment to $50 million from $20 million. The total commitment remains at $50 million and there were no other material changes to the terms and conditions of the facility. Under the renewal mechanics of the facility, should the lenders elect not to renew the facility beyond December 5, 2002, the facility would convert to a term loan facility which
would mature six months thereafter and amortize monthly in accordance with the borrowing base with any remaining balance due at maturity.
Borrowings under the FIRC credit facility were $36,040,000 and $28,610,000 at April 30, 2001 and April 30, 2002, respectively. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the commercial paper market through a commercial paper conduit facility provided by Variable Funding Capital Corporation (VFCC), a commercial paper conduit administered by First Union National Bank (the "FIARC commercial paper facility"). Receivables are transferred periodically from the FIRC credit facility to FIARC commercial paper facility through the assignment of an undivided interest in a specified group of receivables. VFCC issues commercial paper (indirectly secured by the receivables), the proceeds of which are used to repay the FIRC credit facility.
The financing is provided to a special-purpose, wholly-owned subsidiary of the Company, FIARC. Credit enhancement for the $150 million facility is provided to the commercial paper investors by a surety bond issued by MBIA Insurance Corporation. The Company is not a guarantor of, or otherwise a party to, such commercial paper. Borrowings under the commercial paper facility bear interest at the commercial paper rate plus a borrowing spread equal to .30 percent per annum. Additionally, the agreement provides for additional fees based on the unused amount of the facility and dealer fees associated with the issuance of the commercial paper. A surety bond premium equal to .35 percent per annum is assessed based on the outstanding borrowings under the facility. A one percent cash reserve must be maintained as additional credit support for the facility. At April 30, 2001, the Company had borrowings of $121,808,808 outstanding under the commercial paper facility. The Company had no outstanding borrowings under the FIARC facility as of April 30, 2002.
The FIARC commercial paper facility expired on January 12, 2002. In conjunction with the renewal of the facility to January 13, 2003 the facility commitment was assigned from Enterprise Funding Corporation, a commercial paper conduit administered by Bank of America, to VFCC. No other material changes were made to the facility in conjunction with the assignment to VFCC.
If the facility had not been extended beyond the maturity date, receivables pledged as collateral would be allowed to amortize; however, no new receivables would be allowed to transfer from the FIRC credit facility. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
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 percent 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 Company's interest cost is based on VFCC's commercial paper rates for specific maturities plus 0.55 percent.
At April 30, 2002, borrowings were $2,603,433 under the FIACC commercial paper facility, and had a weighted average interest rate of 5.79 percent, including the effects of program fees and hedge instruments. At April 30, 2001, borrowings were $10,400,901 under the FIACC commercial paper facility, and had a weighted average interest rate of 5.56 percent, including the effects of program fees and hedge instruments. The current term of the FIACC commercial paper facility expires on March 11, 2003. If the facility were not renewed on or prior to the maturity date, the outstanding balance under the facility would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the facility from its lenders
prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1997-1. Accordingly, the Company acquired $8,110,849 in outstanding receivables from the trust and borrowed $6,408,150 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456 of the trust certificates. On March 15, 2001, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1998-1. Accordingly, the Company acquired $9,257,612 in outstanding receivables from the trust and borrowed $7,174,509 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,997,615 in senior notes and redeem $1,946,178 of the trust certificates. The receivables purchased were used as collateral to secure the FIACC borrowing with any residual cash flow generated by the receivables pledged to the Partnership. As a result of utilizing FIACC to fund the repurchase of the ALAC securitization, the Company has elected to utilize the FIACC commercial paper facility solely as the financing source for this repurchase and does not expect to utilize the facility to finance Receivables Held for Investment. As FIACC borrowings support a liquidating portfolio, no excess borrowing capacity exists as of April 30, 2002.
TERM NOTES. On January 29, 2002, the Company, through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002-A Auto Trust") completed the issuance of $159,036,000 of 3.46% percent Class A asset-backed notes ("2002-A Term Notes"). The initial pool of automobile receivables transferred to the 2002-A Auto Trust totaled $135,643,109, which were previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In addition to the issuance of the 2002-A Class A Notes, the 2002-A Auto Trust also issued $4,819,000 in Class B Notes which were retained by the Company and pledged to secure the Working Capital Facility as further described below. Proceeds from the issuance, which totaled $159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be used for future loan originations; (ii) repay all outstanding borrowings under the FIARC commercial paper facility, (iii) reduce the outstanding borrowings under the FIRC credit facility, (iv) pay transaction fees related to the 2002-A Term Note issuance, and (v) fund a cash reserve account of 2 percent or $2,712,862 of the initial receivables pledged which will serve as a portion of the credit enhancement for the transaction. The $25,000,000 pre-fund amount has been completely utilized to fund originations and no cash balances remain as of April 30, 2002. The 2002-A Class A Term Notes bear interest at 3.46 percent and require monthly principal reductions sufficient to reduce the balance of the 2002-A Class A Term Notes to 97 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2002-A Term Notes is December 15, 2008. The Class B Notes do not bear interest but require principal reductions sufficient to reduce the balance of the Class B Notes to 3 percent of the outstanding balance of the underlying receivables pool. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2002-A Class A Notes. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool plus 2 percent of the original balance of receivables transferred under the pre-funding provision. Further enhancement is provided through an initial 1 percent overcollateralization which is required to be increased to 3 percent through excess monthly principal and interest collections. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
On January 24, 2000, the Company, through its indirect, wholly owned subsidiary First Investors Auto Owner Trust 2000-A ("2000-A Auto Trust") completed the issuance of $167,969,000 of 7.174 percent asset-backed notes ("2000-A Term Notes"). A pool of automobile receivables totaling $174,968,641, which were previously owned by FIRC, FIARC and FIACC, secures the 2000-A Term Notes. Proceeds from the issuance, which totaled $167,967,690 were used to repay all outstanding borrowings under the FIARC and FIACC commercial paper facilities, to reduce the outstanding borrowings under the FIRC credit facility, to pay transaction fees related to the 2000-A Term Note issuance and to fund a cash reserve account of 2 percent or $3,499,373 which will serve as a portion of the credit enhancement for the transaction. The 2000-A Term Notes bear interest at 7.174 percent and require monthly principal reductions sufficient to reduce the balance of the 2000-A Term Notes to 96 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2000-A Term Notes is February 15, 2006. As of April 30, 2001 and 2002, the outstanding principal balance on the 2000-A Term Notes was $84,925,871 and
$40,162,801, respectively. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2000-A Term Note holders. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool and a 4 percent over-collateralization requirement. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
The following table summarizes borrowings under the warehouse credit facility, the FIARC and FIACC commercial paper facilities and the 2000-A and 2002-A Term Notes (dollars in thousands):
- ----------
(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. (3) Includes borrowings under the FIACC commercial paper facility for the period from May 1, 2000 until September 15, 2000. See FIACC Commercial Paper Facility.
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 FISC. Contemporaneously with the Company's purchase of FISC, FISC transferred certain assets to FIFS Acquisition, consisting primarily of (i) all receivables owned by FISC as of the acquisition date, (ii) FISC's ownership interest in certain trust certificates and subordinated spread or cash reserve accounts related to two asset securitizations previously conducted by FISC, and (iii) certain other financial assets, including charged-off accounts owned by FISC 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 bore interest at VFCC's commercial paper rate plus 2.35 percent and expired August 14, 2000. 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 FISC 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 FISC is also utilized to reduce principal outstanding on the indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union to refinance the acquisition facility. Under the agreement, a partnership was created in which FIFS Acquisition serves as the general partner and contributed its assets for a 70 percent interest in the partnership and First Union Investors, Inc., an affiliate of First Union, serves as the limited partner with a 30 percent interest in the partnership (the "Partnership"). Pursuant to the refinancing, the Partnership issued Class A Notes in the amount of $19,204,362 and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were used to retire the acquisition debt. The Class A Notes bear interest at VFCC's commercial paper rate plus 0.95 percent per annum and amortize on a monthly basis by an amount necessary to reduce the Class A Note balance as of the payment date to 75 percent of the outstanding principal balance of Receivables Acquired for Investment, excluding Receivables Held for Investment that are applicable to FIACC, as of
the previous month end. The Class B Notes bear interest at VFCC's commercial paper rate plus 5.38 percent per annum and amortize on a monthly basis by an amount which varied based on excess cash flows received from Receivables Acquired for Investment after payment of servicing fees, trustee and back-up servicer fees, Class A Note interest and Class A Note principal, plus collections received on the Trust Certificates. The outstanding balance of the Class A Notes was $3,670,765 as of April 30, 2002 and had a weighted average interest rate of 5.76 percent, including the effects of program fees and hedge instruments. The Class B Notes were paid in full on September 15, 2000. After the Class B Notes were paid in full, all cash flows received after payment of Class A Note principal and interest, servicing fees and other costs, are distributed to the Partnership for subsequent distribution to the partners based upon the respective partnership interests. During fiscal 2002, $972,428 was distributed to the limited partner compared to $3,084,494 for fiscal 2001. The amount of the partners' cash flow will vary depending on the timing and amount of residual cash flows. Beginning in November 2001, the partnership used excess cash flow to retire additional Class A Note principal thus no further partnership distributions will be paid until the Class A Notes are retired. The Company is accounting for First Union's limited partnership interest in the Partnership as a minority interest.
The Class A Notes mature on March 11, 2003. If the Class A Notes are not renewed on or prior to the maturity date, the outstanding balance under the notes would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the notes from the lender prior to maturity. Management considers its relationship with the lender to be satisfactory and has no reason to believe that the notes will not be renewed. If the notes were not renewed, however, or if material changes were made to the terms and conditions, it could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million working capital line of credit with Bank of America and First Union National Bank that was utilized for working capital and general corporate purposes. The facility was increased from $10 million to $13.5 million in December 1999 and was scheduled to mature on December 22, 2000. Effective December 22, 2000, the $13.5 million in outstandings were refinanced through the issuance of a $13.5 million term loan. Under the terms of the facility, provided by Bank of America and First Union, the term loan would be repaid in quarterly installments of $675,000 beginning on March 31, 2001. In addition to the scheduled principal payments, the term loan also required additional principal payments of $300,000 in June and December under certain conditions relating to the size of Bank of America's portion of the outstanding balance. The remaining unpaid balance of the term loan was due at maturity on December 22, 2002. Pricing under the facility was based on the LIBOR rate plus 3 percent. The term loan was secured by all unencumbered assets of the Company, excluding receivables owned and financed by wholly-owned, special purpose subsidiaries of the Company and is guaranteed by First Investors Financial Services Group, Inc. and all subsidiaries that are not special purpose subsidiaries. In consideration for refinancing the working capital facility, the Company paid each lender an upfront fee and issued warrants to each lender to purchase, in aggregate, 167,001 shares of the Company's common stock at a strike price of $3.81 per share. The warrants expire on December 22, 2010. On December 22, 2000, the warrant value of $175,000 was estimated based on the expected difference between financing costs with and without the warrants. These costs were included as deferred financing costs and were to be amortized through the maturity date of the debt. In addition, if certain conditions were met, the Company agreed to issue additional warrants to Bank of America to acquire up to a maximum of 47,945 additional shares of stock at a price equal to the average closing price for the immediately preceding 30 trading days prior to each grant date which is June 30, 2001 and December 31, 2001. Pursuant to this requirement, the Company issued 36,986 warrants to Bank of America at a strike price of $3.56 per share on June 30, 2001. All other terms and conditions of the warrants were identical to the warrants issued in December 2000. The amount of warrants, if any, to be issued on December 31, 2001 was to be determined by the outstanding balance owed to Bank of America under the term loan. In no event, however, could the additional warrants issued on December 31, 2001 exceed 10,959. The fair value of the warrants issued on June 30, 2001 of $38,757 is included as deferred financing costs and amortized through the maturity date of the debt. At April 30, 2001, there was $12,825,000 outstanding under this facility.
On December 6, 2001, the Company entered into an agreement with First Union National Bank to refinance the $11,175,000 outstanding balance of the working capital term loan and increase the size of the facility to $13.5 million. The renewal facility was provided to a special-purpose, wholly-owned subsidiary of the Company, First Investors Residual Funding LP. Upon the issuance of the 2002-A Term Notes on January 29, 2002, a portion of this facility was converted to a $4.5 million term loan tranche which amortizes monthly as principal payments are
collected under the 2002-A Term Note facility. The monthly principal amortization must be sufficient to reduce the amounts outstanding under the term loan tranche of this facility to no greater than 3 percent of the outstanding receivables securing the 2002-A Term Note transaction. The term loan tranche of this working capital facility will be evidenced by the Class B Notes issued in conjunction with the 2002 Auto Trust financing. This principal repayment requirement replaces the current $675,000 per quarter and the additional $600,000 per annum required under the previous facility. The remaining $9 million of the $13.5 million working capital facility revolves monthly in accordance with a borrowing base consisting of the overcollateralization amount and reserve accounts for each of the Company's other credit facilities. The new facility is secured solely by the residual cash flow and cash reserve accounts related to the Company's warehouse credit facilities, the acquisition facility and the existing and future term note facilities. This compares to the previous requirement that all assets of the Company, excluding receivables owned and financed by special purpose subsidiaries, secure the indebtedness. Pricing under the facility was not changed. The maturity of the facility was extended to December 5, 2002. In the event that the facility is not renewed at maturity, residual cash flows from the various receivables financing transactions will be applied to amortize the debt over the remaining life of the underlying receivables. Further, as a result of the refinancing, the Company is not obligated to issue additional warrants covering 10,959 shares of the Company's common stock to Bank of America on December 31, 2001. At April 30, 2002, there was $11,798,520 outstanding under this facility. In conjunction with the refinancing, the Company repaid the working capital term loan and entered into the new working capital facility. Consequently, $554,896 of deferred financing costs and warrants were written off.
The Company presently intends to seek a renewal of the working capital facility from its lender prior to maturity. Should the facility not be renewed, the outstanding balance of the receivables would be amortized in accordance with the borrowing base. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
SHAREHOLDER LOANS - On December 3, 2001 the Company entered into an agreement with one of its existing shareholders and a member of its Board of Directors under which the Company may, from time to time, borrow up to $2.5 million. The proceeds of the borrowings will be utilized to fund certain private and open market purchases of the Company's common stock pursuant to a Stock Repurchase Plan authorized by the Board of Directors and for general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10 percent per annum. The facility is unsecured and expressly subordinated to the Company's senior credit facilities. The facility matures on December 3, 2008 but may be repaid at any time unless the Company is in default on one of its other credit facilities. As of April 30, 2002, $525,000 was outstanding under this facility.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear interest at floating interest rates which are reset on a short-term basis while the secured Term Notes bear interest at a fixed rate of interest. The Company's receivables bear interest at fixed rates that do not generally vary changes in market interest rates. Since a primary contributor to the Company's profitability is its ability to manage its net interest spread, the Company seeks to maximize the net interest spread while minimizing exposure to changes in interest rates. In connection with managing the net interest spread, the Company may periodically enter into interest rate swaps or caps to minimize the effects of market interest rate fluctuations on the net interest spread. To the extent that the Company has outstanding floating rate borrowings or has elected to convert a portion of its borrowings from fixed rates to floating rates, the Company will be exposed to fluctuations in short-term interest rates.
In connection with the issuance of the 2000-A Term Notes, the Company entered into a swap agreement with Bank of America pursuant to which the Company pays a floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent and receives a fixed rate of 7.174 percent from the counterparty. The initial notional amount of the swap was $167,969,000, which amortizes in accordance with the expected amortization of the Term Notes. Final maturity of the swap was August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap at no material gain or loss and enter into a new swap under which the Company would pay a fixed rate of 6.30 percent on a notional amount of $100 million. Under the terms of the swap, the counterparty had the option of extending the swap for an additional three years to mature on April 15, 2004 at a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised its extension option.
On June 1, 2001, the Company entered into interest rate swaps with an aggregate notional amount of $100 million and a maturity date of April 15, 2004. Under the terms of these swaps, the Company will pay a floating rate based on one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to enter into these swap agreements to offset the uneconomic position of the existing fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization and the financing of that repurchase through the FIACC subsidiary on September 15, 2000, FIACC entered into an interest rate swap agreement with First Union under which FIACC pays a fixed rate of 6.76 percent as compared to the one month commercial paper index rate. The initial notional amount of the swap is $6,408,150, which amortizes monthly in accordance with the expected amortization of the FIACC borrowings. The final maturity of the swap was December 15, 2001. On March 15, 2001, in connection with the repurchase of the ALAC 1998-1 Securitization and the financing of that purchase through the FIACC subsidiary, the Company and the counterparty modified the existing interest rate swap increasing the notional amount initially to $11,238,710 and reducing the fixed rate from 6.76 percent to 5.12 percent. The new notional amount is scheduled to amortize monthly in accordance with the expected principal amortization of the underlying borrowings. The expiration date of the swap was changed from December 15, 2001 to September 1, 2002.
On October 2, 1998, in connection with the $75 million acquisition facility, the Company, through FIFS Acquisition, entered into a series of hedging instruments with First Union National Bank designed to hedge floating rate borrowings under the acquisition facility against changes in market rates. Accordingly, the Company entered into two interest rate swap agreements, the first in the initial notional amount of $50.1 million (Swap A) pursuant to which the Company's interest rate is fixed at 4.81 percent; and, the second in the initial notional amount of $24.9 million (Swap B) pursuant to which the Company's interest rate is fixed at 5.50 percent. The notional amount outstanding under each swap agreement amortizes based on an implied amortization of the hedged indebtedness. Swap A has a final maturity of December 20, 2002 while Swap B matured on 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 that is not fully covered by the aggregate notional amount outstanding under the swaps. The first cap agreement (Class A Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper rate exceeds 4.81 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap A and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is amortized in interest expense for the period. The second cap agreement (Class B Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper rate exceeds 6 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap B and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is imbedded in the fixed rate applicable to Swap B. Pursuant to the refinance of the acquisition facility on August 8, 2000, the Class B Cap was terminated and the notional amounts of the Swap A and Class A Cap were adjusted downward to reflect the lower outstanding balance of the Class A Notes. The amendment or cancellation of these instruments resulted in a gain of $418,609. This derivative net gain is being amortized over the life of the initial derivative instrument. In addition, the two remaining hedge instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated the three interest rate swaps and one interest rate cap with an aggregate notional value of $130,165,759 as cash flow hedges as defined under SFAS No. 133. Accordingly, any changes in the fair value of these instruments resulting from the mark-to-market process are recorded as unrealized gains or losses and reflected as an increase or reduction in shareholders' equity through other comprehensive income (loss). In connection with the decision to enter into the $100 million floating rate swaps on June 1, 2001, the Company elected to change the designation of the $100 million fixed rate swap and not account for the instrument as a hedge under SFAS No. 133. As a result, the change in fair value of both swaps is reflected in net earnings for the period subsequent to May 31, 2001. In conjunction with this designation and the adoption of SFAS 133 and SFAS 138, the Company recorded a transition adjustment in the aggregate amount of $(2,501,595), net of a tax benefit of $1,437,925, as a reduction to shareholders' equity and recorded a corresponding liability to reflect the fair market value of the derivatives as of May 1, 2001. The equity adjustment is classified as other comprehensive income (loss) and the derivative liability is classified in the interest rate derivative positions liability. Over a period ending April
2004, the maturity date of the final swap, the Company will reclassify into earnings substantially all of the transition adjustment originally recorded.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may be adversely affected by nonperforming receivables. The Company seeks to manage its risk of credit loss through (i) prudent credit evaluations, (ii) risk management activities, (iii) effective collection procedures, and (iv) by maximizing recoveries on defaulted loans. An allowance for credit losses of $2,338,625 as of April 30, 2002 and $2,688,777 as of April 30, 2001 as a percentage of the Receivables Held for Investment of $212,926,747 as of April 30, 2002 and $244,684,343 as of April 30, 2001 was 1.1 percent.
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, 2002 and April 30, 2001, the nonaccretable loss reserve as a percentage of Receivables Acquired for Investment was 14.6% and 8.6%, respectively. The nonaccretable portion represents the excess of the loan's scheduled contractual principal and interest payments over its expected cash flows. The increase as of April 30, 2002 is related to additional reserve provided by the third quarter write down of $1.3 million related to increasing the cumulative loss rate in the cash flow projections. This write down occurred due to higher severity and frequency of losses realized to date and to reserve for potential losses based on the higher loss curve expected.
The Company considers a loan to be delinquent when the borrower fails to make a scheduled payment of principal and interest. Accrual of interest is suspended when the payment from the borrower is over 90 days past due. Generally, repossession procedures are initiated 90 to 120 days after the payment default.
The Company retains the credit risk associated with the receivables acquired. The Company purchases credit enhancement insurance from third party insurers which covers the risk of loss upon default and certain other risks. Until March 1994, such insurance absorbed substantially all credit losses. In April 1994, the Company established a captive insurance subsidiary to reinsure certain risks under the credit enhancement insurance coverage for all receivables acquired in March 1994 and thereafter. In addition, receivables financed under the 2000-A Auto Trust, 2002-A Auto Trust, FIARC and FIACC commercial paper facilities do not carry default insurance. Provisions for credit losses of $8,940,601 and $8,351,234 have been recorded for the twelve months ended April 30, 2002 and April 30, 2001, respectively.
The Company calculates the allowance for credit losses in accordance with SFAS 5, "Accounting for Contingencies". SFAS 114, "Accounting for Creditors for Impairment of a Loan" does not apply to the Company since the Receivables Held for Investment are comprised of a large group of smaller balance homogenous loans.
The Company applies a systematic methodology in order to determine the amount of the allowance for credit losses. The specific methodology utilized is a six-month migration analysis whereby the Company compares the aging status of each loan from six months prior to the aging loan status as of the reporting date. These factors are then applied to the aging status of each loan at the reporting date in order to calculate the number of loans that are expected to migrate to impaired status. The estimated number of impairments is then multiplied by estimated loss per loan, which is based on historical information. The computed reserve is then compared to the amount recorded for adequacy. The Company compares the six-month result to prior six-month periods to compare trends and evaluate any other internal or external factors that may affect collectibility. The allowance for credit losses is based on estimates and qualitative evaluations and ultimate losses will vary from current estimates. These estimates are reviewed periodically and as adjustments, either positive or negative, become necessary, are reported in earnings in the period they become known.
For Receivables Acquired for Investment, nonaccretable difference represents contractual principal and interest payments the Company will be unable to collect. The Company analyzes the composition of these liquidating
portfolios in order to estimate a future loss rate. Criteria evaluated include delinquencies, historical charge offs, recovery rates, portfolio seasoning and economic conditions. A cash flow model that considers term, interest rate, loss rate, prepayment rate and recovery rate is consistently applied to project expected cash flows. The difference between expected cash flows and total contractual principal and interest payments is the nonaccretable difference. During the third quarter of the year ended April 30, 2002, the Company increased the cumulative loss rates on the warehouse and FIACC portfolios by 1.44% and ..42%, respectively. The total increase to nonaccretable difference of $1,288,885 relates to the recessionary environment and the impact it has on customers' ability to maintain comparable paying employment. Additionally, the effective decrease in prices of new automobiles through incentive programs offered by captives contributed to decreasing prices and demands for used vehicles. This results in lower recovery rates realized through repossessions. The collateral comprising the Receivables Acquired for Investment is at higher risk as it is primarily older model used cars with higher mileage. The increase in accretable yield results from increasing the expected term of the remaining cash flow in order to allow for collections on charged off receivables. By extending the cash flow projection model life, accretable yield must be increased to provide for future income.
The following table sets forth certain information regarding the Company's delinquency and charge-off experience over its last two fiscal years (dollars in thousands):
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 Securitized Receivables was 11.3 percent and 6.0 percent as of April 30, 2002, and 2001, respectively.
MARKET RISK
The market risk discussion and the estimated amounts generated from the analysis that follows are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially due to changes in the Company's product and debt mix, developments in the financial markets, and further utilization by the company of risk-mitigating strategies such as hedging.
The Company's operating revenues are derived almost entirely from the collection of interest on the receivables it retains and its primary expense is the interest that it pays on borrowings incurred to purchase and retain such receivables. The Company's credit facilities bear interest at floating rates which are reset on a short-term basis, whereas its receivables bear interest at fixed rates which do not generally vary with changes in interest rates. The Company is therefore exposed primarily to market risks associated with movements in interest rates on its credit facilities. The Company believes that it takes the necessary steps to appropriately reduce the potential impact of interest rate increases on the Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to fund its origination of receivables. Periodically, the Company will transfer receivables from a revolving to a term credit facility. Currently all of the Company's credit facilities in combination with various swaps bear interest at floating rates tied to either a commercial paper index or LIBOR.
As of April 30, 2002, the Company had $38 million of floating rate secured debt outstanding considering the effect of swap and cap agreements. For every 1 percent increase in commercial paper rates or LIBOR, annual after-tax earnings would decrease by approximately $244,000, assuming the Company maintains a level amount of floating rate debt and assuming an immediate increase in rates. As of April 30, 2001, the Company had $62 million of floating rate secured debt outstanding considering the effect of swap and cap agreements. For every 1 percent increase in commercial paper rates or LIBOR, annual after-tax earnings would decrease by approximately $394,000, assuming the Company maintains a level amount of floating rate debt and assuming an immediate increase in rates.
FORWARD LOOKING INFORMATION
Statements and financial discussion and analysis included in this report that are not historical are considered to be forward-looking in nature. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from anticipated results. Specific factors that could cause such differences include unexpected fluctuations in market interest rates, changes in economic conditions, or changes in the competition for loans. Although the Company believes that the expectations reflected in the forward-looking statements presented herein are reasonable, it can give no assurance that such expectations will prove to be correct.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company included in this Form 10-K are listed under Item 14(a). The Company is not required to file any supplementary financial data under this item.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information responsive to this item appears under the caption "Election of Directors" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders expected to be held September 10, 2002, which is to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this item appears under the caption "Summary Compensation Table" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders expected to be held September 10, 2002, which is to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this item appears under the caption "Security Ownership of Management and Certain Beneficial Owners" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders expected to be held September 10, 2002, which is to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item appears under the caption "Certain Transactions" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders expected to be held September 10, 2002, which is to be filed with the Securities and Exchange Commission, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements on Page.
(3) EXHIBITS
2.1(j) -- Stock Purchase Agreement, dated as of September 9, 1998, between First Investors Financial Services Group, Inc. and Fortis, Inc. to purchase Auto Lenders Acceptance Corporation, a wholly-owned subsidiary of Fortis, Inc. 3.1(a) -- Articles of Incorporation, as amended 3.2(a) -- Bylaws, as amended 4.1(a) -- Excerpts from the Articles of Incorporation, as amended (included in Exhibit 3.1). 4.3(a) -- Specimen Stock Certificate 10.5(a) -- Credit Agreement dated as of October 16, 1992 among F.I.R.C., Inc. ("FIRC") and NationsBank of Texas, N.A., individually and as agent for the banks party thereto, as amended by First Amendment to Credit Agreement and Loan Documents dated as of November 5, 1993, Second Amendment to Credit Agreement and Loan Documents dated as of March 3, 1994, Third Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995 and Fourth Amendment to Credit Agreement and Loan Documents dated as of July 7, 1995. 10.6(a) -- Collateral Security Agreement dated as of October 16, 1992 between FIRC and Texas Commerce Bank National Association as collateral agent for the ratable benefit of NationsBank of Texas, N.A., as agent, and the banks party to the Credit Agreement filed as Exhibit 10.5.
10.7(a) -- Escrow Agreement dated as of October 16, 1992 among FIRC, NationsBank of Texas, N.A. as agent
for the banks party to the Credit Agreement filed as Exhibit 10.5, and Texas Commerce Bank National Association as Escrow Agent. 10.8(a) -- Transfer and Administration Agreement dated as of March 3, 1994 among FIRC, Enterprise Funding Corporation, Texas Commerce Bank National Association and NationsBank N.A. (Carolinas) (formerly NationsBank of North Carolina, N.A.), as amended by Amendment Number 1 dated August 1, 1994, Amendment Number 2 dated February 28, 1995 and Amendment No. 3 dated March 21, 1995. 10.9(a) -- Servicing Agreement dated as of October 16, 1992 between FIRC and General Electric Capital Corporation, as amended by First Amendment to Servicing Agreement dated as of November 4, 1993, Second Amendment to Servicing Agreement dated as of March 1, 1994 and Third Amendment to Servicing Agreement dated as of June 1, 1995. 10.10(a) -- Purchase Agreement between FIRC and First Investors Financial Services, Inc. ("First Investors") dated October 16, 1992, as amended by First Amendment to Purchase Agreement dated as of November 5, 1993 and Second Amendment to Purchase Agreement dated as of March 3, 1994. 10.11(a) -- Auto Loan Protection Insurance Policy dated October 13, 1992 issued by Agricultural Excess & Surplus Insurance Company to FIRC as insured. 10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994 issued by National Union Fire Insurance Company of Pittsburgh to FIRC as insured. 10.13(a) -- Facultative Reinsurance Agreement between National Fire Insurance Company of Pittsburgh and First Investors Insurance Company, as reinsurer, dated as of May 26, 1995. 10.14(a) -- Blanket Collateral Protection Insurance Policy dated October 5, 1992 issued by Agricultural Excess & Surplus Insurance Company to FIRC as insured. 10.15(a) -- ISDA Master Agreement dated August 12, 1994 between FIRC and NationsBank of Texas, N.A. together with Confirmation of U.S. Dollar Rate Swap Transaction dated June 14, 1995 and Confirmation for U.S. Dollar Rate Swap Transaction dated May 16, 1995. 10.16(a) -- Employment Agreement dated as of March 20, 1992 between the Registrant and Tommy A. Moore, Jr., as amended by First Amendment dated as of March 15, 1995 and Second Amendment dated as of July 1, 1995. 10.17(a) -- Lease Agreement between A.I.G. Realty, Inc. and First Investors dated as of June 1, 1992, as amended by Amendment One dated October 29, 1993 and Amendment Two dated October 26, 1994. 10.18(a) -- Redemption Agreement dated as of June 8, 1995 among the Registrant and all holders of its class of 1993 Preferred Stock. 10.21(a) -- 1995 Employee Stock Option Plan of the Registrant. 10.22(a) -- Form of Stock Option Agreement between the Registrant and Robert L. Clarke dated August 25, 1995. 10.23(b) -- Amendment No. 4 dated November 20, 1995 to the Transfer and Administration Agreement dated as of March 3, 1994 filed as Exhibit 10.8. 10.24(b) -- Employment Agreement dated as of May 1, 1996 between the Registrant and Bennie H. Duck. 10.25(b) -- Amendment Three dated October 10, 1995 to the Lease Agreement between A.I.G. Realty, Inc. and the Registrant, filed as Exhibit 10.17. 10.26(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated November 16, 1995. 10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise Funding Corporation and FIRC, Inc. 10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated August 7, 1996. 10.29(d) -- Security Agreement dated as of October 22, 1996 among First Investors Auto Receivables Corporation, Enterprise Funding Corporation, Texas Commerce Bank National Association, MBIA Insurance Corporation, NationsBank N.A., and First Investors Financial Services, Inc. 10.30(d) -- Note Purchase Agreement dated as of October 22, 1996 between First Investors Auto Receivables Corporation and Enterprise Funding Corporation. 10.31(d) -- Purchase Agreement dated as of October 22, 1996 between First Investors Financial Services, Inc. and First Investors Auto Receivables Corporation. 10.32(d) -- Insurance Agreement dated as of October 1, 1996 among First Investors Auto Receivables Corporation, MBIA Insurance Corporation, First Investors Financial Services, Inc., Texas Commerce Bank National Association, and NationsBank N.A.
10.33(d) -- Servicing Agreement dated as of October 22, 1996 between First Investors Auto Receivables
Corporation and General Electric Capital Corporation. 10.34(d) -- Amended and Restated Credit Agreement dated as of October 30, 1996 among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as Agent for the financial institutions party thereto. 10.35(d) -- Amended and Restated Collateral Security Agreement dated as of October 30, 1996 between F.I.R.C., Inc. and Texas Commerce Bank National Association as collateral agent for the ratable benefit of NationsBank of Texas, N.A. individually and as agent for the financial institutions party to the Amended and Restated Credit Agreement filed as Exhibit 10.34. 10.36(d) -- Amended and Restated Purchase Agreement dated as of October 30, 1996 between First Investors Financial Services, Inc. and F.I.R.C., Inc. 10.37(d) -- Amended and Restated Servicing Agreement between F.I.R.C., Inc. and General Electric Capital Corporation. 10.38(e) -- Third Amendment dated January 20, 1997 to the Employment Agreement dated as of March 20, 1992 between the Registrant and Tommy A. Moore, Jr. 10.39(f) -- First Amendment to the Amended and Restated Credit Agreement dated January 31, 1997 by and among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto. 10.40(f) -- Second Amendment to the Amended and Restated Credit Agreement dated May 15, 1997 by and among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto. 10.41(f) -- Employment Agreement dated July 16, 1997 between First Investors Financial Services, Inc. and Tommy A. Moore, Jr. 10.42(f) -- Credit Agreement dated as of July 18, 1997 between First Investors Financial Services, Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto. 10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997 by and among First Investors (Vermont) Holdings, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto. 10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among First Investors Financial Services, Inc. and NationsBank of Texas, N.A., as agent for the banks party thereto. 10.45(g) -- Security Agreement dated as of January 1, 1998 among First Investors Auto Capital Corporation, First Union Capital Markets Corp., and First Investors Financial Services, Inc. 10.46(g) -- Note Purchase Agreement dated as of January 1, 1998 between First Investors Auto Capital Corporation, First Union Capital Markets Corp., the Investors, First Union National Bank, and Variable Funding Capital Corporation. 10.47(g) -- Purchase Agreement dated as of January 1, 1998 between First Investors Financial Services, Inc. and First Investors Auto Capital Corporation. 10.48(g) -- Servicing Agreement dated as of January 1, 1998 between First Investors Auto Capital Corporation and General Electric Capital Corporation. 10.49(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Bennie H. Duck. 10.50(h) -- Employment Agreement dated as of May 1, 1998 between the Registrant and Joseph A. Pisano. 10.51(i) -- Loan and Security Agreement dated as of October 2, 1998 between Variable Funding Capital Corporation, Auto Lenders Acceptance Corporation, ALAC Receivables Corp. and FIFS Acquisition Funding Company, L.L.C. 10.52(i) -- Custodial Agreement dated as of October 2, 1998 among Variable Funding Capital Corporation, Norwest Bank Minnesota, NA, and Auto Lenders Acceptance Corporation. 10.53(i) -- Contract Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders Acceptance Corporation and FIFS Acquisition Funding Company, L.L.C. 10.54(i) -- NIM Collateral Purchase Agreement dated as of October 2, 1998 by and between Auto Lenders Acceptance Corporation, ALAC Receivables Corporation and FIFS Acquisition Funding Company, L.L.C. 10.55(k) -- Third Amendment to the Amended and Restated Credit Agreement dated January 25, 1999 by and among F.I.R.C., Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto. 10.56(k) -- Second Amendment to the Credit Agreement dated January 25, 1999 between First Investors Financial Services, Inc. and NationsBank of Texas, N.A., individually and as agent for the banks party thereto. 10.57(l) -- Amendment Number 2 to Security Agreement dated March 31, 1999 among First Investors Auto
Receivables Corporation, Enterprise Funding Corporation, Chase Bank of Texas, National Association, Norwest Bank Minnesota, National Association, MBIA Insurance Corporation, NationsBank N.A., and First Investors Financial Services, Inc. 10.58(l) -- Amendment Number 1 to Note Purchase Agreement dated as of March 31, 1999 among First Investors Auto Receivables Corporation and Enterprise Funding Corporation. 10.59(l) -- Amendment Number 1 to Insurance Agreement dated March 31, 1999 among First Investors Auto Receivables Corporation, MBIA Insurance Corporation, First Investors Financial Services, Inc., Auto Lenders Acceptance Corporation, Norwest Bank Minnesota, National Association and NationsBank, N.A. 10.60(l) -- Servicing Agreement dated March 31, 1999 among First Investors Auto Receivables Corporation, Norwest Bank Minnesota, National Association and Auto Lenders Acceptance Corporation. 10.61(l) -- Guaranty dated March 31, 1999 by First Investors Financial Services, Inc., First Investors Auto Receivables Corporation, Auto Lenders Acceptance Corporation and Norwest Bank Minnesota, National Association. 10.62(m) -- Sale and Allocation Agreement dated January 1, 2000 among First Investors Financial Services, Inc., First Investors Servicing Corporation, First Investors Auto Investment Corp., Norwest Bank Minnesota, National Association and First Investors Auto Owner Trust 2000-A. 10.63(m) -- Indenture dated as of January 1, 2000 $167,969,000 7.174% Asset-Backed Notes among First Investors Auto Owner Trust 2000-A, First Investors Financial Services, Inc. and Norwest Bank Minnesota, National Association. 10.64(m) -- Amended and Restated Trust Agreement dated as of January 24, 2000 among First Investors Auto Investment Corp. and Bankers Trust (Delaware). 10.65(m) -- Servicing Agreement dated as of January 1, 2000 by and among First Investors Auto Owner Trust 2000-A, Norwest Bank Minnesota, National Association, First Investors Auto Investment Corp. and First Investors Servicing Corporation. 10.66(m) -- Insurance Agreement dated as of January 1, 2000 among MBIA Insurance Corporation, First Investors Servicing Corporation, First Investors Financial Services, Inc., First Investors Auto Investment Corp., First Investors Auto Owner Trust 2000-A, Bankers Trust (Delaware) and Norwest Bank Minnesota, National Association. 10.67(m) -- Indemnification Agreement dated as of January 12, 2000 among MBIA Insurance Corporation, First Investors Financial Services, Inc. and Banc of America Securities LLC. 10.68(n) -- Administrative Services Agreement dated as of August 8, 2000 between Project Brave Limited Partnership and First Union Securities, Inc. 10.69(n) -- Project Brave Limited Partnership Agreement of Limited Partnership dated as of July 1, 2000. 10.70(n) -- Amended and Restated NIM Collateral Purchase Agreement dated as of August 8, 2000. 10.71(n) -- Amended and Restated Contract Purchase Agreement dated as of August 8, 2000. 10.72(n) -- First Amendment to Amended and Restated NIM Collateral Purchase Agreement dated as of September 15, 2000. 10.73(n) -- First Amendment to Servicing Agreement dated as of September 13, 2000. 10.74(n) -- First Amendment to Transfer and Servicing Agreement dated as of September 15, 2000. 10.75(n) -- Project Brave Limited Partnership Asset-Backed Notes Indenture dated as of August 8, 2000. 10.76(n) -- Note Purchase Agreement between Project Brave Limited Partnership as Issuer, First Union Securities, Inc., as Deal Agent, the Note Investors named herein, First Union National Bank as Liquidity Agent and Variable Funding Capital Corporation, as an Initial Note Investor, dated as of August 8, 2000. 10.77(n) -- Supplemental Indenture No. 1 (Project Brave Limited Partnership) dated as of September 15, 2000. 10.78(n) -- Third Amendment to Security Agreement dated as of September 13, 2000. 10.79(n) -- Transfer and Servicing Agreement among Project Brave Limited Partnership, Issuer, FIFS Acquisition Funding Company, L.L.C., as Transferor, First Investors Servicing Corporation as Servicer and a Transferor Party, ALAC Receivables Corp., as a Transferor Party, First Union Securities, Inc., as Deal Agent and Collateral Agent and Wells Fargo Bank Minnesota, National Association as Backup Servicer, Collateral Custodian and Indenture Trustee dated as of August 8, 2000. 10.80(o) -- Second Amended and Restated Credit Agreement dated as of November 15, 2000 Among F.I.R.C., Inc. as Borrower and the Financial Institutions Now or Hereafter Parties Hereto as Banks and Bank of
America, N. A. as Agent. 10.81(o) -- Third Amended and Restated Collateral Security Agreement dated as of November 15, 2000. 10.82(o) -- Fourth Amendment to Amended and Restated Purchase Agreement dated as of November 15, 2000. 10.83(o) -- First Amendment to Servicing Agreement dated as of November 15, 2000. 10.84(o) -- Credit Agreement among First Investors Financial Services, Inc., as Borrower, Bank of America, N. A., as the Administrative Agent, Banc of America Securities LLC, as sole lead arranger and sole book manager and the lenders named herein dated as of December 22, 2000. 10.85(o) -- Pledge and Security Agreement (Borrower) dated as of December 22, 2000. 10.86(o) -- Pledge and Security Agreement (Subsidiaries) dated as of December 22, 2000. 10.87(o) -- Pledge and Security Agreement (First Investors (Vermont) Holdings, Inc.) dated as of December 22, 2000. 10.88(o) -- Pledge and Security Agreement (First Investors Financial Services Group, Inc.) dated as of December 22, 2000. 10.89(o) -- Guaranty (Subsidiary) dated as of December 22, 2000. 10.90(o) -- Guaranty (First Investors (Vermont) Holdings, Inc.) dated as of December 22, 2000. 10.91(o) -- Guaranty (First Investors Financial Services Group, Inc.) dated as of December 22, 2000. 10.92(o) -- Amendment No. 2 To Insurance Agreement for First Investors Auto Receivables Corporation Revolving Automobile Receivables Financing Facility dated as of November 29, 2000. 10.93(o) -- Amendment Number 3 To Security Agreement dated as of November 29, 2000. 10.94(o) -- Warrant No. 1 to Purchase 111,334 Shares of Common Stock, $.01 par value. 10.95(o) -- Warrant No. 2 to Purchase 55,667 Shares of Common Stock, $.01 par value. 10.96(o) -- Amendment Number 3 To Purchase Agreement dated as of November 29, 2000. 10.97(o) -- Amendment Number 1 To Servicing Agreement dated as of November 29, 2000. 10.98(p) -- First Omnibus Amendment to the Transaction Documents dated December 6, 2001 between F.I.R.C., Inc., First Investors Financial Services, Inc., First Investors Servicing Corporation, Bank of America, N.A., First Union Securities, Inc. and Wells Fargo Bank Minnesota, National Association 10.99(p) -- Security Agreement dated December 6, 2001 between First Investors Residual Funding L.P. and First Union Securities, Inc. 10.100(p) -- Sale and Servicing Agreement dated December 6, 2001 between First Investors Residual Funding L.P., First Investors Financial Services, Inc. and First Union Securities, Inc. 10.101(p) -- Note Purchase Agreement dated December 6, 2001 between First Investors Residual Funding L.P, First Union Securities, Inc., First Union National Bank and Variable Funding Capital Corporation 10.102(p) -- Asset Purchase Agreement dated December 6, 2001 between First Investors Residual Funding L.P., FIFS Acquisition Funding Company LLC, First Investors Auto Investment Corp. and First Investors Auto Receivables Corporation 10.103(p) -- Indenture dated January 1, 2002 between First Investors Auto Owner Trust 2002-A, First Investors Financial Services, Inc. and Wells Fargo Bank Minnesota, National Association 10.104(p) -- Sale and Allocation Agreement dated January 1, 2002 between First Investors Auto Owner Trust 2002-A, First Investors Financial Services, Inc., First Investors Servicing Corporation, First Investors Auto Funding Corporation and Wells Fargo Bank Minnesota, National Association 10.105(p) -- Amended and Restated Trust Agreement dated January 1, 2002 between First Investors Auto Funding Corporation and Bankers Trust (Delaware) 10.106(p) -- First Omnibus Amendment to Transaction Documents dated January 14, 2002 between First Investors Auto Receivables Corporation, First Investors Financial Services, Inc., First Investors Servicing Corporation, Enterprise Funding Corporation, Bank of America, N.A., Variable Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance Corporation, and Wells Fargo Bank Minnesota, National Association 10.107(p) -- Amendment No.3 to Note Purchase Agreement dated January 14, 2002 between First Investors Auto Receivables Corporation and Variable Funding Capital Corporation 10.108(p) -- Amendment No.4 to Security Agreement dated January 14, 2002 between First Investors Auto Receivables Corporation, First Investors Financial Services, Inc., First Investors Servicing Corporation, Variable Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance Corporation and Wells Fargo Bank Minnesota, National Association 21.1(j) -- Subsidiaries of the Registrant.
- ----------
(a) - Exhibit previously filed with the Company's Registration Statement on Form S-1, - Registration No. 33-94336 and incorporated herein by reference. (b) - Exhibit previously filed on 1996 Form 10-K and incorporated herein by reference. - (c) - Exhibit previously filed on July 31, 1996 First Quarter Form 10-Q and incorporated herein by reference. (d) - Exhibit previously filed on October 31, 1996 Second Quarter Form 10-Q and incorporated herein by reference. (e) - Exhibit previously filed on January 31, 1997 Third Quarter Form 10-Q and incorporated herein by reference. (f) - Exhibit previously filed on July 31, 1997 First Quarter Form 10-Q and incorporated herein by reference. (g) - Exhibit previously filed on January 31, 1998 Third Quarter Form 10-Q and incorporated herein by reference. (h) - Exhibit previously filed on 1998 Form 10-K and incorporated herein by reference. - (i) - Exhibit previously filed on October 31, 1998 Second Quarter Form 10-Q and incorporated herein by reference. (j) - Exhibit previously filed on October 2, 1998 Form 8-K and incorporated herein by reference. - (k) - Exhibit previously filed on January 31, 1999 Third Quarter Form 10-Q and incorporated herein by reference. (l) - Exhibit previously filed on 1999 Form 10-K and incorporated herein by reference. - (m) - Exhibit previously filed on March 21, 2000 Third Quarter Form 10-Q/A and incorporated herein by reference. (n) - Exhibit previously filed on October 31, 2000 Second Quarter Form 10-Q and incorporated herein by reference. (o) - Exhibit previously filed on January 31, 2001 Third Quarter Form 10-Q and incorporated herein by reference. (p) - Exhibit previously filed on January 31, 2002 Third Quarter Form 10-Q and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. (Registrant)
Date: July 24, 2002 By: /s/ Tommy A. Moore, Jr. ----------------------------------------------- TOMMY A. MOORE, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of First Investors Financial Services Group, Inc. and in the capacities and on the date indicated.
Date: July 24, 2002
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services Group, Inc.:
We have audited the accompanying consolidated balance sheet of First Investors Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of April 30, 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Investors Financial Services Group, Inc. and subsidiaries as of April 30, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP - ---------------------- Houston, Texas July 9, 2002
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of First Investors Financial Services Group, Inc.:
We have audited the accompanying consolidated balance sheets of First Investors Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of April 30, 2000 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Investors Financial Services Group, Inc. and subsidiaries as of April 30, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas July 9, 2001
NOTE: THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2001 AND 2002
The accompanying notes are an integral part of these consolidated financial statements.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 2000, 2001 AND 2002
The accompanying notes are an integral part of these consolidated financial statements.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED APRIL 30, 2000, 2001 AND 2002
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED APRIL 30, 2000, 2001 AND 2002
The accompanying notes are an integral part of these consolidated financial statements.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2000, 2001 AND 2002
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First Investors or the Company) was established to serve as a holding company for First Investors Financial Services, Inc. (FIFS) and FIFS's wholly-owned subsidiaries, First Investors Insurance Company (FIIC), First Investors Auto Receivables Corporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors Auto Capital Corporation (FIACC), First Investors Servicing Corporation (FISC) formerly known as, Auto Lenders Acceptance Corporation (ALAC), First Investors Auto Investment Corporation, FIFS Acquisition Funding Corp. LLC., and First Investors Auto Funding Corporation. First Investors, together with its wholly- and majority-owned subsidiaries, is hereinafter referred to as the Company.
FIFS began operations in May 1989 and is principally involved in the business of acquiring and holding for investment retail installment contracts and promissory notes secured by new and used automobiles (receivables) originated by factory authorized franchised dealers or directly through consumers. As of April 30, 2002, approximately 26 percent of receivables held for investment had been originated in Texas. The Company currently operates in 27 states.
FIIC was organized under the captive insurance company laws of the state of Vermont for the purpose of reinsuring certain credit enhancement insurance policies that have been written by unrelated third party insurance companies.
On October 2, 1998, the Company completed the acquisition of FISC and the operations of FISC are included in the consolidated results of the Company since the date of acquisition. Headquartered in Atlanta, Georgia, FISC was engaged in essentially the same business as the Company and additionally performs servicing and collection activities on a portfolio of receivables acquired for investment as well as on a portfolio of receivables acquired and sold pursuant to two asset securitizations. As a result of the acquisition, the Company increased the total dollar value on its balance sheet of receivables, acquired an interest in certain trust certificates related to the asset securitizations and acquired certain servicing rights along with furniture, fixtures, equipment and technology to perform the servicing and collection functions for the portfolio of receivables under management. The Company performs servicing and collection functions on loans originated from 31 states on a Managed Receivables Portfolio of $221 million.
On August 8, 2000, the Company entered into a partnership agreement whereby a subsidiary of the Company is the general partner owning 70 percent of the partnership assets and First Union Investors, Inc. serves as the limited partner and owns 30 percent of the partnership assets (the "Partnership"). The Partnership consists primarily of a portfolio of loans previously owned or securitized by FISC and certain other financial assets including charged-off accounts owned by FISC.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the accounts of First Investors and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates used by the Company relate to the allowance for credit losses and nonaccretable difference. See Notes 3 and 4. Actual results could differ from those estimates.
RECEIVABLES HELD FOR INVESTMENT. The Company acquires automobile loans from dealers and originates loans directly to consumers. Fees and expenses of originating the loan are capitalized and amortized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases". The basis in the receivables includes the costs to acquire the receivables from the dealer, plus or minus any fees paid or received related to the purchase of the receivables.
Receivables are generally acquired from dealers at a premium or discount from the principal amounts financed by the borrower. The Company and the dealers negotiate this premium or discount, and such premium or discount is included in the carrying amount of the receivable. Also included in the carrying amount of receivables is the insurance premium paid to third-party insurers, net of any premiums ceded to FIIC for reinsurance. The Company amortizes the difference between the principal balance of the receivables and its carrying amount over the expected remaining life of the receivables using the interest method.
RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were acquired in a portfolio purchase, the Company estimates the amount and timing of undiscounted expected future principal and interest cash flows. For certain purchased loans, the amount paid for a loan reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to the loan's contractual terms. Accordingly, at acquisition, the Company recognizes the excess of the loan's scheduled contractual principal and contractual interest payments over its expected cash flows as an amount that should not be accreted. The remaining amount, representing the excess of the loan's expected cash flows over the amount paid, is accreted into interest income over the remaining life of the loan. The fiscal year 2000 contractual payments receivable was net of an estimate of future cash flows that were to be sold to the limited partner. For April 30, 2001 and 2002, and in conjunction with formation of the Partnership, the contractual payments receivable does not net estimated future cash flows payable to others and instead such amounts are included as minority interest. See Note 7 - Acquisition Facility.
Over the life of the loan, the Company continues to estimate expected cash flows on a pool by pool basis. The Company evaluates whether the present value of any decrease in the loan's actual or expected cash flows should be recorded as a loss provision for the loan. For any material increases in estimated cash flows, the Company adjusts the amount of accretable yield by reclassification from nonaccretable difference. The Company then adjusts the amount of periodic accretion over the loan's remaining life. See Note 4.
INVESTMENT IN TRUST CERTIFICATES. Through the acquisition of FISC, the Company obtained interests in two securitizations of automobile receivables. Automobile receivables were transferred to a trust (ALAC Automobile Receivables Trust), which issued notes and certificates representing undivided ownership interests in the trusts. The Company owned trust certificates and interest-only residuals from each of these trusts which were classified as Investment in Trust Certificates as of April 30, 2000. Additionally, the Company owned spread accounts held by the trustee for the benefit of the trust's noteholders. Such amounts were classified as Restricted Cash as of April 30, 2000. On September 15, 2000, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1997-1. Accordingly, the Company acquired $8,110,849 in outstanding receivables from the trust and borrowed $6,408,150 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456 of the trust certificates. On March 15, 2001, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Trust 1998-1. Accordingly, the Company acquired $9,257,612 in outstanding receivables from the trust and borrowed $7,174,509 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,997,615 in senior notes and redeem $1,946,177 of the trust certificates. The receivables purchased were used as collateral to secure the FIACC borrowing with any residual cash flow generated by the receivables pledged to the Partnership. A loss of $400,000 was recorded on the Investment in Trust Certificates during year ended April 30, 2001, attributable to the impact of the weakened economic conditions. The net loss to the Company, after minority interest effects, was
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$280,000. Effective with the call dates of the securitizations, these assets were included in Receivables Acquired for Investment.
INCOME RECOGNITION. The Company accrues interest income monthly based upon contractual terms using the effective interest method. Interest income also includes additional amounts received upon early payoffs of certain receivables attributable to the difference between the principal balance of the receivables calculated using the Rule of 78's method and the principal balance of the receivables calculated using the effective interest method. When a receivable becomes 90 days past due, income accrual is suspended until the payments become current. When a loan is charged off or the collateral is repossessed, the remaining income accrual is written off. Other income includes late charge fees and is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES. For receivables financed under the FIRC credit facility, the Company purchases credit enhancement insurance from third-party insurers which covers the risk of loss upon default and certain other risks. The Company established a captive insurance subsidiary to reinsure the credit enhancement insurance coverage. The credit enhancement insurance coverage for all receivables acquired in March 1994 and thereafter has been reinsured by FIIC. Beginning in October 1996, all receivables recorded by the Company were covered by credit enhancement insurance while pledged as collateral for the FIRC credit facility. Once receivables are transferred to the FIARC commercial paper facility, credit enhancement insurance is cancelled. In addition, no default insurance is purchased for core receivables originated and financed under the FIACC commercial paper facility. Accordingly, the Company is exposed to credit losses for all receivables either reinsured by FIIC or uninsured and provides an allowance for such losses.
Efforts to make customer contact begin when the customer is three days past due and become more aggressive as the loan becomes further past due. Management reviews past due loans and considers various factors including payment history, job status and any events that may have occurred that prevent the customer from making a payment. Through the evaluation, if it is determined that the loan is uncollectible, the collateral is repossessed. Generally this occurs at 90 to 120 days past due. Upon repossession, an impairment is recorded to write off Receivables Held for Investment and record the fair value as Assets Held for Sale. Fair value is determined by estimating the proceeds of the collateral which primarily are comprised of auction proceeds on the sale of the automobile less selling related expenses. After collection of all proceeds, the Company realizes an adjustment, positive or negative, based on the difference between the fair value estimate and the true proceeds received. In the event the collateral is unable to be located, the Company will write off the entire balance after exhausting all collection efforts.
For Receivables Acquired for Investment, identical collection procedures are followed. However instead of transferring the estimated fair value to Assets Held for Sale, the estimated loss is charged against nonaccretable difference.
The Company calculates the allowance for credit losses in accordance with SFAS 5, "Accounting for Contingencies". SFAS 114, "Accounting for Creditors for Impairment of a Loan" does not apply to the Company since the Receivables Held for Investment are comprised of a large group of smaller balance homogenous loans.
The Company applies a systematic methodology in order to determine the amount of the allowance for credit losses. The specific methodology utilized is a six-month migration analysis whereby the Company compares the aging status of each loan from six months prior to the aging loan status as of the reporting date. These factors are then applied to the aging status of each loan at the reporting date in order to calculate the number of loans that are expected to migrate to impaired status. The estimated number of impairments is then multiplied by estimated loss per loan, which is based on historical information. The computed reserve is then compared to the amount recorded for adequacy. The Company compares the six-month result to prior six-month periods to compare trends and evaluate any other internal or external factors that may affect collectibility. The allowance for credit losses is based on estimates and qualitative evaluations and ultimate losses will vary from current estimates. These estimates are reviewed periodically and as adjustments, either positive or negative, become necessary, are reported in earnings in the period they become known.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERVICING AGREEMENT. From its inception until July 1999, the Company was a party to a servicing agreement with General Electric Capital Corporation (GECC) under which GECC performed certain loan servicing and collection activities with respect to the Company's portfolio of Receivables Held for Investment. Servicing fees were paid monthly to GECC based on the number of receivables being serviced during the period plus certain reimbursable expenses including legal and third party recovery costs. Due from servicer primarily represents unremitted principal and interest payments and proceeds from the sale of repossessed collateral. In July 1999, the Company elected to terminate the servicing agreement with GECC in connection with the transfer of the servicing and collection activities on the receivables to the Company's internal servicing and collection platform.
FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial assurance for the third party insurance company it reinsures by maintaining premiums ceded to it in a restricted trust account for the benefit of the third party insurance company. The reinsurance agreement provides, among other things, that the funds held can be withdrawn by the third party insurance company due to an insolvency of the Company or to reimburse the third party insurance company for the Company's share of losses paid by the third party insurance company pursuant to the reinsurance agreement.
ASSETS HELD FOR SALE. The Company commences repossession procedures against the underlying collateral when the Company determines that collection efforts are likely to be unsuccessful. Upon repossession, the receivable is written down to the estimated fair value of the collateral, less the cost of disposition and plus the expected recoveries from third-party insurers, through a charge to the allowance for credit losses. Additionally, the repossessed collateral is reclassified to assets held for sale.
DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes the costs related to the respective warehouse credit facilities and Term Notes over the estimated average life of the receivables financed under those respective facilities as the provisions of such facility generally provide that receivables assigned to such facility would be allowed to amortize should the facilities not be extended. Deferred financing costs are expensed proportionately if borrowing capacity is reduced.
SERVICING INCOME. Servicing income is recognized on loan receivables previously sold by FISC in connection with two asset securitization transactions. Under these transactions, FISC, as servicer, is entitled to receive a fee of 3 percent on the outstanding principal balance of securitized receivables plus reimbursement for certain costs and expenses incurred as a result of its collection activities. Under the terms of the securitizations, the servicer may be removed upon breach of its obligations under the servicing agreements, the deterioration of the underlying receivables portfolios in violation of certain performance triggers or the deteriorating financial condition of the servicer.
OTHER OPERATING EXPENSES. Other operating expenses include primarily depreciation expense, professional fees, service bureau fees, telephone, repossession related expenses, and rent.
INCOME TAXES. The Company follows SFAS No. 109, which prescribes that deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest rate swap and cap agreements to maximize net interest income while managing the exposure of floating interest rates under the terms of its credit facilities or Term Notes (see Note 7). The Company endeavors to maintain the effectiveness of the interest rate swap or cap agreements by selecting products with dollar denominated notional principal amounts, interest rate indices and interest reset periods similar to its credit facilities. The differentials paid or received on interest rate agreements are accrued and recognized currently as adjustments to interest expense. Premiums paid or received on these agreements, if any, are amortized to interest expense over the term of the related agreement. Gains and losses on early terminations of interest rate swap and cap agreements are included in the carrying amount of the related debt and amortized as yield adjustments over the estimated remaining term of the swap (see Derivatives).
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK OPTIONS. The Company accounts for its stock-based compensation under Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees". Under this accounting method, no compensation expense is recognized in the consolidated statements of operations if no intrinsic value of the option exists at the date of grant. The Company has made annual pro forma disclosures of net income and earnings per share as if the stock based compensation awards were based on the fair value of the awards at the date of grant. See Note 13.
DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No. 133."
Effective May 1, 2001, the Company adopted SFAS No. 133 concurrently with SFAS No. 138. Accordingly, the Company designated its three interest rate swaps and one interest rate cap having an aggregate notional amount as of May 1, 2001 of $130,165,759 as cash flow hedges as defined under SFAS 133. In conjunction with this designation and the adoption of SFAS 133 and SFAS 138, the Company recorded a transition adjustment in the aggregate amount of ($3,763,908) as a reduction to shareholders' equity and recorded a corresponding liability to reflect the fair market value of the derivatives and deferred gain resulted from previously terminated interest rate swap and cap agreements as of May 1, 2001. In connection with the decision to enter into the $100 million floating rate swaps on June 1, 2001, the Company elected to change the designation of the $100 million fixed rate swap and not account for the instrument as a hedge under SFAS 133. The Company has also established guidelines for measuring the effectiveness of its hedging positions periodically in accordance with the enacted policy. For the period beginning May 1, 2001, changes in the fair value of the Company's open hedging positions resulting from the mark-to-market process will be recorded as unrealized gains or losses and be reflected as an increase or reduction in stockholders' equity through other comprehensive income. In addition, to the extent that all or a portion of the Company's hedging positions are deemed to be ineffective in accordance with the Company's measurement policy, the amount of any ineffectiveness will be recorded through net income. The change in fair value of any derivative not designated as a hedge will also recorded as a gain or loss through income. The Company expects to report material fluctuations in other comprehensive income and shareholders' equity in periods of interest rate volatility.
INTERNAL USE SOFTWARE COSTS. The Company capitalizes external direct costs of materials and services consumed in developing internal-use computer software and payroll costs for employees who devote time to developing internal-use computer software.
EARNINGS PER SHARE. Earnings per share amounts are calculated based on net income available to common shareholders divided by the weighted average number of shares of common stock outstanding (see Note 13 and Note 15).
FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less accumulated depreciation. Depreciable assets are amortized using the straight-line method over the estimated useful lives (two to five years) of the respective assets.
CASH AND SHORT-TERM INVESTMENTS. The Company considers all investments with a maturity of three months or less when purchased to be short-term investments and treated as cash equivalents. See Note 5 for components of restricted cash.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TREASURY STOCK. On December 14, 2001, the Board of Directors authorized the Company to repurchase up to 5% of the Company's outstanding common stock. During the year ended April 30, 2002, 170,000 shares were repurchased under this authorization at an average price of $3.03. No shares were repurchased in prior periods.
RECLASSIFICATIONS. Certain reclassifications have been made to the 2000 and 2001 amounts to conform to the 2002 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
The receivables generally have terms of 60 months and are collateralized by the underlying vehicles. Net receivable balances consisted of the following at April 30, 2001 and 2002:
At April 30, 2002, the weighted average remaining term of the receivable portfolio is 37 months and the weighted average contractual interest rate is 17.6 percent. Principal payments expected to be received on the receivable portfolio, assuming no defaults and that payments are received in accordance with contractual terms are summarized in the following table. Receivables may pay off prior to contractual due dates, primarily due to defaults and early payoffs.
Activity in the allowance for credit losses for the years ended April 30, 2001 and 2002 was as follows:
4. RECEIVABLES ACQUIRED FOR INVESTMENT
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans purchased at a discount relating to credit quality were included in the balance sheet amounts of Receivables Acquired for Investment as follows as of April 30, 2001 and 2002:
The carrying amount of Receivables Acquired for Investment is net of accretable yield and nonaccretable difference. Nonaccretable difference represents contractual principal and interest payments that the Company has estimated that it would be unable to collect.
Additions to accretable yield and nonaccretable difference for the year ended April 30, 2001 relate to the repurchase of ALAC Automobile Receivables Owner Trust 1997-1 and ALAC Automobile Receivables Trust 1998-1. See Note 7 -- FIACC Commercial Paper Facility. For the year ended April 30, 2001, additions to nonaccretable difference also include a loss on the Trust Certificates of $400,000. The write down was attributable to a .81% increase in the cumulative loss rate as it became apparent that the frequency and severity of losses were continuing to be higher than originally anticipated due to softened economic conditions and lower recovery rates on the collateral.
Additions to nonaccretable difference for the year ended April 30, 2002 were due to a $1,260,000 loss recorded on the Receivables Acquired for Investment. Receivables Acquired for Investment are comprised of loans previously originated by Auto Lenders Acceptance Corporation and include a portfolio of warehouse loans and a portfolio of loans that were previously securitized. The securitized loans were subsequently redeemed and funded through the FIACC credit facility. The loss reduced the book value by increasing the nonaccretable difference. The loss relates to a 1.44% increase in the cumulative loss rate for the warehouse portfolio and a .42% increase in the FIACC portfolio. The increase in the cumulative loss rates relates to the recessionary environment and the impact it has on customers' ability to maintain comparable paying employment. Additionally, the effective decrease in prices of new automobiles through incentive programs offered by captives contributed to decreasing prices and demands for used vehicles. This results in lower recovery rates realized through repossessions. The collateral comprising the Receivables Acquired for Investment is at higher risk as it is primarily older model used cars with higher mileage.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nonaccretable difference eliminations represent contractual principal and interest amounts on loans charged-off for the period. The change in accretable yield includes reclassifications from nonaccretable difference for cash flows expected to be collected in excess of previous estimates. Accretable yield also increased for the year ended April 30, 2001 due to the creation of the Partnership on August 8, 2000 to share income from Receivables Acquired for Investment with a limited partner. Partnership income accrues through accretable yield and the limited partner's portion is accounted for as a minority interest. Prior to August 8, 2000, contractual payments receivable was net of an estimate of future cash flows that were to be sold to a limited partner. See Note 7 -- Acquisition Facility. For the year ending April 30, 2002, the increase in accretable yield through reclassifications results from increasing the expected term of the remaining cash flow in order to allow for collections on charged off receivables. By extending the cash flow projection model life, accretable yield must be increased to provide for future income.
Principal payments expected to be received on the receivable portfolio, assuming no defaults and that payments are received in accordance with contractual terms are summarized in the following table. Receivables may pay off prior to contractual due dates, primarily due to defaults and early payoffs.
5. RESTRICTED CASH
The components of restricted cash at April 30, 2001 and 2002 are as follows:
6. DEFERRED FINANCING COSTS AND OTHER ASSETS
The components of deferred financing costs and other assets at April 30, 2001 and 2002 are as follows:
For the year ended April 30, 2002 and in conjunction with the refinancing of the working capital facility, the Company expensed approximately $555,000 of deferred financing costs and warrants related to the old facility. For the year ended April 30, 2001 and related to the reduction of borrowing availability under the FIACC commercial paper facility, approximately $230,000 of unamortized deferred financing costs was expensed. Additionally in 2001, approximately $696,000 of unamortized software costs, professional fees and other non-cash costs that had no further useful life was expensed.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT
The Company finances the acquisition of its receivables portfolio through two warehouse credit facilities. The Company's credit facilities provide for one-year terms and have been renewed annually. Management of the Company believes that the credit facilities will continue to be renewed or extended or that it would be able to secure alternate financing on satisfactory terms; however, there can be no assurance that it will be able to do so. In January 2000 and January 2002, the Company issued $168 million and $159 million, respectively, in asset-backed notes ("Term Notes") secured by discrete pools of receivables. Proceeds from the two note issuances were used to repay outstanding borrowings under the various revolving credit facilities. Substantially all receivables retained by the Company are pledged as collateral for the credit facilities and the Term Notes. The weighted average interest rate for the Company's secured borrowings including the effect of program fees, dealer fees, and other comprehensive income (loss) amortization was 5.8% and 7.6% for the fiscal years ending April 30, 2002 and 2001, respectively.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing for receivables has been provided through a warehouse credit facility agented by First Union National Bank. The borrowing base is defined as the sum of the principal balance of the receivables pledged and the amount on deposit with the Company to fund receivables to be acquired. The Company is required to maintain a reserve account equal to the greater of one percent of the principal amount of receivables financed or $250,000. Borrowings under the FIRC credit facility bear interest at a rate selected by the Company at the time of the advance of either the base rate, defined as the higher of the prime rate or the federal funds rate plus .5 percent, the LIBOR rate plus .5 percent, or a rate agreed to by the Company and the banks. The facility also provides for the payment of a fee of ..25 percent per annum based on the total committed amount.
On November 14, 2001, the facility was renewed to December 7, 2001. On December 7, 2001, the Company entered into an agreement with First Union National Bank to extend the maturity date of the facility until December 5, 2002. In conjunction with this renewal, First Union assumed the role of agent and increased its commitment to $50 million from $20 million. The total commitment remains at $50 million and there were no other material changes to the terms and conditions of the facility. Under the renewal mechanics of the facility, should the lenders elect not to renew the facility beyond December 5, 2002, the facility would convert to a term loan facility which would mature six months thereafter and amortize monthly in accordance with the borrowing base with any remaining balance due at maturity.
Borrowings under the FIRC credit facility were $36,040,000 and $28,610,000 at April 30, 2001 and 2002, respectively, and had weighted average interest rates, including the effect of facility fees and hedge instruments, as applicable, of 6.91 percent and 3.86 percent as of such dates.
The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the commercial paper market through a commercial paper conduit facility provided by Variable Funding Capital Corporation (VFCC), a commercial paper conduit administered by First Union National Bank (the "FIARC commercial paper facility"). Receivables are transferred periodically from the FIRC credit facility to FIARC commercial paper facility through the assignment of an undivided interest in a specified group of receivables. VFCC issues commercial paper (indirectly secured by the receivables), the proceeds of which are used to repay the FIRC credit facility.
The financing is provided to a special-purpose, wholly-owned subsidiary of the Company, FIARC. Credit enhancement for the $150 million facility is provided to the commercial paper investors by a surety bond issued by MBIA Insurance Corporation. The Company is not a guarantor of, or otherwise a party to, such commercial paper. Borrowings under the commercial paper facility bear interest at the commercial paper rate plus a borrowing spread equal to .30 percent per annum. Additionally, the agreement provides for additional fees based on the unused amount
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the facility and dealer fees associated with the issuance of the commercial paper. A surety bond premium equal to .35 percent per annum is assessed based on the outstanding borrowings under the facility. A one percent cash reserve must be maintained as additional credit support for the facility. At April 30, 2001, the Company had borrowings of $121,808,808 outstanding under the commercial paper facility with a weighted average interest rate, including the effect of program fees, dealer fees, and hedge instruments, as applicable, of 6.60 percent. The Company had no outstanding borrowings under the FIARC facility as of April 30, 2002.
The FIARC commercial paper facility expired on January 12, 2002. In conjunction with the renewal of the facility to January 13, 2003 the facility commitment was assigned from Enterprise Funding Corporation, a commercial paper conduit administered by Bank of America, to VFCC. No other material changes were made to the facility in conjunction with the assignment to VFCC.
If the facility had not been extended beyond the maturity date, receivables pledged as collateral would be allowed to amortize; however, no new receivables would be allowed to transfer from the FIRC credit facility. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a $25 million commercial paper conduit facility with Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit administered by First Union National Bank, (the FIACC commercial paper facility"), to fund the acquisition of additional receivables generated under certain of the Company's financing programs. FIACC acquired receivables from the Company and may borrow up to 88% of the face amount of receivables, which are pledged as collateral for the commercial paper borrowings. VFCC funds the advance to FIACC through the issuance of commercial paper (indirectly secured by the receivables) to institutional or public investors. The Company is not a guarantor of, or otherwise a party to, such commercial paper. The Company's interest cost is based on VFCC's commercial paper rates for specific maturities plus .55 percent. At April 30, 2002, borrowings were $2,603,433 under the FIACC commercial paper facility, and had a weighted average interest rate of 5.79 percent, including the effects of program fees and hedge instruments. At April 30, 2001, borrowings were $10,400,901 under the FIACC commercial paper facility, and had a weighted average interest rate of 5.56 percent, including the effects of program fees and hedge instruments. The current term of the FIACC commercial paper facility expires on March 11, 2003. If the facility were not renewed on or prior to the maturity date, the outstanding balance under the facility would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1997-1, (the "ALAC 97-1 Securitization"). Accordingly, the Company acquired $8,110,849 in outstanding receivables from the trust and borrowed $6,408,150 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456 of the trust certificates. On March 15, 2001, the Company elected to exercise its right to repurchase the senior notes issued in connection with the ALAC Automobile Receivables Owner Trust 1998-1, (the "ALAC 98-1 Securitization). Accordingly, the Company acquired $9,257,612 in outstanding receivables from the trust and borrowed $7,174,509 under the FIACC facility which, combined with amounts on deposit in the collection account and the outstanding balance in a cash reserve account, was utilized to repay $7,997,615 in senior notes and redeem $1,946,178 of the Trust Certificates. The receivables purchased were used as collateral to secure the FIACC borrowing with any residual cash flow generated by the receivables pledged to the partnership. As a result of utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company has elected to utilize the FIACC commercial paper facility solely as the financing source for the repurchases and does not expect to utilize the facility to finance Receivables Held for Investment.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TERM NOTES. On January 29, 2002, the Company, through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002-A Auto Trust") completed the issuance of $159,036,000 of 3.46% percent Class A asset-backed notes ("2002-A Term Notes"). The initial pool of automobile receivables transferred to the 2002-A Auto Trust totaled $135,643,109, which were previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In addition to the issuance of the 2002-A Class A Notes, the 2002-A Auto Trust also issued $4,819,000 in Class B Notes which were retained by the Company and pledged to secure the Working Capital Facility as further described below. Proceeds from the issuance, which totaled $159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be used for future loan originations; (ii) repay all outstanding borrowings under the FIARC commercial paper facility, (iii) reduce the outstanding borrowings under the FIRC credit facility, (iv) pay transaction fees related to the 2002-A Term Note issuance, and (v) fund a cash reserve account of 2 percent or $2,712,862 of the initial receivables pledged which will serve as a portion of the credit enhancement for the transaction. The 2002-A Class A Term Notes bear interest at 3.46 percent and require monthly principal reductions sufficient to reduce the balance of the 2002-A Class A Term Notes to 97 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2002-A Term Notes is December 15, 2008. The Class B Notes do not bear interest but require principal reductions sufficient to reduce the balance of the Class B Notes to 3 percent of the outstanding balance of the underlying receivables pool. As of April 30, 2002, the outstanding principal balance of the 2002-A Term Notes was $143,096,984. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2002-A Class A Notes. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool plus 2 percent of the original balance of receivables transferred under the pre-funding provision. Further enhancement is provided through an initial 1 percent overcollateralization which is required to be increased to 3 percent through excess monthly principal and interest collections. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
On January 24, 2000, the Company, through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("2000-A Auto Trust") completed the issuance of $167,969,000 of 7.174 percent asset-backed notes ("2000-A Term Notes"). A pool of automobile receivables totaling $174,968,641, which were previously owned by FIRC, FIARC and FIACC, secures the 2000-A Term Notes. Proceeds from the issuance, which totaled $167,967,690 were used to repay all outstanding borrowings under the FIARC and FIACC commercial paper facilities, to reduce the outstanding borrowings under the FIRC credit facility, to pay transaction fees related to the 2000-A Term Note issuance and to fund a cash reserve account of 2 percent or $3,499,373 which will serve as a portion of the credit enhancement for the transaction. The 2000-A Term Notes bear interest at 7.174 percent and require monthly principal reductions sufficient to reduce the balance of the 2000-A Term Notes to 96 percent of the outstanding balance of the underlying receivables pool. The final maturity of the 2000-A Term Notes is February 15, 2006. As of April 30, 2001 and 2002, the outstanding principal balances on the 2000-A Term Notes were $84,925,871 and $40,162,801, respectively. A surety bond issued by MBIA Insurance Corporation provides credit enhancement for the 2000-A Term Note holders. Additional credit support is provided by the cash reserve account, which equals 2 percent of the original balance of the receivables pool and a 4 percent over-collateralization requirement. In the event that certain asset quality covenants are not met, the reserve account target level will increase to 6 percent of the then current principal balance of the receivables pool.
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 FISC. Contemporaneously with the Company's purchase of FISC, FISC transferred certain assets to FIFS Acquisition, consisting primarily of (i) all receivables owned by FISC as of the acquisition date, (ii) FISC's ownership interest in certain Trust Certificates and subordinated spread or cash reserve accounts related to two asset securitizations previously conducted by FISC, and (iii) certain other financial assets, including charged-off accounts owned by FISC 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 bore interest at VFCC's commercial paper rate plus 2.35 percent and expired on August 14, 2000. 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 FISC a servicing fee in the amount of 3 percent on the outstanding balance of all owned or managed receivables and then to pay interest on the facility. Excess cash flow available after servicing fees and interest payments are utilized to reduce the outstanding
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal balance on the indebtedness. In addition, one-third of the servicing fee paid to FISC is also utilized to reduce principal outstanding on the indebtedness.
On August 8, 2000, the Company entered into an agreement with First Union to refinance the acquisition facility. Under the agreement, a partnership was created in which FIFS Acquisition serves as the general partner and contributed its assets for a 70 percent interest in the partnership and First Union Investors, Inc., an affiliate of First Union, serves as the limited partner with a 30 percent interest in the partnership (the "Partnership"). Pursuant to the refinancing, the Partnership issued Class A Notes in the amount of $19,204,362 and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were used to retire the acquisition debt. The Class A Notes bear interest at VFCC's commercial paper rate plus 0.95 percent per annum and amortize on a monthly basis by an amount necessary to reduce the Class A Note balance as of the payment date to 75 percent of the outstanding principal balance of Receivables Acquired for Investment, excluding Receivables Acquired for Investment that are applicable to FIACC, as of the previous month end. The Class B Notes bear interest at VFCC's commercial paper rate plus 5.38 percent per annum and amortize on a monthly basis by an amount which varied based on excess cash flows received from Receivables Acquired for Investment after payment of servicing fees, trustee and back-up servicer fees, Class A Note interest and Class A Note principal, plus collections received on the Trust Certificates. The outstanding balance of the Class A Notes was $3,670,765 as of April 30, 2002 and had a weighted average interest rate of 5.76 percent, including the effects of program fees and hedge instruments. The Class B Notes were paid in full on September 15, 2000. After the Class B Notes were paid in full, all cash flows received after payment of Class A Note principal and interest, servicing fees and other costs, are distributed to the Partnership for subsequent distribution to the partners based upon the respective partnership interests. During fiscal 2002, $972,428 was distributed to the limited partner compared to $3,084,494 for fiscal 2001. The amount of the partners' cash flow will vary depending on the timing and amount of residual cash flows. Beginning in November 2001, the partnership used excess cash flow to retire additional Class A Note principal thus no further partnership distributions will be paid until the Class A Notes are retired. The Company is accounting for First Union's limited partnership interest in the Partnership as a minority interest.
The Class A Notes mature on March 11, 2003. If the Class A Notes are not renewed on or prior to the maturity date, the outstanding balance under the notes would continue to amortize utilizing cash collections from the receivables pledged as collateral. The Company presently intends to seek a renewal of the notes from the lender prior to maturity. Management considers its relationship with the lender to be satisfactory and has no reason to believe that the notes will not be renewed. If the notes were not renewed, however, or if material changes were made to the terms and conditions, it could have a material adverse effect on the Company.
WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million working capital line of credit with Bank of America and First Union National Bank that was utilized for working capital and general corporate purposes. The facility was increased from $10 million to $13.5 million in December 1999 and was scheduled to mature on December 22, 2000. Effective December 22, 2000, the $13.5 million in outstandings were refinanced through the issuance of a $13.5 million term loan. Under the terms of the facility, provided by Bank of America and First Union, the term loan would be repaid in quarterly installments of $675,000 beginning on March 31, 2001. In addition to the scheduled principal payments, the term loan also required additional principal payments of $300,000 in June and December under certain conditions relating to the size of Bank of America's portion of the outstanding balance. The remaining unpaid balance of the term loan was due at maturity on December 22, 2002. Pricing under the facility was based on the LIBOR rate plus 3 percent. The term loan was secured by all unencumbered assets of the Company, excluding receivables owned and financed by wholly-owned, special purpose subsidiaries of the Company and is guaranteed by First Investors Financial Services Group, Inc. and all subsidiaries that are not special purpose subsidiaries. In consideration for refinancing the working capital facility, the Company paid each lender an upfront fee and issued warrants to each lender to purchase, in aggregate, 167,001 shares of the Company's common stock at a strike price of $3.81 per share. The warrants expire on December 22, 2010. On December 22, 2000, the warrant value of $175,000 was estimated based on the expected difference between financing costs with and without the warrants. These costs were included as deferred financing costs and were to be amortized through the maturity date of the debt. In addition, if certain conditions were met, the Company agreed to issue additional warrants to Bank of America to acquire up to a maximum of 47,945 additional shares of stock at a price equal to the average closing price for the immediately preceding 30 trading days prior to each grant date which is June 30, 2001 and December
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
31, 2001. Pursuant to this requirement, the Company issued 36,986 warrants to Bank of America at a strike price of $3.56 per share on June 30, 2001. All other terms and conditions of the warrants were identical to the warrants issued in December 2000. The amount of warrants, if any, to be issued on December 31, 2001 was to be determined by the outstanding balance owed to Bank of America under the term loan. In no event, however, could the additional warrants issued on December 31, 2001 exceed 10,959. The fair value of the warrants issued on June 30, 2001 of $38,757 is included as deferred financing costs and amortized through the maturity date of the debt. At April 30, 2001, there was $12,825,000 outstanding under this facility.
On December 6, 2001, the Company entered into an agreement with First Union National Bank to refinance the $11,175,000 outstanding balance of the working capital term loan and increase the size of the facility to $13.5 million. The renewal facility was provided to a special-purpose, wholly-owned subsidiary of the Company, First Investors Residual Funding LP. Upon the issuance of the 2002-A Term Notes on January 29, 2002, a portion of this facility was converted to a $4.5 million term loan tranche which amortizes monthly as principal payments are collected under the 2002-A Term Note facility. The monthly principal amortization must be sufficient to reduce the amounts outstanding under the term loan tranche of this facility to no greater than 3 percent of the outstanding receivables securing the 2002-A Term Note transaction. The term loan tranche of this working capital facility will be evidenced by the Class B Notes issued in conjunction with the 2002 Auto Trust financing. This principal repayment requirement replaces the current $675,000 per quarter and the additional $600,000 per annum required under the previous facility. The remaining $9 million of the $13.5 million working capital facility revolves monthly in accordance with a borrowing base consisting of the overcollateralization amount and reserve accounts for each of the Company's other credit facilities. The new facility is secured solely by the residual cash flow and cash reserve accounts related to the Company's warehouse credit facilities, the acquisition facility and the existing and future term note facilities. This compares to the previous requirement that all assets of the Company, excluding receivables owned and financed by special purpose subsidiaries, secure the indebtedness. Pricing under the facility was not changed. The maturity of the facility was extended to December 5, 2002. In the event that the facility is not renewed at maturity, residual cash flows from the various receivables financing transactions will be applied to amortize the debt over the remaining life of the underlying receivables. Further, as a result of the refinancing, the Company is not obligated to issue additional warrants covering 10,959 shares of the Company's common stock to Bank of America on December 31, 2001. At April 30, 2002, there was $11,798,520 outstanding under this facility. In conjunction with the refinancing, the Company repaid the working capital term loan and entered into the new working capital facility. Consequently, $554,896 of deferred financing costs and warrants were written off.
The Company presently intends to seek a renewal of the working capital facility from its lender prior to maturity. Should the facility not be renewed, the outstanding balance of the receivables would be amortized in accordance with the borrowing base. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility were not renewed, however, or if material changes were made to its terms and conditions, it could have a material adverse effect on the Company.
SHAREHOLDER LOANS - On December 3, 2001 the Company entered into an agreement with one of its existing shareholders and a member of its Board of Directors under which the Company may, from time to time, borrow up to $2.5 million. The proceeds of the borrowings will be utilized to fund certain private and open market purchases of the Company's common stock pursuant to a Stock Repurchase Plan authorized by the Board of Directors and for general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10 percent per annum. The facility is unsecured and expressly subordinated to the Company's senior credit facilities. The facility matures on December 3, 2008 but may be repaid at any time unless the Company is in default on one of its other credit facilities. As of April 30, 2002, $525,000 was outstanding under this facility.
LOAN COVENANTS. The documentation governing these credit facilities and Term Notes 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, the Term Notes and the working capital facility or the termination of the commercial paper facilities. The Company was not in default with respect to any covenants governing these financing arrangements at April 30, 2002.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear interest at floating interest rates which are reset on a short-term basis while the secured Term Notes bear interest at a fixed rate of interest. The Company's receivables bear interest at fixed rates that do not generally vary with changes in market interest rates. Since a primary contributor to the Company's profitability is its ability to manage its net interest spread, the Company seeks to maximize the net interest spread while minimizing exposure to changes in interest rates. In connection with managing the net interest spread, the Company may periodically enter into interest rate swaps or caps to minimize the effects of market interest rate fluctuations on the net interest spread. To the extent that the Company has outstanding floating rate borrowings or has elected to convert a portion of its borrowings from fixed rates to floating rates, the Company will be exposed to fluctuations in short-term interest rates.
In connection with the issuance of the 2000-A Term Notes, the Company entered into a swap agreement with Bank of America pursuant to which the Company pays a floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent and receives a fixed rate of 7.174 percent from the counterparty. The initial notional amount of the swap was $167,969,000, which amortizes in accordance with the expected amortization of the Term Notes. Final maturity of the swap was August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap at no material gain or loss and enter into a new swap under which the Company would pay a fixed rate of 6.30 percent on a notional amount of $100 million. Under the terms of the swap, the counterparty had the option of extending the swap for an additional three years to mature on April 15, 2004 at a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised its extension option.
On June 1, 2001, the Company entered into interest rate swaps with an aggregate notional amount of $100 million and a maturity date of April 15, 2004. Under the terms of these swaps, the Company will pay a floating rate based on one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to enter into these swap agreements to offset the uneconomic position of the existing fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization and the financing of that repurchase through the FIACC subsidiary on September 15, 2000, FIACC entered into an interest rate swap agreement with First Union under which FIACC pays a fixed rate of 6.76 percent as compared to the one month commercial paper index rate. The initial notional amount of the swap is $6,408,150, which amortizes monthly in accordance with the expected amortization of the FIACC borrowings. The final maturity of the swap was December 15, 2001. On March 15, 2001, in connection with the repurchase of the ALAC 1998-1 Securitization and the financing of that purchase through the FIACC subsidiary, the Company and the counterparty modified the existing interest rate swap increasing the notional amount initially to $11,238,710 and reducing the fixed rate from 6.76 percent to 5.12 percent. The new notional amount is scheduled to amortize monthly in accordance with the expected principal amortization of the underlying borrowings. The expiration date of the swap was changed from December 15, 2001 to September 1, 2002.
On October 2, 1998, in connection with the $75 million acquisition facility, the Company, through FIFS Acquisition, entered into a series of hedging instruments with First Union National Bank designed to hedge floating rate borrowings under the acquisition facility against changes in market rates. Accordingly, the Company entered into two interest rate swap agreements, the first in the initial notional amount of $50.1 million (Swap A) pursuant to which the Company's interest rate is fixed at 4.81 percent; and, the second in the initial notional amount of $24.9 million (Swap B) pursuant to which the Company's interest rate is fixed at 5.50 percent. The notional amount outstanding under each swap agreement amortizes based on an implied amortization of the hedged indebtedness. Swap A has a final maturity of December 20, 2002 while Swap B matured on 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 that is not fully covered by the aggregate notional amount outstanding under the swaps. The first cap agreement (Class A Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper rate exceeds 4.81 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap A and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is amortized in interest expense for the period. The second cap agreement (Class B Cap) enables the Company to receive payments from the counterparty in the event that the one-month commercial paper
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate exceeds 6 percent on a notional amount that increases initially and then amortizes based on the expected difference between the outstanding notional amount under Swap B and the underlying indebtedness. The interest rate cap expires December 20, 2002 and the cost of the cap is imbedded in the fixed rate applicable to Swap B. Pursuant to the refinance of the acquisition facility on August 8, 2000, the Class B Cap was terminated and the notional amounts of the Swap A and Class A Cap were adjusted downward to reflect the lower outstanding balance of the Class A Notes. The amendment or cancellation of these instruments resulted in a gain of $418,609. This derivative net gain is being amortized over the life of the initial derivative instrument. In addition, the two remaining hedge instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated the three interest rate swaps and one interest rate cap with an aggregate notional value of $130,165,759 as cash flow hedges as defined under SFAS No. 133. Accordingly, any changes in the fair value of these instruments resulting from the mark-to-market process are recorded as unrealized gains or losses and reflected as an increase or reduction in shareholders' equity through other comprehensive income (loss). In connection with the decision to enter into the $100 million floating rate swaps on June 1, 2001, the Company elected to change the designation of the $100 million fixed rate swap and not account for the instrument as a hedge under SFAS No. 133. As a result, the change in fair value of both swaps is reflected in net earnings for the period subsequent to May 31, 2001. In conjunction with this designation and the adoption of SFAS 133 and SFAS 138, the Company recorded a transition adjustment in the aggregate amount of $(2,501,595), net of a tax benefit of $1,437,925, as a reduction to shareholders' equity and recorded a corresponding liability to reflect the fair market value of the derivatives as of May 1, 2001. The equity adjustment is classified as other comprehensive income (loss) and the derivative liability is classified in the interest rate derivative positions liability. Over a period ending April 2004, the maturity date of the final swap, the Company will reclassify into earnings substantially all of the transition adjustment originally recorded.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The temporary differences which give rise to deferred tax assets are as follows at April 30, 2001 and 2002, respectively:
The provision (benefit) for income taxes on income before income taxes and minority interest for the years ended April 30, 2000, 2001 and 2002, consists of the following:
The following is a reconciliation between the effective income tax rate and the applicable statutory federal income tax rate for the years ended April 30, 2000, 2001 and 2002.
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CREDIT RISKS
Approximately 26 percent of the Company's Receivables Held for Investment by principal balance at April 30, 2002 represent receivables acquired from dealers located in Texas. The economy of Texas is primarily dependent on petroleum and natural gas production and sales of related supplies and services, petrochemical operations, light and medium manufacturing operations, computer and computer service businesses, agribusiness and tourism. Job losses in any or all of these primary economic segments of the Texas economy may result in a significant increase in delinquencies or defaults in the Company's receivable portfolio. While vehicles secure the receivables, it is not expected that the value of the vehicles if repossessed and sold by the Company would be sufficient to recover the principal outstanding under any defaulted loans.
The Company is also exposed to credit loss in the event that the counterparties to the swap agreements described in Note 7 do not perform their obligations. The terms of the Company's interest rate agreements provide for settlement on a monthly basis and accordingly, any credit loss due to non-performance of the counterparty would be limited to the amount due from the counterparty for the month non-performance occurred. The Company would be exposed to adverse interest rate fluctuations following any such non-performance. While management believes that it could enter into interest rate swap agreements with other counterparties to effectively manage such rate exposure, there is no assurance that it would be able to enter interest rate agreements on comparable terms as those of its present agreements.
10. MARKET RISKS
The market risk discussion and the estimated amounts generated from the analysis that follows are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially due to changes in the Company's product and debt mix, developments in the financial markets, and further utilization by the Company of risk-mitigating strategies such as hedging.
The Company's operating revenues are derived almost entirely from the collection of interest on the receivables it retains and its primary expense is the interest that it pays on borrowings incurred to purchase and retain such receivables. The Company's credit facilities bear interest at floating rates which are reset on a short-term basis, whereas its receivables bear interest at fixed rates which do not generally vary with changes in interest rates. The Company is therefore exposed primarily to market risks associated with movements in interest rates on its credit facilities. The Company believes that it takes the necessary steps to appropriately reduce the potential impact of interest rate increases on the Company's financial position and operating performance.
The Company relies almost exclusively on revolving credit facilities to fund its origination of receivables. Periodically, the Company will transfer receivables from a revolving to a term credit facility. Currently, all of the Company's credit facilities in combination with various swaps bear interest at floating rates tied to either a commercial paper index or LIBOR.
As of April 30, 2002, the Company had $38 million of floating rate secured debt outstanding net of swap and cap agreements. For every 1 percent increase in commercial paper rates or LIBOR, annual after-tax earnings would decrease by approximately $244,000 assuming the Company maintains a level amount of floating rate debt and assuming an immediate increase in rates. As of April 30, 2001, the Company had $62 million of floating rate secured debt outstanding net of swap and cap agreements. For every 1 percent increase in commercial paper rates or LIBOR, annual after-tax earnings would decrease by approximately $394,000 assuming the Company maintains a level amount of floating rate debt and assuming an immediate increase in rates.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the carrying amounts and estimated fair values of the Company's financial instruments for those financial instruments whose carrying amounts differ from their estimated fair values. SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts shown in the table are included in the balance sheet under the indicated captions.
The following methods and assumptions were used to estimate the fair value of each category of financial instruments:
CASH AND SHORT-TERM INVESTMENTS, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. The carrying amounts approximate fair value because of the short maturity and market interest rates of those instruments.
RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by discounting expected cash flows at a risk-adjusted rate of return deemed to be appropriate for investors in such receivables. Expected cash flows take into consideration management's estimates of prepayments, defaults and recoveries.
RECEIVABLES ACQUIRED FOR INVESTMENT. The carrying value approximates fair value. The fair values were estimated by discounting expected cash flows at a risk-adjusted rate of return deemed to be appropriate for investors in such receivables. Expected cash flows take into consideration management's estimates of prepayments, defaults and recoveries.
TERM NOTES. The fair value was estimated by discounting cash payments using current rates and comparative maturities. Expected cash payments take into consideration prepayments, defaults and recoveries on the underlying collateral.
CREDIT FACILITIES. The carrying amount approximates fair value because of the floating interest rates on the credit facilities.
SWAP AGREEMENTS. The fair value was estimated based on the payment the Company would have to make to or receive from the swap counterparty to terminate the swap agreements.
CAP AGREEMENTS. The fair value was estimated based on the payment the Company would receive from the cap counterparty to terminate the cap agreements.
12. DEFINED CONTRIBUTION PLAN
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective May 1, 1994, the Company adopted a participant-directed 401(k) retirement plan for its employees. An employee becomes eligible to participate in the plan immediately upon employment. The Company pays the administrative expenses of the 401(k) plan. The Company also matches a percentage of each participant's voluntary contributions up to a maximum voluntary contribution of 3 percent of the participant's compensation. In fiscal year 2002 and 2001, the Company made matching contributions to the 401(k) plan in the amounts of $30,265 and $32,932, respectively. Prior to fiscal year 2000, no matching contributions were made. Effective April 28, 1998, the Company established a participant directed Deferred Compensation Plan for certain executive officers of the Company. Under the terms of the Deferred Compensation Plan, the participants may elect to make contributions to the plan that exceeds amounts allowed under the Company's 401(k) plan. The Company pays the administrative expenses of the Deferred Compensation Plan. As of April 30, 2002 and 2001, the amounts invested under the Deferred Compensation Plan totaled $256,876 and $527,958, respectively.
13. SHAREHOLDERS' EQUITY
PREFERRED STOCK. In June 1995, the shareholders approved a new series of preferred stock (New Preferred Stock) with a $1.00 par value, and authorized 1,000,000 shares. As of April 30, 2002, no shares have been issued.
STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered by the Compensation Committee of the Board of Directors and provides that options may be granted to officers and other key employees for the purchase of up to 300,000 shares of Common Stock, subject to adjustment in the event of certain changes in capitalization. Options may be granted either as incentive stock options (which are intended to qualify for certain favorable tax treatment) or as non-qualified stock options.
The Compensation Committee selects the persons to receive options and determines the exercise price, the duration, any conditions on exercise and other terms of the options. In the case of options intended to be incentive stock options, the exercise price may not be less than 100 percent of the fair market value per share of Common Stock on the date of grant. With respect to non-qualified stock options, the exercise price may be fixed as low as 50 percent of the fair market value per share at the time of grant. In no event may the duration of an option exceed 10 years and no option may be granted after the expiration of 10 years from the adoption of the Plan.
The exercise price of the option is payable in full upon exercise and payment may be in cash, by delivery of shares of Common Stock (valued at their fair market value at the time of exercise), or by a combination of cash and shares. At the discretion of the Compensation Committee, options may be issued in tandem with stock appreciation rights entitling the option holder to receive an amount in cash or in shares of Common Stock, or a combination thereof, equal in value to any increase since the date of grant in the fair market value of the Common Stock covered by the option.
A summary of the status of the Company's stock option plans for the years ended April 30, 2000, 2001 and 2002 is presented below:
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the status of options outstanding at April 30, 2002:
(1) The option will terminate one year after the Director ceases to be a member of the Board of Directors, except that in the event of the Director's death while serving as a Director the option would be exercisable by his heirs or representatives of his estate for a period of two years after date of death.
The Company accounts for these plans under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.
The following weighted-average assumptions were used:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
14. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT. As of April 30, 2002, the Company was not a party to any employment agreements.
LITIGATION. The Company from time to time becomes involved in various routine legal proceedings which are incidental to the business. Management of the Company vigorously defends such matters. As of April 30, 2002, management believes there are no such legal proceedings that would have a material adverse impact on the Company's financial position or results of operations.
LEASES. The Company is a party to a lease agreement for office space in Houston that expires on February 28, 2005. The Company is party to a lease agreement for office space in Atlanta which expires on June 30, 2007. The Company also holds equipment under operating leases that expire in fiscal year 2003. Rent expense for office space and other operating leases for the years ended April 30, 2000, 2001 and 2002, was $1,149,646, $1,192,466 and $910,816, respectively. Required minimum lease payments for the remaining terms of the above leases are:
15. EARNINGS PER SHARE
Earnings per share amounts are based on the weighted average number of shares of common stock and potential dilutive common shares outstanding during the period. The weighted average number of shares used to compute basic and diluted earnings per share for the years ended April 30, 2000, 2001 and 2002 are as follows:
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At April 30, 2002, the Company had 475,446 employee stock options and warrants and 70,000 director options which were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the period presented.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by quarter for the year ended April 30, 2002.
The table below sets forth the unaudited consolidated operating results by quarter for the year ended April 30, 2001.