**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                    |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                |
| ** ** | **For the quarterly period ended October 31, 2005**                                                                                                                                                                  |
| ** ** | ** **                                                                                                                                                                                                                |
| **OR**     |
| ** ** | ** **                                                                                                                                                                                                                |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                   |
| ** ** | ** **                                                                                                                                                                                                                |
| ** ** | **For the transition period  from               to               ** |

 

### **Commission File Number 0-26686**

 

**FirstInvestors Financial Services Group, Inc.**

(Exact Name of Registrant as Specified in itsCharter)

 
| **Texas**                                      | ** ** | **76-0465087**                        |
|------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation |       | (I.R.S. Employer  Identification No.) |
| or Organization)                               |       |                                  |
| ** **                                     | ** ** | ** **                            |
| **675 Bering Drive, Suite 710**           | ** ** | ** **                            |
| **Houston, Texas**                             |       | **77057**                             |
| (Address of Principal  Executive Offices)      |       | (Zip Code)                            |

 

**(713) 977-2600**

(Registrant’s Telephone Number, Including AreaCode)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý No o.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý.

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date.

 

| **Class**                    | ** ** | **Shares  Outstanding At  December 8, 2005** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|
| Common Stock-$.001 Par Value |       | 4,451,693                                         |       |

 

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

 

##### **FORM 10-Q**

##### ** **

### **October 31, 2005**

### ** **

##### **TABLE OF CONTENTS**

 
| **Part I**  | **Financial Information** |                                                                                                                   |
|------------------|---------------------------|------------------------------------------------------------------------------------------------------------------------|
|             |                      |                                                                                                                   |   |
|             | Item 1.                   | Financial Statements                                                                                                   |   |
|             |                      |                                                                                                                   |   |
|             |                      | Consolidated  Condensed Balance Sheets as of April 30, 2005 and October 31, 2005                             |   |
|             |                      |                                                                                                                   |   |
|             |                      | Consolidated  Condensed Statements of Income for the Three Months and Six Months Ended October 31,  2004 and 2005 |   |
|             |                      |                                                                                                                   |   |
|             |                      | Consolidated  Condensed Statement of Shareholders’ Equity for the Six Months Ended October 31,  2005         |   |
|             |                      |                                                                                                                   |   |
|             |                      | Consolidated  Condensed Statements of Cash Flows for the Six Months Ended October 31,  2004 and 2005              |   |
|             |                      |                                                                                                                   |   |
|             |                      | Notes to Unaudited  Consolidated Condensed Financial Statements                                                        |   |
|             |                      |                                                                                                                   |   |
|             | Item  2.                  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |   |
|             |                      |                                                                                                                   |   |
|             | Item  3.                  | Quantitative  and Qualitative Disclosures About Market Risk                                                            |   |
|             |                      |                                                                                                                   |   |
|             | Item 4.                   | Controls  and Procedures                                                                                               |   |
|             |                      |                                                                                                                   |   |
| **Part II** | **Other  Information**    |                                                                                                                   |
|             |                      |                                                                                                                   |   |
|             | Item  4.                  | Other  Information                                                                                                     |   |
|             |                      |                                                                                                                   |   |
|             | Item  6.                  | Exhibits  and Reports on Form 8-K                                                                                 |   |
|             |                      |                                                                                                                   |   |
| **Signatures**   |                      |                                                                                                                   |

 

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**FIRST INVESTORS FINANCIAL SERVICESGROUP, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSEDBALANCE SHEETS — APRIL 30, 2005 AND OCTOBER 31, 2005**

 
| ** **                                                                                                                          | ** ** | **April 30,  2005** | ** **  | **October 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|-------------|----------------------------|------------|
| ** **                                                                                                                          | ** ** | **(Audited)**            | ** **  | **(Unaudited)**            | ** ** |
| **ASSETS**                                                                                                                          |       |                     |        |                       |       |
| Receivables Held for Investment, net                                                                                                |       | $                        | 248,976,931 |                       | $          | 331,163,075 |   |
| Receivables Acquired for Investment, net                                                                                            |       | 641,223                  |        | 380,062                    |       |
| Cash and Short-Term Investments                                                                                                     |       | 2,413,738                |        | 4,279,540                  |       |
| Restricted Cash                                                                                                                     |       | 19,096,858               |        | 27,434,240                 |       |
| Accrued Interest Receivable                                                                                                         |       | 2,239,798                |        | 2,793,856                  |       |
| Assets Held for Sale                                                                                                                |       | 942,774                  |        | 1,076,982                  |       |
| Other Assets:                                                                                                                       |       |                     |        |                       |       |
| Funds held under reinsurance agreement                                                                                              |       | 4,174,814                |        | 4,806,403                  |       |
| Deferred financing costs and other assets, net of  accumulated amortization and depreciation of $2,684,543 and $2,787,380           |       | 5,019,030                |        | 5,270,214                  |       |
| Current income taxes receivable                                                                                                     |       | 5,233                    |        | —                     |       |
| Interest rate derivative positions                                                                                                  | ** ** | **—**               |        | 332,231                    |       |
| Total assets                                                                                                                        |       | $                        | 283,510,399 |                       | $          | 377,536,603 |   |
|                                                                                                                                |       |                     |        |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                       |       |                     |        |                       |       |
| Debt:                                                                                                                               |       |                     |        |                       |       |
| Warehouse credit facilities                                                                                                         |       | $                        | 171,562,153 |                       | $          | 138,980,091 |   |
| Term notes                                                                                                                          |       | 70,050,511               |        | 189,745,895                |       |
| Working capital facility                                                                                                            |       | 10,500,000               |        | 14,116,210                 |       |
| Related Party Note                                                                                                                  |       | 2,500,000                |        | 2,500,000                  |       |
| Other Liabilities:                                                                                                                  |       |                     |        |                       |       |
| Accounts payable and accrued liabilities                                                                                            |       | 2,495,260                |        | 3,021,965                  |       |
| Current income taxes payable                                                                                                        |       | —                   |        | 295,013                    |       |
| Deferred income taxes payable                                                                                                       |       | 910,807                  |        | 1,550,923                  |       |
| Total liabilities                                                                                                                   |       | 258,018,731              |        | 350,210,097                |       |
|                                                                                                                                |       |                     |        |                       |       |
| Commitments and Contingencies                                                                                                       | ** ** | **—**               |        | —                     |       |
| Shareholders’ Equity:                                                                                                          |       |                     |        |                       |       |
| Common stock, $0.001 par value, 10,000,000 shares  authorized, 5,583,669 and 5,623,669 issued; 4,411,693 and 4,451,693  outstanding |       | 5,584                    |        | 5,624                      |       |
| Additional paid-in capital                                                                                                          |       | 18,754,608               |        | 18,899,902                 |       |
| Retained earnings                                                                                                                   |       | 11,198,788               |        | 12,888,292                 |       |
| Less, treasury stock, at cost, 1,171,976 shares                                                                                     |       | (4,467,312               | )           | (4,467,312                 | )          |
| Total shareholders’ equity                                                                                                     |       | 25,491,668               |        | 27,326,506                 |       |
| Total liabilities and shareholders’ equity                                                                                     |       | $                        | 283,510,399 |                       | $          | 377,536,603 |   |

 

The accompanying notes are an integral part of these consolidatedcondensed financial statements.

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTSOF INCOMEFor the Three Months and Six Months Ended October 31, 2004 and 2005(Unaudited)**

 
| ** **                                                    | ** ** | **For the Three Months  Ended October 31,** | ** ** | **For the Six Months  Ended October 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                         | ** ** | **2005**                                       | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                          |       |                                             |       |                                           |       |   |   |   |   |
| Interest Income                                               |       | $                                                | 7,001,225  |                                           | $          | 9,914,714 |   | $ | 13,953,404 |   | $ | 18,412,720 |   |
| Interest Expense                                              |       | 1,828,779                                        |       | 3,476,266                                      |       | 3,605,552 |   | 6,436,413 |   |
| Net interest income                                           |       | 5,172,446                                        |       | 6,438,448                                      |       | 10,347,852 |   | 11,976,307 |   |
| Provision for Credit Losses                                   |       | 2,442,406                                        |       | 2,064,817                                      |       | 4,884,511 |   | 3,716,228 |   |
| Net Interest Income After  Provision for Credit Losses        |       | 2,730,040                                        |       | 4,373,631                                      |       | 5,463,341 |   | 8,260,079 |   |
| Other Income:                                                 |       |                                             |       |                                           |       |   |   |   |   |
| Servicing revenue                                             |       | 905,409                                          |       | 494,811                                        |       | 1,875,364 |   | 1,073,037 |   |
| Other finance charges and fees                                |       | 834,439                                          |       | 597,868                                        |       | 1,233,634 |   | 1,106,120 |   |
| Insurance products                                            |       | 190,502                                          |       | 262,929                                        |       | 331,931 |   | 553,581 |   |
| Income from investment                                        |       | 176,522                                          |       | 111,236                                        |       | 370,228 |   | 237,194 |   |
| Other interest income                                         |       | 91,834                                           |       | 283,651                                        |       | 165,966 |   | 533,215 |   |
| Other income                                                  |       | 221,017                                          |       | 242,199                                        |       | 330,901 |   | 386,021 |   |
| Unrealized (loss)/gain on  interest rate derivative positions |       | (170,097                                         | )          | 23,057                                         |       | (237,754 | ) | 20,375 |   |
| Total other income                                            |       | 2,249,626                                        |       | 2,015,751                                      |       | 4,070,270 |   | 3,909,543 |   |
| Operating Expenses:                                           |       |                                             |       |                                           |       |   |   |   |   |
| Salaries and benefits                                         |       | 2,215,196                                        |       | 2,661,055                                      |       | 4,278,641 |   | 5,202,856 |   |
| Operating expense                                             |       | 1,365,338                                        |       | 1,124,014                                      |       | 2,684,083 |   | 1,727,338 |   |
| General and administrative                                    |       | 936,232                                          |       | 1,096,522                                      |       | 1,859,053 |   | 2,013,704 |   |
| Other interest expense                                        |       | 122,632                                          |       | 303,546                                        |       | 234,632 |   | 565,000 |   |
| Total operating expenses                                      |       | 4,639,398                                        |       | 5,185,137                                      |       | 9,056,409 |   | 9,508,898 |   |
| Income Before Provision for  Income Taxes                     |       | 340,268                                          |       | 1,204,245                                      |       | 477,202 |   | 2,660,724 |   |
| Provision (Benefit) for Income  Taxes:                        |       |                                             |       |                                           |       |   |   |   |   |
| Current                                                       |       | 326,252                                          |       | 224,291                                        |       | 376,233 |   | 331,104 |   |
| Deferred                                                      |       | (202,054                                         | )          | 215,314                                        |       | (202,054 | ) | 640,116 |   |
| Total provision for income  taxes                             |       | 124,198                                          |       | 439,605                                        |       | 174,179 |   | 971,220 |   |
| Net Income                                                    |       | $                                                | 216,070    |                                           | $          | 764,640 |   | $ | 303,023 |   | $ | 1,689,504 |   |
|                                                          |       |                                             |       |                                           |       |   |   |   |   |
| Basic Net Income per Common  Share                            |       | $                                                | 0.04       |                                           | $          | 0.17 |   | $ | 0.06 |   | $ | 0.38 |   |
| Diluted Net Income per Common  Share                          |       | $                                                | 0.04       |                                           | $          | 0.17 |   | $ | 0.06 |   | $ | 0.37 |   |

 

The accompanying notes are an integral part ofthese consolidated condensed financial statements.

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDCONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY**

** **

**For the Six Months Ended October 31,2005**

**(Unaudited)**

 
| ** **                        | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock, at cost** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|------------------------------|------------|-----------|------------|
| Balance at April 30, 2005    |       | $                 | 5,584      |                             | $          | 18,754,608             |       | $                            | 11,198,788 |      | $          | (4,467,312 | ) | $ | 25,491,668 |   |
| Net income                        |       | —            |       | —                           |       | 1,689,504              |       | —                       |       | 1,689,504 |       |
| Exercise of stock options         |       | 40                |       | 145,294                          |       | —                 |       | —                       |       | 145,334   |       |
| Balance at October 31,  2005 |       | $                 | 5,624      |                             | $          | 18,899,902             |       | $                            | 12,888,292 |      | $          | (4,467,312 | ) | $ | 27,326,506 |   |

 

The accompanying notes are an integral part of thisconsolidated condensed financial statement.

 

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**FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended October 31,2004 and 2005**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **2004**    | ** ** | **2005**     | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|
|                                                                                     |       |        |       |         |       |
| Cash Flows From Operating Activities:                                                    |       |        |       |         |       |
| Net income                                                                               |       | $           | 303,023    |         | $          | 1,689,504 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |       |        |       |         |       |
| Depreciation and amortization  expense                                                   |       | 2,000,025   |       | 2,331,025    |       |
| Provision for credit losses                                                              |       | 4,884,511   |       | 3,716,228    |       |
| (Increase) decrease in:                                                                  |       |        |       |         |       |
| Accrued interest receivable                                                              |       | (34,962     | )          | (554,057     | )          |
| Restricted cash                                                                          |       | (2,193,873  | )          | (8,337,383   | )          |
| Deferred financing costs and  other assets                                               |       | (484,754    | )          | (567,331     | )          |
| Funds held under reinsurance  agreement                                                  |       | (480,614    | )          | (631,589     | )          |
| Current income tax receivable                                                            |       | 8,212       |       | 5,233        |       |
| Interest rate derivative  positions                                                      |       | (438,246    | )          | (332,231     | )          |
| Increase (decrease) in:                                                                  |       |        |       |         |       |
| Accounts payable and accrued  liabilities                                                |       | 909,081     |       | 526,707      |       |
| Deferred income taxes payable                                                            |       | (202,054    | )          | 295,013      |       |
| Current income taxes payable                                                             |       | 333,713     |       | 640,116      |       |
| Net cash provided by (used in)  operating activities                                     |       | 4,604,062   |       | (1,218,765   | )          |
| Cash Flows From Investing Activities:                                                    |       |        |       |         |       |
| Origination of Receivables  Held for Investment                                          |       | (67,201,988 | )          | (148,341,251 | )          |
| Payments received from  investment                                                       |       | —      |       | 93,994       |       |
| Principal payments from  Receivables Held for Investment                                 |       | 47,201,002  |       | 57,753,028   |       |
| Principal payments from  Receivables Acquired for Investment                             |       | 371,036     |       | 261,161      |       |
| Payments received on Assets  Held for Sale                                               |       | 3,143,316   |       | 2,889,204    |       |
| Purchase of furniture and  equipment                                                     |       | (54,401     | )          | (446,434     | )          |
| Net cash used in investing  activities                                                   |       | (16,541,035 | )          | (87,790,298  | )          |
| Cash Flows From Financing Activities:                                                    |       |        |       |         |       |
| Proceeds from advances on—                                                          |       |        |       |         |       |
| Warehouse credit facilities                                                              |       | 121,887,990 |       | 258,104,987  |       |
| Term notes                                                                               |       | —      |       | 175,493,000  |       |
| Working capital facility                                                                 |       | 543,863     |       | 3,616,210    |       |
| Principal payments made on—                                                         |       |        |       |         |       |
| Warehouse credit facilities                                                              |       | (68,706,353 | )          | (290,687,050 | )          |
| Term notes                                                                               |       | (43,011,983 | )          | (55,797,616  | )          |
| Working capital facility                                                                 |       | (305,006    | )          | —       |       |
| Proceeds from issuance of  common stock                                                  |       | —      |       | 145,334      |       |
| Treasury stock purchased                                                                 |       | (3,913      | )          | —       |       |
| Net cash provided by financing  activities                                               |       | 10,404,598  |       | 90,874,865   |       |
| (Decrease) Increase in Cash and Short-Term Investments                                   |       | (1,532,375  | )          | 1,865,802    |       |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 2,018,490   |       | 2,413,738    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $           | 486,115    |         | $          | 4,279,540 |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |        |       |         |       |
| Cash paid during the period  for—                                                   |       |        |       |         |       |
| Interest                                                                                 |       | $           | 3,092,784  |         | $          | 5,774,356 |   |
| Income taxes                                                                             |       | 33,963      |       | 31,932       |       |

 

The accompanying notesare an integral part of these consolidated condensed financial statements

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC. AND SUBSIDIARIES**

 

**NOTES TOUNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

##### **October 31, 2005**

 

**1.****              The Company**

 

*Organization.*  First Investors Financial Services Group, Inc.(First Investors) was established to serve as a holding company for FirstInvestors Financial Services, Inc. (FIFS) and FIFS’s wholly-ownedsubsidiaries, First Investors Insurance Company (FIIC), First Investors Auto ReceivablesCorporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors ServicingCorporation (FISC), formerly known as Auto Lenders Acceptance Corporation(ALAC), FIFS Acquisition Funding Corp. LLC, Farragut Financial Corporation, andFirst Investors Auto Funding Corporation. First Investors, together with itswholly-owned and majority-owned subsidiaries, is hereinafter referred to as theCompany.

 

FIFS began operations in May 1989 and isprincipally involved in the business of originating and holding for investmentretail installment contracts and promissory notes secured by new and usedautomobiles originated by factory authorized franchised dealers or directlythrough consumers. As of October 31, 2005, approximately 32% and 16% ofreceivables held for investment had been originated in Texas and Georgia,respectively. The Company currently operates in 28 states.

 

FIIC was organized under the captive insurancecompany laws of the state of Vermont for the purpose of reinsuring certaincredit enhancement insurance policies that have been written by unrelated thirdparty insurance companies.

 

On October 2, 1998, the Company completedthe acquisition of FISC and the operations of FISC are included in theconsolidated results of the Company since the date of acquisition.Headquartered in Atlanta, Georgia, FISC performed servicing and collectionactivities on a portfolio of receivables originated for investment as well ason a portfolio of receivables originated and sold pursuant to two assetsecuritizations. As a result of the acquisition, the Company increased thetotal dollar value on its balance sheet of receivables, acquired an interest incertain trust certificates related to the asset securitizations and acquiredcertain servicing rights along with furniture, fixtures, equipment andtechnology to perform the servicing and collection functions for the portfolioof receivables under management.

 

On August 8, 2000, the Company entered intoa partnership agreement (Partnership) whereby a subsidiary of the Company wasthe general partner owning 70% of the partnership interests and First UnionInvestors, Inc. served as the limited partner and owned 30% of thepartnership interests.  On September 19,2003, First Investors Financial Services, Inc. purchased the limited partnershipinterests previously held by First Union Investors, Inc.  The Partnership consists primarily of aportfolio of loans previously owned or securitized by FISC and certain otherfinancial assets including charged-off accounts owned by FISC.

 

On December 24, 2002, the Company purchased40% of common stock and an investment in the junior mezzanine debt of FirstAuto Receivables Corporation (FARC). FARC purchased an approximately $197.5 million portfolio of installmentloan receivables from a subsidiary of Union Acceptance Corporation.  FISC performs ongoing servicing andcollection activities on the portfolio.

 

On March 19, 2003, FISC entered into aservicing agreement with an unrelated third party to service an approximately$300 million portfolio of installment loan receivables purchased from asubsidiary of Union Acceptance Corporation.

 

In total, at October 31, 2005, FISCperforms servicing and collection functions on a managed receivables portfolioof approximately $467 million.

 

7

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**2.****                Interim Financial Information**

 

*Basis ofPresentation*.  The consolidatedcondensed financial statements include the accounts of First Investors and itswholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have beeneliminated. Investments in which the Company exercises significant influence,but which it does not control (generally a 20% to 50% ownership interest), areaccounted for under the equity method of accounting, except for variableinterest entities for which the Company is considered the primary beneficiaryunder Financial Accounting Standards Board (“FASB”) Interpretation No. 46,*Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51*, as amended in December 2003by Interpretation 46R.  As of October 31,2005, the Company does not have any variable interest entities under which FIN46 as amended by Interpretation 46R would apply.

 

The results for the interim periods are notnecessarily indicative of the results of operations that may be expected forthe fiscal year. In the opinion of management, the information furnishedreflects all adjustments which are of a normal recurring nature and arenecessary for a fair presentation of the Company’s financial position as of October 31,2005, and the results of its operations for the three and six months ended October 31,2004 and 2005, and its cash flows for the six months ended October 31, 2004and 2005.

 

The consolidatedcondensed financial statements for the interim periods have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations, although the Companybelieves that the disclosures are adequate to make the information notmisleading. These financial statements should be read in conjunction with theaudited consolidated condensed financial statements included in the Company’s2005 Annual Report on Form 10-K filed July 29, 2005.

 

*Receivables Held for Investment*.  Receivables Held for Investment represents the aggregateoutstanding balance of installment sales contracts and promissory notesoriginated by the Company through its automobile dealer relationships ordirectly with consumers.  The Companyaccrues interest income monthly using the effective interest method.  When a receivable becomes 90 days past due,the income accrual is suspended until the payments become current. When a loanis charged off or the collateral is repossessed, the remaining income accrualis written off.

 

*Other Income*.  Other Income consists of income received fromservicing activities, other finance charges and fees, income from investments,reinvestment revenue, income earned from the sale of GAP insurance and extendedservice contracts, and unrealized gain or loss on interest rate derivativepositions.  Servicing revenue is accruedas services are rendered. Late fees and other loan-related fees are recognizedwhen received.  Income from investmentsand reinvestment revenue are accrued based on the respective interest rate ofsuch investment.  Income from the sale ofGAP insurance and extended service contracts is recognized when sold as theCompany has no further obligation after the sale.  Unrealized gain or loss on interest ratederivatives is recognized when incurred.

 

*Allowance for Credit Losses*.  The Company calculates theallowance for credit losses in accordance with SFAS No. 5*, Accounting for Contingencies.*   SFAS No. 114, *Accountingfor Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they comprise a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

 

The Company initiates efforts to make customercontact as early as when the customer is one day past due and become moreaggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair 

 

8

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valueof the collateral is recorded as an Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling relatedexpenses.  After collection of allproceeds, the Company records an adjustment, positive or negative, based on thedifference between the fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

 

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanon a date which is six months prior to the reporting date, to the aging loanstatus as of the reporting date.  Thesefactors are then applied to the aging status of each loan at the reporting datein order to calculate the number of loans that are expected to migrate toimpaired status.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase itsallowance for loan losses against loans that were greater than 120 days pastdue and loans in which the collateral had been assigned for repossession buthad not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowancefor credit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, they are reported in earnings in theperiod they become known.

 

*Stock-Based Compensation*.  The Company has an employee stock option planand a non-employee director stock option plan, which are described more fullyin Note 9.  The Company has adopted the disclosureprovisions of SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123*.This pronouncement requires prominent disclosures in both annual and interimfinancial statements regarding the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The Company accounts for stock compensation awards under the intrinsic valuemethod of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*which requirescompensation cost to be recognized based on the excess, if any, between thequoted market price of the stock at the date of grant and the amount thegrantee must pay to acquire the stock. All options awarded under the Company’splan are granted with an exercise price equal to or greater than the fairmarket value on the date of the grant.

 

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Thefollowing table presents the Company’s net income per share had the Companyadopted the fair value method of accounting for stock-based compensation underSFAS No. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148.

 
| ** **                                                                                                                                            | ** ** | **For the  Three Months  Ended October 31,** | ** ** | **For the  Six Months  Ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2004**                                          | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| Net Income, as reported                                                                                                                               |       | $                                                 | 216,070    |                                            | $          | 764,640 |   | $ | 303,023 |   | $ | 1,689,504 |   |
| Deduct: Total stock option  plan compensation expense determined under fair value based method for awards  granted, modified or settled, net of taxes |       | 44,942                                            |       | 56,739                                          |       | 80,710 |   | 102,987 |   |
| Pro Forma Net Income                                                                                                                                  |       | $                                                 | 171,128    |                                            | $          | 707,901 |   | $ | 222,313 |   | $ | 1,586,517 |   |
|                                                                                                                                                  |       |                                              |       |                                            |       |   |   |   |   |
| Basic Net Income per Common  Share, as reported                                                                                                       |       | $                                                 | 0.04       |                                            | $          | 0.17 |   | $ | 0.06 |   | $ | 0.38 |   |
| Diluted Net Income per Common  Share, as reported                                                                                                     |       | $                                                 | 0.04       |                                            | $          | 0.17 |   | $ | 0.06 |   | $ | 0.37 |   |
| Basic Net Income per Common  Share, pro forma                                                                                                         |       | $                                                 | 0.03       |                                            | $          | 0.16 |   | $ | 0.04 |   | $ | 0.35 |   |
| Diluted Net Income per Common  Share, pro forma                                                                                                       |       | $                                                 | 0.03       |                                            | $          | 0.15 |   | $ | 0.04 |   | $ | 0.34 |   |

 

*Reclassifications*.Certain reclassifications have been made to the fiscal 2005 amounts to conformwith the fiscal 2006 presentation.

 

**3.****    ****  Receivables Held for Investment**

 

Thereceivables generally have terms between 48 and 72 months and arecollateralized by the underlying vehicles. Net receivable balances consisted of the following at April 30, 2005and October 31, 2005:

 
| ** **                                | ** ** | **April 30,  2005** | ** **  | **October 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|-------------|----------------------------|------------|
| Receivables                               |       | $                        | 244,940,526 |                       | $          | 323,845,032 |   |
| Unamortized premium and deferred fees (1) |       | 6,285,004                |        | 9,577,061                  |       |
| Allowance for credit losses               |       | (2,248,599               | )           | (2,259,018                 | )          |
| Net receivables                           |       | $                        | 248,976,931 |                       | $          | 331,163,075 |   |

 

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    (1) Includes premium and discounts paid to dealer plus deferred acquisition cost.

 

Activity in the allowance for credit losses for theperiods ended October 31, 2004 and 2005 was as follows:

 
| ** **                     | ** ** | **For the  Six Months  Ended October 31,** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                        | ** ** | **2005** | ** ** |
| Balance, beginning of period   |       | $                                               | 2,199,386  |   | $ | 2,248,599 |   |
| Provision for credit losses    |       | 4,884,511                                       |       | 3,716,228 |   |
| Charge-offs, net of recoveries |       | (4,772,857                                      | )          | (3,705,809 | ) |
| Balance, end of period         |       | $                                               | 2,311,040  |   | $ | 2,259,018 |   |

 

**4.****              Receivables Acquired for Investment**

 

Receivables Acquired for Investment comprise loanspreviously originated by Auto Lenders Acceptance Corporation and another thirdparty.  Loans originated by Auto Lenders AcceptanceCorporation include a portfolio of warehouse loans and a portfolio of loansthat were previously securitized.  Thesecuritized loans were subsequently redeemed and funded through one of theCompany’s credit facilities.  ReceivablesAcquired for Investment previously originated by Auto Lenders AcceptanceCorporation were purchased at a discount relating to credit quality.  As a result of the amortization of theoutstanding principal balance of the receivables portfolio, the majority of theremaining cash flows projected constitute default collections fromobligors.  Given the nature 

 

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of the remaining cash flows of individual loans, theCompany determined that the timing of collections on Receivables Acquired forInvestment was much more unpredictable than contractual cash flows fromnon-defaulted receivables.  Therefore,under the guidance provided by Practice Bulletin 6*,Amortization of Discounts on Certain Acquired Loans*, ReceivablesAcquired for Investment will be accounted for under the cost-recovery methodbeginning September 30, 2003.  Underthe cost recovery method, cash proceeds from collections are applied to firstreduce the Company’s basis in the assets. Cash collected in excess of this cost basis is recognized as income whenreceived. Receivables Acquired for Investment previously originated by AutoLenders Acceptance Corporation were $607,894 and $358,741 as of April 30,2005 and October 31, 2005, respectively.

 

On September 30, 2003 the Company purchased $9.4million of defaulted auto loan receivables from an unrelated third party.  The remaining balances of these loans of$33,329 and $21,321 are included in Receivables Acquired for Investment on thebalance sheet as of April 30, 2005 and October 31, 2005 respectively,and are accounted for using the cost-recovery method.  The Company may, from time to time, considersimilar acquisitions in the future.

 

**5.****              Debt**

 

The Company finances its loan origination throughtwo warehouse credit facilities. The Company’s credit facilities provide forone-year terms and have been renewed annually. Management of the Companybelieves that the credit facilities will continue to be renewed or extended orthat 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,2002 the Company issued $159 million in asset-backed notes (“Term Notes”)secured by discrete pools of receivables. These notes were subsequently calledand redeemed in March, 2005.  InNovember, 2003, the Company issued $140 million in Term Notes secured by adiscrete pool of receivables.  In May,2005, the Company issued $175 million in Term Notes secured by a discrete poolof receivables.  Substantially allreceivables retained by the Company are pledged as collateral for the creditfacilities and the Term Notes. The weighted average interest rate for theCompany’s secured borrowings including the effect of program fees and dealerfees was 3.5% and 4.3% for the periods ended October 31, 2004 and 2005,respectively.

 

*WarehouseFacilities as of October 31, 2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  October 31,  2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| FIARC        | ** ** | **$**        | 150,000,000 |            | $          | 95,354,257        |       | Commercial paper rate plus .3%                                                                         |       | .25% of Unused Facility |       | .35                                            | %          | 3.98 | % |
|         | ** ** | ** **   |        |            |       |              |       |                                                                                                   |       |                    |       |                                           |       |
| FIRC         | ** ** | **$**        | 50,000,000  |            | $          | 43,625,834        |       | Option of a) Base Rate, which is the higher of prime  rate or fed funds plus .5% or  b) LIBOR plus .5% |       | .25% of Unused Facility |       | See below                                      |       | 4.39 | % |

 

*WarehouseFacilities – Credit Enhancement as of October 31, 2005*

 
| **Facility** | ** ** | **Cash Reserve**              | ** ** | **Advance  Rate** | ** ** | **Insurance**             | ** ** |
|--------------|------------|-------------------------------|------------|-------------------|------------|---------------------------|------------|
| FIARC        |       | 1% of outstanding receivables |       | 94                | %          | Surety Bond               |       |
|         |       |                          |       |              |       |                      |       |
| FIRC         |       | 1% of borrowings              |       | 100               | %          | Default  Insurance (ALPI) |       |

 

FIRC- In order to obtain a lower cost of funding, the Company has agreed tomaintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders are 

 

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named as additionalinsureds under these policies. The coverages are obtained on each receivable atthe time it is originated by the Company, and the applicable premiums areprepaid for the life of the receivable. Each receivable is covered by threeseparate credit insurance policies, consisting of basic default insurance undera standard auto loan protection policy (known as “ALPI” insurance) togetherwith certain supplemental coverages relating to physical damage and otherrisks. Solely at its expense, the Company carries these coverages and neitherthe vehicle purchasers nor the dealers are charged for the coverages, nor arethey usually aware of their existence. The Company’s ALPI insurance policy iswritten by National Union Fire Insurance Company of Pittsburgh (“National Union”),which is a wholly-owned subsidiary of American International Group.

 

Thepremiums that the Company paid during the three months and six months ended October 31,2005 for its three credit enhancement insurance coverages, of which the largestcomponent is basic ALPI insurance, represented approximately 2.2% of theprincipal amount of the receivables originated during the periods. Aggregatepremiums paid for ALPI coverage alone were $901,966 and $1,365,819 during thethree months ended, and $1,616,436 and $2,571,566 for six months ended, October 31,2004 and 2005, respectively, and accounted for 2.4% and 2.1% during the threemonths ended, and 2.4% and 1.8% for the six months ended, October 31, 2004and 2005, respectively, of the principal amount of the receivables originatedduring such respective periods.

 

In April 1994,the Company organized First Investors Insurance Company (the “InsuranceSubsidiary”) under the captive insurance company laws of the State of Vermont.The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Companyand is a party to a reinsurance agreement whereby the Insurance Subsidiaryreinsures 100% of the risk under the Company’s ALPI insurance policy. At thetime each receivable is insured by National Union, the risk is automaticallyreinsured to its full extent and approximately 96% of the premium paid by theCompany to National Union with respect to such receivable is ceded to theInsurance Subsidiary. When a loss covered by the ALPI policy occurs, NationalUnion pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. In addition to the monthly premiums and liquidity reserves of theInsurance Subsidiary, a trust account is maintained by National Union to securethe Insurance Subsidiary’s obligations for losses it has reinsured.

 

Theresult of the foregoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of October 31, 2005, the InsuranceSubsidiary had capital and surplus of $2,754,482 and unencumbered cash reservesof $1,610,297 in addition to the $3,364,617 trust account.

 

TheALPI coverage as well as the Insurance Subsidiary’s liability under theReinsurance Agreement, remains in effect for each receivable that is pledged ascollateral under the warehouse credit facility. Once receivables aretransferred from FIRC to FIARC and financed under the commercial paperfacility, ALPI coverage and the Insurance Subsidiary’s liability under theReinsurance Agreement is cancelled with respect to the transferred receivables.Any unearned premium associated with the transferred receivables is returned tothe Company. The Company believes the losses its Insurance Subsidiary will berequired 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 andthe capital and surplus of the Insurance Subsidiary.

 

FIARC– Credit Enhancement for the FIARC warehouse facility is provided to thecommercial paper investors by a cash reserve account equal to 1% of thereceivables held by FIARC and, additionally, a surety bond issued by MBIA. TheCompany is not a guarantor of, or otherwise a party to, such commercial paper.

 

*WarehouseFacilities – Agents and Expirations*

 
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**         | ** ** | **Event if not Renewed**                                                                                                                                                |
|--------------|------------|-----------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15, 2006 |       | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility                                     |
|         |       |      |       |                   |       |                                                                                                                                                                    |
| FIRC         |       | Wachovia  |       | February 15, 2006 |       | Convert to a  term loan which would mature six months thereafter and amortize monthly in  accordance with the borrowing base with the remaining balance due at maturity |

 

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On December 4, 2003, theFIRC facility was renewed, under similar terms and conditions, at the $50million commitment level until December 2, 2004, and was subsequentlyextended until February 15, 2006. On June 15, 2004, the FIRC facility was increased to $65 million,and reverted back to $50 million on September 13, 2004.  As of April 30, 2005 and October 31,2005, there was $43.6 outstanding.

 

On January 29, 2004,following a short-term extension of the original maturity date, the FIARCfacility was renewed, under similar terms and conditions, to December 2,2004, and was subsequently extended until February 15, 2006.  As of April 30, 2005 and October 31,2005, there was $127.9 and $95.4 million, respectively, outstanding.

 

Managementpresently intends to seek further extensions to these warehouse facilitiesprior to the current expiration dates. Management further considers its relationship with its lenders to besatisfactory and has no reason to believe that the FIRC and FIARC facilitieswill not be renewed at each of their respective expiration dates.

 

The following tablecontains pertinent information on the Term Notes as of October 31, 2005.

 
| **Term Notes**      | ** ** | **Issuance Date**      | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **              | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|-------------|-------------------|-------------------------|-----------------|------------|--------------------|------------|
| 2003-A              |       | November 11, 2003 |       | $                    | 139,661,000 |              | April 20,  2011    |            | $          | 51,201,476         |       | 2.58 | % |
| 2005-A Class 1 |       | May 5, 2005       |       | $                    | 69,000,000  |              | December 17,  2007 |            | $          | 32,051,419         |       | 3.57 | % |
| 2005-A Class 2 |       | May 5, 2005       |       | $                    | 106,493,000 |              | July 16,  2012     |            | $          | 106,493,000        |       | 4.23 | % |

 

Credit enhancement on thetwo Term Notes is as follows:

 
| **Facility** | ** ** | **Cash Reserve**                                                                                    | ** ** | **Advance  Rate**                           | ** ** | **Insurance** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2003-A       |       | 0.5% of Initial Pool  Balance increasing to 2% of Initial Pool Balance including Pre-Funding Amount |       | 96.5% initial advance  decreasing to 96.1%  |       | Surety Bond   |
|         |       |                                                                                                |       |                                        |       |          |
| 2005-A       |       | 1.0% of Initial Pool  Balance increasing to 2% of Initial Pool Balance including Pre-Funding Amount |       | 97.0% initial advance  decreasing to 95.75% |       | Surety Bond   |

 

Term Notes - On January 29, 2002, the Company, through its indirect,wholly-owned subsidiary First Investors Auto Owner Trust 2002-A (“2002 AutoTrust”) completed the issuance of $159,036,000 of 3.46% Class Aasset-backed notes (“2002-A Term Notes”). The initial pool of automobilereceivables transferred to the 2002 Auto Trust totaled $135,643,109, which waspreviously owned by FIRC and FIARC, secured the 2002-A Term Notes.  In addition to the issuance of the Class ANotes, the 2002 Auto Trust also issued $4,819,000 in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom 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) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2002-A Term Note issuance, and (v) fund acash reserve account of 2% or $2,712,862 of the initial receivables pledgedwhich served as a portion of the credit enhancement for the transaction. The Class ATerm Notes bore interest at 3.46% and required monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 97% of theoutstanding balance of the underlying receivables pool. The final maturity ofthe 2002-A Term Notes was December 15, 2008.  The Class B Notes did not bear interestbut required principal reductions sufficient to reduce the balance of the Class BNotes to 3% of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provided credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants were not met, the reserve account target level would increase to 6%of the then current principal balance of the receivables pool.  On February 28, 2005, 

 

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theCompany notified the note holders of the 2002-A securitization of its intent toexercise its prepayment call provision. This call provision was completed effective March 15, 2005, andtherefore there was no outstanding balance as of October 31, 2005 and April 30,2005.

 

On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A (“2003Auto Trust”) completed the issuance of $139,661,000 of 2.58% Class Aasset-backed notes (“2003-A Term Notes”). The initial pool of automobilereceivables transferred to the 2003 Auto Trust totaled $114,726,891, which waspreviously owned by FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued $5,065,891 in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $139,656,629 were used to (i) fund a$30,000,000 pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2003-A term note issuance, and (v) fund aninitial cash reserve account of 0.5% or $573,635 of the initial receivablespledged.  The Class A Term Notesbear interest at 2.58% and requires monthly principal reductions sufficient toreduce the balance of the Class A Term Notes to 96.1% of the outstandingbalance of the underlying receivables pool. The final maturity of the 2003-ATerm Notes is April 20, 2011.  The Class BNotes do not bear interest but require principal reductions sufficient toreduce the balance of the Class B Notes to 3.9% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30,2005, and October 31, 2005, the outstanding principal balances on the 2003-Aterm notes were $70,050,511 and $51,201,476, respectively.

 

On May 5, 2005, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2005-A (“2005Auto Trust”) completed the issuance of $69,000,000 of 3.57% Class A-1asset-backed notes and $106,493,000 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493,000 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,920,721, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the2005 Auto Trust also issued $5,427,619 in Class B Notes that were retainedby the Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $175,487,827 were used to (i) fund a $29,999,898pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1% or $1,509,207 of the initial receivablespledged.  The Class A-1 and Class A-2Term Notes bear interest at 3.57% and 4.23%, respectively, and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1 and Class A-2 Term Notes is December 17,2007 and July 16, 2012, respectively. The Class B Notes do not bear interest but require principalreductions sufficient to reduce the balance of the Class B Notes to 4.25%of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of October 31, 2005, the outstandingprincipal balances on the 2005-A Class A-1 and Class A-2 Term noteswere $32,051,419 and $106,493,000 respectively.

 

*Working Capital Facility*.  On December 6, 2001, theCompany entered into an agreement with Wachovia Securities to refinance the$11,175,000 outstanding balance of the working capital term loan previouslyprovided by Bank of America and Wachovia and increase the size of the facilityto $13.5 million.  The renewal facilitywas provided to a special-purpose, wholly-owned subsidiary of the Company,First Investors Residual Funding LP.  Thefacility originally consisted of a $9 million revolving tranche and a $4.5million term loan tranche which amortizes monthly.  The term loan tranche of this working capitalfacility was evidenced by the Class B Notes issued in conjunction with the2002 Auto Trust financing. The remaining $9 million of the $13.5 millionworking capital facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities, theacquisition facility and the existing and future term note facilities.  During 2002, the facility was modified toincrease the 

 

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interestrate from LIBOR plus a 1.5% program fee to LIBOR plus a 2.25% program fee.  The commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  In addition, the monthly principalamortization under the term loan tranche was increased to the greater of$250,000 or the principal distributions made under the Class B Notesissued under the 2002 Auto Trust financing. On December 4, 2003, the Working Capital Facility was extended to December 2,2004.  Under the terms of the extension,the monthly amortization requirement was replaced with the requirement thatoutstanding balances under the facility could not exceed the lesser of aborrowing base or the $9 million facility limit.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitmentamount to $13.5 million.  The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  On August 15, 2005, the Working CapitalFacility was extended until February 15, 2006, increasing the commitmentamount to $23.5 million.  The interestrate remained at LIBOR plus 2.25% and the commitment fee paid on the totalavailable amount of the facility was maintained at 1.5%.  As of April 30, 2005 and October 31,2005, there was $10,500,000 and $14,116,210, respectively, outstanding underthis facility.

 

The Company presently intends to seek a renewal of theworking capital facility from its lender prior to maturity.  Should the facility not be renewed, theoutstanding balance of the receivables would be amortized in accordance withthe borrowing base.  Management considersits relationship with its lenders to be satisfactory and has no reason tobelieve that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have a materialadverse effect on the Company.

 

*Related Party Loans. *On December 3, 2001 the Company enteredinto an agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5 million.  On December 6, 2004, the original $2.5million shareholder loan was replaced with a $2.5 million loan containingidentical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors  The proceeds of the borrowingshave been utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid atany time unless the Company is in default on one of its other creditfacilities.  There was $2.5 millionoutstanding under this facility as of April 30, 2005 and October 31,2005.  The Company recorded interestexpense of $0 and $63,014 for the three months ended, and $0 and $126,027 forthe six months ended, October 31, 2004 and 2005, respectively.

 

*LoanCovenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance of creditenhancement insurance covering the receivables (if applicable), the observanceof certain financial and non-financial covenants, the avoidance of certainlevels of delinquency experience and other matters. The breach of thesecovenants, if not cured within the time limits specified, could precipitateevents of default that might result in the acceleration of the FIRC creditfacility, the Term Notes and the working capital facility or the termination ofthe commercial paper facilities. The Company was not in default with respect toany financial and non-financial covenants governing these financingarrangements at October 31, 2005.

 

*InterestRate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bearinterest at floating interest rates which are reset on a short-term basis whilethe secured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage its net interest spread, the Companyseeks to maximize the net interest spread while minimizing exposure to changesin interest rates. In connection with managing the net interest spread, theCompany may periodically enter into interest rate swaps or caps to minimize theeffects of market interest rate fluctuations on the net interest spread. To theextent that the Company has outstanding floating rate borrowings or has electedto convert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

 

During the six months ended October 31,2005, as a requirement of the FIARC commercial paper facility, the Companyentered into five interest rate cap transactions, with a strike rate of6%.  The aggregate initial notionalamount of the caps was $98,914,120 which amortizes over six years.  The Company paid $311,856 in premium to 

 

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purchase these caps. The interest rate caps were not designated as hedges, and accordingly,changes in the fair value of the interest rate caps are recorded as unrealized gainsor losses and are reflected in net income. During the three and six months ended October 31, 2005, the Companyrecorded unrealized gains of $23,057 and $20,375, respectively, that are includedas a separate caption of other income.

 

During fiscal year 2005, as a requirement of the FIARCcommercial paper facility, the Company entered into nine interest rate captransactions, with strike rates between 5% and 6%.  The aggregate initial notional amount of thecaps was $126,086,843 which amortized over six years.  The Company paid an aggregate of $1,213,097in premiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes inthe fair value of the interest rate caps were recorded as unrealized gains orlosses and reflected in net income.  On April 28,2005, the Company terminated all interest rate caps outstanding in exchange forproceeds of $840,000.  The caps wereterminated following the repayment of all balances outstanding under the FIARCfacility prior to the issuance of the 2005-A term notes.  As a result, a realized loss of $373,097 wasincurred relative to the aggregate market value of the interest rate caps.

 

**6.****              Earnings Per Share**

 

Earnings per share amounts are based on the weightedaverage number of shares of common stock and potential dilutive common shares outstandingduring the period. The weighted average number of shares used to compute basicand diluted earnings per share for the three and six months ended October 31,2004 and 2005, is as follows:

 
| ** **                                                          | ** ** | **For the  Three Months Ended  October 31,** | ** ** | **For the  Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                          | ** ** | **2005**                                        | ** ** | **2004** | ** ** | **2005** | ** ** |
| Weighted average shares:                                            |       |                                              |       |                                            |       |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share   |       | 4,999,960                                         |       | 4,438,504                                       |       | 5,000,114 |   | 4,425,099 |   |
| Effect of dilutive stock  options and warrants                      |       | 70,766                                            |       | 183,113                                         |       | 109,378 |   | 132,504 |   |
| Weighted average shares  outstanding for diluted earnings per share |       | 5,070,726                                         |       | 4,621,617                                       |       | 5,109,492 |   | 4,557,603 |   |

 

For the three months ended October 31, 2004 and2005, the Company had 468,000 and 43,500, respectively, of stock options andstock warrants which were not included in the computation of diluted earningsper share.  These were not included inthe computation of earnings per share because to do so would have beenantidilutive for the period presented.

 

**7.****              Investment in First Auto Receivables Corporation**

 

On December 24, 2002, the Company invested $475,061for a 40% ownership interest in First Auto Receivables Corporation (“FARC”) and$712,591 for junior mezzanine investments of FARC.  FARC purchased a $197.5 million automobileloan portfolio from UAFC-2 Corporation, a subsidiary of Union AcceptanceCorporation, with proceeds from $186 million in senior bridge debt, $8.9million of senior mezzanine debt, $1.8 million of junior mezzanine debt and$1.2 million of equity.  The bridge debtinterest rate is LIBOR plus 1%, the senior mezzanine interest rate is 22.5% andthe junior mezzanine interest rate is 25%.

 

TheCompany accounts for its ownership investment in FARC using the equity methodin accordance with APB Opinion 18.  Inaddition to the equity and debt investments, the Company performs loanservicing and collection activities on the portfolio.  The Company recognized servicing revenueof  $237,310 and $139,441 for the threemonths ended, and $500,492 and $300,905 for the six months ended, October 31,2004 and 2005, respectively, interest income of $27,472 and $27,413 for thethree months ended, and $54,945 and $54,885 for the six months ended, October 31,2004 and 2005, respectively, and equity in earnings in FARC of $176,522 and $111,236for the three months ended, and $370,228 and $237,194 for the six months ended,October 31, 2004 and 2005, respectively. As of April 30, 2005 the equity investment in FARC of $968,327 andjunior mezzanine debt 

 

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of $716,675 and as of October 31,2005, the equity investment in FARC of $968,327 and junior mezzanine debt of $622,681are included in Deferred Financing Costs and Other Assets on the balance sheet.

 

**8.****              New AccountingPronouncements**

 

In December 2004, the FASB issued SFAS No. 123(R),*Share-Based Payment - a revision to SFAS No. 123,Accounting for Stock-Based Compensation*(“SFAS No. 123(R)”)that addresses the accounting for share-based payment transactions in which anenterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123(R) eliminates theability to account for share-based compensation transactions using APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and generally requires instead that such transactions be accounted for using afair-value-based method.

 

SFAS No. 123(R) is effective as of thebeginning of the fiscal year that begins after June 15, 2005. SFAS 123(R)applies to all awards granted after the required effective date and to suchawards modified, repurchased, or cancelled after that date. The cumulativeeffect of initially applying SFAS No. 123(R), if any, is recognized as ofthe required effective date. As of the required effective date, all publicentities that used the fair-value-based method for either recognition ordisclosure under SFAS No. 123 will apply SFAS No. 123(R) using amodified version of the prospective application. Under that transition method,compensation cost is recognized on or after the required effective date for theportion of outstanding awards for which the requisite service has not yet beenrendered, based on the grant-date fair value of those awards calculated underSFAS No. 123 for either recognition or pro forma disclosures. For periodsbefore the required effective date, those entities may elect to apply a modifiedversion of retrospective application under which financial statements for priorperiods are adjusted on a basis consistent with the pro forma disclosuresrequired for those periods by SFAS No. 123. The Company has not yetcompleted its evaluation of the impact that SFAS No. 123(R) will have onits financial position and results of operations.

 

**9.****              Shareholders’Equity**

 

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of October 31, 2005, no shares have been issued.

 

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employees forthe purchase of up to 300,000 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. In no event may the duration of an option exceed 10 years andno option may be granted after the expiration of 10 years from the adoption ofthe Plan. As of April 30, 2005 and October 31, 2005, a total of360,500 and 334,500, respectively, options had been issued and remainedoutstanding. This plan expired on June 27, 2005.

 

On September 8, 2005, the shareholdersapproved the Company’s 2005 Employee Stock Option Plan (the 2005 Plan).  The 2005 Plan is administered by theCompensation Committee of the Board of Directors and provides that options maybe granted to officers and other key employees for the purchase of up to200,000 shares of common stock, subject to adjustment in the event of certainchanges in capitalization. Options may be granted either as incentive stockoptions (which are intended to qualify for certain favorable tax treatment) oras non-qualified stock options.  TheCompensation Committee selects the persons to receive options and determinesthe exercise price, the duration, any conditions on exercise and other terms ofthe options. The exercise price may not be less than 100% of the fair marketvalue per share of common stock on the date of grant, and in no event may theduration of an option exceed 10 years and no option may be granted after theexpiration of 10 years from the 

 

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adoptionof the Plan.  As of October 31,2005, 102,500 options were issued and outstanding under the 2005 Plan, leaving97,500 options remaining and available for issuance.

 

The exercise price of the option is payable incash upon exercise.  At the discretion ofthe Compensation Committee, options may be issued in tandem with stockappreciation rights entitling the option holder to receive an amount in cash orin shares of common stock, or a combination thereof, equal in value to anyincrease since the date of grant in the fair market value of the common stockcovered by the option.

 

*Non-Employee Director Stock Option Plan* - In September 2002,the Non-Employee Stock Option Plan was established to further align theinterests of the Company’s directors with the interests of the shareholders, aswell as attracting and retaining qualified directors.  The Board of Directors administers the planand the options will not be qualified as incentive stock options.  A total of 500,000 shares of common stock areavailable for issuance.  Option grantswill be both automatic and discretionary. Automatic grants of 20,000 shares for each non-employee director, or100,000 shares total, were approved in September 2002.  Subsequent automatic grants of an option topurchase 20,000 shares shall be made to each non-employee director on July 15theach year, beginning July 15, 2003. The plan also gives the Board ofDirectors discretionary authority to provide for additional option grants ifthe Company’s annual financial performance exceeds parameters established bythe Board.  No discretionary grants havebeen awarded.  As of April 30, 2005and October 31, 2005, a total of 390,000 and 490,000, respectively,options had been issued, with 390,000 and 450,000, respectively, optionsoutstanding under the plan, leaving a remaining 110,000 and 10,000,respectively, available for issuance.  Inaddition to the options granted above, there were an additional 20,000 optionsgranted to a director in 1995, before the adoption of the Non-Employee StockOption Plan.

 

**10.****      ****Commitments and Contingencies**

 

*Litigation*.  The Company from time to time becomesinvolved in various routine legal proceedings which are incidental to thebusiness. Management of the Company vigorously defends such matters. As of October 31,2005, management believes there are no such legal proceedings that will have amaterial adverse impact on the Company’s financial position or results ofoperations.

 

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**ITEM 2.   *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS***

 

**CriticalAccounting Policies**

 

Financial Reporting Release No. 60,which was issued by the Securities and Exchange Commission (“SEC”), requiresall registrants to discuss critical accounting policies or methods used in thepreparation of financial statements. Note 2 to the consolidated condensed financial statements includes asummary of the significant accounting policies and methods used in thepreparation of the Company’s consolidated condensed financial statements.

 

The preparation of financial statementsincludes the use of estimates and assumptions that affect the reported amountsof assets and liabilities and the reported amounts of net revenues and expensesduring the reporting periods. The following is a review of the more significantassumptions and estimates, as well as the accounting policies and methods usedin the preparation of the consolidated condensed financial statements.

 

*Receivables Held for Investment*.  Receivables Held for Investment represents theaggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers, which includes the amortization of premiums ordiscounts associated with the loan originations.  The Company accrues interest income monthlyusing the effective interest method. When a receivable becomes 90 days past due, the income accrual issuspended until the payments become current. When a loan is charged off or thecollateral is repossessed, the remaining income accrual is written off.

 

*Other Income*.  Other Income consists of income received fromservicing activities, late fees and other loan-related fees, income frominvestments, reinvestment revenue, GAP insurance and extended servicecontracts, and unrealized losses on interest rate derivative positions.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Revenue from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized gains or losses on interest rate derivatives are recognizedwhen incurred.

 

*Advertising Costs. *The Companyexpenses advertising costs as incurred.

 

*Allowance for Credit Losses*.  The Company calculates theallowance for credit losses in accordance with SFAS No. 5*, Accounting for Contingencies.*   SFAS No. 114, *Accountingfor Creditors for Impairment of a Loan* does not apply to loanscurrently held by the Company because they comprise a large group of smallerbalance homogenous loans that are evaluated collectively for impairment.

 

The Company initiates efforts to make customercontact as early as when the customer is one day past due and become moreaggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 60 to 90 days afterthe loan becomes past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as an Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging 

 

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statusof each loan on a date which is six months prior to the reporting date, to theaging loan status as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate to impaired status.  Theestimated number of impairments is then multiplied by the estimated loss perloan, which is based on historical information. Effective for the quarter ended April 30, 2005, the Company electedto increase its allowance for loan losses against loans that were greater than120 days past due and loans in which the collateral had been assigned forrepossession but had not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become moreprotracted.  Based on this, the Companyhas assigned a specific allowance against these loans equal to the outstandingbalance of loans in these categories less the estimated recovery amount basedon current data regarding liquidation of the collateral and collection of anyadditional payments.  The Companyutilized its most recent recovery rates in order to assess fair value of theseloans.  For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment. Despite the increase in allowance associated with the higher delinquencyloans and bankrupt accounts, the total allowance for loan losses decreasedduring the period as a percentage of Receivables Held for Investment due toimproving overall delinquency trends and lower repossession and lossrates.  The allowance for credit lossesis based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, are reported in earnings in the periodthey become known.

 

*Stock-Based Compensation*.  The Company has an employee stock option planand a non-employee director stock option plan. The Company has adopted thedisclosure provisions of SFAS No. 148, *Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment of FASB Statement No. 123*.This pronouncement requires prominent disclosures in both annual and interimfinancial statements regarding the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. The Companyaccounts for stock compensation awards under the intrinsic value method ofAccounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*which requires compensation cost to berecognized based on the excess, if any, between the quoted market price of thestock at the date of grant and the amount an employee must pay to acquire thestock. All options awarded under the Company’s plan are granted with anexercise price equal to or greater than the fair market value on the date ofthe grant.

 

**Managed Receivables**

 

The Company’s managed receivables are(dollars in thousands):

 
| ** **                                                                          | ** ** | **As of or  for the Periods  Ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2004**                                              | ** ** | **2005** | ** ** |
| Receivables Held for  Investment:                                                   |       |                                                  |       |   |   |
| Number                                                                              |       | 16,397                                                |       | 20,523 |   |
| Principal balance                                                                   |       | $                                                     | 218,023    |   | $ | 323,845 |   |
| Average principal balance of receivables outstanding during the  six-month period   |       | $                                                     | 209,670    |   | $ | 288,749 |   |
| Average principal balance of receivables outstanding during the  three-month period |       | $                                                     | 211,909    |   | $ | 310,276 |   |
| Receivables Acquired for  Investment:                                               |       |                                                  |       |   |   |
| Number                                                                              |       | 654                                                   |       | 303 |   |
| Principal balance                                                                   |       | $                                                     | 819        |   | $ | 380 |   |
| Other Servicing:                                                                    |       |                                                  |       |   |   |
| Number                                                                              |       | 16,223                                                |       | 11,753 |   |
| Principal balance                                                                   |       | $                                                     | 236,399    |   | $ | 143,095 |   |
| Total Managed Receivables  Portfolio:                                               |       |                                                  |       |   |   |
| Number                                                                              |       | 33,274                                                |       | 32,579 |   |
| Principal balance                                                                   |       | $                                                     | 455,241    |   | $ | 467,330 |   |
| Average principal balance of receivables outstanding during the  six-month period   |       | $                                                     | 469,366    |   | $ | 456,789 |   |
| Average principal balance of receivables outstanding during the  three-month period |       | $                                                     | 597,541    |   | $ | 465,260 |   |

 

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The following table sets forth informationwith regard to the Company’s net interest spread, which represents thedifference between the effective yield on Receivables Held for Investment andthe Company’s average cost of debt utilized to fund these receivables, and itsnet interest margin (averages based on month-end balances):

 
| ** **                                             | ** ** | **Three  Months Ended  October 31,** | ** ** | **Six  Months Ended  October 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                  | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2005** | ** ** |
| Receivables Held for  Investment:                      |       |                                      |       |                                    |       |   |   |   |   |
| Effective yield on Receivables Held for Investment (1) |       | 13.2                                      | %          | 12.8                                    | %          | 13.3 | % | 12.8 | % |
| Average cost of debt (2)                               |       | 3.5                                       | %          | 4.5                                     | %          | 3.5 | % | 4.5 | % |
| Net interest spread (3)                                |       | 9.7                                       | %          | 8.3                                     | %          | 9.8 | % | 8.3 | % |
| Net interest margin (4)                                |       | 9.8                                       | %          | 8.3                                     | %          | 9.9 | % | 8.3 | % |

 

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(1) Represents interest income as apercentage of average Receivables Held for Investment outstanding.

 

(2) Represents interest expense as apercentage of average debt outstanding.

 

(3) Represents effective yield onReceivables Held for Investment less average cost of debt.

 

(4) Represents net interest income as apercentage of average Receivables Held for Investment outstanding.

 

Net interest income is the difference betweeninterest earned from the receivables portfolio and interest expense incurred onthe credit facilities used to finance the receivables. Net interest income was$6.4 million and $12.0 million for the three and six months ended October 31,2005, respectively, an increase of 24% and 16% when compared to amountsreported for the three and six months ended October 31, 2004,respectively.

 

The amount of net interest income is theresult of the relationship between the average principal amount of receivablesheld and average rate earned thereon and the average principal amount of debtincurred to finance such receivables and the average rates paid thereon.Changes in the principal amount and rate components associated with thereceivables and debt can be segregated to analyze the periodic changes in netinterest income. The following table analyzes the changes attributable to theprincipal amount and rate components of net interest income (dollars inthousands):

 
| ** **                       | ** ** | **Three Months Ended  October 31, 2004 to 2005** | ** ** | **Six Months Ended  October 31, 2004 to 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                       | ** ** | **Increase (Decrease) Due to  Change in**             | ** ** | **Increase (Decrease) Due to  Change in**           | ** ** |
| ** **                       | ** ** | **Average  Principal  Amount**                        | ** ** | **Average  Rate**                                   | ** ** | **Total Net** | ** ** | **Average  Principal  Amount** | ** ** | **Average  Rate** | ** ** | **Total Net** | ** ** |
|                             |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Receivables Held for Investment: |       |                                                  |       |                                                |       |   |   |   |   |   |   |   |   |
| Interest income                  |       | $                                                     | 3,250      |                                                | $          | (336 | ) | $ | 2,914 |   | $ | 5,262 |   | $ | (803 | ) | $ | 4,459 |   |
| Interest expense                 |       | 880                                                   |       | 768                                                 |       | 1,648 |   | 1,404 |   | 1,427 |   | 2,831 |   |
| Net interest income              |       | $                                                     | 2,370      |                                                | $          | (1,104 | ) | $ | 1,266 |   | $ | 3,858 |   | $ | (2,230 | ) | $ | 1,628 |   |

 

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**Results of Operations**

 

*Three Months and Six MonthsEnded October 31, 2005 and 2004 (dollars in thousands, except per shareamounts)*

 

*Key Factors.*Thecritical factors affecting the Company’s profitability during any period are (i) loan origination volume and thecorresponding growth in Receivables Held For Investment; (ii) the level ofnet interest spread, which is defined as the difference between the effectiveyield on Receivables Held for Investment and the cost of funds under theCompany’s credit facilities and securitizations utilized to finance thesereceivables; (iii) the level of provision for credit losses; (iv) theamount of income derived from other activities; and (v) the ability of theCompany to control operating expenses relative to the total amount of themanaged portfolio.

 

*Executive Summary. *Net income for thethree and six months ended October 31, 2005 was $765 and $1,690,respectively, compared to $216 and $303 for the three and six months ended October 31,2004.  Basic and diluted earnings percommon share were $0.17 and $0.17, respectively, for the three months ended October 31,2005 compared to $0.04 and $0.04 for the three months ended October 31,2004.  Basic and diluted earnings per commonshare were $0.38 and $0.37, respectively, for the six months ended October 31,2005 compared to $0.06 and $0.06 for the six months ended October 31,2004.  The increase in net income for thethree and six months ended October 31, 2005 compared to October 31,2004 is due to (i) an increase in interest income from a 46% increase forthe three months ended October 31, 2005 and a 38% increase for the sixmonths ended October 31, 2005 in average Receivables Held for Investment (ii) anincrease in other income from insurance products and other interest income and (iii) again on interest rate derivative positions for the three and six months ended October 31,2005 compared to a loss for the three and six months ended October 31,2004, partially offset by several factors including (i) a decline ineffective yields, (ii) an increase in interest expense due to an increasein the average debt outstanding and an increase in the effective rate, (iii) adecline in loan servicing income and (iv) a decline in late fees and otherincome due to changes made in the methodology of payment allocation during thethree and six months ended October 31, 2004, under which the Companyallocated cash received to interest, uncollected fees, and principal.

 

*Interest Income*. Interest income for the three and six monthsended October 31, 2005 increased to $9,915 and $18,413, respectively,compared to $7,001 and $13,953 for the three and six months ended October 31,2004.

 

The level ofinterest income, a primary driver of financial results, is impacted by theaverage outstanding balance of the portfolio of Receivables Held forInvestment, the weighted average interest rate on receivables originated by theCompany, the mix of direct and indirect receivables within Receivables Held forInvestment, and the level of prepayments and charge-offs.  Interest income on Receivables Held forInvestment increased****42% and 32%for the three and six months ended October 31, 2005, respectively,compared to the three and six months ended October 31, 2004.  The increase in interest income for the threeand six months ended October 31, 2005 is due to a 46% and 38% increase inthe average portfolio outstanding for the three and six months ended October 31,2005 compared the three and six months ended October 31, 2004. This ispartially offset by a decrease in the weighted average interest rate of 43basis points for the three months ended, and 56 basis points for the sixmonths, ended October 31, 2005 compared to the three and six months ended October 31,2004.  This reflects the Company’sincreased focus on receivables originated directly to consumers which typicallycarry lower interest rates.

 

*Interest Expense*. Interest expense for the three and six monthsended October 31, 2005 increased****to $3,476 and$6,436, respectively, compared to $1,828 and $3,606 for the three and sixmonths ended October 31, 2004. Interest expense on borrowings related toReceivables Held for Investment increased 90% and 79% for the three and sixmonths ended October 31, 2005.  Theincrease in interest expense is primarily due to (i) the average debtoutstanding increasing $101,267, or 48%, for the three months ended October 31,2005 and $81,374, or 39%, for the six months ended October 31, 2005compared to the three and six months ended October 31, 2004 as a result ofa 42% and 32% increase in the average portfolio of Receivables Held forInvestment for the three and six months ended October 31, 2005 compared toOctober 31, 2004 (ii) the Company’s decision to lock in interestrates on $175 million of debt in May 2005 through the issuance of TermNotes to minimize the risk of future interest rate increases as longer termfixed rate Term Notes typically carry higher interest rates than shorter termfloating rate debt and (iii) an increase of 98 basis points in the averagecost of debt due to an increase in overall market interest rates as a result ofthe current economic environment and market rate increases adopted by theFederal Reserve Board.

 

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*Provision for Credit Losses*. The provision for credit losses for the three and six months ended October 31,2005 decreased to $2,065 and $3,716, respectively, as compared to $2,442 and$4,885 for the three and six months ended October 31, 2004. The decreasein provision for credit losses is primarily due to (i) improving economictrends (ii) a change in the portfolio mix resulting in more loansoriginated directly to the customer, which typically have a lower lossfrequency and (iii) a lower delinquency and repossession experience.

 

Net charge-offs for thethree and six months ended October 31, 2005 decreased to $1,998 and$3,706, respectively, compared to $2,333 and $4,773 for the three and sixmonths ended October 31, 2004.  Thedecrease in net charge-offs for the three and six months ended October 31,2005 is primarily due to (i) a decrease in loss frequency and severityfrom repossessions and (ii) an increase in recoveries from defaultedloans.

 

Thelevel of the provision for credit losses is a key driver of overall financialperformance and should be positively impacted by improvement in generaleconomic conditions, improvements in wholesale used car prices and lowerdelinquency rates and net losses projected for the portfolio of ReceivablesHeld for Investment.  Any additionaleconomic deterioration or decline in wholesale used car prices will negativelyimpact provision expense to the extent that these events cause an increase indelinquency rates, bankruptcy rates or net charge-off rates in the portfolio ofReceivables Held for Investment.

 

Duringthe three months ended October 31, 2005, the Company experienced a 16%increase in the outstanding balance of bankrupt accounts.  The increase is primarily attributed to achange in federal bankruptcy laws which became effective on October 17,2005, and the corresponding increase in new bankruptcy filings prior to theeffective date of the legislation.  Whilethe Company believes the increase in new filings during the three months ended October 31,2005 will be partially offset by reduced bankruptcy filings during the last sixmonths of the Company’s fiscal year, the increase in bankruptcies may cause anincrease in defaults in subsequent periods, which could adversely impact netcharge-offs.

 

*Servicing Revenue*.  On December 24,2002, the Company entered into an agreement to provide loan servicing andcollection activities on behalf of FARC. FARC, which is 40% owned by the Company, purchased a portfolio ofapproximately $200 million of installment loan receivables.  On March 19, 2003, the Company enteredinto an agreement to provide loan servicing and collection activities on $276million of installment loan receivables for unrelated third parties.  Servicing revenue decreased to $495 and$1,073****for the three and six months ended October 31,2005 compared to $905 and $1,875 for three and six months ended October 31,2004.  Thedecrease in servicing revenue for the three and six months ended October 31,2005 is due to the liquidation of serviced receivables during the quarter.  Revenue derived from servicing activitieswill increase or decrease in direct proportion to the average outstandingbalance of serviced receivables.

 

*Other Finance Charges and Fees.*  Late and loan related feesdecreased to $598 and $1,016 for the three and six months ended October 31,2005, compared to $834 and $1,224 for the three and six months ended October 31,2004.  Thedecrease is attributable to decreased collections and payments allocated tolate fees and other income as a result of changes made to the methodology inOctober, 2004, under which the Company allocated cash received to interest,uncollected fees and principal, partially offset by increased assessment andcollection of fees due to a 38% increase in the average portfolio ofReceivables Held for Investment.  Income derived from late fees and collectionactivities are recognized when received, and therefore can be potentiallyvolatile from period to period based on overall cash collection, seasonality,delinquency rates and other factors.

 

Late fees and other incomeare driven by a number of factors including overall delinquency rates, thepercentage of customers utilizing electronic payment products and growth ratesin the Company’s direct lending business which will affect the ability of theCompany to generate fee income from marketing insurance and warranty products.

 

*InsuranceProducts. *Insurance Products revenue increased to $263 and $554for the three and six months ended October 31, 2005, compared to $191 and$332 for the three and six months ended October 31, 2004.  The increase is attributable to (i) anincrease of 124% and 77% in loan originationsfor the three and six months ended October 31, 2005, and (ii) increasedpenetration rates on insurance products. Insurance products revenue is primarily driven by growth rates in theCompany’s direct lending business which will affect the ability of the Companyto generate fee income from marketing insurance and warranty products.

 

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*Other Interest Income.*  Other interest income increasedto $284 and $533 for the three and six months ended October 31, 2005,compared to $92 and $166 for the three and six months ended October 31,2004.  The increase is attributable to (i) anincrease in the average cash on hand balance due to increased collections as aresult of a 46% and 38% increase in the average portfolio of Receivables Heldfor Investment for the three and six months ended October 31, 2005 and (ii) anincrease in overall market interest rates as a result of the current economicenvironment and market rate increases adopted by the Federal Reserve Board.

 

*Unrealized Gain/(Loss) on Interest Rate DerivativePositions*.  In conjunction withthe adoption of SFAS No. 133, the Company is required to record interestrate derivative positions at fair value. An unrealized gain of $23 and $20 for the three and six months ended October 31,2005, compared to an unrealized loss of $170 and $238 for the three and sixmonths ended October 31, 2004 are principally due to changes in the fairvalue of the Company’s derivative positions.

 

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$2,661 and $5,203 for the three and six months ended October 31, 2005,compared to $2,215 and $4,279 for the three and six months ended October 31,2004.  The increase is primarily due toan increase in staff due to a 124% and 77% increase in loan originations forthe three and six months ended October 31, 2005, respectively.  This is partially offset by a decrease instaff associated with a decrease in the Company’s serviced portfolio.

 

*Operating Expenses.* Operating expenses decreased to $1,124 and$1,727 for the three and six months ended October 31, 2005, compared to$1,365 and $2,684 for the three and six months ended October 31,2004.  Expenses characterized as operating expenses are generally variable innature and are typically dependent on a number of factors including originationvolume, the outstanding balance of the managed portfolio, credit quality andoperating efficiency levels.  Thedecrease was primarily due to an increase in the dollar amount of expenseswhich the Company was able to capitalize as deferred acquisition costs.  Although expenses increased during theperiod, the Company was able to capitalize a higher level of these expenses dueto the significant increase in origination volume and increased efficiency inits loan origination functions.  Thedecline in operating expenses was also positively impacted by lower collection-relatedcosts as a result of improving credit quality.

 

*General and Administrative.* General and administrative expenses increased to$1,097 and $2,014 for the three and six months ended October 31, 2005,compared to $936 and $1,859 for the three and six months ended October 31,2004.  The three and six months ended October 31,2005 experienced a general increase in professional fees and travelexpenses.  General and administrativecosts tend to be more fixed in nature and not as dependent on the overall levelof managed receivables.

 

*Other Interest Expense*. Other interest expense increased to $304 and $565 forthe three and six months ended October 31, 2005, compared to $123 and $235for the three and six months ended October 31, 2004. The increase wasprimarily due to (i) a 39% increase in the average outstanding borrowingson the Company’s working capital line and (ii) the related party notehaving an average outstanding balance of $2,500 for the three and six monthsended October 31, 2005, as compared to an average outstanding balance of$0 for the three and six months ended October 31, 2004.

 

**Portfolio Characteristics**

 

*General*.  In selecting receivables for inclusion in itsportfolio, the Company seeks to identify potential borrowers whom it regards ascreditworthy despite credit histories that limit their access to traditionalsources of consumer credit. In addition to personal credit qualifications, theCompany attempts to assure that the characteristics of the automobile sold andthe terms of the sale are likely to result in a consistently performingreceivable. These considerations include amount financed, monthly paymentsrequired, duration of the loan, age of the automobile, mileage on theautomobile and other factors.

 

*Customer Profile*.  The Company’s primary goal in creditevaluation is to make loans to customers having stable personal situations,predictable incomes and the ability and inclination to perform theirobligations in a timely manner. Many of the Company’s customers are persons whohave experienced credit difficulties in the past by reason of illness, divorce,job loss, reduction in pay or other adversities, but who appear to the Companyto 

 

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have the capability and commitment to meettheir obligations. Through its credit evaluation process, the Company seeks todistinguish these persons from those applicants who are chronically poor creditrisks.

 

**Credit Evaluation**

 

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which (i) thecreditworthiness of the borrower and the terms of the proposed transaction areevaluated and either approved, declined or modified by the Company’s creditverification department, (ii) the loan documentation and collateralizationis reviewed by the Company’s funding department, and (iii) additionalcollateral verification procedures and customer interviews are conducted by theCompany. During the course of this process, the Company’s credit verificationand funding personnel coordinate closely with the finance and insurancedepartments of the dealers or with individuals to whom the Company lendsdirectly. The Company has developed financing programs under which it approvesloans that vary in pricing and loan terms depending on the relative credit riskdetermined for each loan. Credit or default risk is evaluated by the Company’sloan officers in conjunction with a proprietary, empirical credit scoring modeldeveloped from the Company’s 17 year database of non-prime lending results.

 

*Collateral Verification*.  As a condition to the origination of eachreceivable by the Company, the Company performs an individual audit evaluationto verify the details of the credit application, and to confirm that thematerial terms of the sale conform to the purchaser’s understanding of thetransaction.  In the majority ofcircumstances for dealer indirect loans, we conduct a personal telephonicinterview with each prospective obligor. For direct to consumer loans, we verify all information during ournormal underwriting procedures.  TheCompany will originate a receivable only after receipt and review of asatisfactory audit report.

 

# **Liquidity and Capital Resources**

 

*Sources and Uses of Cash Flows*.  The Company’s business requires significantcash flow to support its operating activities. The principal cash requirementsinclude (i) amounts necessary to acquire receivables from dealers and fundrequired reserve accounts, (ii) amounts necessary to fund premiums forcredit enhancement insurance or other credit enhancement required by theCompany’s financing programs, and (iii) amounts necessary to fund costs toretain receivables, primarily interest expense. The Company also requires asignificant amount of cash flow for working capital to fund fixed operatingexpenses, primarily salaries and benefits.

 

The Company’s most significant cash flowrequirement is for the origination of receivables. The Company originated $66.9million and $148.3 million of receivables to be held for investment for thethree and six months ended October 31, 2005 compared to $38.0 million and$67.2 million for the three and six months ended October 31, 2004.

 

The Company funds loan originations through acombination of two warehouse credit facilities. The FIRC credit facilitygenerally permits the Company to borrow up to the outstanding principal balanceof qualified receivables, not to exceed $50 million.  Receivables that have accumulated in the FIRCcredit facility may be transferred to the FIARC commercial paper facility atthe option of the Company. The FIARC commercial paper facility provides anadditional financing source of up to $150 million. Additionally, the Companyhas transferred receivables from the warehouse credit facilities and issuedterm notes. Substantially all of the Company’s receivables are pledged tocollateralize these credit facilities and term notes.  The Company is obligated to meet certain financialcovenants.  Noncompliance maysignificantly affect cash flow.

 

The Company’s most significant source of cashflow is the principal and interest payments received from its receivablesportfolios. The Company received such payments in the amount of $39.9 millionand $75.6****million during the three and sixmonths ended October 31, 2005, and $29.9 million and $61.1 million duringthe three and six months ended October 31, 2004.  Such cash flow funds were used to repayamounts borrowed under the Company’s credit facilities and other holding costs,primarily interest expense, and servicing and custodial fees.  During the three and six months ended October 31,2005, the Company required net cash of $26.9 million and $72.7 million ascompared to $8.1 million and $6.1 for the three and six months ended October 31,2004, as the receivables originated exceeded portfolio collections.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of October 31, 2005, the Company had $61 million of availablecapacity in the FIRC and FIARC credit facilities to fund future growth.

 

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In addition to the cash flowgenerated from the principal and interest collections on its receivablesportfolio, the Company collects servicing fees from its managed receivablesportfolio.  Servicing fees range from1.4% to 2.5% of the outstanding principal balance of the loans in theportfolio.  Cash flow and servicing feesare received after month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash available tofund operations.  At October 31,2005 and 2004, the Company’s unencumbered cash was $4,279,540 and $486,115 respectively.  The increase in available cash is primarilydue to a an increase in revenues due to a 38% increase in the average portfolioof Receivables Held for Investment and an increase in the amount due under theworking capital line of credit of $5 million. Management believes the unencumbered cash and cash inflows and amountsavailable under the working capital facility are adequate to fund cashrequirements for operations.

 

*Capitalization*. TheCompany expects to rely primarily on its credit facilities and the issuance ofsecured term notes to acquire and retain receivables. The Company believes itsexisting credit facilities have adequate capacity to fund the increase of thereceivables portfolio expected in the foreseeable future. While the Company hasno reason to believe that these facilities will not continue to be available,their termination could have a material adverse effect on the Company’soperations if substitute financing on comparable terms was not obtained.

 

*Financing Arrangements.* The Company finances its loan originationthrough two warehouse credit facilities. The Company’s credit facilitiesprovide for one-year terms and have been renewed annually. Management of theCompany believes that the credit facilities will continue to be renewed orextended or that it would be able to secure alternate financing on satisfactoryterms; however, there can be no assurance that it will be able to do so. InJanuary, 2002 the Company issued $159 million in asset-backed notes (“TermNotes”) secured by discrete pools of receivables. These notes were subsequentlycalled and redeemed in March, 2005.  InNovember, 2003, the Company issued $140 million in Term Notes secured by adiscrete pool of receivables.  In May,2005, the Company issued $175 million in Term Notes secured by a discrete poolof receivables.  Substantially allreceivables retained by the Company are pledged as collateral for the creditfacilities and the Term Notes. The weighted average interest rate for theCompany’s secured borrowings including the effect of program fees and dealerfees was 3.5% and 4.3% for the periods ended October 31, 2004 and 2005,respectively.

 

*Warehouse Facilities as of October 31,2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At  October 31,  2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| FIARC        | ** ** | **$**        | 150,000,000 |            | $          | 95,354,257        |       | Commercial  paper rate plus .3%                                                                        |       | .25% of  Unused Facility |       | .35                                            | %          | 3.98 | % |
|         | ** ** | ** **   |        |            |       |              |       |                                                                                                   |       |                     |       |                                           |       |
| FIRC         | ** ** | **$**        | 50,000,000  |            | $          | 43,625,834        |       | Option of a)  Base Rate, which is the higher of prime rate or fed funds plus .5% or b)  LIBOR plus .5% |       | .25% of  Unused Facility |       | See below                                      |       | 4.39 | % |

 

*Warehouse Facilities – Credit Enhancement asof October 31, 2005*

 
| **Facility** | ** ** | **Cash Reserve**               | ** ** | **Advance  Rate** | ** ** | **Insurance**            | ** ** |
|--------------|------------|--------------------------------|------------|-------------------|------------|--------------------------|------------|
| FIARC        |       | 1% of  outstanding receivables |       | 94                | %          | Surety Bond              |       |
|         |       |                           |       |              |       |                     |       |
| FIRC         |       | 1% of  borrowings              |       | 100               | %          | Default Insurance (ALPI) |       |

 

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FIRC - In order toobtain a lower cost of funding, the Company has agreed to maintain creditenhancement insurance covering the receivables pledged as collateral under theFIRC credit facility. The facility lenders are named as additional insuredsunder these policies. The coverages are obtained on each receivable at the timeit is originated by the Company, and the applicable premiums are prepaid forthe life of the receivable. Each receivable is covered by three separate creditinsurance policies, consisting of basic default insurance under a standard autoloan protection policy (known as “ALPI” insurance) together with certainsupplemental coverages relating to physical damage and other risks. Solely atits expense, the Company carries these coverages and neither the vehiclepurchasers nor the dealers are charged for the coverages, nor are they usuallyaware of their existence. The Company’s ALPI insurance policy is written byNational Union Fire Insurance Company of Pittsburgh (“National Union”), whichis a wholly-owned subsidiary of American International Group.

 

The premiums that the Company paid during thethree months and six months ended October 31, 2005 for its three creditenhancement insurance coverages, of which the largest component is basic ALPIinsurance, represented approximately 2.2% of the principal amount of thereceivables originated during the periods. Aggregate premiums paid for ALPIcoverage alone were $901,966 and $1,365,819 during the three months ended, and$1,616,436 and $2,571,566 for six months ended, October 31, 2004 and 2005,respectively, and accounted for 2.4% and 2.1% during the three months ended,and 2.4% and 1.8% for the six months ended, October 31, 2004 and 2005,respectively, of the principal amount of the receivables originated during suchrespective periods.

 

In April 1994, the Company organizedFirst Investors Insurance Company (the “Insurance Subsidiary”) under thecaptive insurance company laws of the State of Vermont. The InsuranceSubsidiary is an indirect wholly-owned subsidiary of the Company and is a partyto a reinsurance agreement whereby the Insurance Subsidiary reinsures 100% ofthe risk under the Company’s ALPI insurance policy. At the time each receivableis insured by National Union, the risk is automatically reinsured to its fullextent and approximately 96% of the premium paid by the Company to NationalUnion with respect to such receivable is ceded to the Insurance Subsidiary.When a loss covered by the ALPI policy occurs, National Union pays it after theclaim is processed, and National Union is then reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

 

The result of the foregoing reinsurancestructure is that National Union, as the “fronting” insurer under the captivearrangement, is unconditionally obligated to the Company’s credit facilitylenders for all losses covered by the ALPI policy, and the Company, through itsInsurance Subsidiary, is obligated to indemnify National Union for all suchlosses. As of October 31, 2005, the Insurance Subsidiary had capital andsurplus of $2,754,482 and unencumbered cash reserves of $1,610,297 in additionto the $3,364,617 trust account.

 

The ALPI coverage as well as the InsuranceSubsidiary’s liability under the Reinsurance Agreement, remains in effect foreach receivable that is pledged as collateral under the warehouse creditfacility. Once receivables are transferred from FIRC to FIARC and financedunder the commercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses its InsuranceSubsidiary will be required to indemnify will be less than the premiums cededto it. However, there can be no assurance that losses will not exceed thepremiums ceded and the capital and surplus of the Insurance Subsidiary.

 

FIARC – CreditEnhancement for the FIARC warehouse facility is provided to the commercialpaper investors by a cash reserve account equal to 1% of the receivables heldby FIARC and, additionally, a surety bond issued by MBIA. The Company is not aguarantor of, or otherwise a party to, such commercial paper.

 

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*Warehouse Facilities – Agents and Expirations*

 
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**          | ** ** | **Event if not Renewed**                                                                                                                                                |
|--------------|------------|-----------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15,  2006 |       | Receivables pledged would be allowed to  amortize; however, no new receivables would be allowed to transfer from the  FIRC facility                                     |
|         |       |      |       |                    |       |                                                                                                                                                                    |
| FIRC         |       | Wachovia  |       | February 15,  2006 |       | Convert to a term loan which would mature  six months thereafter and amortize monthly in accordance with the borrowing base  with the remaining balance due at maturity |

 

On December 4, 2003,the FIRC facility was renewed, under similar terms and conditions, at the $50million commitment level until December 2, 2004, and was subsequentlyextended until February 15, 2006. On June 15, 2004, the FIRC facility was increased to $65 million,and reverted back to $50 million on September 13, 2004.  As of April 30, 2005 and October 31,2005, there was $43.6 outstanding.

 

On January 29, 2004,following a short-term extension of the original maturity date, the FIARCfacility was renewed, under similar terms and conditions, to December 2,2004, and was subsequently extended until February 15, 2006.  As of April 30, 2005 and October 31,2005, there was $127.9 and $95.4 million, respectively, outstanding.

 

Management presently intends to seek furtherextensions to these warehouse facilities prior to the current expirationdates.  Management further considers itsrelationship with its lenders to be satisfactory and has no reason to believe thatthe FIRC and FIARC facilities will not be renewed at each of their respectiveexpiration dates.

 

The following table contains pertinent information on the Term Notes asof October 31, 2005.

 
| **Term Notes**      | ** ** | **Issuance Date**       | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **             | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|---------------------|------------|-------------------------|------------|----------------------|-------------|-------------------|------------------------|-----------------|------------|--------------------|------------|
| 2003-A              |       | November 11,  2003 |       | $                    | 139,661,000 |              | April 20, 2011    |            | $          | 51,201,476         |       | 2.58 | % |
| 2005-A Class 1 |       | May 5,  2005       |       | $                    | 69,000,000  |              | December 17, 2007 |            | $          | 32,051,419         |       | 3.57 | % |
| 2005-A Class 2 |       | May 5,  2005       |       | $                    | 106,493,000 |              | July 16, 2012     |            | $          | 106,493,000        |       | 4.23 | % |

 

Credit enhancement on the two Term Notes is as follows:

 
| **Facility** | ** ** | **Cash Reserve**                                                                                    | ** ** | **Advance  Rate**                           | ** ** | **Insurance** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2003-A       |       | 0.5% of Initial Pool  Balance increasing to 2% of Initial Pool Balance including Pre-Funding Amount |       | 96.5% initial advance  decreasing to 96.1%  |       | Surety Bond   |
|         |       |                                                                                                |       |                                        |       |          |
| 2005-A       |       | 1.0% of Initial Pool  Balance increasing to 2% of Initial Pool Balance including Pre-Funding Amount |       | 97.0% initial advance  decreasing to 95.75% |       | Surety Bond   |

 

Term Notes - On January 29, 2002, the Company, through its indirect,wholly-owned subsidiary First Investors Auto Owner Trust 2002-A (“2002 AutoTrust”) completed the issuance of $159,036,000 of 3.46% Class Aasset-backed notes (“2002-A Term Notes”). The initial pool of automobilereceivables transferred to the 2002 Auto Trust totaled $135,643,109, which waspreviously owned by FIRC and FIARC, secured the 2002-A Term Notes.  In addition to the issuance of the Class ANotes, the 2002 Auto Trust also issued $4,819,000 in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom 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) repayall outstanding borrowings under the FIARC commercial 

 

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paperfacility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2002-A Term Noteissuance, and (v) fund a cash reserve account of 2% or $2,712,862 of theinitial receivables pledged which served as a portion of the credit enhancementfor the transaction. The Class A Term Notes bore interest at 3.46% andrequired monthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 97% of the outstanding balance of the underlying receivablespool. The final maturity of the 2002-A Term Notes was December 15,2008.  The Class B Notes did notbear interest but required principal reductions sufficient to reduce thebalance of the Class B Notes to 3% of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provided credit enhancement for the Class ANotes.  In the event that certain assetquality covenants were not met, the reserve account target level would increaseto 6% of the then current principal balance of the receivables pool.  On February 28, 2005, the Companynotified the note holders of the 2002-A securitization of its intent toexercise its prepayment call provision. This call provision was completed effective March 15, 2005, andtherefore there was no outstanding balance as of October 31, 2005 and April 30,2005.

 

On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A (“2003Auto Trust”) completed the issuance of $139,661,000 of 2.58% Class Aasset-backed notes (“2003-A Term Notes”). The initial pool of automobilereceivables transferred to the 2003 Auto Trust totaled $114,726,891, which waspreviously owned by FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued $5,065,891 in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $139,656,629 were used to (i) fund a$30,000,000 pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2003-A term note issuance, and (v) fund aninitial cash reserve account of 0.5% or $573,635 of the initial receivablespledged.  The Class A Term Notesbear interest at 2.58% and requires monthly principal reductions sufficient toreduce the balance of the Class A Term Notes to 96.1% of the outstandingbalance of the underlying receivables pool. The final maturity of the 2003-ATerm Notes is April 20, 2011.  The Class BNotes do not bear interest but require principal reductions sufficient toreduce the balance of the Class B Notes to 3.9% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30,2005, and October 31, 2005, the outstanding principal balances on the 2003-Aterm notes were $70,050,511 and $51,201,476, respectively.

 

On May 5, 2005, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2005-A (“2005Auto Trust”) completed the issuance of $69,000,000 of 3.57% Class A-1asset-backed notes and $106,493,000 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493,000 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,920,721, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the2005 Auto Trust also issued $5,427,619 in Class B Notes that were retainedby the Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $175,487,827 were used to (i) fund a $29,999,898pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1% or $1,509,207 of the initial receivablespledged.  The Class A-1 and Class A-2Term Notes bear interest at 3.57% and 4.23%, respectively, and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1 and Class A-2 Term Notes is December 17,2007 and July 16, 2012, respectively. The Class B Notes do not bear interest but require principalreductions sufficient to reduce the balance of the Class B Notes to 4.25%of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of October 31, 2005, the outstandingprincipal balances on the 2005-A Class A-1 and Class A-2 Term noteswere $32,051,419 and $106,493,000 respectively.

 

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*Working Capital Facility*.  On December 6, 2001, theCompany entered into an agreement with Wachovia Securities to refinance the$11,175,000 outstanding balance of the working capital term loan previouslyprovided by Bank of America and Wachovia and increase the size of the facilityto $13.5 million.  The renewal facilitywas provided to a special-purpose, wholly-owned subsidiary of the Company,First Investors Residual Funding LP.  Thefacility originally consisted of a $9 million revolving tranche and a $4.5million term loan tranche which amortizes monthly.  The term loan tranche of this working capitalfacility was evidenced by the Class B Notes issued in conjunction with the2002 Auto Trust financing. The remaining $9 million of the $13.5 millionworking capital facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities, theacquisition facility and the existing and future term note facilities.  During 2002, the facility was modified toincrease the interest rate from LIBOR plus a 1.5% program fee to LIBOR plus a2.25% program fee.  The commitment feepaid on the total available amount of the facility was maintained at 1.5%.  In addition, the monthly principalamortization under the term loan tranche was increased to the greater of$250,000 or the principal distributions made under the Class B Notesissued under the 2002 Auto Trust financing. On December 4, 2003, the Working Capital Facility was extended to December 2,2004.  Under the terms of the extension,the monthly amortization requirement was replaced with the requirement that outstandingbalances under the facility could not exceed the lesser of a borrowing base orthe $9 million facility limit.  On October 26,2004, the Working Capital Facility was extended until October 10, 2005,increasing the commitment amount to $13.5 million.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23.5 million.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  As of April 30,2005 and October 31, 2005, there was $10,500,000 and $14,116,210,respectively, outstanding under this facility.

 

The Company presently intends to seek a renewal of theworking capital facility from its lender prior to maturity.  Should the facility not be renewed, theoutstanding balance of the receivables would be amortized in accordance withthe borrowing base.  Management considersits relationship with its lenders to be satisfactory and has no reason tobelieve that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have amaterial adverse effect on the Company.

 

*Related Party Loans. *On December 3, 2001 the Company enteredinto an agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5million.  On December 6, 2004, theoriginal $2.5 million shareholder loan was replaced with a $2.5 million loancontaining identical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors  The proceeds of the borrowingshave been utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid atany time unless the Company is in default on one of its other creditfacilities.  There was $2.5 millionoutstanding under this facility as of April 30, 2005 and October 31,2005.  The Company recorded interestexpense of $0 and $63,014 for the three months ended, and $0 and $126,027 forthe six months ended, October 31, 2004 and 2005, respectively.

 

*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial andnon-financial covenants, the avoidance of certain levels of delinquency experienceand other matters. The breach of these covenants, if not cured within the timelimits specified, could precipitate events of default that might result in theacceleration of the FIRC credit facility, the Term Notes and the workingcapital facility or the termination of the commercial paper facilities. TheCompany was not in default with respect to any financial and non-financial covenantsgoverning these financing arrangements at October 31, 2005.

 

*Interest Rate Management*.  The Company’s warehouse credit facilities andworking capital facilities bear interest at floating interest rates which arereset on a short-term basis while the secured Term Notes bear interest at afixed rate of interest. The Company’s receivables bear interest at fixed ratesthat do not generally vary with a 

 

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change in market interest rates. Since a primary contributor to theCompany’s profitability is its ability to manage its net interest spread, theCompany seeks to maximize the net interest spread while minimizing exposure tochanges in interest rates. In connection with managing the net interest spread,the Company may periodically enter into interest rate swaps or caps to minimizethe effects of market interest rate fluctuations on the net interest spread. Tothe extent that the Company has outstanding floating rate borrowings or haselected to convert a portion of its borrowings from fixed rates to floatingrates, the Company will be exposed to fluctuations in short-term interestrates.

 

During the six months ended October 31,2005, as a requirement of the FIARC commercial paper facility, the Companyentered into five interest rate cap transactions, with a strike rate of6%.  The aggregate initial notionalamount of the caps was $98,914,120 which amortizes over six years.  The Company paid $311,856 in premium topurchase these caps.  The interest ratecaps were not designated as hedges, and accordingly, changes in the fair valueof the interest rate caps are recorded as unrealized gains or losses and arereflected in net income.  During thethree and six months ended October 31, 2005, the Company recordedunrealized gains of $23,057 and $20,375, respectively, that are included as aseparate caption of other income.

 

During fiscalyear 2005, as a requirement of the FIARC commercial paper facility, the Companyentered into nine interest rate cap transactions, with strike rates between 5%and 6%.  The aggregate initial notionalamount of the caps was $126,086,843 which amortized over six years.  The Company paid an aggregate of $1,213,097in premiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes in thefair value of the interest rate caps were recorded as unrealized gains or lossesand reflected in net income.  On April 28,2005, the Company terminated all interest rate caps outstanding in exchange forproceeds of $840,000.  The caps wereterminated following the repayment of all balances outstanding under the FIARCfacility prior to the issuance of the 2005-A term notes.  As a result, a realized loss of $373,097 wasincurred relative to the aggregate market value of the interest rate caps.

 

**Delinquencyand Credit Loss Experience**

 

The Company’s results of operations, financial conditionand liquidity may be adversely affected by nonperforming receivables. TheCompany seeks to manage its risk of credit loss through (i) prudent creditevaluations, (ii) risk management activities, (iii) effectivecollection procedures, and (iv) by maximizing recoveries on defaultedloans. The allowance for credit losses of $2,259,018 as of October 31,2005 and $2,248,599 as of April 30, 2005 as a percentage of ReceivablesHeld for Investment of $323,845,032 as of October 31, 2005 and$244,940,526 as of April 30, 2005 was 0.7% and 0.9% respectively.

 

The Company considers a loan to be delinquent when theborrower fails to make a scheduled payment of principal and interest. Accrualof interest is suspended when the payment from the borrower is over 90 dayspast due. Generally, repossession procedures are initiated 90 to 120 days afterthe payment default.

 

The Company retains the credit risk associated withthe receivables originated. The Company purchases credit enhancement insurancefrom third party insurers, which covers the risk of loss upon default andcertain other risks. The Company established a captive insurance subsidiary toreinsure certain risks under the credit enhancement insurance coverage for allreceivables.  In addition, receivablesfinanced under the Auto Trust and FIARC commercial paper facilities do notcarry default insurance.  Provisions forcredit losses of $2,064,817 and $3,716,228 for the three and six months ended October 31,2005 compared to and $2,442,406 and $4,884,511 for the three and six monthsended October 31, 2004 have been recorded.

 

The Company calculates the allowance forcredit losses in accordance with SFAS No. 5*, Accountingfor Contingencies.*  SFAS No. 114,*Accounting for Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they arecomprised of a large group of smaller balance homogenous loans that areevaluated collectively for impairment.

 

The Company applies a systematic methodology inorder to determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanfrom six months prior to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are 

 

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expectedto migrate to impaired status.  Theestimated number of impairments is then multiplied by the estimated loss perloan, which is based on historical information. During the quarter ended April 30, 2005, the Company elected toincrease its allowance for loan losses against loans that were greater than 120days past due and loans in which the collateral had been assigned forrepossession but had not yet been repossessed as of the reporting date.  The Company believes that this increase iswarranted in light of the change in federal bankruptcy laws enacted during theperiod and the recognition that the migration trends of severely delinquentloans and loans subject to bankruptcy are expected to become moreprotracted.  Based on this, the Companyhas assigned a specific allowance against these loans equal to the outstandingbalance of loans in these categories less the estimated recovery amount basedon current data regarding liquidation of the collateral and collection of anyadditional payments.  The Companyutilized its most recent recovery rates in order to assess fair value of theseloans.  For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment. Despite the increase in allowance associated with the higher delinquencyloans and bankrupt accounts, the total allowance for loan losses decreasedduring the period as a percentage of Receivables Held for Investment due toimproving overall delinquency trends and lower repossession and lossrates.  The allowance for credit lossesis based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, are reported in earnings in the periodthey become known.

 

The following table sets forth certaininformation regarding the Company’s delinquency and charge-off experience overits last two fiscal years (dollars in thousands):

 

| ** **                                                                                 | ** ** | **As of or for the Six Months  Ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **Number  of Loans**                                    | ** ** | **Amount** | ** ** | **Number  of Loans** | ** ** | **Amount** | ** ** |
| Receivables  Held for Investment:                                                          |       |                                                    |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                        |       |                                                    |       |   |   |   |   |   |   |
| 30 - 59 days                                                                               |       | 284                                                     |       | $ | 2,879 |   | 110 |   | $ | 907 |   |
| 60 - 89 days                                                                               |       | 80                                                      |       | 895 |   | 53 |   | 288 |   |
| 90 days or  more                                                                           |       | 215                                                     |       | 1,948 |   | 48 |   | 289 |   |
| Total  delinquencies                                                                       |       | 579                                                     |       | $ | 5,722 |   | 211 |   | $ | 1,484 |   |
| Total  delinquencies as a percentage of outstanding receivables                            |       | 3.5                                                     | %          | 2.6 | % | 1.0 | % | 0.5 | % |
| Net  charge-offs as a percentage of average receivables outstanding during the  period (2) |       |                                                    |       | 4.6 | % |   |   | 2.6 | % |

 

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(1)           Delinquent amounts outstanding do not includeloans in bankruptcy status since collection activity is limited and highlyregulated for bankrupt accounts.

 

(2)           Thepercentages have been annualized and are not necessarily indicative of theresults for a full year.

 

The lower annualized charge-off rate resultsfrom an improving economic environment coupled with an increase in the Company’sdirect to consumer lending program and higher recovery rates on repossessions.

 

As of October 31, 2005, there were 460 accountstotaling $5,279,500 that were in bankruptcy status and were more than 30 dayspast due.  As of October 31, 2004,there were 409 accounts totaling $3,951,168 that were in bankruptcy status andwere more than 30 days past due.  As of October 31,2005 and 2004, 86% and 91%, respectively, of the bankruptcy delinquencies filedfor protection under Chapter 13.

 

**New Accounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 123(R),*Share-Based Payment - a revision to SFAS No. 123,Accounting for Stock-Based Compensation*(“SFAS No. 123(R)”)that addresses the accounting for share-based 

 

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paymenttransactions in which an enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123(R) eliminates theability to account for share-based compensation transactions using APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and generally requires instead that such transactions be accounted for using afair-value-based method.

 

SFAS No. 123(R) is effective as of thebeginning of the fiscal year that begins after June 15, 2005. SFAS 123(R)applies to all awards granted after the required effective date and to suchawards modified, repurchased, or cancelled after that date. The cumulativeeffect of initially applying SFAS No. 123(R), if any, is recognized as ofthe required effective date. As of the required effective date, all publicentities that used the fair-value-based method for either recognition ordisclosure under SFAS No. 123 will apply SFAS No. 123(R) using amodified version of the prospective application. Under that transition method,compensation cost is recognized on or after the required effective date for theportion of outstanding awards for which the requisite service has not yet beenrendered, based on the grant-date fair value of those awards calculated underSFAS No. 123 for either recognition or pro forma disclosures. For periodsbefore the required effective date, those entities may elect to apply amodified version of retrospective application under which financial statementsfor prior periods are adjusted on a basis consistent with the pro formadisclosures required for those periods by SFAS No. 123. The Company hasnot yet completed its evaluation of the impact that SFAS No. 123(R) willhave on its financial position and results of operations.

 

**Forward Looking Information**

 

Statements and financial discussion and analysisincluded in this report that are not historical are considered to beforward-looking in nature. Forward-looking statements involve a number of risksand uncertainties that may cause actual results to differ materially fromanticipated results. Specific factors that could cause such differences includeunexpected fluctuations in market interest rates, changes in economicconditions, changes in the competition for loans, or the inability to renew orobtain financing. Further information concerning risks and uncertainties isincluded in this report and the company’s other reports filed with theSecurities and Exchange Commission.

 

The Company believes the factors discussed inits reports are important factors that could cause actual results to differmaterially from those expressed in any forward looking statement made herein orelsewhere by the Company or on its behalf. The factors listed are not necessarily all of the important factors.  Unpredictable or unknown factors notdiscussed could also have material adverse effects on actual results.  The Company does not intend to update itsdescription of important factors each time a potential important factorarises.  The Company advises itsstockholders that they should:  (1) beaware that important factors not described herein could affect the accuracy ofour forward looking statements, and (2) use caution and common sense whenanalyzing our forward looking statements in this document or elsewhere.  All of such forward looking statements arequalified in their entirety by this cautionary statement.

 

**ITEM 3.   *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

The market risk discussion and the estimatedamounts generated from the analysis that follows are forward-looking statementsof market risk assuming certain adverse market conditions occur. Actual resultsin the future may differ materially due to changes in the Company’s product anddebt mix, developments in the financial markets, and further utilization by thecompany of risk-mitigating strategies such as hedging.

 

The Company’s operating revenues are derivedalmost entirely from the collection of interest on the receivables it retainsand its primary expense is the interest that it pays on borrowings incurred topurchase and retain such receivables. The Company’s credit facilities bearinterest at floating rates which are reset on a short-term basis, whereas itsreceivables bear interest at fixed rates which do not generally vary withchanges in interest rates. The Company is therefore exposed primarily to marketrisks associated with movements in interest rates on its credit facilities. TheCompany believes that it takes the necessary steps to appropriately reduce thepotential impact of interest rate increases on the Company’s financial positionand operating performance.

 

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The Company relies almost exclusively onrevolving credit facilities to fund its origination of receivables.Periodically, the Company will transfer receivables from a revolving to a termcredit facility. Currently all of the Company’s credit facilities in bearinterest at floating rates tied to either a commercial paper index or LIBOR.

 

As of October 31, 2005, the Company had$153.1 million of floating rate secured debt outstanding under the FIRCwarehouse and working capital facilities. For every 1% increase in LIBOR annual after-tax earnings would decreaseby approximately $1.0 million assuming the Company maintains a level amount offloating rate debt and assuming an immediate increase in rates.  As of October 31, 2004, the Company had$104.9 million of floating rate secured debt outstanding net of swap and capagreements. For every 1% increase in commercial paper rates or LIBOR, annualafter-tax earnings would decrease by approximately $.7 million assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates.

 

**ITEM 4.   CONTROLS ANDPROCEDURES**

 

In accordance with Exchange Act Rules 13a-15and 15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of October 31, 2005 to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There has been no change in our internalcontrols over financial reporting that occurred during the three months ended October 31,2005 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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**PART II – OTHER INFORMATION**

 

**ITEM 4.   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On September 8, 2005, the Company heldits Annual Meeting of Shareholders to elect the Company’s Board of Directorsfor a term of one year, (ii) approve the adoption of the 2005 EmployeeStock Option Plan and receive authorization to make available 200,000 shares ofcommon stock for issuance under the plan, and (iii) ratify the appointmentof Grant Thornton LLP as the Company’s independent auditors.  Below are the results of the vote:

 

ProposalNumber 1: Election of Directors of the Company

 
| ** **               | ** ** | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------------|------------|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|                     |       |      |       |        |       |        |       |                 |       |
| Tommy A. Moore, Jr. |       | 3,466,613 |       | 0           |       | 935,517     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| Robert L. Clarke         |       | 4,001,880 |       | 0           |       | 390,250     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| W.A. Stockard, Jr.  |       | 4,001,880 |       | 0           |       | 390,250     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| Roberto Marchesini       |       | 3,470,113 |       | 0           |       | 922,017     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| Seymour M. Jacobs        |       | 4,001,880 |       | 0           |       | 390,250     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| John H. Buck             |       | 4,001,880 |       | 0           |       | 390,250     |       | 0                    |       |
|                     |       |      |       |        |       |        |       |                 |       |
| Daniel M. Theriault      |       | 4,001,880 |       | 0           |       | 390,250     |       | 0                    |       |

 

ProposalNumber 2: Adoption of the 2005 Employee Stock Option Plan

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|      |       |        |       |        |       |                 |       |
| 2,850,685 |       | 417,277     |       | 0           |       | 1,124,168            |       |

 

ProposalNumber 3: Appointment of Grant Thornton LLP as independent auditors

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------|------------|
|      |       |        |       |        |       |                 |       |
| 3,956,080 |       | 300         |       | 750         |       | 0                    |       |

 

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**ITEM 6.   *EXHIBITS AND REPORTS ON FORM 8-K***

 

(a)          Exhibits

 
| 10.121(t)            | 2005 Employee Stock Option Plan  of the Registrant                                                                                                                                                                      |
|----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |                                                                                                                                                                                                                    |
| 10.122(t)            | Amendment No. 5 to Note  Purchase Agreement dated August 15, 2005, between First Investors  Residual Funding LP, Variable Funding Capital Corporation, Wachovia Bank, NA,  and Wachovia Capital Markets, LLC. |
|                 |                                                                                                                                                                                                                    |
| 10.123(t)            | Amendment No. 7 to  Security Agreement dated August 15, 2005, between First Investors  Residual Funding LP, First Investors Financial Services, Inc., and  Wachovia Capital Markets, LLC.                |
|                 |                                                                                                                                                                                                                    |
| 31.1                 | Certification of Chief  Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                              |
|                 |                                                                                                                                                                                                                    |
| 31.2                 | Certification of Chief  Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                              |
|                 |                                                                                                                                                                                                                    |
| 32.1                 | Certification of Chief  Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                              |
|                 |                                                                                                                                                                                                                    |
| 32.2                 | Certification of Chief  Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                              |
|                 |                                                                                                                                                                                                                    |
| Filed with this 10-Q |

 

(b)         Reports onForm 8-K

 

Form 8-K filed September 8, 2005,press release announcing the quarter end July 31, 2005 financial results.

 

Form 8-K filed December 8, 2005,press release announcing the quarter end October 31, 2005 financialresults.

 

Form 8-K filed September 13, 2005,2005 stock option plan.

 

### **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                                      | First Investors Financial Services Group, Inc. |
|-------------------------------------------|-----------------------------------------------------|
|                                      | (Registrant)                                        |
|                                      |                                                |
|   Date: December 12,  2005 | By: /s/TOMMY A. MOORE, JR.                          |
|                                      | Tommy A. Moore, Jr.                            |
|                                      | President and Chief Executive Officer               |
|                                      |                                                |
|   Date: December 12,  2005 | By: /s/BENNIE H. DUCK                               |
|                                      | Bennie H. Duck                                      |
|                                      | Secretary, Treasurer and Chief Financial Officer    |

 

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