**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                        |
|       |       | **For the quarterly period ended January 31,  2006**                                                                        |
|       |       |                                                                                                                        |
| **OR**     |
|       |       |                                                                                                                        |
| ** ̈** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                               |
|       |       |                                                                                                                        |
|       |       | **For the transition period from          to       ** |

 

### **CommissionFile Number 0-26686**

### ** **

**First Investors Financial Services Group, Inc.**

(Exact Name of Registrant asSpecified in its Charter)

 
| **Texas**                                                        | ** ** | **76-0465087**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation  or Organization) | ** ** | (I.R.S. Employer Identification  No.) |

 

| **675 Bering Drive, Suite 710**           | ** ** | ** ** |
|-------------------------------------------|------------|------------|
| **Houston, Texas**                        |       | **77057**  |
| (Address of Principal Executive  Offices) | ** ** | (Zip Code) |

 

**(713) 977-2600**

(Registrant’s Telephone Number,Including Area Code)

 

Indicate by check mark whether the registrant(1) has filed 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)has been subject to such filing requirements for the past 90 days. Yes  x    No   ̈.

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ̈    No  x.

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

| ** **                   | ** ** | **Shares Outstanding At** |
|------------------------------|------------|---------------------------|
| **Class**                    | ** ** | **March 9, 2006**         |
| Common Stock-$.001 Par Value |       | 4,454,193                 |

 

 

----

 

**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

 

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

##### ** **

### **January31, 2006**

### ** **

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

##### ** **

| **Part I**     |   | **Financial Information** |   |                                                                                                               |
|----------------|--------|---------------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|           |   |                      |   |                                                                                                               |   |   |
|           |   | Item 1.                   |   |  Financial Statements                                                                                         |   |   |
|           |   |                      |   |                                                                                                               |   |   |
|           |   |                      |   | Consolidated  Condensed Balance Sheets as of April 30, 2005 and January 31, 2006                                   |   |   |
|           |   |                      |   |                                                                                                               |   |   |
|           |   |                      |   | Consolidated  Condensed Statements of Income for the Three Months and Nine Months Ended  January 31, 2005 and 2006 |   |   |
|           |   |                      |   |                                                                                                               |   |   |
|           |   |                      |   | Consolidated Condensed Statement of Shareholders’ Equity for the Nine  months Ended January 31, 2006          |   |   |
|           |   |                      |   |                                                                                                               |   |   |
|           |   |                      |   | Consolidated  Condensed Statements of Cash Flows for the Nine months Ended January 31, 2005  and 2006              |   |   |
|           |   |                      |   |                                                                                                               |   |   |
|           |   |                      |   | 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 6.                   |   | Exhibits  and Reports on Form 8-K                                                                                  |   |   |
|           |   |                      |   |                                                                                                               |   |   |
| **Signatures** |   |                      |

 

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

 

##### **CONSOLIDATED CONDENSED BALANCESHEETS — APRIL 30, 2005 AND JANUARY 31, 2006**

##### ** **

 
| ** **                                                                                                                          | ** ** | **April 30,  2005** | ** **  | **January 31,  2006** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|-----------------------|-------------|
| ** **                                                                                                                          | ** ** | **(Audited)**       | ** **  | **(Unaudited)**       | ** **  |
| **ASSETS**                                                                                                                          |       |                |        |                  |        |
| Receivables  Held for Investment, net                                                                                               |       | $                   | 248,976,931 |                  | 343,622,013 |   |
| Receivables  Acquired for Investment, net                                                                                           |       | 641,223             |        | 294,504               |        |
| Cash and  Short-Term Investments                                                                                                    |       | 2,413,738           |        | 4,173,400             |        |
| Restricted  Cash                                                                                                                    |       | 19,096,858          |        | 66,743,428            |        |
| Accrued  Interest Receivable                                                                                                        |       | 2,239,798           |        | 2,863,253             |        |
| Assets Held  for Sale                                                                                                               |       | 942,774             |        | 1,127,125             |        |
| Other  Assets:                                                                                                                      |       |                |        |                  |        |
| Funds held under reinsurance agreement                                                                                              |       | 4,174,814           |        | 4,691,049             |        |
| Deferred financing costs and other assets,  net of accumulated amortization and depreciation of $2,684,543 and $3,052,432           |       | 5,019,030           |        | 5,574,845             |        |
| Current income taxes receivable                                                                                                     |       | 5,233               |        | —                |        |
| Total assets                                                                                                                        |       | $                   | 283,510,399 |                  | $           | 429,089,617 |   |
|                                                                                                                                |       |                |        |                  |        |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                       |       |                |        |                  |        |
| Debt:                                                                                                                               |       |                |        |                  |        |
| Warehouse credit facilities                                                                                                         |       | $                   | 171,562,153 |                  | $           | 21,661,029 |   |
| Term notes                                                                                                                          |       | 70,050,511          |        | 355,541,939           |        |
| Working capital facility                                                                                                            |       | 10,500,000          |        | 15,149,641            |        |
| Related Party Note                                                                                                                  |       | 2,500,000           |        | 2,500,000             |        |
| Other  Liabilities:                                                                                                                 |       |                |        |                  |        |
| Accounts payable and accrued liabilities                                                                                            |       | 2,495,260           |        | 4,638,846             |        |
| Current income taxes payable                                                                                                        |       | —              |        | 285,281               |        |
| Deferred income taxes payable                                                                                                       |       | 910,807             |        | 1,629,635             |        |
| Total liabilities                                                                                                                   |       | 258,018,731         |        | 401,406,371           |        |
|                                                                                                                                |       |                |        |                  |        |
| Commitments  and Contingencies                                                                                                      | ** ** | **—**          |        | —                |        |
| Shareholders’  Equity:                                                                                                         |       |                |        |                  |        |
| Common stock, $0.001 par value, 10,000,000  shares authorized, 5,583,669 and 5,626,169 issued; 4,411,693 and 4,454,193  outstanding |       | 5,584               |        | 5,627                 |        |
| Additional paid-in capital                                                                                                          |       | 18,754,608          |        | 18,938,148            |        |
| Retained earnings                                                                                                                   |       | 11,198,788          |        | 13,206,783            |        |
| Less, treasury stock, at cost, 1,171,976  shares                                                                                    |       | (4,467,312          | )           | (4,467,312            | )           |
| Total shareholders’ equity                                                                                                     |       | 25,491,668          |        | 27,683,246            |        |
| Total liabilities  and shareholders’ equity                                                                                    |       | $                   | 283,510,399 |                  | $           | 429,089,617 |   |

 

The accompanying notes are an integral partof these consolidated condensed financial statements.

 

3

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

**CONSOLIDATED CONDENSED STATEMENTSOF INCOME**

**For the Three Months and Ninemonths Ended January 31, 2005 and 2006**

**(Unaudited)**

 
| ** **                                                                 | ** ** | **For the Three Months  Ended January 31,** | ** ** | **For the Nine months  Ended January 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Interest Income                                                            |       | $                                           | 7,220,443  |                                       | $          | 10,331,603 |   | $ | 21,173,847 |   | $ | 28,744,324 |   |
| Interest Expense                                                           |       | 1,964,382                                   |       | 3,937,523                                  |       | 5,569,934 |   | 10,373,936 |   |
| Net interest income                                                        |       | 5,256,061                                   |       | 6,394,080                                  |       | 15,603,913 |   | 18,370,388 |   |
| Provision for Credit Losses                                                |       | 2,574,748                                   |       | 1,821,667                                  |       | 7,459,259 |   | 5,537,895 |   |
| Net Interest Income After Provision for Credit  Losses                |       | 2,681,313                                   |       | 4,572,413                                  |       | 8,144,654 |   | 12,832,493 |   |
| Other Income:                                                              |       |                                        |       |                                       |       |   |   |   |   |
| Servicing revenue                                                          |       | 820,952                                     |       | 432,530                                    |       | 2,696,316 |   | 1,505,567 |   |
| Other finance charges and fees                                             |       | 700,297                                     |       | 696,580                                    |       | 1,933,930 |   | 1,802,700 |   |
| Insurance products                                                         |       | 237,211                                     |       | 226,235                                    |       | 569,142 |   | 779,816 |   |
| Income from investment                                                     |       | 156,652                                     |       | 95,839                                     |       | 526,880 |   | 333,033 |   |
| Other interest income                                                      |       | 117,613                                     |       | 335,809                                    |       | 283,579 |   | 869,024 |   |
| Other income                                                               |       | 210,775                                     |       | 182,825                                    |       | 541,677 |   | 568,846 |   |
| Unrealized and realized  gain/(loss) on interest rate derivative positions |       | 5,562                                       |       | (195,121                                   | )          | (232,192 | ) | (174,746 | ) |
| Total other income                                                         |       | 2,249,062                                   |       | 1,774,697                                  |       | 6,319,332 |   | 5,684,240 |   |
| Operating Expenses:                                                        |       |                                        |       |                                       |       |   |   |   |   |
| Salaries and benefits                                                      |       | 2,304,304                                   |       | 2,699,929                                  |       | 6,582,945 |   | 7,902,785 |   |
| Operating expense                                                          |       | 1,087,173                                   |       | 1,226,338                                  |       | 3,771,256 |   | 2,953,675 |   |
| General and administrative                                                 |       | 959,693                                     |       | 1,654,686                                  |       | 2,818,746 |   | 3,668,390 |   |
| Other interest expense                                                     |       | 140,014                                     |       | 357,191                                    |       | 374,646 |   | 922,193 |   |
| Total operating expenses                                                   |       | 4,491,184                                   |       | 5,938,144                                  |       | 13,547,593 |   | 15,447,043 |   |
| Income Before Provision for Income Taxes                                   |       | 439,191                                     |       | 408,966                                    |       | 916,393 |   | 3,069,690 |   |
| (Benefit) Provision for Income Taxes:                                      |       |                                        |       |                                       |       |   |   |   |   |
| Current                                                                    |       | (402,301                                    | )          | 11,763                                     |       | (26,067 | ) | 342,867 |   |
| Deferred                                                                   |       | 562,606                                     |       | 78,712                                     |       | 360,551 |   | 718,828 |   |
| Total provision for income  taxes                                          |       | 160,305                                     |       | 90,475                                     |       | 334,484 |   | 1,061,695 |   |
| Net Income                                                                 |       | $                                           | 278,886    |                                       | $          | 318,491 |   | $ | 581,909 |   | 2,007,995 |   |
|                                                                       |       |                                        |       |                                       |       |   |   |   |   |
| Basic Net Income per Common Share                                          |       | $                                           | 0.06       |                                       | $          | 0.07 |   | $ | 0.12 |   | $ | 0.45 |   |
| Diluted Net Income per Common Share                                        |       | $                                           | 0.06       |                                       | $          | 0.07 |   | $ | 0.12 |   | $ | 0.44 |   |

 

The accompanying notes are anintegral part of these consolidated condensed financial statements.

 

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

 

**CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’EQUITY**

** **

**For the Nine months EndedJanuary 31, 2006**

**(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                   |       | —             |       | —                             |       | 2,007,995               |       | —                        |       | 2,007,995 |       |
| Exercise of stock options    |       | 43                 |       | 183,540                            |       | —                  |       | —                        |       | 183,583   |       |
|                         |       |               |       |                               |       |                    |       |                          |       |      |       |
| Balance at  January 31, 2006 |       | $                  | 5,627      |                               | $          | 18,938,148              |       | $                             | 13,206,783 |      | $          | (4,467,312 | ) | $ | 27,683,246 |   |

 

The accompanying notes are anintegral part of this consolidated condensed financial statement.

 

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**FIRST INVESTORS FINANCIAL SERVICES GROUP,INC. AND SUBSIDIARIES**

**CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS**

**For the Nine months Ended January 31, 2005 and2006**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **2005**     | ** ** | **2006**     | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|
|                                                                                     |       |         |       |         |       |
| Cash Flows From Operating Activities:                                                    |       |         |       |         |       |
| Net income                                                                               |       | $            | 581,909    |         | $          | 2,007,995 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |       |         |       |         |       |
| Depreciation and amortization  expense                                                   |       | 2,931,083    |       | 3,635,296    |       |
| Provision for credit losses                                                              |       | 7,459,259    |       | 5,537,895    |       |
| (Increase) decrease in:                                                                  |       |         |       |         |       |
| Accrued interest receivable                                                              |       | —       |       | (623,455     | )          |
| Restricted cash                                                                          |       | 236,474      |       | (47,646,570  | )          |
| Deferred financing costs and  other assets                                               |       | (408,120     | )          | (1,543,207   | )          |
| Funds held under reinsurance  agreement                                                  |       | (660,048     | )          | (516,235     | )          |
| Current income tax receivable                                                            |       | (635,869     | )          | 5,233        |       |
| Interest rate derivative  positions                                                      |       | 8,212        |       | —       |       |
| Increase (decrease) in:                                                                  |       |         |       |         |       |
| Accounts payable and accrued  liabilities                                                |       | (844,495     | )          | 2,143,588    |       |
| Deferred income taxes payable                                                            |       | 339,592      |       | 718,828      |       |
| Current income taxes payable                                                             |       | 290,069      |       | 285,281      |       |
| Net cash provided by (used in)  operating activities                                     |       | 9,298,066    |       | (35,995,351  | )          |
| Cash Flows From Investing Activities:                                                    |       |         |       |         |       |
| Origination of Receivables Held  for Investment                                          |       | (104,941,043 | )          | (189,944,579 | )          |
| Payments received from  investment                                                       |       | —       |       | 434,876      |       |
| Principal payments from  Receivables Held for Investment                                 |       | 69,888,379   |       | 82,061,611   |       |
| Principal payments from  Receivables Acquired for Investment                             |       | 469,570      |       | 346,719      |       |
| Payments received on Assets  Held for Sale                                               |       | 4,713,682    |       | 4,887,219    |       |
| Purchase of furniture and  equipment                                                     |       | (88,391      | )          | (454,360     | )          |
| Net cash used in investing  activities                                                   |       | (29,957,803  | )          | (102,668,514 | )          |
| Cash Flows From Financing Activities:                                                    |       |         |       |         |       |
| Proceeds from advances on—                                                          |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | 201,034,659  |       | 330,702,887  |       |
| Term notes                                                                               |       | —       |       | 364,553,000  |       |
| Working capital facility                                                                 |       | 2,043,863    |       | 4,649,641    |       |
| Principal payments made on—                                                         |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | (120,640,062 | )          | (480,604,012 | )          |
| Term notes                                                                               |       | (60,275,494  | )          | (79,061,572  | )          |
| Working capital facility                                                                 |       | (305,006     | )          | —       |       |
| Proceeds from issuance of  common stock                                                  |       | —       |       | 183,583      |       |
| Treasury stock purchased                                                                 |       | (2,495,546   | )          | —       |       |
| Net cash provided by financing  activities                                               |       | 19,362,414   |       | 140,423,527  |       |
| (Decrease) Increase in Cash and Short-Term Investments                                   |       | (1,297,323   | )          | 1,759,662    |       |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 2,018,490    |       | 2,413,738    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $            | 721,167    |         | 4,173,400  |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |         |       |         |       |
| Cash paid during the period  for—                                                   |       |         |       |         |       |
| Interest                                                                                 |       | $            | 4,755,179  |         | $          | 9,714,520 |   |
| Income taxes                                                                             |       | 33,963       |       | 31,560       |       |

 

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

 

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

 

**NOTES TO UNAUDITEDCONSOLIDATED CONDENSED FINANCIAL STATEMENTS**

 

##### **January 31, 2006**

##### ** **

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

 

*Organization.*FirstInvestors Financial Services Group, Inc. (First Investors) was established toserve as a holding company for First Investors Financial Services, Inc. (FIFS)and FIFS’s wholly-owned subsidiaries, First Investors Insurance Company (FIIC),First Investors Auto Receivables Corporation (FIARC), F.I.R.C., Inc. (FIRC),First Investors Servicing Corporation (FISC), formerly known as Auto LendersAcceptance Corporation (ALAC), FIFS Acquisition Funding Corp. LLC, FarragutFinancial Corporation, and First Investors Auto Funding Corporation. FirstInvestors, together with its wholly-owned and majority-owned subsidiaries, ishereinafter referred to as the Company.

 

FIFSbegan operations in May 1989 and is principally involved in the business oforiginating and holding for investment retail installment contracts andpromissory notes secured by new and used automobiles originated by factoryauthorized franchised dealers or directly through consumers. As of January 31,2006, approximately 32% and 15% of receivables held for investment had beenoriginated in Texas and Georgia, respectively. The Company currently operatesin 28 states.

 

FIICwas organized under the captive insurance company laws of the state of Vermontfor the purpose of reinsuring certain credit enhancement insurance policiesthat have been written by unrelated third party insurance companies.

 

OnOctober 2, 1998, the Company completed the acquisition of FISC and theoperations of FISC are included in the consolidated results of the Companysince the date of acquisition. Headquartered in Atlanta, Georgia, FISCperformed servicing and collection activities on a portfolio of receivablesoriginated for investment as well as on a portfolio of receivables originatedand sold pursuant to two asset securitizations. As a result of the acquisition,the Company increased the total dollar value on its balance sheet ofreceivables, acquired an interest in certain trust certificates related to theasset securitizations and acquired certain servicing rights along withfurniture, fixtures, equipment and technology to perform the servicing and collectionfunctions for the portfolio of receivables under management.

 

OnAugust 8, 2000, the Company entered into a partnership agreement (Partnership)whereby a subsidiary of the Company was the general partner owning 70% of thepartnership interests and First Union Investors, Inc. served as the limitedpartner and owned 30% of the partnership interests. On September 19, 2003,First Investors Financial Services, Inc. purchased the limited partnershipinterests previously held by First Union Investors, Inc. The Partnershipconsists primarily of a portfolio of loans previously owned or securitized byFISC and certain other financial assets including charged-off accounts owned byFISC.

 

OnDecember 24, 2002, the Company purchased 40% of common stock and an investmentin the junior mezzanine debt of First Auto Receivables Corporation (FARC). FARCpurchased an approximately $197.5 million portfolio of installment loanreceivables from a subsidiary of Union Acceptance Corporation. FISC performsongoing servicing and collection activities on the portfolio.

 

OnMarch 19, 2003, FISC entered into a servicing agreement with an unrelated thirdparty to service an approximately $300 million portfolio of installment loanreceivables purchased from a subsidiary of Union Acceptance Corporation.

 

Intotal, at January 31, 2006, FISC performs servicing and collection functions ona managed receivables portfolio of approximately $460 million.

 

7

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

 

*Basis of Presentation*.The consolidated condensed financial statements include the accounts of FirstInvestors and its wholly-owned and majority-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated. Investments inwhich the Company exercises significant influence, but which it does notcontrol (generally a 20% to 50% ownership interest), are accounted for underthe equity method of accounting, except for variable interest entities forwhich the Company is considered the primary beneficiary under FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*, asamended in December 2003 by Interpretation 46R. As of January 31, 2006, theCompany does not have any variable interest entities under which FIN 46 asamended by Interpretation 46R would apply.

 

The results for theinterim periods are not necessarily indicative of the results of operationsthat may be expected for the fiscal year. In the opinion of management, theinformation furnished reflects all adjustments which are of a normal recurringnature and are necessary for a fair presentation of the Company’s financialposition as of January 31, 2006, and the results of its operations for thethree and nine months ended January 31, 2005 and 2006, and its cash flows forthe nine months ended January 31, 2005 and 2006.

 

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 Company believesthat the disclosures are adequate to make the information not misleading. Thesefinancial statements should be read in conjunction with the auditedconsolidated condensed financial statements included in the Company’s 2005Annual Report on Form 10-K filed July 29, 2005.

 

*Receivables Held for Investment*. ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers. The Company accruesinterest income monthly using the effective interest method. When a receivablebecomes 90 days past due, the income accrual is suspended until the paymentsbecome current. When a loan is charged off or the collateral is repossessed,the remaining income accrual is written off.

 

*Other Income*.Other Income consists of income received from servicing activities, otherfinance charges and fees, income from investments, reinvestment revenue, incomeearned from the sale of GAP insurance and extended service contracts, andunrealized gain or loss on interest rate derivative positions. Servicingrevenue is accrued as services are rendered. Late fees and other loan-relatedfees are recognized when received. Income from investments and reinvestmentrevenue are accrued based on the respective interest rate of such investment.Income from the sale of GAP insurance and extended service contracts isrecognized when sold as the Company has no further obligation after the sale.Unrealized gain or loss on interest rate derivatives is recognized whenincurred.

 

*Allowance for Credit Losses*. The Company calculates the allowance for credit losses in accordancewith SFAS No. 5*, Accounting for Contingencies.*SFASNo. 114, *Accounting By Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they comprise alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

 

TheCompany initiates efforts to make customer contact as early as when thecustomer is one day past due and become more aggressive as the loan becomesfurther past due. Management reviews past due loans and considers variousfactors including payment history, job status and any events that may haveoccurred that prevent the customer from making a payment. Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed. Generally this occurs at 60 to 90 days after the loanbecomes past due. Upon repossession, the uncollectible portion of the loan and100% of accrued interest is written off. The fair 

 

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value of the collateral isrecorded 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 Company records an adjustment, positiveor negative, based on the difference between the fair value estimate and theproceeds received. In the event the collateral cannot be located or if thecustomer refuses to pay and is not subject to bankruptcy court protection, theCompany will write off the entire balance of the loan once it reaches 180 dayspast due. If the customer is subject to bankruptcy court protection, the loangenerally remains in bankruptcy status as long as payments are being receivedfrom the trustee. If a payment is missed, the Company seeks to repossess thecollateral with approval of the court. If the customer is dismissed frombankruptcy, the Company resumes collection efforts.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe 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. These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to migrate to impaired status. The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information. Effective the quarter ended April 30, 2005, theCompany elected to increase its allowance for loan losses against loans thatwere greater than 120 days past due and loans in which the collateral had beenassigned for repossession but had not yet been repossessed as of the reportingdate. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted. 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 Company utilized its most recent recovery rates inorder to assess fair value of these loans. For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment. The allowance for credit losses is based onestimates 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 anemployee stock option plan and a non-employee director stock option plan, whichare described more fully in 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 the fair market value on thedate of the grant.

 

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The following table presents the Company’s net income per share had theCompany adopted the fair value method of accounting for stock-basedcompensation under SFAS No. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148.

 
| ** **                                                                                                                                             | ** ** | **For the Three Months  Ended January 31,** | ** ** | **For the Nine months  Ended January 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **2005**                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net Income, as reported                                                                                                                                |       | $                                           | 278,886    |                                       | $          | 318,491 |   | $ | 581,909 |   | $ | 2,007,995 |   |
| Deduct: Total stock option plan  compensation expense determined under fair value based method for awards  granted, modified or settled, net of taxes. |       | 44,933                                      |       | 54,066                                     |       | 125,643 |   | 157,053 |   |
| Pro Forma Net Income                                                                                                                                   |       | $                                           | 233,953    |                                       | $          | 264,425 |   | $ | 456,266 |   | $ | 1,850,942 |   |
|                                                                                                                                                   |       |                                        |       |                                       |       |   |   |   |   |
| Basic Net Income per Common Share, as reported                                                                                                         |       | $                                           | 0.06       |                                       | $          | 0.07 |   | $ | 0.12 |   | $ | 0.45 |   |
| Diluted Net Income per Common Share, as reported                                                                                                       |       | $                                           | 0.06       |                                       | $          | 0.07 |   | $ | 0.12 |   | $ | 0.44 |   |
| Basic Net Income per Common Share, pro forma                                                                                                           |       | $                                           | 0.05       |                                       | $          | 0.06 |   | $ | 0.09 |   | $ | 0.41 |   |
| Diluted Net Income per Common Share, pro forma                                                                                                         |       | $                                           | 0.05       |                                       | $          | 0.06 |   | $ | 0.09 |   | $ | 0.40 |   |

 

*Reclassifications*. Certain reclassifications have been made to thefiscal 2005 amounts to conform with the fiscal 2006 presentation.

 

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

 

The receivables generally have terms between 48 and 72 months and arecollateralized by the underlying vehicles. Net receivable balances consisted ofthe following at April 30, 2005 and January 31, 2006:

 
| ** **                                | ** ** | **April 30,** | ** **  | **January 31,** | ** ** |
|-------------------------------------------|------------|---------------|-------------|-----------------|------------|
| ** **                                | ** ** | **2005**      | ** **  | **2006**        | ** ** |
| Receivables                               |       | $             | 244,940,526 |            | $          | 336,005,497 |   |
| Unamortized premium and deferred fees (1) |       | 6,285,004     |        | 9,843,987       |       |
| Allowance for credit losses               |       | (2,248,599    | )           | (2,227,471      | )          |
| Net receivables                           |       | $             | 248,976,931 |            | $          | 343,622,013 |   |

 

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

 

Activity in the allowance for credit lossesfor the periods ended January 31, 2005 and 2006 was as follows:

 
| ** **                     | ** ** | **For the Nine months  Ended January 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                   | ** ** | **2006** | ** ** |
| Balance, beginning of period   |       | $                                          | 2,199,386  |   | $ | 2,248,599 |   |
| Provision for credit losses    |       | 7,459,260                                  |       | 5,537,895 |   |
| Charge-offs, net of recoveries |       | (7,245,967                                 | )          | (5,559,023 | ) |
| Balance, end of period         |       | $                                          | 2,412,679  |   | $ | 2,227,471 |   |

 

**4.****              Receivables Acquiredfor Investment**

 

ReceivablesAcquired for Investment comprise loans previously originated by Auto LendersAcceptance Corporation and another third party. Loans originated by AutoLenders Acceptance Corporation include a portfolio of warehouse loans and aportfolio of loans that were previously securitized. The securitized loans weresubsequently redeemed and funded through one of the Company’s creditfacilities. Receivables Acquired for Investment previously originated by AutoLenders Acceptance Corporation were purchased at a discount relating to creditquality. As a result of the amortization of the outstanding principal balanceof the receivables portfolio, the majority of the remaining cash flowsprojected constitute default collections from obligors. Given the nature

 

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of the remaining cash flows ofindividual loans, the Company determined that the timing of collections onReceivables Acquired for Investment was much more unpredictable thancontractual cash flows from non-defaulted receivables. Therefore, under theguidance provided by Practice Bulletin 6*, Amortization ofDiscounts on Certain Acquired Loans*, Receivables Acquired forInvestment will be accounted for under the cost-recovery method beginningSeptember 30, 2003. Under the cost recovery method, cash proceeds fromcollections are applied to first reduce the Company’s basis in the assets. Cashcollected in excess of this cost basis is recognized as income when received.Receivables Acquired for Investment previously originated by Auto Lenders AcceptanceCorporation were $607,894 and $294,504 as of April 30, 2005 and January 31,2006, respectively.

 

OnSeptember 30, 2003 the Company purchased $9.4 million of defaulted auto loanreceivables from an unrelated third party. The remaining balances of theseloans of $33,329 and $0 are included in Receivables Acquired for Investment onthe balance sheet as of April 30, 2005 and January 31, 2006 respectively, andare accounted for using the cost-recovery method. The Company may, from time totime, consider similar acquisitions in the future.

 

**5.****              Debt**

 

TheCompany finances its loan origination through two warehouse credit facilities.The Company’s credit facilities provide for one-year terms and have beenrenewed annually. Management of the Company believes that the credit facilitieswill continue to be renewed or extended or that it would be able to securealternate financing on satisfactory terms; however, there can be no assurancethat it will be able to do so. In January, 2002 the Company issued $159 millionin asset-backed notes (“Term Notes”) secured by discrete pools of receivables.These notes were subsequently called and redeemed in March, 2005. In November,2003, the Company issued $140 million in Term Notes secured by a discrete poolof receivables. In May, 2005, the Company issued $175 million in Term Notessecured by a discrete pool of receivables. In January, 2006, the Company issued$189 million in Term Notes secured by a discrete pool of receivables.Substantially all receivables retained by the Company are pledged as collateralfor the credit facilities and the Term Notes. The weighted average interestrate for the Company’s secured borrowings including the effect of program feesand dealer fees was 3.5% and 4.4% for the periods ended January 31, 2005 and2006, respectively.

 

*Warehouse Facilities as of January 31, 2006*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**            | ** ** | **Borrowing   Rate At  January 31,  2006** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 0                 |       | Commercial paper rate plus .3%                                                                         |       | .25 % of Unused Facility |       | .35                                        | %          | 4.47 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 21,661,029        |       | 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                                  |       | 5.03 | % |

 

*Warehouse Facilities – Credit Enhancement as of January 31, 2006*

 
| **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 the three months and ninemonths ended January 31, 2006 for its three credit enhancement insurancecoverages, of which the largest component is basic ALPI insurance, representedapproximately 2.1% of the principal amount of the receivables originated duringthe periods. Aggregate premiums paid for ALPI coverage alone were $1,028,980and $584,613 during the three months ended, and $2,645,416 and $3,156,179 fornine months ended, January 31, 2005 and 2006, respectively, and accounted for2.8% and 1.2% during the three months ended, and 2.6% and 1.6% for the ninemonths ended, January 31, 2005 and 2006, respectively, of the principal amountof the receivables originated during such respective periods.

 

In April 1994, the Company organized First Investors Insurance Company(the “Insurance Subsidiary”) under the captive insurance company laws of theState of Vermont. The Insurance Subsidiary is an indirect wholly-owned subsidiaryof the Company and is a party to a reinsurance agreement whereby the InsuranceSubsidiary reinsures 100% of the risk under the Company’s ALPI insurancepolicy. At the time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96% of the premiumpaid by the Company to National Union with respect to such receivable is cededto the Insurance Subsidiary. When a loss covered by the ALPI policy occurs,National Union pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. In addition to the monthlypremiums and liquidity reserves of the Insurance Subsidiary, a trust account ismaintained by National Union to secure the Insurance Subsidiary’s obligationsfor losses it has reinsured.

 

The result of the foregoing reinsurance structure is that NationalUnion, as the “fronting” insurer under the captive arrangement, isunconditionally obligated to the Company’s credit facility lenders for all lossescovered by the ALPI policy, and the Company, through its Insurance Subsidiary,is obligated to indemnify National Union for all such losses. As of January 31,2006, the Insurance Subsidiary had capital and surplus of $2,761,279 andunencumbered cash reserves of $1,660,665 in addition to $3,393,022 in a trustaccount.

 

The ALPI coverage as well as the Insurance Subsidiary’s liability underthe Reinsurance Agreement, remains in effect for each receivable that ispledged as collateral 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 – 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  |       | March 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 14, 2007 |       | 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 $50 million commitment level untilDecember 2, 2004, and was subsequently extended until February 14, 2007. OnJune 15, 2004, the FIRC facility was increased to $65 million, and revertedback to $50 million on September 13, 2004. As of April 30, 2005 and January 31,2006, there was $43.6 million and $21.7, respectively, outstanding.

 

On January 29, 2004, following a short-termextension of the original maturity date, the FIARC facility was renewed, undersimilar terms and conditions, to December 2, 2004, and was subsequentlyextended until March 15, 2006. As of April 30, 2005 and January 31, 2006, therewas $127.9 and $0, respectively, outstanding.

 

Management presently intends to seek further extensions to thesewarehouse facilities prior to the current expiration dates. Management furtherconsiders its relationship with its lenders to be satisfactory and has noreason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

The following table contains pertinent information on the Term Notes asof January 31, 2006.

 
| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|-------------------|------------|----------------------|-------------|-------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November 11, 2003 |       | $                    | 139,661,000 |              | April 20,  2011    |            | $          | 44,184,622         |       | 2.58 | % |
| 2005-A Class  1 |       | May 5, 2005       |       | $                    | 69,000,000  |              | December 17,  2007 |            | $          | 15,804,317         |       | 3.57 | % |
| 2005-A Class  2 |       | May 5, 2005       |       | $                    | 106,493,000 |              | July 16,  2012     |            | $          | 106,493,000        |       | 4.23 | % |
| 2006-A Class  1 |       | January 26, 2006  |       | $                    | 32,000,000  |              | January 16,  2007  |            | $          | 32,000,000         |       | 4.57 | % |
| 2006-A Class  2 |       | January 26, 2006  |       | $                    | 47,000,000  |              | March 16,  2009    |            | $          | 47,000,000         |       | 4.87 | % |
| 2006-A Class  3 |       | January 26, 2006  |       | $                    | 74,000,000  |              | February 15,  2011 |            | $          | 74,000,000         |       | 4.93 | % |
| 2006-A Class  4 |       | January 26, 2006  |       | $                    | 36,060,000  |              | April 15,  2013    |            | $          | 36,060,000         |       | 5.00 | % |

 

Credit enhancement on the three 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  |
| 2006-A       |       | 1.0%  of Initial Pool Balance increasing to 2% of Initial Pool Balance including  Pre-Funding Amount |       | 98.5%  initial advance decreasing to 96.75% |       | Surety  Bond  |

 

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Term Notes -On January 29, 2002, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2002-A (“2002 Auto Trust”) completed theissuance of $159,036,000 of 3.46% Class A asset-backed notes (“2002-A TermNotes”). The initial pool of automobile receivables transferred to the 2002Auto Trust totaled $135,643,109, which was previously 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 a $4,819,000 Class B Note that wasretained by the Company and pledged to secure the Working Capital Facility asfurther described below. Proceeds from the issuance, which totaled $159,033,471were used to (i) fund a $25,000,000 pre-funding account to be used for futureloan originations; (ii) repay all outstanding borrowings under the FIARC commercialpaper facility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2002-A Term Note issuance,and (v) fund a cash reserve account of 2% or $2,712,862 of the initialreceivables pledged which served as a portion of the credit enhancement for thetransaction. The Class A Term Notes bore interest at 3.46% and required monthlyprincipal reductions sufficient to reduce the balance of the Class A Term Notesto 97% of the outstanding balance of the underlying receivables pool. The finalmaturity of the 2002-A Term Notes was December 15, 2008. The Class B Note didnot bear interest but required principal reductions sufficient to reduce thebalance of the Class B Note to 3% of the outstanding balance of the underlyingreceivables pool. A surety bond issued by MBIA Insurance Corporation providedcredit enhancement for the Class A Notes. 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. OnFebruary 28, 2005, the Company notified the note holders of the 2002-Asecuritization of its intent to exercise its prepayment call provision. Thiscall provision was completed effective March 15, 2005, and therefore there wasno outstanding balance as of January 31, 2006 and April 30, 2005.

 

OnNovember 20, 2003, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed theissuance of $139,661,000 of 2.58% Class A asset-backed notes (“2003-A TermNotes”). The initial pool of automobile receivables transferred to the 2003Auto Trust totaled $114,726,891, which was previously owned by FIRC and FIARC,secure the 2003-A Term Notes. In addition to the issuance of the Class A Notes,the 2003 Auto Trust also issued a $5,065,891 Class B Note that was retained bythe Company and pledged to secure the Working Capital Facility as furtherdescribed below. Proceeds from the issuance, which totaled $139,656,629 wereused to (i) fund a $30,000,000 pre-funding account to be used for future loanoriginations; (ii) repay all outstanding borrowings under the FIARC commercialpaper facility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2003-A term note issuance,and (v) fund an initial cash reserve account of 0.5% or $573,635 of the initialreceivables pledged. The Class A Term Notes bear interest at 2.58% and requiresmonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 96.1% of the outstanding balance of the underlying receivablespool. The final maturity of the 2003-A Term Notes is April 20, 2011. The ClassB Note does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 3.9% of the outstanding balance ofthe underlying receivables pool. A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for 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 January 31, 2006, the outstandingprincipal balances on the 2003-A term notes were $70,050,511 and $44,184,622,respectively.

 

OnMay 5, 2005, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2005-A (“2005 Auto Trust”) completed the issuance of$69,000,000 of 3.57% Class A-1 asset-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 backed notes. The initial pool of automobile receivablestransferred to the 2005 Auto Trust totaled $150,920,721, which was previouslyowned by FIRC and FIARC, and secures the 2005-A Term Notes. In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trust also issueda $5,427,619 Class B Note that was retained by the Company and pledged tosecure the Working Capital Facility as further described below. Proceeds fromthe issuance, which totaled $175,487,827 were used to (i) fund a $29,999,898pre-funding account to be used for future loan originations; (ii) repay all outstandingborrowings under the FIARC commercial paper facility, (iii) reduce theoutstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2005-A Term Note issuance, and (v) fund an initial cashreserve account of 1% or $1,509,207 of the initial receivables pledged. TheClass A-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%,respectively, and requires monthly principal reductions sufficient to reducethe balance of the Class A Term Notes to 95.75% of the outstanding balance ofthe underlying receivables pool. The final maturity of the Class A-1 and ClassA-2 Term Notes is December 17, 2007 and July 16, 2012, respectively. The ClassB Note does not bear

 

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interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 4.25% of theoutstanding balance of the underlying receivables pool. A surety bond issued byMBIA Insurance Corporation provides credit enhancement for the Class A Notes.In the event that certain asset quality covenants are not met, the reserveaccount target level will increase to 2% of the then current principal balanceof the receivables pool. As of January 31, 2006, the outstanding principalbalances on the 2005-A Class A-1 and Class A-2 Term notes were $15,804,317 and$106,493,000 respectively.

 

OnJanuary 26, 2006, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2006-A (“2006 Auto Trust”) completed theissuance of $32,000,000 of 4.57% Class A-1 asset-backed notes, $47,000,000 of4.87% Class A-2 asset-backed notes, $74,000,000 of 4.93% Class A-3 asset-backednotes, and $36,060,000 of 5.00% Class A-4 asset-backed notes (collectively“2006-A Term Notes”), for a total of $189,060,000 of asset backed notes. Theinitial pool of automobile receivables transferred to the 2006 Auto Trusttotaled $151,939,112, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes. In addition to the issuance of the Class A-1, Class A-2,Class A-3, and Class A-4 notes, the 2006 Auto Trust also issued a $2,879,112Class B Note that was retained by the Company and pledged to secure the WorkingCapital Facility as further described below. Proceeds from the issuance, whichtotaled $188,445,709 were used to (i) fund a $40,000,000 pre-funding account tobe used for future loan originations; (ii) repay all outstanding borrowingsunder the FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction fees related tothe 2006-A Term Note issuance, and (v) fund an initial cash reserve account of1% or $1,519,391 of the initial receivables pledged. The 2006-A Term Notesrequire monthly principal reductions sufficient to reduce the balance of thenotes to 96.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1, Class A-2, Class A-3, and Class A-4 TermNotes is January 16, 2007, March 16, 2009, February 15, 2011, and April 15, 2013,respectively. The Class B Note does not bear interest but requires principalreductions sufficient to reduce the balance of the Class B Note to 3.25% of theoutstanding balance of the underlying receivables pool. A surety bond issued byMBIA Insurance Corporation provides credit enhancement for the Class A Notes.In the event that certain asset quality covenants are not met, the reserveaccount target level will increase to the greater of 2% of the initial poolbalance or 6% of the then current principal balance of the receivables pool. Asof January 31, 2006, there were no principal payments made on the 2006-A TermNotes, and the outstanding balance is equal to the original issuance amount of$189,060,000.

 

*Working Capital Facility*. The facility is provided to a special-purpose, wholly-ownedsubsidiary of the Company, First Investors Residual Funding LP. This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities. The facility is secured solely by the residual cashflow and cash reserve accounts related to the Company’s warehouse creditfacilities and the existing and future term note facilities. The outstandingborrowings under the facility bear interest at one-month LIBOR plus 2.25%. Inaddition, a commitment fee of 1.5% is paid on the total amount of thisfacility. On October 26, 2004, the Working Capital Facility was extended untilOctober 10, 2005, increasing the commitment amount from $9 million to $13.5million. The interest rate remained at LIBOR plus 2.25% and the commitment feepaid on the total available amount of the facility was maintained at 1.5%. OnAugust 15, 2005, the Working Capital Facility was extended until February 15,2006, increasing the commitment amount to $23.5 million, and was subsequentlyextended on February 15, 2006 until February 14, 2007. The interest rateremained at LIBOR plus 2.25% and the commitment fee paid on the total availableamount of the facility was maintained at 1.5%. As of April 30, 2005 and January31, 2006, there was $10,500,000 and $15,149,641, respectively, outstandingunder this facility.

 

TheCompany presently intends to seek a renewal of the working capital facilityfrom 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 considers its relationship with its lenders tobe satisfactory and has no reason to believe that this credit facility will notbe renewed. If the facility is not renewed, however, or if material changes aremade to its terms and conditions, it could have a material adverse effect onthe Company.

 

*Related Party Loans.*On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2.5 million. On December 6, 2004,the original $2.5 million shareholder loan was replaced with a $2.5 millionloan containing identical terms and conditions between the Company and alimited partnership that is affiliated with a current shareholder and member ofthe Board of Directors  The proceeds ofthe borrowings have been utilized to fund certain private and open marketpurchases of the Company’s common stock pursuant to a 

 

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Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.Borrowings under the facility bear interest at a fixed rate of 10% per annum.The facility is unsecured and expressly subordinated to the Company’s seniorcredit facilities. The facility matures on December 3, 2008 but may be repaidat any time unless the Company is in default on one of its other creditfacilities. There was $2.5 million outstanding under this facility as of April30, 2005 and January 31, 2006. The Company recorded interest expense of $0 and$63,014 for the three months ended, and $0 and $189,041 for the nine months ended,January 31, 2005 and 2006, respectively.

 

*Loan Covenants*. Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at January31, 2006.

 

*Interest Rate Management*.The Company’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 nine months ended January 31, 2006, as arequirement of the FIARC commercial paper facility, the Company entered intoseven interest rate cap transactions, with a strike rate of 6%. The aggregateinitial notional amount of the caps was $131,710,159 which amortizes over sixyears. The Company paid $449,746 in premium to purchase these caps. On January 26, 2006, the Company terminated allinterest rate caps outstanding in exchange for proceeds of $275,000. The capswere terminated following the repayment of all balances outstanding under theFIARC facility prior to the issuance of the 2006-A Term Notes. As a result, arealized loss of $174,746 was incurred relative to the aggregate market valueof the interest rate caps.

 

During fiscal year 2005, as a requirement ofthe FIARC commercial paper facility, the Company entered into nine interestrate cap transactions, with strike rates between 5% and 6%. The aggregateinitial notional amount of the caps was $126,086,843 which amortized over sixyears. The Company paid an aggregate of $1,213,097 in premiums to purchasethese caps. The interest rate caps were not designated as hedges, andaccordingly, changes in the fair value of the interest rate caps were recordedas unrealized gains or losses 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 were terminated following the repayment of allbalances outstanding under the FIARC facility prior to the issuance of the2005-A term notes. As a result, a realized loss of $373,097 was incurredrelative to the aggregate market value of the interest rate caps.

 

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**6.     Earnings Per Share**

 

Earnings per share amounts are based on the weightedaverage number of shares of common stock and potential dilutive common sharesoutstanding during the period. The weighted average number of shares used tocompute basic and diluted earnings per share for the three and nine monthsended January 31, 2005 and 2006, is as follows:

 
| ** **                                                          | ** ** | **For the Three Months Ended  January 31,** | ** ** | **For the Nine months Ended  January 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2005**                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted average shares:                                            |       |                                        |       |                                       |       |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share   |       | 4,747,197                                   |       | 4,451,693                                  |       | 4,915,815 |   | 4,433,963 |   |
| Effect of dilutive stock  options and warrants                      |       | 71,740                                      |       | 294,587                                    |       | 96,832 |   | 181,512 |   |
| Weighted average shares outstanding  for diluted earnings per share |       | 4,818,937                                   |       | 4,746,280                                  |       | 5,012,647 |   | 4,615,475 |   |

 

Forthe three and nine months ended January 31, 2005 and 2006, the Company had468,000 and 63,500, respectively, of stock options and stock warrants whichwere not included in the computation of diluted earnings per share. These werenot included in the computation of earnings per share because to do so wouldhave been antidilutive for the period presented.

 

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

 

OnDecember 24, 2002, the Company invested $475,061 for a 40% ownership interestin First Auto Receivables Corporation (“FARC”) and $712,591 for juniormezzanine investments of FARC. FARC purchased a $197.5 million automobile loanportfolio 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 debt interest rate is LIBOR plus 1%, thesenior mezzanine interest rate is 22.5% and the junior mezzanine interest rateis 25%.

 

TheCompany accounts for its ownership investment in FARC using the equity methodin accordance with APB Opinion 18. In addition to the equity and debtinvestments, the Company performs loan servicing and collection activities onthe portfolio. The Company recognized servicing revenue of  $207,505 and $122,462 for the three monthsended, and $707,997 and $423,367 for the nine months ended, January 31, 2005and 2006, respectively, interest income of $27,473 and $21,048 for the threemonths ended, and $82,418 and $75,933 for the nine months ended, January 31,2005 and 2006, respectively, and equity in earnings in FARC of $156,652 and$95,839 for the three months ended, and $526,880 and $333,033 for the ninemonths ended, January 31, 2005 and 2006, respectively. As of April 30, 2005 theequity investment in FARC of $968,327 and junior mezzanine debt of $716,675 andas of January 31, 2006, the equity investment in FARC of $832,695 and juniormezzanine debt of $417,431 are included in Deferred Financing Costs and OtherAssets on the balance sheet.

 

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

 

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140” (“SFAS 155”). This statement amends SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”), and SFASNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” and resolves issues addressed in SFAS 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterest in Securitized Financial Assets”. This Statement: (a) permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminates

 

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restrictions on a qualifyingspecial-purpose entity’s ability to hold passive derivative financialinstruments that pertain to beneficial interests that are or contain aderivative financial instrument. The standard also requires presentation withinthe financial statements that identifies those hybrid financial instruments forwhich the fair value election has been applied and information on the incomestatement impact of the changes in fair value of those instruments. The Companyis required to apply SFAS 155 to all financial instruments acquired, issued orsubject to a remeasurement event beginning January 1, 2007 although earlyadoption is permitted as of the beginning of an entity’s fiscal year. Theprovisions of SFAS 155 are not expected to have a financial statement impactrecorded at adoption; however, the standard could affect the future incomerecognition for securitized financial assets because there may be more embeddedderivatives identified with changes in fair value recognized in net income.

 

InMay 2005, SFAS No. 154, “Accounting Changes and Error Corrections,” was issued.This statement applies to all voluntary changes in accounting principle andrequires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless this would be impracticable. Thisstatement also makes a distinction between “retrospective application” of anaccounting principle and the “restatement” of financial statements to reflectthe correction of an error. This statement is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15, 2005.The Company does not expect the adoption of this interpretation to have amaterial impact on its financial position, cash flows and results ofoperations.

 

InDecember 2004, the FASB issued SFAS No. 123(R), *Share-BasedPayment - a revision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”) that addresses the accounting for share-based payment transactionsin which an enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on the fairvalue of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123(R) eliminates the ability toaccount for share-based compensation transactions using APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and generallyrequires instead that such transactions be accounted for using afair-value-based method.

 

SFASNo. 123(R) is effective as of the beginning of the fiscal year that beginsafter June 15, 2005. SFAS 123(R) applies to all awards granted after therequired effective date and to such awards modified, repurchased, or cancelledafter that date. The cumulative effect of initially applying SFAS No. 123(R),if any, is recognized as of the required effective date. As of the requiredeffective date, all public entities that used the fair-value-based method foreither recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R)using a modified version of the prospective application. Under that transitionmethod, compensation cost is recognized on or after the required effective datefor the portion of outstanding awards for which the requisite service has notyet been rendered, based on the grant-date fair value of those awardscalculated under SFAS No. 123 for either recognition or pro forma disclosures.For periods before the required effective date, those entities may elect toapply a modified version of retrospective application under which financialstatements for prior periods are adjusted on a basis consistent with the proforma disclosures required for those periods by SFAS No. 123. The Company hasnot yet completed its evaluation of the impact that SFAS No. 123(R) will haveon its financial position and results of operations.

 

**9.     Shareholders’Equity**

 

*Preferred Stock*. TheCompany has authorized 1,000,000 shares of preferred stock with a $1.00 parvalue. As of January 31, 2006, 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 Compensation Committee selects the persons to receiveoptions and determines the exercise price, the duration, any conditions onexercise and other terms of the options. In the case of options intended to beincentive stock options, the exercise price may not be less than 100% of thefair market value per share of common stock on the date of grant. With respectto non-qualified stock options, the exercise price may be

 

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fixedas low as 50% of the fair market value per share at the time of grant. In noevent may the duration of an option exceed 10 years and no option may begranted after the expiration of 10 years from the adoption of the Plan. As ofApril 30, 2005 and January 31, 2006, a total of 533,500 options had beenissued, with 360,500 and 294,500, respectively, options outstanding under theplan. This plan expired on June 27, 2005.

 

OnSeptember 8, 2005, the shareholders approved the Company’s 2005 Employee StockOption Plan (the 2005 Plan). The 2005 Plan is administered by the CompensationCommittee of the Board of Directors and provides that options may be granted toofficers and other key employees for the purchase of up to 200,000 shares ofcommon stock, subject to adjustment in the event of certain changes incapitalization. Options may be granted either as incentive stock options (whichare intended to qualify for certain favorable tax treatment) or as non-qualifiedstock options. The Compensation Committee selects the persons to receiveoptions and determines the exercise price, the duration, any conditions onexercise and other terms of the options. The exercise price may not be lessthan 100% of the fair market value per share of common stock on the date ofgrant, and in no event may the duration of an option exceed 10 years and nooption may be granted after the expiration of 10 years from the adoption of thePlan. As of January 31, 2006, 102,500 options were issued and outstanding underthe 2005 Plan, leaving 97,500 options remaining and available for issuance.

 

Theexercise price of the option is payable in cash upon exercise. At thediscretion of the Compensation Committee, options may be issued in tandem withstock appreciation rights entitling the option holder to receive an amount incash or in shares of common stock, or a combination thereof, equal in value toany increase since the date of grant in the fair market value of the commonstock covered by the option.

 

*Non-Employee Director Stock Option Plan* - InSeptember 2002, the Non-Employee Stock Option Plan was established to furtheralign the interests of the Company’s directors with the interests of theshareholders, as well as attracting and retaining qualified directors. TheBoard of Directors administers the plan and the options will not be qualifiedas incentive stock options. A total of 500,000 shares of common stock areavailable for issuance. Option grants will be both automatic and discretionary.Automatic grants of 20,000 shares for each non-employee director, or 100,000shares total, were approved in September 2002. Subsequent automatic grants ofan option to purchase 20,000 shares shall be made to each non-employee directoron July 15th each year, beginning July 15, 2003. The plan also givesthe Board of Directors discretionary authority to provide for additional optiongrants if the Company’s annual financial performance exceeds parametersestablished by the Board. No discretionary grants have been awarded. As ofApril 30, 2005 and January 31, 2006, a total of 390,000 and 490,000,respectively, options had been issued, with 390,000 and 450,000, respectively,options outstanding under the plan, leaving a remaining 110,000 and 10,000,respectively, available for issuance. In addition to the options granted above,there were an additional 20,000 options granted to a director in 1995, beforethe adoption of the Non-Employee Stock Option Plan.

 

**10.****      ****Subsequent Event**

 

Forthe three months ended January 31, 2006, the Company incurred legal expenses of$214 and accrued legal expenses of $30 and settlement costs of $450 inconnection with its defense and settlement of a class action lawsuit filedagainst a wholly-owned subsidiary alleging violations of the Fair CreditReporting Act. The Company’s decision to settle the lawsuit was prompted by thetrial court’s granting the plaintiff’s motion for summary judgment on January20, 2006. The Company and its counsel believe that the court’s ruling iscontrary to the statute and the facts in the case, and believe that an appealwould be successful. However, given the trial court’s ruling, the Companyconcluded that settlement is preferable to continuing to incur the costsassociated with the appeal and defense of the lawsuit. The settlement issubject to approval of the court, which is anticipated on March 15, 2006.

 

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**ITEM 2.  *MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

 

**Critical Accounting Policies**

 

Financial Reporting Release No. 60, which was issued by the Securitiesand Exchange Commission (“SEC”), requires all registrants to discuss criticalaccounting policies or methods used in the preparation of financial statements.Note 2 to the consolidated condensed financial statements includes a summary ofthe significant accounting policies and methods used in the preparation of theCompany’s consolidated condensed financial statements.

 

The preparation of financial statements includes the use of estimatesand assumptions that affect the reported amounts of assets and liabilities andthe reported amounts of net revenues and expenses during the reporting periods.The following is a review of the more significant assumptions and estimates, aswell as the accounting policies and methods used in the preparation of theconsolidated condensed financial statements.

 

*Receivables Held for Investment*. ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers, which includes theamortization of premiums or discounts associated with the loan originations.The Company accrues interest income monthly using the effective interestmethod. 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 from servicing activities, late feesand other loan-related fees, income from investments, reinvestment revenue, GAPinsurance and extended service contracts, and unrealized loss on interest ratederivative positions. Servicing revenue is accrued as services are rendered.Late fees and other loan-related fees are recognized when received. Income frominvestments and reinvestment revenue are accrued based on the respectiveinterest rate of such investment. Revenue from the sale of GAP insurance andextended service contracts is recognized when sold as the Company has nofurther obligation after the sale. Unrealized gain or loss on interest ratederivatives is recognized when incurred.

 

*Advertising Costs.*TheCompany expenses advertising costs as incurred.

 

*Allowance for Credit Losses*. The Company calculates the allowance for credit losses in accordancewith SFAS No. 5*, Accounting for Contingencies.*SFASNo. 114, *Accounting By Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they comprise alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

 

TheCompany initiates efforts to make customer contact as early as when thecustomer is one day past due and become more aggressive as the loan becomesfurther past due. Management reviews past due loans and considers variousfactors including payment history, job status and any events that may haveoccurred that prevent the customer from making a payment. Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed. Generally this occurs at 60 to 90 days after the loanbecomes past due. Upon repossession, the uncollectible portion of the loan and100% of accrued interest is written off. The fair value of the collateral isrecorded 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 Company records an adjustment, positiveor negative, based on the difference between the fair value estimate and theproceeds received. In the event the collateral cannot be located or if thecustomer refuses to pay and is not subject to bankruptcy court protection, theCompany will write off the entire balance of the loan once it reaches 180 dayspast due. If the customer is subject to bankruptcy court protection, the loangenerally remains in bankruptcy status as long as payments are being receivedfrom the trustee. If a payment is missed, the Company seeks to repossess thecollateral with approval of the court. If the customer is dismissed frombankruptcy, the Company resumes collection efforts.

 

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

 

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status of each loan on a datewhich is six months prior to the reporting date, to the aging loan status as ofthe reporting date. These factors are then applied to the aging status of eachloan at the reporting date in order to calculate the number of loans that areexpected to migrate to impaired status. The estimated number of impairments isthen multiplied by the estimated loss per loan, which is based on historicalinformation. Effective for the quarter ended April 30, 2005, the Companyelected to increase its allowance for loan losses against loans that weregreater than 120 days past due and loans in which the collateral had beenassigned for repossession but had not yet been repossessed as of the reportingdate. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted. 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 Company utilized its most recent recovery rates inorder to assess fair value of these loans. For loans that are not classifiedinto these categories, the historical migration pattern is utilized in order toestablish the estimated impairment. Despite the increase in allowanceassociated with the higher delinquency loans and bankrupt accounts, the totalallowance for loan losses decreased during the period as a percentage ofReceivables Held for Investment due to improving overall delinquency trends andlower repossession and loss rates. The allowance for credit losses is based onestimates 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 plan and a non-employee director stockoption plan. The Company has adopted the disclosure provisions of SFAS No. 148,*Accounting for Stock-Based Compensation-Transitionand Disclosure, an amendment of FASB Statement No. 123*. Thispronouncement 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 value methodof Accounting 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.

 

**ManagedReceivables**

 

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

 
| ** **                                                                                 | ** ** | **As of or for the Periods** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                 | ** ** | **Ended January 31,**        | ** ** |
| ** **                                                                                 | ** ** | **2005**                     | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                                                           |       |                         |       |   |   |
| Number                                                                                     |       | 16,672                       |       | 21,113 |   |
| Principal balance                                                                          |       | $                            | 227,611    |   | $ | 336,005 |   |
| Average principal balance of  receivables outstanding  during  the nine-month period  |       | $                            | 214,121    |   | $ | 301,737 |   |
| Average principal balance of  receivables outstanding  during  the three-month period |       | $                            | 222,886    |   | $ | 329,993 |   |
| Receivables Acquired for Investment:                                                       |       |                         |       |   |   |
| Number                                                                                     |       | 654                          |       | 303 |   |
| Principal balance                                                                          |       | $                            | 721        |   | $ | 295 |   |
| Other Servicing:                                                                           |       |                         |       |   |   |
| Number                                                                                     |       | 15,461                       |       | 10,866 |   |
| Principal balance                                                                          |       | $                            | 220,087    |   | $ | 123,825 |   |
| Total Managed Receivables Portfolio:                                                       |       |                         |       |   |   |
| Number                                                                                     |       | 32,787                       |       | 32,282 |   |
| Principal balance                                                                          |       | $                            | 448,419    |   | $ | 460,125 |   |
| Average principal balance of receivables  outstanding  during the  nine-month period  |       | $                            | 463,995    |   | $ | 456,789 |   |
| Average principal balance of  receivables outstanding  during  the three-month period |       | $                            | 452,408    |   | $ | 463,772 |   |

 

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The following table setsforth information with regard to the Company’s net interest spread, whichrepresents the difference between the effective yield on Receivables Held forInvestment and the Company’s average cost of debt utilized to fund thesereceivables, and its net interest margin (averages based on month-endbalances):

 
| ** **                                                    | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine months Ended  January 31,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                            | ** ** | **2006**                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                              |       |                                |       |                               |       |   |   |   |   |
| Effective yield on Receivables  Held  for Investment (1) |       | 13.0                                | %          | 12.5                               | %          | 13.2 | % | 12.7 | % |
| Average cost of debt (2)                                      |       | 3.5                                 | %          | 4.6                                | %          | 3.5 | % | 4.5 | % |
| Net interest spread (3)                                       |       | 9.5                                 | %          | 7.9                                | %          | 9.7 | % | 8.2 | % |
| Net interest margin (4)                                       |       | 9.4                                 | %          | 7.8                                | %          | 9.7 | % | 8.1 | 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 on ReceivablesHeld for Investment less average cost of debt.

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

 

Netinterest income is the difference between interest earned from the receivablesportfolio and interest expense incurred on the credit facilities used tofinance the receivables. Net interest income was $6.4 million and $18.4 millionfor the three and nine months ended January 31, 2006, respectively, an increaseof 22% and 18% when compared to amounts reported for the three and nine monthsended January 31, 2005, respectively.

 

The amount of net interest income is the result of the relationshipbetween the average principal amount of receivables held and average rateearned thereon and the average principal amount of debt incurred to financesuch receivables and the average rates paid thereon. Changes in the principalamount and rate components associated with the receivables and debt can besegregated to analyze the periodic changes in net interest income. Thefollowing table analyzes the changes attributable to the principal amount andrate components of net interest income (dollars in thousands):

** **
| ** **                        | ** ** | **Three Months Ended  January 31, 2005 to 2006** | ** ** | **Nine months Ended  January 31, 2005 to 2006** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                        | ** ** | **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                   |       | $                                                | 3,470      |                                            | $          | (359 | ) | $ | 3,111 |   | $ | 8,664 |   | $ | (1,094 | ) | $ | 7,570 |   |
| Interest expense                  |       | 1,049                                            |       | 924                                             |       | 1,973 |   | 2,435 |   | 2,369 |   | $ | 4,804 |   |
| Net interest income               |       | $                                                | 2,421      |                                            | $          | (1,283 | ) | $ | 1,138 |   | $ | 6,229 |   | $ | (3,463 | ) | $ | 2,766 |   |

 

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**Results of Operations**

 

*Three Months and Nine months Ended January31, 2006 and 2005 (dollars in thousands, except per share amounts)*

 

*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 of netinterest spread, which is defined as the difference between the effective yieldon Receivables Held for Investment and the cost of funds under the Company’scredit facilities and securitizations utilized to finance these receivables;(iii) the level of provision for credit losses; (iv) the amount of incomederived from other activities; and (v) the ability of the Company to controloperating expenses relative to the total amount of the managed portfolio.

 

*Executive Summary.*Netincome for the three and nine months ended January 31, 2006 was $318 and$2,007, respectively, compared to $279 and $582 for the three and nine monthsended January 31, 2005. Basic and diluted earnings per common share were $0.07for the three months ended January 31, 2006 compared to $0.06 for the threemonths ended January 31, 2005. Basic and diluted earnings per common share were$0.45 and $0.44, respectively, for the nine months ended January 31, 2006compared to $0.12 and $0.12 for the nine months ended January 31, 2005. Theincrease in net income for the three and nine months ended January 31, 2006compared to January 31, 2005 is due to (i) an increase in interest income froma 48% increase for the three months ended January 31, 2006 and a 41% increasefor the nine months ended January 31, 2006 in average Receivables Held forInvestment, (ii) a decrease in lossfrequency and severity from repossessions and (iii) an increase in otherinterest income due to a larger portion of the Company’s cash being reinvested,partially offset by several factors including (i) a decline in effectiveyields, (ii) an increase in interest expense due to an increase in the averagedebt outstanding and an increase in the effective rate, (iii) a decline in loanservicing income, (iv) an increase in printing and postage expenses as a resultof an increase in direct to consumer loans, and (v) settlement costs and legalfees totaling $694 associated with defending and settling a lawsuit broughtagainst a wholly-owned subsidiary of the Company.

 

*Interest Income*. Interest income for the three and nine monthsended January 31, 2006 increased to $10,332 and $28,774, respectively, comparedto $7,220 and $21,174 for the three and nine months ended January 31, 2005.

 

The level of interest income, a primarydriver of financial results, is impacted by the average outstanding balance ofthe portfolio of Receivables Held for Investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectreceivables within Receivables Held for Investment, and the level ofprepayments and charge-offs. Interest income on Receivables Held for Investmentincreased****43% and 36% for the three and ninemonths ended January 31, 2006, respectively, compared to the three and ninemonths ended January 31, 2005. The increase in interest income for the threeand nine months ended January 31, 2006 is due to a 48% and 41% increase in theaverage portfolio outstanding for the three and nine months ended January 31,2006 compared the three and nine months ended January 31, 2005. This ispartially offset by a decrease in the weighted average interest rate of 43basis points for the three months ended, and 48 basis points for the ninemonths, ended January 31, 2006 compared to the three and nine months endedJanuary 31, 2005. This reflects the Company’s increased focus on receivablesoriginated directly to consumers which typically carry lower interest rates.

 

*Interest Expense*. Interest expense for the three and nine monthsended January 31, 2006 increased****to $3,938 and$10,374, respectively, compared to $1,964 and $5,570 for the three and ninemonths ended January 31, 2005. Interest expense on borrowings related toReceivables Held for Investment increased 100% and 86% for the three and ninemonths ended January 31, 2006. The increase in interest expense is primarilydue to (i) the average debt outstanding increasing $118,512, or 53%, for thethree months ended January 31, 2006 and $93,253, or 44%, for the nine monthsended January 31, 2006 compared to the three and nine months ended January 31,2005 as a result of a 48% and 41% increase in the average portfolio ofReceivables Held for Investment for the three and nine months ended January 31,2006 compared to January 31, 2005 and (ii) an increase of 109 and 103 basispoints for the three and nine months ended January 31, 2006, respectively, inthe average cost of debt due to an increase in overall market interest rates asa result of the current economic environment and market rate increases adoptedby the Federal Reserve Board.

 

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*Provision for Credit Losses*. The provision for credit losses for the three and nine months endedJanuary 31, 2006 decreased to $1,822 and $5,538, respectively, as compared to$2,575 and $7,459 for the three and nine months ended January 31, 2005. Thedecrease in provision for credit losses is primarily due to (i) improvingeconomic trends (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 the three and nine months endedJanuary 31, 2006 decreased to $1,853 and $5,559, respectively, compared to$2,473 and $7,246 for the three and nine months ended January 31, 2005. Thedecrease in net charge-offs for the three and nine months ended January 31,2006 is primarily due to (i) a decrease in loss frequency and severity fromrepossessions and (ii) an increase in recoveries from defaulted loans.

 

The level of theprovision for credit losses is a key driver of overall financial performanceand should be positively impacted by improvement in general economicconditions, improvements in wholesale used car prices and lower delinquency ratesand net losses projected for the portfolio of Receivables Held for Investment.Any additional economic deterioration or decline in wholesale used car priceswill negatively impact provision expense to the extent that these events causean increase in delinquency rates, bankruptcy rates or net charge-off rates inthe portfolio of Receivables Held for Investment.

 

*Servicing Revenue*. OnDecember 24, 2002, the Company entered into an agreement to provide loanservicing and collection activities on behalf of FARC. FARC, which is 40% ownedby the Company, purchased a portfolio of approximately $200 million ofinstallment loan receivables. On March 19, 2003, the Company entered into anagreement to provide loan servicing and collection activities on $276 millionof installment loan receivables for unrelated third parties. Servicingrevenue decreased to $433 and $1,506****for the threeand nine months ended January 31, 2006 compared to $821 and $2,696****for three and nine months ended January 31, 2005. Thedecrease in servicing revenue for the three and nine months ended January 31,2006 is due to the liquidation of serviced receivables during the quarter.Revenue derived from servicing activities will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

 

*Other Finance Charges and Fees.*Late and loan related fees decreased to $697 and $1,803 for the three andnine months ended January 31, 2006, compared to $700 and $1,934 for the threeand nine months ended January 31, 2005. Thedecrease is attributable to lower delinquencies, partially offset by increasedassessment and collection of fees due to a 41% increase in the averageportfolio of Receivables Held for Investment. Income derived from late fees and collection activities are recognizedwhen received, and therefore can be potentially volatile from period to periodbased on overall cash collection, seasonality, delinquency rates and otherfactors.

 

Late fees and other income are driven by a number offactors including overall delinquency rates, the percentage of customersutilizing electronic payment products and growth rates in the Company’s directlending business which will affect the ability of the Company to generate feeincome from marketing insurance and warranty products.

 

*InsuranceProducts.*Insurance products revenue decreased to $226 for the three months endedJanuary 31, 2006, compared to $237 for the three months ended January 31, 2005.The decrease is attributable to (i) a decrease in the penetration rates of theinsurance products sold and (ii) lower gross margins due to the Company’sincreased costs in purchasing the insurance products. This is partially offsetby an increase of 29% in loanoriginations for the three months ended January 31, 2006. Insurance products revenue increased to $780 for thenine months ended January 31, 2006, compared to $569 for the nine months endedJanuary 31, 2005. The increase is due to an increase of 90% in loan originations for the nine months ended January 31, 2006.This is partially offset by lower gross margins due to the Company’s increased costs in purchasingthe insurance products. Insurance productsrevenue is primarily driven by growth rates in the Company’s direct lendingbusiness which will affect the ability of the Company to generate fee incomefrom marketing insurance and warranty products.

 

*Income from Investment*. Incomefrom investment decreased to $96 and $333****for the threeand nine months ended January 31, 2006 compared to $157 and $527****for three and nine months ended January 31, 2005. Thedecrease in income from investment for the three and nine months ended January31, 2006 is due to the liquidation of serviced receivables during the quarter.Revenue derived from income from investment will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

 

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*Other Interest Income.*Other interest income increased to $336 and $869 for the three and ninemonths ended January 31, 2006, compared to $118 and $284 for the three and ninemonths ended January 31, 2005. The increase is attributable to (i) an increasein the average cash on hand balance due to increased collections as a result ofa 48% and 41% increase in the average portfolio of Receivables Held forInvestment for the three and nine months ended January 31, 2006 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 and Realized Gain/(Loss) on InterestRate Derivative Positions*. In conjunction with the adoption ofSFAS No. 133, the Company is required to record interest rate derivativepositions at fair value. A realized loss of $195 and $175 for the three andnine months ended January 31, 2006, compared to an unrealized gain of $6 and anunrealized loss of $232 for the three and nine months ended January 31, 2005are principally due to changes in the fair value of the Company’s derivativepositions.

 

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to$2,700 and $7,903 for the three and nine months ended January 31, 2006,compared to $2,304 and $6,583 for the three and nine months ended January 31,2005. The increase is primarily due to an increase in staff due to a 29% and90% increase in loan originations for the three and nine months ended January31, 2006, respectively. This is partially offset by a decrease in staffassociated with a decrease in the Company’s serviced portfolio.

 

*Operating Expenses.* Operating expenses increased to $1,226 for thethree months ended January 31, 2006, compared to $1,087 for the three monthsended January 31, 2005, while operating expenses decreased to $2,954 for thenine months ended January 31, 2006, compared to $3,771 for the nine monthsended January 31, 2005. Expensescharacterized as operating expenses are generally variable in nature and aretypically dependent on a number of factors including origination volume, theoutstanding balance of the managed portfolio, credit quality and operatingefficiency levels. The increase for the three months ended January 31, 2006 wasprimarily due to  increased costs ingenerating higher direct loan originations. This was partially offset by anincrease in the dollar amount of expenses which the Company was able tocapitalize as deferred acquisition costs. The decrease for the nine monthsended January 31, 2006 was primarily due to an increase in the dollar amount ofexpenses which the Company was able to capitalize as deferred acquisitioncosts. Although expenses increased during the nine month period, the Companywas able to capitalize a higher level of these expenses due to the significantincrease in origination volume and increased efficiency in its loan originationfunctions. The decline in operating expenses was also positively impacted bylower collection-related costs as a result of improving credit quality.

 

*General and Administrative.* General and administrative expenses increased to$1,655 and $3,668 for the three and nine months ended January 31, 2006,compared to $960 and $2,819 for the three and nine months ended January 31,2005. The three and nine months ended January 31, 2006 experienced an increasein professional fees due to the Company’s defense in a class action lawsuit.General and administrative costs tend to be more fixed in nature and not asdependent on the overall level of managed receivables.

 

Forthe three months ended January 31, 2006, the Company incurred legal expenses of$214 and accrued legal expenses of $30 and settlement costs of $450 inconnection with its defense and settlement of a class action lawsuit filedagainst a wholly-owned subsidiary alleging violations of the Fair CreditReporting Act. The Company’s decision to settle the lawsuit was prompted by thetrial court’s granting the plaintiff’s motion for summary judgment on January20, 2006. The Company and its counsel believe that the court’s ruling iscontrary to the statute and the facts in the case, and believe that an appealwould be successful. However, given the trial court’s ruling, the Companyconcluded that settlement is preferable to continuing to incur the costsassociated with the appeal and defense of the lawsuit. The settlement issubject to approval of the court, which is anticipated on March 15, 2006.

 

Otherthan the litigation described above, the Company is not involved in anylitigation which might be expected to have a material adverse effect on theCompany’s business or operations.

 

*Other Interest Expense*. Other interest expense increased to $357 and $922 forthe three and nine months ended January 31, 2006, compared to $140 and $375 forthe three and nine months ended January 31, 2005. The increase was primarilydue to (i) a 50% and 33% increase for the three and nine months ended January31, 2006,  respectively, in the averageoutstanding borrowings on the Company’s working capital line and (ii) therelated

 

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partynote having an average outstanding balance of $2,500 for the three and ninemonths ended January 31, 2006, as compared to an average outstanding balance of$0 for the three and nine months ended January 31, 2005.

 

**Portfolio Characteristics**

 

*General*.In selecting receivables for inclusion in its portfolio, the Company seeks toidentify potential borrowers whom it regards as creditworthy despite credithistories that limit their access to traditional sources of consumer credit. Inaddition to personal credit qualifications, the Company attempts to assure thatthe characteristics of the automobile sold and the terms of the sale are likelyto result in a consistently performing receivable. These considerations includeamount financed, monthly payments required, duration of the loan, age of theautomobile, mileage on the automobile and other factors.

 

*Customer Profile*.The Company’s primary goal in credit evaluation is to make loans to customershaving stable personal situations, predictable incomes and the ability andinclination to perform their obligations in a timely manner. Many of theCompany’s customers are persons who have experienced credit difficulties in thepast by reason of illness, divorce, job loss, reduction in pay or otheradversities, but who appear to the Company to have the capability andcommitment to meet their obligations. Through its credit evaluation process,the Company seeks to distinguish these persons from those applicants who arechronically poor credit risks.

 

**Credit Evaluation**

 

*General*.In connection with the origination of a receivable by the Company, the Companyfollows systematic procedures designed to eliminate unacceptable risks. Thisinvolves a three-step process in which (i) the creditworthiness of the borrowerand the terms of the proposed transaction are evaluated and either approved,declined or modified by the Company’s credit verification department, (ii) theloan documentation and collateralization is reviewed by the Company’s fundingdepartment, and (iii) additional collateral verification procedures and customerinterviews are conducted by the Company. During the course of this process, theCompany’s credit verification and funding personnel coordinate closely with thefinance and insurance departments of the dealers or with individuals to whomthe Company lends directly. The Company has developed financing programs underwhich it approves loans that vary in pricing and loan terms depending on therelative credit risk determined for each loan. Credit or default risk isevaluated by the Company’s loan officers in conjunction with a proprietary,empirical credit scoring model developed from the Company’s 17 year database ofnon-prime lending results.

 

*Collateral Verification*.As a condition to the origination of each receivable by the Company, theCompany performs an individual audit evaluation to verify the details of thecredit application, and to confirm that the material terms of the sale conformto the purchaser’s understanding of the transaction. In the majority ofcircumstances for dealer indirect loans, the Company conducts a personaltelephonic interview with each prospective obligor. For direct to consumerloans, the Company verifies all information during the normal underwritingprocedures. The Company will originate a receivable only after receipt and reviewof a satisfactory audit report.

 

# **Liquidity andCapital Resources**

# ** **

*Sources and Uses of Cash Flows*.The Company’s business requires significant cash flow to support its operatingactivities. The principal cash requirements include (i) amounts necessary to acquirereceivables from dealers and fund required reserve accounts, (ii) amountsnecessary to fund premiums for credit enhancement insurance or other creditenhancement required by the Company’s financing programs, and (iii) amountsnecessary to fund costs to retain receivables, primarily interest expense. TheCompany also requires a significant amount of cash flow for working capital tofund fixed operating expenses, primarily salaries and benefits.

 

The Company’s most significant cash flow requirement is for theorigination of receivables. The Company originated $41.6 million and $189.9million of receivables to be held for investment for the three and nine monthsended January 31, 2006 compared to $37.7 million and $104.9 million for thethree and nine months ended January 31, 2005.

 

The Company funds loan originations through a combination of twowarehouse credit facilities. The FIRC credit facility generally permits theCompany to borrow up to the outstanding principal balance of qualified

 

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receivables, not to exceed $50million. Receivables that have accumulated in the FIRC credit facility may betransferred to the FIARC commercial paper facility at the option of theCompany. The FIARC commercial paper facility provides an additional financingsource of up to $150 million. Additionally, the Company has transferredreceivables from the warehouse credit facilities and issued term notes.Substantially all of the Company’s receivables are pledged to collateralizethese credit facilities and term notes. The Company is obligated to meetcertain financial covenants. Noncompliance may significantly affect cash flow.

 

The Company’s most significant source of cash flow is the principal andinterest payments received from its receivables portfolios. The Companyreceived such payments in the amount of $34.6 million and $110.2****million during the three and nine months ended January 31,2006, and $30.2 million and $91.3 million during the three and nine monthsended January 31, 2005. Such cash flow funds were used to repay amountsborrowed under the Company’s credit facilities and for other holding costs,primarily interest expense, and servicing and custodial fees. During the threeand nine months ended January 31, 2006, the Company required net cash of $7.0million and $79.8 million as compared to $7.6 million and $13.6 for the threeand nine months ended January 31, 2005, as the receivables originated exceededportfolio collections. The Company relies on borrowed funds to provide cashflow in periods of growth. As of January 31, 2006, the Company had $178.3million of available capacity in the FIRC and FIARC credit facilities to fundfuture growth.

 

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 from 1.4% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees arereceived after month end, but relate to the prior month activity. Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations. At January 31, 2006 and 2005,the Company’s unencumbered cash was $4,173,400 and $721,167 respectively. Theincrease in available cash is primarily due to (i) an increase in revenues dueto a 48% increase in the average portfolio of Receivables Held for Investmentand (ii) an increase in the amount due under the working capital line of creditof $4.6 million. Management believes the unencumbered cash and cash inflows andamounts available 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. In November, 2003, the Company issued $140million in Term Notes secured by a discrete pool of receivables. In May, 2005,the Company issued $175 million in Term Notes secured by a discrete pool ofreceivables. In January, 2006, the Company issued $189 million in Term Notessecured by a discrete pool of receivables. Substantially all receivablesretained by the Company are pledged as collateral for the credit facilities andthe Term Notes. The weighted average interest rate for the Company’s securedborrowings including the effect of program fees and dealer fees was 3.5% and4.4% for the periods ended January 31, 2005 and 2006, respectively.

 

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*Warehouse Facilities as of January 31, 2006*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**           | ** ** | **Borrowing   Rate At  January 31, 2006** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 0                 |       | Commercial paper rate plus .3%                                                                        |       | .25% of Unused Facility |       | .35                                            | %          | 4.47 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 21,661,029        |       | 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                                      |       | 5.03 | % |

 

*Warehouse Facilities – Credit Enhancement as of January 31, 2006*

 
| **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 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 vehicle purchasersnor the dealers are charged for the coverages, nor are they usually aware oftheir existence. The Company’s ALPI insurance policy is written by NationalUnion Fire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

 

The premiums that the Company paid during the three months and ninemonths ended January 31, 2006 for its three credit enhancement insurancecoverages, of which the largest component is basic ALPI insurance, representedapproximately 2.1% of the principal amount of the receivables originated duringthe periods. Aggregate premiums paid for ALPI coverage alone were $1,028,980and $584,613 during the three months ended, and $2,645,416 and $3,156,179 fornine months ended, January 31, 2005 and 2006, respectively, and accounted for2.8% and 1.2% during the three months ended, and 2.6% and 1.6% for the ninemonths ended, January 31, 2005 and 2006, respectively, of the principal amountof the receivables originated during such respective periods.

 

In April 1994, the Company organized First Investors Insurance Company(the “Insurance Subsidiary”) under the captive insurance company laws of theState of Vermont. The Insurance Subsidiary is an indirect wholly-ownedsubsidiary of the Company and is a party to a reinsurance agreement whereby theInsurance Subsidiary reinsures 100% of the risk under the Company’s ALPIinsurance policy. At the time each receivable is insured by National Union, therisk is automatically reinsured to its full extent and approximately 96% of thepremium paid by the Company to National Union with respect to such receivableis ceded to the Insurance Subsidiary. When a loss covered by the ALPI policyoccurs, National Union pays it after the claim is processed, and National Unionis then reimbursed in full by the Insurance 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.

 

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The result of the foregoing reinsurance structure is that NationalUnion, as the “fronting” insurer under the captive arrangement, isunconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofJanuary 31, 2006, the Insurance Subsidiary had capital and surplus of$2,761,279 and unencumbered cash reserves of $1,660,665 in addition to$3,393,022 in a trust account.

 

The ALPI coverage as well as the Insurance Subsidiary’s liability underthe Reinsurance Agreement, remains in effect for each receivable that ispledged as collateral 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 – 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.

 

*Warehouse Facilities – Agents and Expirations*

 
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if not Renewed**                                                                                                                                                |
|--------------|------------|-----------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | March 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 14, 2007 |       | 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 $50 million commitment level untilDecember 2, 2004, and was subsequently extended until February 14, 2007. OnJune 15, 2004, the FIRC facility was increased to $65 million, and revertedback to $50 million on September 13, 2004. As of April 30, 2005 and January 31,2006, there was $43.6 million and $21.7, respectively, outstanding.

 

On January 29, 2004, following a short-termextension of the original maturity date, the FIARC facility was renewed, undersimilar terms and conditions, to December 2, 2004, and was subsequentlyextended until March 15, 2006. As of April 30, 2005 and January 31, 2006, therewas $127.9 and $0, respectively, outstanding.

 

Management presently intends to seek further extensions to thesewarehouse facilities prior to the current expiration dates. Management furtherconsiders its relationship with its lenders to be satisfactory and has noreason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

The following table contains pertinent information on the Term Notes asof January 31, 2006.

 
| **Term Notes**  | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** **  | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|-------------|-------------------|--------------------|-----------------|------------|---------------------|------------|
| 2003-A          |       | November 11, 2003 |       | $                     | 139,661,000 |              | April 20,  2011    |            | $          | 44,184,622          |       | 2.58 | % |
| 2005-A Class  1 |       | May 5, 2005       |       | $                     | 69,000,000  |              | December 17,  2007 |            | $          | 15,804,317          |       | 3.57 | % |
| 2005-A Class  2 |       | May 5, 2005       |       | $                     | 106,493,000 |              | July 16,  2012     |            | $          | 106,493,000         |       | 4.23 | % |
| 2006-A Class  1 |       | January 26, 2006  |       | $                     | 32,000,000  |              | January 16,  2007  |            | $          | 32,000,000          |       | 4.57 | % |
| 2006-A Class  2 |       | January 26, 2006  |       | $                     | 47,000,000  |              | March 16,  2009    |            | $          | 47,000,000          |       | 4.87 | % |
| 2006-A Class  3 |       | January 26, 2006  |       | $                     | 74,000,000  |              | February 15,  2011 |            | $          | 74,000,000          |       | 4.93 | % |
| 2006-A Class  4 |       | January 26, 2006  |       | $                     | 36,060,000  |              | April 15,  2013    |            | $          | 36,060,000          |       | 5.00 | % |

 

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Credit enhancement on the three 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  |
| 2006-A       |       | 1.0%  of Initial Pool Balance increasing to 2% of Initial Pool Balance including  Pre-Funding Amount |       | 98.5%  initial advance decreasing to 96.75% |       | Surety  Bond  |

 

Term Notes -On January 29, 2002, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2002-A (“2002 Auto Trust”) completed theissuance of $159,036,000 of 3.46% Class A asset-backed notes (“2002-A TermNotes”). The initial pool of automobile receivables transferred to the 2002Auto Trust totaled $135,643,109, which was previously 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 a $4,819,000 Class B Note that wasretained by the Company and pledged to secure the Working Capital Facility asfurther described below. Proceeds from the issuance, which totaled $159,033,471were used to (i) fund a $25,000,000 pre-funding account to be used for futureloan originations; (ii) repay all outstanding borrowings under the FIARCcommercial paper facility, (iii) reduce the outstanding borrowings under theFIRC credit facility, (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% and requiredmonthly 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. TheClass B Note did not bear interest but required principal reductions sufficientto reduce the balance of the Class B Note to 3% of the outstanding balance of theunderlying receivables pool. A surety bond issued by MBIA Insurance Corporationprovided credit enhancement for the Class A Notes. In the event that certainasset quality covenants were not met, the reserve account target level wouldincrease to 6% of the then current principal balance of the receivables pool.On February 28, 2005, the Company notified the note holders of the 2002-Asecuritization of its intent to exercise its prepayment call provision. Thiscall provision was completed effective March 15, 2005, and therefore there wasno outstanding balance as of January 31, 2006 and April 30, 2005.

 

OnNovember 20, 2003, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed the issuanceof $139,661,000 of 2.58% Class A asset-backed notes (“2003-A Term Notes”). Theinitial pool of automobile receivables transferred to the 2003 Auto Trusttotaled $114,726,891, which was previously owned by FIRC and FIARC, secure the2003-A Term Notes. In addition to the issuance of the Class A Notes, the 2003Auto Trust also issued a $5,065,891 Class B Note that was retained by theCompany and pledged to secure the Working Capital Facility as further describedbelow. Proceeds from 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) repay all outstanding borrowings under the FIARC commercial paperfacility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2003-A term note issuance,and (v) fund an initial cash reserve account of 0.5% or $573,635 of the initialreceivables pledged. The Class A Term Notes bear interest at 2.58% and requiresmonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 96.1% of the outstanding balance of the underlying receivablespool. The final maturity of the 2003-A Term Notes is April 20, 2011. The ClassB Note does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 3.9% of the outstanding balance ofthe underlying receivables pool. A surety bond issued by MBIA InsuranceCorporation

 

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provides credit enhancement forthe Class A Notes. In the event that certain asset quality covenants are notmet, the reserve account target level will increase to 6% of the then currentprincipal balance of the receivables pool. As of April 30, 2005, and January31, 2006, the outstanding principal balances on the 2003-A term notes were$70,050,511 and $44,184,622, respectively.

 

OnMay 5, 2005, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2005-A (“2005 Auto Trust”) completed the issuance of$69,000,000 of 3.57% Class A-1 asset-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 backed notes. The initial pool of automobile receivablestransferred to the 2005 Auto Trust totaled $150,920,721, which was previouslyowned by FIRC and FIARC, and secures the 2005-A Term Notes. In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trust also issueda $5,427,619 Class B Note that was retained by the Company and pledged tosecure the Working Capital Facility as further described below. Proceeds fromthe issuance, which totaled $175,487,827 were used to (i) fund a $29,999,898pre-funding account to be used for future loan originations; (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2005-A Term Note issuance, and (v) fund an initial cashreserve account of 1% or $1,509,207 of the initial receivables pledged. TheClass A-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%,respectively, and requires monthly principal reductions sufficient to reducethe balance of the Class A Term Notes to 95.75% of the outstanding balance ofthe underlying receivables pool. The final maturity of the Class A-1 and ClassA-2 Term Notes is December 17, 2007 and July 16, 2012, respectively. The ClassB Note does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 4.25% of the outstanding balance ofthe underlying receivables pool. A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes. In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 2% of the then current principal balance of thereceivables pool. As of January 31, 2006, the outstanding principal balances onthe 2005-A Class A-1 and Class A-2 Term notes were $15,804,317 and $106,493,000respectively.

 

OnJanuary 26, 2006, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2006-A (“2006 Auto Trust”) completed theissuance of $32,000,000 of 4.57% Class A-1 asset-backed notes, $47,000,000 of4.87% Class A-2 asset-backed notes, $74,000,000 of 4.93% Class A-3 asset-backednotes, and $36,060,000 of 5.00% Class A-4 asset-backed notes (collectively“2006-A Term Notes”), for a total of $189,060,000 of asset backed notes. Theinitial pool of automobile receivables transferred to the 2006 Auto Trusttotaled $151,939,112, was previously owned by FIRC and FIARC, and secures the2006-A Term Notes. In addition to the issuance of the Class A-1, Class A-2,Class A-3, and Class A-4 notes, the 2006 Auto Trust also issued a $2,879,112Class B Note that was retained by the Company and pledged to secure the WorkingCapital Facility as further described below. Proceeds from the issuance, whichtotaled $188,445,709 were used to (i) fund a $40,000,000 pre-funding account tobe used for future loan originations; (ii) repay all outstanding borrowingsunder the FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction fees related tothe 2006-A Term Note issuance, and (v) fund an initial cash reserve account of1% or $1,519,391 of the initial receivables pledged. The 2006-A Term Notesrequire monthly principal reductions sufficient to reduce the balance of thenotes to 96.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1, Class A-2, Class A-3, and Class A-4 TermNotes is January 16, 2007, March 16, 2009, February 15, 2011, and April 15,2013, respectively. The Class B Note does not bear interest but requiresprincipal reductions sufficient to reduce the balance of the Class B Note to3.25% of the outstanding balance of the underlying receivables pool. A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes. In the event that certain asset quality covenants are not met,the reserve account target level will increase to the greater of 2% of theinitial pool balance or 6% of the then current principal balance of thereceivables pool. As of January 31, 2006, there were no principal payments madeon the 2006-A Term Notes, and the outstanding balance is equal to the originalissuance amount of $189,060,000.

 

*Working Capital Facility*. The facility is provided to a special-purpose, wholly-ownedsubsidiary of the Company, First Investors Residual Funding LP. This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’s othercredit facilities. The facility is secured solely by the residual cash flow andcash reserve accounts related to the Company’s warehouse credit facilities andthe existing and future term note facilities. The outstanding borrowings underthe facility bear interest at one-month LIBOR plus 2.25%. In addition, acommitment fee of 1.5% is paid on the total amount of this facility. On October26, 2004, the Working Capital Facility was extended

 

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until October 10, 2005,increasing the commitment amount from $9 million 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 Capital Facility was extended until February 15, 2006, increasingthe commitment amount to $23.5 million, and was subsequently extended onFebruary 15, 2006 until February 14, 2007. The interest rate remained at LIBORplus 2.25% and the commitment fee paid on the total available amount of thefacility was maintained at 1.5%. As of April 30, 2005 and January 31, 2006,there was $10,500,000 and $15,149,641, respectively, outstanding under thisfacility.

 

TheCompany presently intends to seek a renewal of the working capital facilityfrom 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 considers its relationship with its lenders tobe satisfactory and has no reason to believe that this credit facility will notbe renewed. If the facility is not renewed, however, or if material changes aremade to its terms and conditions, it could have a material adverse effect onthe Company.

 

*Related Party Loans.*On December 3, 2001 the Company entered into an agreement with one ofits shareholders who is a member of its Board of Directors under which theCompany may, from time to time, borrow up to $2.5 million. On December 6, 2004,the original $2.5 million shareholder loan was replaced with a $2.5 millionloan containing identical terms and conditions between the Company and alimited partnership that is affiliated with a current shareholder and member ofthe Board of Directors  The proceeds of theborrowings have been utilized to fund certain private and open market purchasesof the Company’s common stock pursuant to a Stock Repurchase Plan authorized bythe Board of Directors and for general corporate purposes. Borrowings under thefacility bear interest at a fixed rate of 10% per annum. The facility isunsecured and expressly subordinated to the Company’s senior credit facilities.The facility matures on December 3, 2008 but may be repaid at any time unlessthe Company is in default on one of its other credit facilities. There was $2.5million outstanding under this facility as of April 30, 2005 and January 31,2006. The Company recorded interest expense of $0 and $63,014 for the threemonths ended, and $0 and $189,041 for the nine months ended, January 31, 2005and 2006, respectively.

 

*Loan Covenants*. Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any financialand non-financial covenants governing these financing arrangements at January31, 2006.

 

*Interest Rate Management*.The Company’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 nine months ended January 31, 2006, as arequirement of the FIARC commercial paper facility, the Company entered intoseven interest rate cap transactions, with a strike rate of 6%. The aggregateinitial notional amount of the caps was $131,710,159 which amortizes over sixyears. The Company paid $449,746 in premium to purchase these caps. On January 26, 2006, the Company terminated allinterest rate caps outstanding in exchange for proceeds of $275,000. The capswere terminated following the repayment of all balances outstanding under theFIARC facility prior to the issuance of the 2006-A Term Notes. As a result, arealized loss of $174,746 was incurred relative to the aggregate market valueof the interest rate caps.

 

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During fiscal year 2005, as a requirement ofthe FIARC commercial paper facility, the Company entered into nine interestrate cap transactions, with strike rates between 5% and 6%. The aggregateinitial notional amount of the caps was $126,086,843 which amortized over sixyears. The Company paid an aggregate of $1,213,097 in premiums to purchasethese caps. The interest rate caps were not designated as hedges, andaccordingly, changes in the fair value of the interest rate caps were recordedas unrealized gains or losses 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 were terminated following the repayment of allbalances outstanding under the FIARC facility prior to the issuance of the2005-A term notes. As a result, a realized loss of $373,097 was incurredrelative to the aggregate market value of the interest rate caps.

 

**Delinquency and Credit LossExperience**

 

TheCompany’s results of operations, financial condition and liquidity may beadversely affected by nonperforming receivables. The Company seeks to manageits risk of credit loss through (i) prudent credit evaluations, (ii) riskmanagement activities, (iii) effective collection procedures, and (iv) bymaximizing recoveries on defaulted loans. The allowance for credit losses of$2,227,471 as of January 31, 2006 and $2,248,599 as of April 30, 2005 as apercentage of Receivables Held for Investment of $336,005,497 as of January 31,2006 and $244,940,526 as of April 30, 2005 was 0.7% and 0.9% respectively.

 

TheCompany considers a loan to be delinquent when the borrower fails to make ascheduled payment of principal and interest. Accrual of interest is suspendedwhen the payment from the borrower is over 90 days past due. Generally,repossession procedures are initiated 90 to 120 days after the payment default.

 

TheCompany retains the credit risk associated with the receivables originated. TheCompany purchases credit enhancement insurance from third party insurers, whichcovers the risk of loss upon default and certain other risks. The Companyestablished a captive insurance subsidiary to reinsure certain risks under thecredit enhancement insurance coverage for all receivables. In addition,receivables financed under the Auto Trust and FIARC commercial paper facilitiesdo not carry default insurance. Provisions for credit losses of $1,821,667 and $5,537,895for the three and nine months ended January 31, 2006 compared to and $2,574,748and $7,459,259 for the three and nine months ended January 31, 2005 have beenrecorded.

 

The Company calculates the allowance for credit losses in accordancewith SFAS No. 5*, Accounting for Contingencies.*SFASNo. 114, *Accounting By 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.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe 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. 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 of impairments is then multiplied by theestimated loss per loan, which is based on historical information. During thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increaseis warranted in light of the change in federal bankruptcy laws enacted duringthe period 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 a specific allowance against these loansequal to the outstanding balance of loans in these categories less theestimated recovery amount based on current data regarding liquidation of thecollateral and collection of any additional payments. The Company utilized itsmost recent recovery rates in order to assess fair value of these loans. Forloans that are not classified into these categories, the historical migrationpattern is utilized in order to establish the estimated impairment. Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates. The allowance forcredit losses is based on estimates and qualitative evaluations. Ultimatelosses may vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,are reported in earnings in the period they become known.

 

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The following table sets forth certain information regarding theCompany’s delinquency and charge-off experience over its last two fiscal years(dollars in thousands):

 
| ** **                                                                                | ** ** | **As of or for the Nine months Ended January 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                           | ** ** | **2006** | ** ** |
| ** **                                                                                | ** ** | **Number**                                         | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | **of Loans**                                       | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables  Held for Investment:                                                         |       |                                               |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                       |       |                                               |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 263                                                |       | $ | 2,488 |   | 89 |   | $ | 791 |   |
| 60 - 89 days                                                                              |       | 76                                                 |       | 629 |   | 34 |   | 288 |   |
| 90 days or  more                                                                          |       | 183                                                |       | 1,469 |   | 54 |   | 340 |   |
| Total  delinquencies                                                                      |       | 522                                                |       | $ | 4,586 |   | 177 |   | $ | 1,419 |   |
| Total delinquencies as a percentage of  outstanding receivables.                          |       | 3.1                                                | %          | 2.0 | % | 0.8 | % | 0.4 | % |
| Net charge-offs as a percentage of average  receivables outstanding during the period (2) |       |                                               |       | 4.5 | % |   |   | 2.5 | % |

 

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(1)           Delinquent amounts outstanding do notinclude loans in bankruptcy status since collection activity is limited andhighly regulated for bankrupt accounts.

 

(2)           The percentages have been annualizedand are not necessarily indicative of the results for a full year.

 

Thelower annualized charge-off rate results from an improving economic environmentcoupled with an increase in the Company’s direct to consumer lending programand higher recovery rates on repossessions.

 

As ofJanuary 31, 2006, there were 298 accounts totaling $3,348,178 that were inbankruptcy status and were more than 30 days past due. As of January 31, 2005,there were 379 accounts totaling $3,869,214 that were in bankruptcy status andwere more than 30 days past due. As of January 31, 2006 and 2005, 80% and 89%,respectively, of the bankruptcy delinquencies filed for protection underChapter 13.

 

**New Accounting Pronouncements**

 

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments—an amendment of FASB Statements No. 133 and140” (“SFAS 155”). This statement amends SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”), and SFASNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” and resolves issues addressed in SFAS 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterest in Securitized Financial Assets”. This Statement: (a) permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also requirespresentation within the financial statements that identifies those hybridfinancial instruments for which the fair value election has been applied andinformation on the income statement impact of the changes in fair value ofthose instruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginning January 1,2007 although early adoption is permitted as of the beginning of an entity’sfiscal year. The provisions of SFAS 155 are not expected to have a financialstatement impact recorded at adoption; however, the standard could affect thefuture income recognition for securitized 

 

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financial assets because theremay be more embedded derivatives identified with changes in fair valuerecognized in net income.

 

InMay 2005, SFAS No. 154, “Accounting Changes and Error Corrections,” was issued.This statement applies to all voluntary changes in accounting principle andrequires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless this would be impracticable. Thisstatement also makes a distinction between “retrospective application” of anaccounting principle and the “restatement” of financial statements to reflectthe correction of an error. This statement is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. The Company does not expect the adoption of this interpretation to have amaterial impact on its financial position, cash flows and results ofoperations.

 

InDecember 2004, the FASB issued SFAS No. 123(R), *Share-BasedPayment - a revision to SFAS No. 123, Accounting for Stock-Based Compensation*(“SFASNo. 123(R)”) that addresses the accounting for share-based payment transactionsin which an enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on the fairvalue of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123(R) eliminates the ability toaccount for share-based compensation transactions using APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and generallyrequires instead that such transactions be accounted for using afair-value-based method.

 

SFASNo. 123(R) is effective as of the beginning of the fiscal year that beginsafter June 15, 2005. SFAS 123(R) applies to all awards granted after therequired effective date and to such awards modified, repurchased, or cancelledafter that date. The cumulative effect of initially applying SFAS No. 123(R),if any, is recognized as of the required effective date. As of the requiredeffective date, all public entities that used the fair-value-based method foreither recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R)using a modified version of the prospective application. Under that transitionmethod, compensation cost is recognized on or after the required effective datefor the portion of outstanding awards for which the requisite service has notyet been rendered, based on the grant-date fair value of those awardscalculated under SFAS No. 123 for either recognition or pro forma disclosures.For periods before the required effective date, those entities may elect toapply a modified version of retrospective application under which financialstatements for prior periods are adjusted on a basis consistent with the proforma disclosures required for those periods by SFAS No. 123. The Company hasnot yet completed its evaluation of the impact that SFAS No. 123(R) will haveon its financial position and results of operations.

 

**Forward Looking Information**

 

Statementsand financial discussion and analysis included in this report that are nothistorical are considered to be forward-looking in nature. Forward-lookingstatements involve a number of risks and uncertainties that may cause actualresults to differ materially from anticipated results. Specific factors thatcould cause such differences include unexpected fluctuations in market interestrates, changes in economic conditions, changes in the competition for loans, orthe inability to renew or obtain financing. Further information concerningrisks and uncertainties is included in this report and the company’s otherreports filed with the Securities and Exchange Commission.

 

The Company believes the factors discussed in its reports are importantfactors that could cause actual results to differ materially from thoseexpressed in any forward looking statement made herein or elsewhere by theCompany or on its behalf. The factors listed are not necessarily all of theimportant factors. Unpredictable or unknown factors not discussed could alsohave material adverse effects on actual results. The Company does not intend toupdate its description of important factors each time a potential importantfactor arises. The Company advises its stockholders that they should:  (1) be aware that important factors notdescribed herein could affect the accuracy of our forward looking statements,and (2) use caution and common sense when analyzing our forward lookingstatements in this document or elsewhere. All of such forward lookingstatements are qualified in their entirety by this cautionary statement.

 

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**ITEM 3.      *QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

Themarket risk discussion and the estimated amounts generated from the analysisthat follows are forward-looking statements of market risk assuming certainadverse market conditions occur. Actual results in the future may differ materiallydue to changes in the Company’s product and debt mix, developments in thefinancial markets, and further utilization by the company of risk-mitigatingstrategies such as hedging.

 

TheCompany’s operating revenues are derived almost entirely from the collection ofinterest on the receivables it retains and its primary expense is the interestthat it pays on borrowings incurred to purchase and retain such receivables.The Company’s credit facilities bear interest at floating rates which are reseton a short-term basis, whereas its receivables bear interest at fixed rateswhich do not generally vary with changes in interest rates. The Company istherefore exposed primarily to market risks associated with movements ininterest rates on its credit facilities. The Company believes that it takes thenecessary steps to appropriately reduce the potential impact of interest rateincreases on the Company’s financial position and operating performance.

 

TheCompany relies almost exclusively on revolving credit facilities to fund itsorigination of receivables. Periodically, the Company will transfer receivablesfrom a revolving to a term credit facility. Currently all of the Company’scredit facilities in bear interest at floating rates tied to either a commercialpaper index or LIBOR.

 

Asof January 31, 2006, the Company had $36.8 million of floating rate secureddebt outstanding under the FIRC warehouse and working capital facilities. Forevery 1% increase in LIBOR annual after-tax earnings would decrease by approximately$.2 million assuming the Company maintains a level amount of floating rate debtand assuming an immediate increase in rates. As of January 31, 2005, theCompany had $133.6 million of floating rate secured debt outstanding net ofswap and cap agreements. For every 1% increase in commercial paper rates orLIBOR, annual after-tax earnings would decrease by approximately $.9 millionassuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates.

 

**ITEM 4.      CONTROLS AND PROCEDURES**

 

In accordancewith Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, underthe supervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of January 31, 2006 to provide reasonable assurance thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

 

There has beenno change in our internal controls over financial reporting that occurredduring the three months ended January 31, 2006 that has materially affected, oris reasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II –OTHER INFORMATION**

 

**ITEM 6.      *EXHIBITS AND REPORTS ONFORM 8-K***

 

(a)          Exhibits

 
| 10.124(u)             |   | Amended and Restated Trust Agreement dated January  26, 2006 between First Investors Auto Funding Corporation and Wells Fargo  Delaware Trust Company.                                                                                                                                                                                 |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.125(u)             |   | Indenture dated January 26, 2006 between First  Investors Auto Owner Trust 2006-A and Wells Fargo Bank, National Association.                                                                                                                                                                                                          |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.126(u)             |   | Sale and Allocation Agreement dated January 26,  2006 between First Investors Auto Owner Trust 2006-A, First Investors Auto  Funding Corporation, First Investors Servicing Corporation and Wells Fargo  Bank, National Association.                                                                                                   |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.127(u)             |   | Insurance Agreement dated January 26, 2006  between MBIA Insurance Corporation, First Investors Servicing Corporation,  First Investors Financial Services, Inc., First Investors Auto Funding  Corporation, First Investors Auto Owner Trust 2006-A, Wells Fargo Delaware  Trust Company, and Wells Fargo Bank, National Association. |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.128(u)             |   | Servicing Agreement dated  January 26, 2006 between Wells Fargo Bank, National Association, First  Investors Auto Owner Trust 2006-A, and First Investors Servicing Corporation.                                                                                                                                                       |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.129(u)             |   | Administration Agreement dated January 26, 2006  between Wells Fargo Bank, National Association, First Investors Financial  Services, Inc. and First Investors Auto Owner Trust 2006-A.                                                                                                                                                |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.130(u)             |   | Contribution Agreement dated January 26, 2006  between First Investors Financial Services, Inc. and First Investors Auto  Funding Corporation.                                                                                                                                                                                         |
|                  |   |                                                                                                                                                                                                                                                                                                                                   |
| 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 |

 

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(b)         Reports on Form 8-K

 

Form 8-K filed March 9, 2006, press releaseannouncing the quarter end January 31, 2006 financial results.

 

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### **SIGNATURES**

### ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                 | First Investors Financial  Services Group, Inc.   |
|----------------------|---------------------------------------------------|
|                 | (Registrant)                                      |
|                 |                                              |
| Date: March 14, 2006 | By: /s/ TOMMY A. MOORE, JR.                       |
|                 | Tommy A. Moore, Jr.                               |
|                 | President and Chief Executive  Officer            |
|                 |                                              |
| Date: March 14, 2006 | By: /s/ BENNIE H. DUCK                            |
|                 | Bennie H. Duck                                    |
|                 | Secretary, Treasurer and Chief  Financial Officer |

 

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