**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**CommissionFile Number 0-26686**

 

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

(Exact Name of Registrant as Specified in its Charter)

 
| **Texas**                                                              | ** ** | **76-0465087 **                 |
|------------------------------------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes o No ý.

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No ý.

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| ** **                   | ** ** | **Shares Outstanding At** |
|------------------------------|------------|---------------------------|
| **Class**                    | ** ** | **September 8, 2005**     |
| Common Stock-$.001 Par Value |       | 4,411,693                 |

 

 

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**FIRST INVESTORS FINANCIALSERVICES GROUP, INC.**

**AND SUBSIDIARIES**

 

##### **FORM10-Q**

 

### **JULY 31, 2005**

 

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

 
| **Part I   Financial Information** |                                                                                          |
|-----------------------------------------|-----------------------------------------------------------------------------------------------|
|                                    |                                                                                          |   |
| Item 1.                                 | Financial  Statements                                                                         |   |
|                                    |                                                                                          |   |
|                                    | Consolidated Balance Sheets as of April 30, 2005 and  July 31, 2005                           |   |
|                                    |                                                                                          |   |
|                                    | Consolidated Statements of Operations for the Three  Months Ended July 31, 2004 and 2005      |   |
|                                    |                                                                                          |   |
|                                    | Consolidated Statement of Shareholders’ Equity  for the Three Months Ended July 31, 2005 |   |
|                                    |                                                                                          |   |
|                                    | Consolidated Statements of Cash Flows for the Three  Months Ended July 31, 2004 and 2005      |   |
|                                    |                                                                                          |   |
|                                    | Notes to Unaudited Consolidated 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**                          |                                                                                          |   |

 

2

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

 

##### **CONSOLIDATED BALANCESHEETS — APRIL 30, 2005 AND JULY 31, 2005**

 
| ** **                                                                                                                                     | ** ** | **April 30,   2005** | ** **  | **July 31,   2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|-------------|---------------------|------------|
| ** **                                                                                                                                     | ** ** | **(Audited)**        | ** **  | **(Unaudited)**     | ** ** |
| **ASSETS**                                                                                                                                     |       |                 |        |                |       |
| Receivables Held for  Investment, net                                                                                                          |       | $                    | 248,976,931 |                | $          | 298,988,543 |   |
| Receivables Acquired  for Investment, net                                                                                                      |       | 641,223              |        | 542,013             |       |
| Cash and Short-Term  Investments                                                                                                               |       | 2,413,738            |        | 359,820             |       |
| Restricted Cash                                                                                                                                |       | 19,096,858           |        | 21,371,105          |       |
| Accrued Interest  Receivable                                                                                                                   |       | 2,239,798            |        | 2,824,856           |       |
| Assets Held for Sale                                                                                                                           |       | 942,774              |        | 680,119             |       |
| Other Assets:                                                                                                                                  |       |                 |        |                |       |
| Funds  held under reinsurance agreement                                                                                                        |       | 4,174,814            |        | 4,900,877           |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $2,684,543 and $2,883,942                     |       | 5,019,030            |        | 5,006,127           |       |
| Current  income taxes receivable                                                                                                               |       | 5,233                |        | —              |       |
| Interest  rate derivative positions                                                                                                            |       | —               |        | 56,144              |       |
| Total  assets                                                                                                                                  |       | $                    | 283,510,399 |                | $          | 334,729,604 |   |
|                                                                                                                                           |       |                 |        |                |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                 |       |                 |        |                |       |
| Debt:                                                                                                                                          |       |                 |        |                |       |
| Warehouse  credit facilities                                                                                                                   |       | $                    | 171,562,153 |                | $          | 72,963,739 |   |
| Term  notes                                                                                                                                    |       | 70,050,511           |        | 217,205,926         |       |
| Working  capital facility                                                                                                                      |       | 10,500,000           |        | 11,776,493          |       |
| Related  party note                                                                                                                            |       | 2,500,000            |        | 2,500,000           |       |
| Other Liabilities:                                                                                                                             |       |                 |        |                |       |
| Accounts  payable and accrued liabilities                                                                                                      |       | 2,495,260            |        | 2,448,104           |       |
| Current  income taxes payable                                                                                                                  |       | —               |        | 83,201              |       |
| Deferred  income taxes payable                                                                                                                 |       | 910,807              |        | 1,335,609           |       |
| Total  liabilities                                                                                                                             |       | 258,018,731          |        | 308,313,072         |       |
|                                                                                                                                           |       |                 |        |                |       |
| Commitments and  Contingencies                                                                                                                 | ** ** | **—**           |        | —              |       |
| Shareholders’ Equity:                                                                                                                     |       |                 |        |                |       |
| Common  stock, $0.001 par value, 10,000,000 shares authorized, 5,583,669 issued;  4,411,693 outstanding at April 30, 2005 and at July 31, 2005 |       | 5,584                |        | 5,584               |       |
| Additional  paid-in capital                                                                                                                    |       | 18,754,608           |        | 18,754,608          |       |
| Retained  earnings                                                                                                                             |       | 11,198,788           |        | 12,123,652          |       |
| Less:  treasury stock, at cost, 1,171,976 shares                                                                                               |       | (4,467,312           | )           | (4,467,312          | )          |
| Total  shareholders’ equity                                                                                                               |       | 25,491,668           |        | 26,416,532          |       |
| Total liabilities and  shareholders’ equity                                                                                               |       | $                    | 283,510,399 |                | $          | 334,729,604 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three Months Ended July31, 2004 and 2005**

**(Unaudited)**

 
| ** **                                             | ** ** | **For the Three Months   Ended July 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
|                                                   |       |                                      |       |   |   |
| Interest  Income                                       |       | $                                         | 6,952,179  |   | $ | 8,498,007 |   |
| Interest  Expense                                      |       | 1,776,773                                 |       | 2,960,147 |   |
| Net interest income                                    |       | 5,175,406                                 |       | 5,537,860 |   |
| Provision  for Credit Losses                           |       | 2,442,105                                 |       | 1,651,411 |   |
| Net  Interest Income After Provision for Credit Losses |       | 2,733,301                                 |       | 3,886,449 |   |
| Other  Income:                                         |       |                                      |       |   |   |
| Servicing revenue                                      |       | 969,955                                   |       | 578,226 |   |
| Other finance charges and fees                         |       | 399,193                                   |       | 508,252 |   |
| Insurance products                                     |       | 141,429                                   |       | 290,652 |   |
| Income from investment                                 |       | 193,706                                   |       | 125,958 |   |
| Other interest income                                  |       | 74,132                                    |       | 249,563 |   |
| Other income                                           |       | 109,886                                   |       | 143,822 |   |
| Unrealized loss on interest rate derivative positions  |       | (67,657                                   | )          | (2,682 | ) |
| Total other income                                     |       | 1,820,644                                 |       | 1,893,791 |   |
| Operating  Expenses:                                   |       |                                      |       |   |   |
| Salaries and benefits                                  |       | 2,063,445                                 |       | 2,541,802 |   |
| Operating expense                                      |       | 1,318,745                                 |       | 603,324 |   |
| General and administrative                             |       | 922,821                                   |       | 917,182 |   |
| Other interest expense                                 |       | 112,000                                   |       | 261,453 |   |
| Total operating expenses                               |       | 4,417,011                                 |       | 4,323,761 |   |
| Income  Before Provision for Income Taxes              |       | 136,934                                   |       | 1,456,479 |   |
| Provision  for Income Taxes:                           |       |                                      |       |   |   |
| Current                                                |       | 49,981                                    |       | 106,813 |   |
| Deferred                                               |       | —                                    |       | 424,802 |   |
| Total provision for income taxes                       |       | 49,981                                    |       | 531,615 |   |
| Net  Income                                            |       | $                                         | 86,953     |   | $ | 924,864 |   |
|                                                   |       |                                      |       |   |   |
| Basic  and Diluted Net Income per Common Share         |       | $                                         | 0.02       |   | $ | 0.21 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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

 

**CONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY**

 

**For the Three Months Ended July31, 2005**

**(Unaudited)**

 
| ** **                 | ** ** | **Common   Stock** | ** ** | **Additional   Paid-In   Capital** | ** ** | **Retained   Earnings** | ** ** | **Treasury   Stock, at   cost** | ** ** | **Total** | ** ** |
|----------------------------|------------|--------------------|------------|------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|
| Balance  at April 30, 2005 |       | $                  | 5,584      |                               | $          | 18,754,608              |       | $                               | 11,198,788 |      | $          | (4,467,312 | ) | $ | 25,491,668 |   |
| Net  income                |       | —             |       | —                             |       | 924,864                 |       | —                          |       | 924,864   |       |
| Balance at July 31,  2005  |       | $                  | 5,584      |                               | $          | 18,754,608              |       | $                               | 12,123,652 |      | $          | (4,467,312 | ) | $ | 26,416,532 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

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**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Three Months Ended July 31, 2004 and 2005**

**(Unaudited)**

** **
| ** **                                                                               | ** ** | **2004**    | ** ** | **2005**     | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|
|                                                                                     |       |        |       |         |       |
| Cash  Flows From Operating Activities:                                                   |       |        |       |         |       |
| Net income                                                                               |       | $           | 86,953     |         | $          | 924,864 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities — |       |        |       |         |       |
| Depreciation and amortization expense                                                    |       | 1,002,154   |       | 1,113,344    |       |
| Provision for credit losses                                                              |       | 2,442,105   |       | 1,651,411    |       |
| (Increase) decrease in:                                                                  |       |        |       |         |       |
| Accrued interest receivable                                                              |       | 113,251     |       | (585,058     | )          |
| Restricted cash                                                                          |       | 746,524     |       | (2,274,247   | )          |
| Deferred financing costs and other assets                                                |       | (153,978    | )          | (131,147     | )          |
| Funds held under reinsurance agreement                                                   |       | (195,168    | )          | (726,063     | )          |
| Current income tax receivable                                                            |       | —      |       | 5,233        |       |
| Interest rate derivative positions                                                       |       | (115,344    | )          | (56,144      | )          |
| Increase (decrease) in:                                                                  |       |        |       |         |       |
| Accounts payable and accrued liabilities                                                 |       | 138,430     |       | (47,156      | )          |
| Deferred income taxes payable                                                            |       | —      |       | 424,802      |       |
| Current income taxes payable                                                             |       | 22,822      |       | 83,201       |       |
| Net cash provided by operating activities                                                |       | 4,087,749   |       | 383,040      |       |
| Cash  Flows From Investing Activities:                                                   |       |        |       |         |       |
| Origination of Receivables Held for Investment                                           |       | (29,210,448 | )          | (81,479,948  | )          |
| Principal payments from Receivables Held for  Investment                                 |       | 24,158,794  |       | 27,762,372   |       |
| Principal payments from Receivables Acquired for  Investment                             |       | 198,158     |       | 99,210       |       |
| Payments received on Assets Held for Sale                                                |       | 1,651,565   |       | 1,521,165    |       |
| Sale (purchase) of furniture and equipment                                               |       | 125,097     |       | (173,251     | )          |
| Net cash used in investing activities                                                    |       | (3,076,834  | )          | (52,270,452  | )          |
| Cash  Flows From Financing Activities:                                                   |       |        |       |         |       |
| Proceeds from advances on—                                                          |       |        |       |         |       |
| Warehouse credit facilities                                                              |       | 32,703,706  |       | 121,217,801  |       |
| Term notes                                                                               |       | —      |       | 175,493,000  |       |
| Working capital facility                                                                 |       | —      |       | 1,276,493    |       |
| Principal payments made on—                                                         |       |        |       |         |       |
| Warehouse credit facilities                                                              |       | (13,739,434 | )          | (219,816,215 | )          |
| Term notes                                                                               |       | (21,751,667 | )          | (28,337,585  | )          |
| Working capital facility                                                                 |       | (1,600      | )          | —       |       |
| Net cash (used in) provided by financing activities                                      |       | (2,788,995  | )          | 49,833,494   |       |
| Decrease  in Cash and Short-Term Investments                                             |       | (1,778,080  | )          | (2,053,918   | )          |
| Cash  and Short-Term Investments at Beginning of Period                                  |       | 2,018,490   |       | 2,413,738    |       |
| Cash  and Short-Term Investments at End of Period                                        |       | $           | 240,410    |         | $          | 359,820 |   |
| Supplemental  Disclosures of Cash Flow Information:                                      |       |        |       |         |       |
| Cash paid during the period for—                                                    |       |        |       |         |       |
| Interest                                                                                 |       | $           | 1,543,921  |         | $          | 2,758,370 |   |
| Income taxes                                                                             |       | —      |       | 18,379       |       |

 

The accompanying notes are an integral part ofthese consolidated financial statements

 

6

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

 

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

##### **July 31, 2005**

 

**1.****              TheCompany**

 

*Organization.*  First Investors Financial Services Group,Inc. (First Investors) was established to serve as a holding company for FirstInvestors Financial Services, Inc. (FIFS) and FIFS’s wholly-owned subsidiaries,First Investors Insurance Company (FIIC), First Investors Auto ReceivablesCorporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors Servicing Corporation(FISC), formerly known as Auto Lenders Acceptance Corporation (ALAC), FIFSAcquisition Funding Corp. LLC, Farragut Financial Corporation, and FirstInvestors Auto Funding Corporation. First Investors, together with its wholly-and majority-owned subsidiaries, is hereinafter 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 July 31,2005, approximately 32% and 17% of receivables held for investment had beenoriginated in Texas and Georgia, respectively. The Company currently operates in28 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 of receivables,acquired an interest in certain trust certificates related to the assetsecuritizations and acquired certain servicing rights along with furniture,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 whereby asubsidiary of the Company was the general partner owning 70% of the partnershipinterests and First Union Investors, Inc. served as the limited partner andowned 30% of the partnership interests. On September 19, 2003, First Investors Financial Services, Inc.purchased the limited partnership interests previously held by First UnionInvestors, Inc.  The Partnership consistsprimarily of a portfolio of loans previously owned or securitized by FISC andcertain other financial assets including charged-off accounts owned by FISC.

 

OnDecember 24, 2002, the Company purchased 40% of common stock and an investmentin the junior mezzanine debt of First Auto Receivables Corporation (“FARC”).  FARC purchased an approximately $197.5million portfolio of installment loan receivables from a subsidiary of UnionAcceptance 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 July 31, 2005, FISC performs servicing and collection functions on amanaged receivables portfolio of approximately $460 million.

 

7

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

 

*Basis ofPresentation*.  Theconsolidated financial statements include the accounts of First Investors andits wholly-owned and majority-owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated. Investments in which theCompany exercises significant influence, but which it does not control(generally a 20% to 50% ownership interest), are accounted for under the equitymethod of accounting, except for variable interest entities for which theCompany is considered the primary beneficiary under Financial AccountingStandards Board (“FASB”) Interpretation No. 46, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*, asamended in December 2003 by Interpretation 46R. As of July 31, 2005, the Company does not have any entities under FIN 46as amended by Interpretation 46R.

 

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 July 31, 2005, and the results of its operations for the threemonths ended July 31, 2005 and 2004, and its cash flows for the three monthsended July 31, 2005 and 2004.

 

The consolidatedfinancial statements for the interim periods have been prepared pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations, although the Company believes that the disclosures are adequateto make the information not misleading. These financial statements should beread in conjunction with the audited consolidated financial statements includedin the Company’s 2005 Annual Report on Form 10-K filed July 29, 2005.

 

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

 

*ReceivablesAcquired for Investment*.  In connection with loans thatwere acquired in a portfolio purchase by the Partnership, the Company estimatesthe amount and timing of undiscounted expected future principal and interestcash flows. For certain purchased loans, the amount paid for a loan reflectsthe Company’s determination that it is probable the Company will be unable tocollect all amounts due according to the loan’s contractual terms. Accordingly,at acquisition, the Company recognizes the excess of the loan’s scheduledcontractual principal and contractual interest payments over its expected cashflows as an amount that should not be accreted. The remaining amount,representing the excess of the loan’s expected cash flows over the amount paid,is accreted into interest income over the remaining life of the loan.  As a result of the amortization of theoutstanding principal balance of the receivables portfolio, the majority of theremaining cash flows projected constitute default collections fromobligors.  Giventhe nature of the remaining cash flows of individual loans, the Companydetermined that the timing of collections on Receivables Acquired forInvestment was much more unpredictable than contractual cash flows from non-defaultedreceivables.  Therefore, under theguidance provided by Practice Bulletin 6*, Amortization ofDiscounts on Certain Acquired Loans*, Receivables Acquired forInvestment are accounted for under the cost-recovery method beginning September30, 2003.  Under the cost recoverymethod, cash proceeds from collections are applied to first reduce the Company’sbasis in the assets.  Cash collected inexcess of this cost basis is recognized as income when received.

 

*Other Income*.  Other Income consists of income received fromservicing activities, other finance charges and fees, income from investments,reinvestment revenue, income earned from the sale of GAP insurance and extendedservice contracts, and unrealized loss on interest rate derivative positions.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.

 

8

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Incomefrom the sale of GAP insurance and extended service contracts is recognizedwhen sold as the Company has no further obligation after the sale.  Unrealized loss on interest rate derivativesis recognized when incurred.

 

*Allowance for Credit Losses*.  The Company calculates theallowance for credit losses in accordance with SFAS No. 5*, Accountingfor Contingencies.*   SFAS No.114, *Accounting for Creditors for Impairment of a Loan*does not apply to loans currently held by the Company because they 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 reviewspast due loans and considers various factors including payment history, jobstatus and any events that may have occurred that prevent the customer frommaking a payment.  Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed.  Generally thisoccurs at 90 to 120 days after the loan becomes past due.   Upon repossession, the uncollectible portionof the loan and 100% of accrued interest is written off.  The fair value of the collateral is recordedas an Assets Held for Sale.  Fair valueis determined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile lessselling related expenses.  Aftercollection of all proceeds, the Company records an adjustment, positive ornegative, based on the difference between the fair value estimate and theproceeds received.  In the event thecollateral cannot be located or if the customer refuses to pay and is notsubject to bankruptcy court protection, the Company will write off the entirebalance of the loan once it reaches 180 days past due.  If the customer is subject to bankruptcycourt protection, the loan generally remains in bankruptcy status as long aspayments are being received from the trustee. If a payment is missed, the Company seeks to repossess the collateralwith approval of the court.  If thecustomer is dismissed from bankruptcy, the Company resumes collection efforts.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan on a date which is six months prior tothe reporting date, to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During the quarter endedApril 30, 2005, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  The allowance forcredit losses is based on estimates and qualitative evaluations.  Ultimate losses may vary from currentestimates. These estimates are reviewed periodically and as adjustments, eitherpositive or negative, become necessary, they are reported in earnings in theperiod they become known.

 

*Stock-Based Compensation*.  The Company has an employee stock option planand a non-employee director stock option plan, which are described more fullyin Note 9.  The Company has adopted thedisclosure provisions of SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123*.This pronouncement requires prominent disclosures in both annual and interimfinancial statements regarding the method of accounting for stock-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 

 

9

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underthe Company’s plan are granted with an exercise price equal to or greater thanthe fair market value on the date of the grant.

 

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

 
| ** **                                                                                                                                            | ** ** | **For the Three Months  Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| Net Income as reported                                                                                                                                |       | $                                        | 86,953     |   | $ | 924,864 |   |
| Deduct:  Total stock option plan compensation expense determined under fair value  based method for awards granted, modified or settled, net of taxes |       | (36,339                                  | )          | (46,248 | ) |
| Pro Forma Net Income                                                                                                                                  |       | $                                        | 50,614     |   | $ | 878,616 |   |
|                                                                                                                                                  |       |                                     |       |   |   |
| Basic and Diluted Net  Income per Common Share, as reported                                                                                           |       | $                                        | 0.02       |   | $ | 0.21 |   |
| Basic and Diluted Net  Income per Common Share, pro forma                                                                                             |       | $                                        | 0.01       |   | $ | 0.20 |   |

 

*Reclassifications*.Certain reclassifications have been made to the fiscal 2004 amounts to conformwith the fiscal 2005 presentation.

 

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

 

The receivables generallyhave terms between 48 and 72 months and are collateralized by the underlyingvehicles.  Net receivable balancesconsisted of the following at April 30, 2005 and July 31, 2005:

 
| ** **                                 | ** ** | **April 30,  2005** | ** **  | **July 31,  2005** | ** ** |
|--------------------------------------------|------------|---------------------|-------------|--------------------|------------|
| Receivables                                |       | $                   | 244,940,526 |               | $          | 292,825,928 |   |
| Unamortized  premium and deferred fees (1) |       | 6,285,004           |        | 8,355,393          |       |
| Allowance  for credit losses               |       | (2,248,599          | )           | (2,192,778         | )          |
| Net receivables                            |       | $                   | 248,976,931 |               | $          | 298,988,543 |   |

 

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

 

Activityin the allowance for credit losses for the periods ended July 31, 2004 and 2005was as follows:

 
| ** **                      | ** ** | **For the Three Months  Ended July 31,** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                 | ** ** | **2005** | ** ** |
| Balance,  beginning of period   |       | $                                        | 2,199,386  |   | $ | 2,248,599 |   |
| Provision  for credit losses    |       | 2,442,105                                |       | 1,651,411 |   |
| Charge-offs,  net of recoveries |       | (2,439,429                               | )          | (1,707,232 | ) |
| Balance,  end of period         |       | $                                        | 2,202,062  |   | $ | 2,192,778 |   |

 

**4.****           ReceivablesAcquired for Investment**

 

Receivables Acquired for Investment comprise loanspreviously originated by Auto Lenders Acceptance Corporation and other thirdparties.  Loans originated by AutoLenders Acceptance Corporation include a portfolio of warehouse loans and aportfolio of loans that were previously securitized.  The securitized loans were subsequentlyredeemed and funded through one of the Company’s credit facilities.  Receivables Acquired for 

 

10

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Investment previously originated by Auto LendersAcceptance Corporation were purchased at a discount relating to creditquality.  As a result of the amortizationof the outstanding principal balance of the receivables portfolio, the majorityof the remaining cash flows projected constitute default collections fromobligors.  Given the nature of theremaining cash flows of individual loans, the Company determined that thetiming of collections on Receivables Acquired for Investment was much moreunpredictable than contractual cash flows from non-defaulted receivables.  Therefore, under the guidance provided byPractice Bulletin 6*, Amortization ofDiscounts on Certain Acquired Loans*, Receivables Acquired forInvestment will be accounted for under the cost-recovery method beginningSeptember 30, 2003.  Under this method,cash proceeds from collections are applied to first reduce the Company’s basisin the assets.  Cash collected in excessof this cost basis is recognized as income when received. Receivables Acquiredfor Investment previously originated by Auto Lenders Acceptance Corporationwere $607,894 and $514,109 as of April 30, 2005 and July 31, 2005,respectively.

 

OnSeptember 30, 2003 the Company purchased $9.4 million of defaulted auto loanreceivables from an unrelated third party. The remaining balances of these loans of $33,329 and $27,904 areincluded in Receivables Acquired for Investment on the balance sheet as ofApril 30, 2005 and July 31, 2005 respectively, and are accounted for using thecost-recovery method.  The Company may,from time to time, 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 $140million in Term Notes secured by a discrete pool of receivables.  In May, 2005, the Company issued $175 millionin Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees and dealer fees was 2.8% and 4.0% for theperiods ended July 31, 2004 and 2005, respectively.

 

*WarehouseFacilities as of July 31, 2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**            | ** ** | **Borrowing  Rate At   July 31,   2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 37,626,450        |       | Commercial paper  rate plus .3%                                                                        |       | .25% of Unused  Facility |       | .35                                      | %          | 3.40 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 35,337,289        |       | 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                                |       | 3.98 | % |

 

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

 

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

 

FIRC - Inorder to obtain a lower cost of funding, the Company has agreed to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders are named as additionalinsureds under these policies. The coverages are obtained on each receivable atthe time it is purchased by the Company and the applicable premiums are prepaidfor the life of the receivable. Each receivable is covered by three separatecredit insurance policies, consisting of basic default insurance under astandard auto loan protection policy (known as “ALPI” insurance) together withcertain supplemental coverages relating to physical damage and other risks.Solely at its expense, the Company carries these coverages and neither thevehicle purchasers nor the dealers are charged for the coverages and they areusually unaware of their existence. The Company’s ALPI insurance policy iswritten by National Union Fire Insurance Company of Pittsburgh (“National Union”),which is a wholly-owned subsidiary of American International Group.

 

Thepremiums that the Company paid during the three months ended July 31, 2005 forits three credit enhancement insurance coverages, of which the largestcomponent is basic ALPI insurance, represented approximately 2.0% of theprincipal amount of the receivables originated during the three months endedJuly 31, 2005. Aggregate premiums paid for ALPI coverage alone during the threemonths ended July 31, 2004 and 2005 were $714,470 and $1,205,747 respectively,and accounted for 2.6% and 1.5% of the aggregate principal balance of thereceivables originated during such respective periods.

 

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

 

Theresult of the foregoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of July 31, 2005, the InsuranceSubsidiary had capital and surplus of $2,744,149 and unencumbered cash reservesof $1,463,193 in addition to the $3,336,450 trust account.

 

TheALPI coverage as well as the Insurance Subsidiary’s liability under theReinsurance Agreement, remains in effect for each receivable that is pledged ascollateral under the warehouse credit facility. Once receivables aretransferred from FIRC to FIARC and financed under the commercial paperfacility, ALPI coverage and the Insurance Subsidiary’s liability under theReinsurance Agreement is cancelled with respect to the transferred receivables.Any unearned premium associated with the transferred receivables is returned tothe Company. The Company believes the losses its Insurance Subsidiary will berequired to indemnify will be less than the premiums ceded to it. However,there can be no assurance that losses will not exceed the premiums ceded andthe capital and surplus of the Insurance Subsidiary.

 

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

 

*WarehouseFacilities – Agents and Expirations*

* *
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if  not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|-------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15, 2006 |       | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility.                                                     |
| FIRC         |       | Wachovia  |       | February 15, 2006 |       | The  loan would 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 15, 2006.  On June 15, 2004, the FIRC facility wasextended to $65 million, and reverted back to $50 million on September 13, 2004.  As of July 31, 2004 and 2005, there was $52.5and $35.3 million, 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 February 15, 2006.  As of July31, 2004 and 2005, there was $9.2 and $37.6 million, respectively, outstanding.

 

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

 

Thefollowing table contains pertinent information on the Term Note as of July 31,2005.

 
| **Term  Notes** | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** **  | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|-------------|-------------------|-------------------|-----------------|------------|---------------------|------------|
| 2003-A          |       | November 11, 2003 |       | $                     | 139,661,000 |              | April 20, 2011    |            | $          | 60,377,975          |       | 2.58 | % |
| 2005-A Class 1  |       | May 5, 2005       |       | $                     | 69,000,000  |              | December 17, 2007 |            | $          | 50,334,951          |       | 3.57 | % |
| 2005-A Class 2  |       | May 5, 2005       |       | $                     | 106,493,000 |              | July 16, 2012     |            | $          | 106,493,000         |       | 4.23 | % |

 

Creditenhancement on the Term Note 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   |

 

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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,secure the 2002-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2002 Auto Trust also issued$4,819,000 in Class B Notes that were retained by the Company and pledged tosecure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2002-A TermNote issuance, and (v) fund a cash reserve account of 2% or $2,712,862 of theinitial receivables pledged which will serve as a portion of the creditenhancement for the transaction. The Class A Term Notes bear interest at 3.46%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 97% of the outstanding balance of the underlying receivablespool. The final maturity of the 2002-A Term Notes is December 15, 2008.  The Class B Notes do not bear interest butrequire principal reductions sufficient to reduce the balance of the Class BNotes to 3% of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  On February 28, 2005, the Company notifiedthe note holders of the 2002-A securitization of its intent to exercise itsprepayment call provision.  This callprovision was completed effective March 15, 2005, and therefore there was nooutstanding balance as of July 31, 2005 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 additionto the issuance of the Class A Notes, the 2003 Auto Trust also issued$5,065,891 in Class B Notes that were retained by the Company and pledged tosecure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,656,629 were used to (i) fund a $30,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2003-A termnote issuance, and (v) fund an initial cash reserve account of 0.5% or $573,635of the initial receivables pledged.  TheClass A Term Notes bear interest at 2.58% and requires monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 96.1%of the outstanding balance of the underlying receivables pool. The finalmaturity of the 2003-A Term Notes is April 20, 2011.  The Class B Notes do not bear interest butrequire principal reductions sufficient to reduce the balance of the Class BNotes to 3.9% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2005, and July 31, 2005, theoutstanding principal balances on the 2003-A term notes were $70,050,511 and $60,377,975,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 the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued $5,427,619 in Class B Notesthat were retained by the Company and pledged to secure the Working CapitalFacility as further described below. Proceeds from the issuance, which totaled $175,487,827 were used to (i)fund a $29,999,898 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 2005-A Term Note issuance,and (v) fund an initial cash reserve account of 1% or $1,509,207 of the initialreceivables pledged.  The Class A-1 andClass A-2 Term Notes bear interest at 3.57% 

 

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and4.23%, respectively, and requires monthly principal reductions sufficient toreduce the balance of the Class A Term Notes to 95.75% of the outstandingbalance of the underlying receivables pool. The final maturity of the Class A-1and Class A-2 Term Notes is December 17, 2007 and July 16, 2012,respectively.  The Class B Notes do notbear interest but require principal reductions sufficient to reduce the balanceof the Class B Notes to 4.25% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.  As of July 31, 2005, the outstandingprincipal balances on the 2005-A Term notes were $156,827,951.

 

*Working Capital Facility*.  On December 6, 2001, theCompany entered into an agreement with Wachovia Securities to refinance the$11,175,000 outstanding balance of the working capital term loan previouslyprovided by Bank of America and Wachovia and increase the size of the facilityto $13.5 million.  The renewal facilitywas provided to a special-purpose, wholly-owned subsidiary of the Company,First Investors Residual Funding LP.  The facility originally consisted of a $9 million revolving tranche anda $4.5 million term loan tranche which amortizes monthly.  The term loan tranche of this working capitalfacility was evidenced by the Class B Notes issued in conjunction with the 2002Auto Trust financing. The remaining $9 million of the $13.5 million workingcapital facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities, theacquisition facility and the existing and future term note facilities.  During 2002, the facility was modified toincrease the interest rate from LIBOR plus a 1.5% program fee to LIBOR plus a2.25% program fee.  The commitment feepaid on the total available amount of the facility was maintained at 1.5%.  In addition, the monthly principalamortization under the term loan tranche was increased to the greater of$250,000 or the principal distributions made under the Class B Notes issuedunder the 2002 Auto Trust financing.  OnDecember 4, 2003, the Working Capital Facility was extended to December 2,2004.  Under the terms of the extension,the monthly amortization requirement was replaced with the requirement thatoutstanding balances under the facility could not exceed the lesser of aborrowing base or the $9 million facility limit.  On October 26, 2004, the Working CapitalFacility was extended until October 10, 2005, increasing the commitment amountto $13.5 million.  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%. On August 15, 2005, the Working Capital Facility was extended untilFebruary 15, 2006, increasing the commitment amount to $23.5 million.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  As of April 30,2005 and July 31, 2005, there was $10,500,000 and $11,776,493, respectively,outstanding under this facility.

 

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

 

*Related Party Loans. *On December 3, 2001 the Company entered intoan agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5million.  On December 6, 2004, theoriginal $2.5 million shareholder loan was replaced with a $2.5 million loancontaining identical terms and conditions between the Company and a limitedpartnership that is affiliated with a current shareholder and member of theBoard 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 the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2.5 millionoutstanding under these facilities as of April 30, 2005 and July 31, 2005,respectively.  For the three months endedJuly 31, 2004 and July 31, 2005, the Company recorded interest expense underthese facilities of $0 and $63,014.

 

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*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of the FIRCcredit facility, the Term Notes and the working capital facility or thetermination of the commercial paper facilities. The Company was not in defaultwith respect to any financial covenants governing these financing arrangementsat July 31, 2005.

 

*Interest Rate Management*.  The Company’s warehouse creditfacilities and working capital facilities bear interest at floating interestrates which are reset on a short-term basis while the secured Term Notes bearinterest at a fixed rate of interest. The Company’s receivables bear interestat fixed rates that do not generally vary with a change in market interestrates. Since a primary contributor to the Company’s profitability is itsability to manage its net interest spread, the Company seeks to maximize thenet interest spread while minimizing exposure to changes in interest rates. Inconnection with managing the net interest spread, the Company may periodicallyenter into interest rate swaps or caps to minimize the effects of marketinterest rate fluctuations on the net interest spread. To the extent that theCompany has outstanding floating rate borrowings or has elected to convert aportion of its borrowings from fixed rates to floating rates, the Company willbe exposed to fluctuations in short-term interest rates.

 

On July 18, 2005, as a requirement of the FIARCcommercial paper facility, the Company entered into an interest rate captransaction, with a strike rate of 6%. The aggregate initial notional amount of the cap was $18,803,810 whichamortizes over six years.  The Companypaid $58,826 in premium to purchase this cap. The interest rate cap was not designated as a hedge, and accordingly,changes in the fair value of the interest rate cap is recorded as an unrealizedloss and is reflected in net income.  Duringthe three months ended July 31, 2005, the Company recorded an unrealized lossof $2,682 that is included as a separate caption of other income.

 

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

 

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

 

Earnings per share amounts are based on the weightedaverage number of shares of common stock and potential dilutive common sharesoutstanding during the period. The weighted average number of shares used tocompute basic and diluted earnings per share for the three months ended July31, 2004 and 2005, are as follows:

 
| ** **                                                          | ** ** | **For the Three Months Ended   July 31,** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
| Weighted  average shares:                                           |       |                                      |       |   |   |
| Weighted average shares outstanding for basic earnings  per share   |       | 5,000,269                                 |       | 4,411,693 |   |
| Effect of dilutive stock options and warrants                       |       | 147,989                                   |       | 81,896 |   |
| Weighted average shares outstanding for diluted  earnings per share |       | 5,148,258                                 |       | 4,493,589 |   |

 

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For the three monthsended July 31, 2004 and 2005, the Company had 93,500 and 437,000 respectively,of stock options and stock warrants which were not included in the computationof diluted earnings per share because to do so would have been antidilutive forthe period presented.

 

**7.****              Investmentin 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.  FARCpurchased a $197.5 million automobile loan portfolio from UAFC-2 Corporation, asubsidiary of Union Acceptance Corporation, with proceeds from $186 million insenior bridge debt, $8.9 million of senior mezzanine debt, $1.8 million ofjunior mezzanine debt and $1.2 million of equity.  The bridge debt interest rate is LIBOR plus1%, the senior mezzanine interest rate is 22.5% and the junior mezzanineinterest rate is 25%.

 

The Company accounts forits ownership investment in FARC using the equity method in accordance with APBOpinion 18.  In addition to the equityand debt investments, the Company performs loan servicing and collectionactivities on the portfolio.  For thethree months ended July 31, 2004 and 2005, the Company recognized $263,087 and$161,464 respectively of servicing revenue, $27,473 and $27,473 of interestincome respectively, and $193,706 and $125,958 respectively of equity in theincome from investment in FARC.  For thethree months ended July 31, 2005, the equity investment in FARC of $968,327 andjunior mezzanine debt of $716,675 are included in Deferred Financing Costs andOther Assets on the balance sheet.

 

**8.****     NewAccounting Pronouncements**

 

In December 2003, theAmerican Institute of Certified Public Accountants issued Statement of Position(SOP) 03-3,*Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer*. SOP 03-3 addresses the accounting for loansacquired through a transfer (including a business combination) that havedifferences between their expected cash flows and their contractual cash flows,due in part to credit quality. The SOP requires that the excess of the expectedcash flows at acquisition to be collected over the acquirer’s initialinvestment be recognized on a level-yield basis over the loan’s life. Anyfuture excess of contractual cash flows over the original expected cash flowsis recognized as a future yield adjustment. Future decreases in actual cashflows over the original expected cash flows are recognized as impairment andexpensed immediately. Valuation allowances can not be created or “carried over”in the initial accounting for loans acquired that are within the scope of theSOP. SOP 03-3 is effective for loans acquired in fiscal years beginning afterDecember 15, 2004.  The Company does notanticipate SOP 03-3 will have a material effect on its financial statements.

 

In December 2004, the FASBissued SFAS No. 123(R), *Share-Based Payment - arevision 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.

 

SFAS No. 123(R) is effectiveas of the beginning of the fiscal year that begins after June 15, 2005. SFAS123(R) applies to all awards granted after the required effective date and tosuch awards modified, repurchased, or cancelled after that date. The cumulativeeffect of initially applying SFAS No. 123(R), if any, is recognized as of therequired effective date. As of the required effective date, all public entitiesthat used the fair-value-based method for either recognition or disclosureunder SFAS No. 123 will apply SFAS No. 123(R) using a modified version of theprospective application. Under that transition method, compensation cost isrecognized on or after the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS No.123 for either recognition or pro forma disclosures. For periods before therequired effective date, those entities may elect to apply a modified versionof retrospective application under which financial statements for prior periodsare adjusted on a basis consistent with the pro forma disclosures required forthose periods by SFAS No. 123. The Company has

 

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not yet completed its evaluation of the impact that SFAS No. 123(R)will have on its financial position and results of operations.

 

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

 

*PreferredStock*.  The Company hasauthorized 1,000,000 shares of preferred stock with a $1.00 par value.  As of July 31, 2005, no shares have beenissued.

 

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employees forthe purchase of up to 300,000 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. In no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan. As of April 30, 2005 and July 31, 2005, a total of 360,500 and334,500, respectively, options had been issued and remained outstanding. Thisplan expired on June 27, 2005.

 

OnSeptember 8, 2005, the shareholders approved the Company’s 2005 Employee StockOption Plan (the 2005 Plan).  The 2005Plan is administered by the Compensation Committee of the Board of Directorsand provides that options may be granted to officers and other key employeesfor the purchase of up to 200,000 shares of common stock, subject to adjustmentin the event of certain changes in capitalization. Options may be grantedeither as incentive stock options (which are intended to qualify for certainfavorable tax treatment) or as non-qualified stock options.  The Compensation Committee selects thepersons to receive options and determines the exercise price, the duration, anyconditions on exercise and other terms of the options. The exercise price maynot be less than 100% of the fair market value per share of common stock on thedate of grant, and in no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan.  On September 8, 2005,102,500 options were issued under the 2005 Plan, leaving 97,500 optionsremaining.

 

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.  The Board of Directors administers the planand the options will not be qualified as incentive stock options.  A total of 500,000 shares of common stock areavailable for issuance.  Option typeswill be automatic and discretionary. Automatic grants of 20,000 shares for each non-employee director, or100,000 shares total, were approved in September 2002.  Subsequent automatic grants of an option topurchase 20,000 shares shall be made to each non-employee director on July 15theach year, beginning July 15, 2003. The plan also gives the Board of Directorsdiscretionary authority to provide for additional option grants if the Company’sannual financial performance exceeds parameters established by the Board.  No discretionary grants have beenawarded.  As of April 30, 2005 and July31, 2005, a total of 390,000 and 490,000, respectively, options had been issuedunder the plan, leaving a remaining 110,000 and 10,000, respectively, availablefor issuance.  In addition to the optionsgranted above, there were an additional 20,000 options granted to a director in1995, before the adoption of the Non-Employee Stock Option Plan.

 

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

 

**Critical Accounting Policies**

 

Financial Reporting Release No. 60, which was issuedby the Securities and Exchange Commission (“SEC”), requires all registrants todiscuss critical accounting policies or methods used in the preparation offinancial statements.  Note 2 to theconsolidated financial statements includes a summary of the significant accountingpolicies and methods used in the preparation of the Company’s consolidatedfinancial statements.

 

The preparation of financial statements includes theuse of estimates and assumptions that affect the reported amounts of assets andliabilities and the reported amounts of net revenues and expenses during thereporting periods. The following is a review of the more significantassumptions and estimates, as well as the accounting policies and methods usedin the preparation of the consolidated financial statements.

 

*ReceivablesHeld 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 monthlyusing the effective interest method. When a receivable becomes 90 days past due, the income accrual issuspended until the payments become current. When a loan is charged off or thecollateral is repossessed, the remaining income accrual is written off.

 

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

 

*Advertising Costs. *The Company expenses advertising costs asincurred.

 

*Allowancefor Credit Losses*.  The Company calculates the allowance forcredit losses in accordance with SFAS No. 5*, Accounting forContingencies.*  SFAS No. 114, *Accounting for Creditors for Impairment of a Loan* does notapply to loans currently held by the Company because they comprise a largegroup of smaller balance homogenous loans that are evaluated collectively forimpairment.

 

The Company initiatesefforts to make customer contact as early as when the customer is one day pastdue and become more aggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determined thatthe loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 90 to 120 days afterthe loan becomes past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as an Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

 

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyis a six-month migration analysis whereby the Company compares the aging statusof each loan on a date which is six months prior to the reporting date, to theaging loan status as of the

 

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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 of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During quarter ended April30, 2005, the Company elected to increase its allowance for loan losses againstloans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  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 for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

 

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

 

**Managed Receivables**

 

The Company’s managedreceivables are (dollars in thousands):

 
| ** **                                                                               | ** ** | **As of or for the  Three Months Ended  July 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                                           | ** ** | **2005** | ** ** |
| Receivables Held for  Investment:                                                        |       |                                               |       |   |   |
| Number                                                                                   |       | 16,226                                             |       | 19,085 |   |
| Principal balance                                                                        |       | $                                                  | 207,742    |   | $ | 292,826 |   |
| Average principal balance of receivables outstanding  during the three-month period |       | $                                                  | 206,950    |   | $ | 268,242 |   |
| Receivables Acquired for  Investment:                                                    |       |                                               |       |   |   |
| Number                                                                                   |       | 654                                                |       | 654 |   |
| Principal balance                                                                        |       | $                                                  | 992        |   | $ | 542 |   |
| Other Servicing:                                                                         |       |                                               |       |   |   |
| Number                                                                                   |       | 17,363                                             |       | 12,898 |   |
| Principal balance                                                                        |       | $                                                  | 257,164    |   | $ | 167,110 |   |
| Total Managed Receivables  Portfolio:                                                    |       |                                               |       |   |   |
| Number                                                                                   |       | 34,243                                             |       | 32,637 |   |
| Principal balance                                                                        |       | $                                                  | 465,898    |   | $ | 460,478 |   |
| Average principal balance of receivables outstanding  during the three-month period |       | $                                                  | 478,580    |   | $ | 449,239 |   |

 

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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  July 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| Receivables Held for  Investment:                            |       |                             |       |   |   |
| Effective yield on Receivables Held  for Investment (1) |       | 13.4                             | %          | 12.7 | % |
| Average cost of debt (2)                                     |       | 3.4                              | %          | 4.4 | % |
| Net interest spread (3)                                      |       | 10.0                             | %          | 8.3 | % |
| Net interest margin (4)                                      |       | 10.0                             | %          | 8.3 | % |
|                                                              |            |                                  |            |  |  |  |

 

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(1)           Represents interest income as a percentage ofaverage Receivables Held for Investment outstanding.

 

(2)           Represents interest expense as a percentage ofaverage debt outstanding.

 

(3)           Represents yield on Receivables Held forInvestment less average cost of debt.

 

(4)           Represents net interest income as a percentage ofaverage 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 toacquire the receivables. Net interest income was $5.5 million for the threemonths ended July 31, 2005, an increase of 7% when compared to amounts reportedfor the three months ended July 31, 2004.

 

The amount of net interest income is the result of therelationship between the average principal amount of receivables held andaverage rate earned thereon and the average principal amount of debt incurredto finance such receivables and the average rates paid thereon. Changes in theprincipal amount and rate components associated with the receivables and debtcan be segregated 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  July 31, 2004 to 2005** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **Increase (Decrease)  Due to  Change in**    | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Average  Principal  Amount**                | ** ** | **Average  Rate** | ** ** | **Total  Net Increase  (Decrease)** | ** ** |
|                              |       |                                          |       |   |   |   |   |
| Receivables Held for  Investment: |       |                                          |       |   |   |   |   |
| Interest income                   |       | $                                             | 2,059      |   | $ | (513 | ) | $ | 1,546 |   |
| Interest expense                  |       | 539                                           |       | 645 |   | $ | 1,184 |   |
| Net interest income               |       | $                                             | 1,520      |   | $ | (1,158 | ) | $ | 362 |   |

 

**Results of Operations**

 

*Three Months Ended July 31, 2005and 2004 (dollars in thousands)*

 

*KeyFactors.*The critical factors affecting the Company’sprofitability during any period are (i)loan origination volume and the corresponding growth in Receivables Held ForInvestment; (2) the level of net interest spread, which is defined as thedifference between the effective yield on receivables held for investment andthe cost of funds under the Company’s credit facilities and securitizationsutilized to finance these receivables; (3) the level of provision for creditlosses; (4) the amount of income derived from other activities; and (5) theability of the Company to control operating expenses relative to the totalamount of the managed portfolio.

 

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*Executive Summary. *Netincome for the three months ended July 31, 2005 was $925 compared to $87 foryear the three months ended July 31, 2004. Basic and diluted earnings per common share were $0.21 and $0.02 for thethree months ended July 31, 2005 and July 31, 2004, respectively.  The increase in net income for the threemonths ended July 31, 2005 compared to July 31, 2004 is due to several factorsincluding (i) an increase in the average balance of Receivables Held forInvestment, (ii) an increase in insurance product sales, (iii) an increase inother interest income due to higher average cash balances, (iv) marketingrevenue that was not present in 2004 and (v) a decrease in the unrealized losson interest rate derivatives for the three months ended July 31, 2005 ascompared to July 31, 2004.  This ispartially offset by (i) a decline in loan servicing income, (ii) a decline in netinterest spread and (iii) the termination of an agreement to originate loansfor a third party.

 

*InterestIncome*. Interest incomefor the three months ended July 31, 2005 increased to $8,498 compared to $6,952for the three months ended July 31, 2004.

 

The level of interest income, aprimary driver of financial results, is impacted by the average outstandingbalance of the portfolio of Receivables Held for Investment, the weightedaverage interest rate on receivables originated by the Company, the mix ofdirect and indirect lending activities and the level of early prepayments andcharge-offs.  Interest income onReceivables Held for Investment increased****22% for thethree months ended July 31, 2005 compared to the three months ended July 31, 2004.  The increase in interest income for the threemonths ended July 31, 2005 is primarily due to a 30% increase in the averageportfolio outstanding for the period ended July 31, 2005 compared the periodended July 31, 2004 partially offset by a decrease of 77 basis points in theweighted average interest rate on the performing portfolio.

 

*InterestExpense*. Interest expensefor the three months ended July 31, 2005 increased to $2,960 compared to $1,777for the three months ended July 31, 2004. Interest expense on Receivables Heldfor Investment increased 67% for the three months ended July 31, 2005.  The increase in interest expense is primarilydue to (i) the average debt outstanding, which included a $30 millionprefunding account related to the 2005-A securitization, increased $62,521 or 30%for the three months ended July 31, 2005, compared to the three months endedJuly 31, 2004 as a result of a 30% increase in the average portfolio ofReceivables Held for Investment, (ii) the Company’s decision to lock ininterest rates on $175 million of debt in May 2005 through the issuance of TermNotes to minimize the risk of future interest rate increases as longer termfixed rate Term Notes typically carry higher interest rates than shorter termfloating rate debt and (iii) an increase in overall market interest rates as aresult of the current economic environment and market rate increases adopted bythe Federal Reserve System.  The combinedeffects of the Company’s decision to lock in interest on $175 million of debtand the increase in overall market interest rates, resulted in a 96 basis pointincrease in the average interest rate for the three months ended July 31, 2005,as compared to the three months ended July 31, 2004.

 

*Provision for Credit Losses*. The provision for credit losses for the three months ended July 31,2005 decreased to $1,651 as compared to $2,442 for the three months ended July31, 2004. The decrease in provision for credit losses is primarily due to (i) improvingeconomic trends (ii) a change in the portfolio mix to loans originated directlyto the customer, which typically have a lower loss frequency and (iii) theincrease in recovery rates on repossessions and general defaults.

 

Net charge-offs for the three months ended July 31, 2005decreased to $1,707 compared to $2,439 for the three months ended July 31, 2004.  The decrease in net charge-offs for the threemonths ended July 31, 2005 is primarily due to (i) a decrease in loss frequencyand severity from repossessions and (iii) an increase in recoveries fromdefaulted loans.

 

The level of provision forcredit losses is a key driver of overall financial performance and should bepositively impacted by improvement in general economic conditions, improvementsin wholesale used car prices and lower delinquency rates and net lossesprojected for the portfolio of Receivables Held for Investment.  Any additional economic deterioration ordecline in wholesale used car prices will negatively impact provision expenseto the extent that these events cause an increase in delinquency rates,bankruptcy rates or net charge-off rates in the portfolio of Receivables Heldfor Investment.

 

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200 million of installmentloan receivables.  On March 19, 2003, theCompany

 

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enteredinto an agreement to provide loan servicing and collection activities on $276million of installment loan receivables for unrelated third parties.  Servicing revenue decreased to $578****for the three months ended July 31, 2005 compared to $970for three months ended July 31, 2004. The decrease in servicing revenue for the three months ended July 31,2005 is due to the liquidation of serviced receivables during the quarter.  Revenue derived from servicing activitieswill increase or decrease in direct proportion to the average outstandingbalance of serviced receivables.

 

*Late and Loan Related Fees*.  Late and loan related feesincreased to $508 for the three months ended July 31, 2005, compared to $399for the three months ended July 31, 2004. The increase is attributable to (i)increased collections and payments allocated to late fees and other income as aresult of changes made to the methodology under which the Company allocatedcash received to interest, uncollected fees and principal and (ii) increasedassessment and collection of fees due to a 30% increase in the averageportfolio of Receivables Held for Investment. Income derived from late fees andcollection activities are recognized when received, and therefore can bepotentially volatile from period to period based on overall cash collection,seasonality, delinquency rates and other factors.  Late and loan related fees are driven by a number of factors includingoverall delinquency rates, the percentage of customers utilizing electronicpayment products and growth rates in the Company’s direct lending business.

 

*Insurance Products. *Insurance Products revenue increased to $291 for the three months endedJuly 31, 2005, compared to $141 for the three months ended July 31, 2004.  The increase is attributable to (i) anincrease of 30% in the average portfolio ofReceivables Held for Investment and (ii) increased penetration rates oninsurance 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.

 

*Other Interest Income.*  Other interest income increasedto $250 for the three months ended July 31, 2005, compared to $74 for the threemonths ended July 31, 2004.  The increaseis attributable to (i) an increase in the average cash on hand balance due toincreased collections as a result of a 30% increase in the average portfolio ofReceivables Held for Investment and (ii) an increase in overall market interestrates as a result of the current economic environment and market rate increasesadopted by the Federal Reserve System.

 

*UnrealizedLoss on Interest Rate Derivative Positions*.  In conjunction with the adoption of SFAS 133,the Company is required to report the fair value of interest rate derivativepositions.  An unrealized loss of $3 forthe three months ended July 31, 2005, compared to an unrealized loss of $68 forthe three months ended July 31, 2004 are principally due to changes in the fairvalue of the Company’s derivative position due to a significant decrease in thevolume of derivative positions between the periods.

 

*Salariesand Benefit Expenses*.Salaries and benefit expense increased to $2,541 for the three months ended July31, 2005, compared to $2,063 for the three months ended July 31, 2004.  The increase is primarily due to an increasein staff due to a 179% increase in loan originations.  This is partially offset by a decrease instaff associated with a decrease in the Company’s serviced portfolio.

 

*OperatingExpenses.* Operating Expenses decreased to $603 for thethree months ended July 31, 2005, compared to $1,319 for the three months endedJuly 31, 2004.  Expenses characterized asoperating expenses are generally variable in nature and are typically dependenton a number of factors including origination volume, the outstanding balance ofthe managed portfolio, credit quality and operating efficiency levels.  The decrease was primarily due to an increasein the dollar amount of expenses which the Company was able to capitalize asdeferred acquisition costs.  Althoughexpenses increased during the period, the Company was able to capitalize ahigher level of these expenses due to the significant increase in originationvolume and increased efficiency in its loan origination functions.  The decline in operating expenses was alsopositively impacted by lower collection-related costs as a result of improvingcredit quality.

 

*General andAdministrative.* Generaland administrative expenses decreased to $917 for the three months ended July31, 2005, compared to $923 for the three months ended July 31, 2004.  General and administrative costs tend to bemore fixed in nature and not as dependent on the overall level of managedreceivables.

 

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*OtherInterest Expense*. Other interest expenseincreased to $261 for the three months ended July 31, 2005, compared to $112for the three months ended July 31, 2004. The increase was primarily due to (i)a 12% increase in the average outstanding borrowings on the Company’s workingcapital line and (ii) the related party note having an average outstandingbalance of $2,500 for the three months ended July 31, 2005, as compared to anaverage outstanding balance of $0 for the three months ended July 31, 2004.

 

**PortfolioCharacteristics**

 

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

 

*Customer Profile*.  The Company’s primary goal in creditevaluation is to make loans to customers having stable personal situations,predictable incomes and the ability and inclination to perform theirobligations in a timely manner. Many of the Company’s customers are persons whohave experienced credit difficulties in the past by reason of illness, divorce,job loss, reduction in pay or other adversities, but who appear to the Companyto have the capability and commitment to meet their obligations. Through itscredit evaluation process, the Company seeks to distinguish these persons fromthose applicants who are chronically poor credit risks.

 

**CreditEvaluation**

 

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which(i) the creditworthiness of the borrower and the terms of the proposedtransaction are evaluated and either approved, declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews areconducted by the Company. During the course of this process, the Company’scredit verification and funding personnel coordinate closely with the financeand insurance departments of the dealers or with individuals to whom theCompany 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 eachreceivable by the Company, the Company performs an individual audit evaluationto verify the details of the credit application, and to confirm that thematerial terms of the sale conform to the purchaser’s understanding of thetransaction.  In the majority ofcircumstances for dealer indirect loans, we conduct a personal telephonicinterview with each prospective obligor. For direct to consumer loans, we verify all information during ournormal underwriting procedures.  TheCompany will originate a receivable only after receipt and review of asatisfactory audit report.

 

# **Liquidity and CapitalResources**

 

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

 

The Company’s most significant cash flow requirementis for the origination of receivables. The Company originated $81.5 million ofreceivables to be held for investment for the three months ended July 31, 2005compared to $29.2 million for the three months ended July 31, 2004.

 

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

 

The Company’s most significant source of cash flow isthe principal and interest payments received from its receivables portfolios.The Company received such payments in the amount of $35.7****millionduring the three months ended July 31, 2005, and $31.2 million during the threemonths ended July 31, 2004.  Such cashflow funds were used to repay amounts borrowed under the Company’s creditfacilities and other holding costs, primarily interest expense, and servicingand custodial fees.  During the threemonths ended July 31, 2005, the Company required net cash of $45.8 million ascompared to net proceeds of $2.0 million for the three months ended July 31,2004, as the receivables originated exceeded portfolio collections in 2005 ascompared to collections exceeding originations in 2004.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of July 31, 2005, the Company had $127 million of available capacityin the FIRC and FIARC credit facilities to fund future growth.

 

In addition to the cash flow generated from the principal and interestcollections on its receivables portfolio, the Company collects servicing feesfunded from each of the credit facilities. Servicing fees range from 1.4% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees are received after month end, but relate tothe prior month activity.  Thus uponfiling of the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations. At July 31, 2005 and 2004, the Company’s unencumbered cash was $359,820and $240,410 respectively.  The increasein available cash is primarily due to a decrease in operating expenses coupledwith an increase in revenues due to a 30% increase in the average portfolio ofReceivables Held for Investment. Management believes the unencumbered cash and cash inflows and amountsavailable under the working capital facility are adequate to fund cash requirementsfor 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’s operationsif substitute financing on comparable terms was not obtained.

 

*Financing Arrangements.* The Company finances its loan originationthrough two warehouse credit facilities. The Company’s credit facilitiesprovide for one-year terms and have been renewed annually. Management of theCompany believes that the credit facilities will continue to be renewed orextended or that it would be able to secure alternate financing on satisfactoryterms; however, there can be no assurance that it will be able to do so. InJanuary, 2002 the Company issued $159 million in asset-backed notes (“TermNotes”) secured by discrete pools of receivables. These notes were subsequentlycalled and redeemed in March, 2005.  InNovember, 2003, the Company issued $140 million in Term Notes secured by adiscrete pool of receivables.  In May,2005, the Company issued $175 million in Term Notes secured by a discrete poolof receivables.  Substantially 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 2.8% and4.0% for the periods ended July 31, 2004 and 2005, respectively.

 

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*Warehouse Facilities as of July31, 2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  July 31,  2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 37,626,450        |       | Commercial paper rate  plus .3%                                                                       |       | .25% of Unused Facility |       | .35                                    | %          | 3.40 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 35,337,289        |       | 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                              |       | 3.98 | % |

 

*Warehouse Facilities – CreditEnhancement as of July 31, 2005*

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

 

FIRC - In order to obtain a lower cost offunding, the Company has agreed to maintain credit enhancement insurancecovering the receivables pledged as collateral under the FIRC credit facility.The facility lenders are named as additional insureds under these policies. Thecoverages are obtained on each receivable at the time it is purchased by theCompany and the applicable premiums are prepaid for the life of the receivable.Each receivable is covered by three separate credit insurance policies,consisting of basic default insurance under a standard auto loan protectionpolicy (known as “ALPI” insurance) together with certain supplemental coveragesrelating to physical damage and other risks. Solely at its expense, the Companycarries these coverages and neither the vehicle purchasers nor the dealers arecharged for the coverages and they are usually unaware of their existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

 

The premiums that the Companypaid during the three months ended July 31, 2005 for its three creditenhancement insurance coverages, of which the largest component is basic ALPIinsurance, represented approximately 2.0% of the principal amount of thereceivables originated during the three months ended July 31, 2005. Aggregatepremiums paid for ALPI coverage alone during the three months ended July 31,2004 and 2005 were $714,470 and $1,205,747 respectively, and accounted for 2.6%and 1.5% of the aggregate principal balance of the receivables originatedduring such respective periods.

 

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

 

The result of the foregoingreinsurance structure is that National Union, as the “fronting” insurer underthe captive arrangement, is unconditionally obligated to the Company’s credit facilitylenders for all losses covered by the ALPI policy, and the Company, through itsInsurance Subsidiary, is obligated to indemnify National Union for

 

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all such losses. As of July 31, 2005, theInsurance Subsidiary had capital and surplus of $2,744,149 and unencumberedcash reserves of $1,463,193 in addition to the $3,336,450 trust account.

 

The ALPI coverage as well asthe Insurance Subsidiary’s liability under the Reinsurance Agreement, remainsin effect for each receivable that is pledged as collateral under the warehousecredit facility. Once receivables are transferred from FIRC to FIARC andfinanced under the commercial paper facility, ALPI coverage and the InsuranceSubsidiary’s liability under the Reinsurance Agreement is cancelled withrespect to the transferred receivables. Any unearned premium associated withthe transferred receivables is returned to the Company. The Company believesthe losses its Insurance Subsidiary will be required to indemnify will be lessthan the premiums ceded to it. However, there can be no assurance that losseswill not exceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

 

FIARC – Credit Enhancement for the FIARC warehousefacility is provided to the commercial paper investors by a cash reserveaccount equal to 1% of the receivables held by FIARC and, additionally, asurety bond issued by MBIA. The Company is not a guarantor of, or otherwise aparty to, such commercial paper.

 

*Warehouse Facilities – Agents andExpirations*

* *
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15, 2006 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 15, 2006 |       | The loan would 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. |

 

OnDecember 4, 2003, the FIRC facility was renewed, under similar terms andconditions, at the $50 million commitment level until December 2, 2004, and wassubsequently extended until February 15, 2006. On June 15, 2004, the FIRC facility was extended to $65 million, andreverted back to $50 million on September 13, 2004.  As of July 31, 2004 and 2005, there was $52.5and $35.3 million, respectively, outstanding.

 

OnJanuary 29, 2004, following a short-term extension of the original maturitydate, the FIARC facility was renewed, under similar terms and conditions, toDecember 2, 2004, and was subsequently extended until February 15, 2006.  As of July 31, 2004 and 2005, there was $9.2and $37.6 million, respectively, outstanding.

 

Management presently intendsto seek further extensions to these warehouse facilities prior to the currentexpiration 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 pertinentinformation on the Term Note as of July 31, 2005.

 
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|----------------|------------|-------------------|------------|----------------------|-------------|-------------------|-------------------|-----------------|------------|--------------------|------------|
| 2003-A         |       | November 11, 2003 |       | $                    | 139,661,000 |              | April 20, 2011    |            | $          | 60,377,975         |       | 2.58 | % |
| 2005-A Class 1 |       | May 5, 2005       |       | $                    | 69,000,000  |              | December 17, 2007 |            | $          | 50,334,951         |       | 3.57 | % |
| 2005-A Class 2 |       | May 5, 2005       |       | $                    | 106,493,000 |              | July 16, 2012     |            | $          | 106,493,000        |       | 4.23 | % |

 

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Credit enhancement on the Term Note is asfollows:

 

| **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   |

 

TermNotes - On January29, 2002, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2002-A (“2002 Auto Trust”) completed the issuance of$159,036,000 of 3.46% Class A asset-backed notes (“2002-A Term Notes”). Theinitial pool of automobile receivables transferred to the 2002 Auto Trusttotaled $135,643,109, which was previously owned by FIRC and FIARC, secure the2002-A Term Notes.  In addition to theissuance of the Class A Notes, the 2002 Auto Trust also issued $4,819,000 inClass B Notes that were retained by the Company and pledged to secure theWorking Capital Facility as further described below.  Proceeds from the issuance, which totaled$159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2002-A TermNote issuance, and (v) fund a cash reserve account of 2% or $2,712,862 of theinitial receivables pledged which will serve as a portion of the creditenhancement for the transaction. The Class A Term Notes bear interest at 3.46%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 97% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2002-A Term Notes is December 15,2008.  The Class B Notes do not bearinterest but require principal reductions sufficient to reduce the balance ofthe Class B Notes to 3% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  On February 28, 2005, the Company notifiedthe note holders of the 2002-A securitization of its intent to exercise itsprepayment call provision.  This callprovision was completed effective March 15, 2005, and therefore there was nooutstanding balance as of July 31, 2005 and April 30, 2005.

 

On November 20, 2003, theCompany, through its indirect, wholly-owned subsidiary First Investors AutoOwner Trust 2003-A (“2003 Auto Trust”) completed the issuance of $139,661,000of 2.58% Class A asset-backed notes (“2003-A Term Notes”). The initial pool ofautomobile receivables transferred to the 2003 Auto Trust totaled $114,726,891,which was previously owned by FIRC and FIARC, secure the 2003-A TermNotes.  In addition to the issuance ofthe Class A Notes, the 2003 Auto Trust also issued $5,065,891 in Class B Notesthat were retained by the Company and pledged to secure the Working CapitalFacility as further described below. 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 TermNotes bear interest at 2.58% and requires monthly principal reductionssufficient to reduce the balance of the Class A Term Notes to 96.1% of theoutstanding balance of the underlying receivables pool. The final maturity ofthe 2003-A Term Notes is April 20, 2011. The Class B Notes do not bear interest but require principal reductionssufficient to reduce the balance of the Class B Notes to 3.9% of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2005, and July 31, 2005, theoutstanding principal balances on the 2003-A term notes were $70,050,511 and$60,377,975, respectively.

 

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On May 5, 2005, the Company,through its indirect, wholly-owned subsidiary First Investors Auto Owner Trust2005-A (“2005 Auto Trust”) completed the issuance of $69,000,000 of 3.57% ClassA-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 backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,920,721, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the 2005 AutoTrust also issued $5,427,619 in Class B Notes that were retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $175,487,827 were used to (i) fund a $29,999,898 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 2005-A Term Note issuance, and (v) fund an initial cash reserve account of1% or $1,509,207 of the initial receivables pledged.  The Class A-1 and Class A-2 Term Notes bearinterest at 3.57% and 4.23%, respectively, and requires monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 95.75%of the outstanding balance of the underlying receivables pool. The finalmaturity of the Class A-1 and Class A-2 Term Notes is December 17, 2007 andJuly 16, 2012, respectively.  The Class BNotes do not bear interest but require principal reductions sufficient toreduce the balance of the Class B Notes to 4.25% of the outstanding balance ofthe underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the event thatcertain asset quality covenants are not met, the reserve account target levelwill increase to 2% of the then current principal balance of the receivablespool.  As of July 31, 2005, theoutstanding principal balances on the 2005-A Term notes were $156,827,951.

 

*WorkingCapital Facility*.  On December 6, 2001, the Company entered intoan agreement with Wachovia Securities to refinance the $11,175,000 outstandingbalance of the working capital term loan previously provided by Bank of Americaand Wachovia and increase the size of the facility to $13.5 million.  The renewal facility was provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  The facility originallyconsisted of a $9 million revolving tranche and a $4.5 million term loantranche which amortizes monthly.  Theterm loan tranche of this working capital facility was evidenced by the Class BNotes issued in conjunction with the 2002 Auto Trust financing. The remaining$9 million of the $13.5 million working capital facility revolves monthly inaccordance with a borrowing base consisting of the overcollateralization amountand reserve account for each of the Company’s other credit facilities.  The facility is secured solely by theresidual cash flow and cash reserve accounts related to the Company’s warehousecredit facilities, the acquisition facility and the existing and future termnote facilities.  During 2002, thefacility was modified to increase the interest rate from LIBOR plus a 1.5%program fee to LIBOR plus a 2.25% program fee. The commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  In addition, themonthly principal amortization under the term loan tranche was increased to thegreater of $250,000 or the principal distributions made under the Class B Notesissued under the 2002 Auto Trust financing. On December 4, 2003, the Working Capital Facility was extended toDecember 2, 2004.  Under the terms of theextension, the monthly amortization requirement was replaced with therequirement that outstanding balances under the facility could not exceed thelesser of a borrowing base or the $9 million facility limit.  On October 26, 2004, the Working Capital Facilitywas extended until October 10, 2005, increasing the commitment amount to $13.5million.  The interest rate remained atLIBOR plus 2.25% and the commitment fee paid on the total available amount ofthe 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.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  As of April 30,2005 and July 31, 2005, there was $10,500,000 and $11,776,493, respectively,outstanding under 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, the outstanding balance of thereceivables would be amortized in accordance with the borrowing base.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

 

*RelatedParty Loans. *On December 3, 2001 the Company entered intoan agreement with one of its shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5million.  On December 6, 2004, theoriginal $2.5 million shareholder loan was replaced with a

 

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$2.5 million loan containing identical termsand conditions between the Company and a limited partnership that is affiliatedwith a current shareholder and member of the Board of Directors  The proceeds of the borrowings have beenutilized to fund certain private and open market purchases of the Company’scommon stock pursuant to a Stock Repurchase Plan authorized by the Board ofDirectors and for general corporate purposes. Borrowings under the facility bear interest at a fixed rate of 10% perannum.  The facility is unsecured andexpressly subordinated to the Company’s senior credit facilities. The facilitymatures on December 3, 2008 but may be repaid at any time unless the Company isin default on one of its other credit facilities.  There was $2.5 million outstanding underthese facilities as of April 30, 2005 and July 31, 2005, respectively.  For the three months ended July 31, 2004 andJuly 31, 2005, the Company recorded interest expense under these facilities of$0 and $63,014.

 

*LoanCovenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of the FIRCcredit facility, the Term Notes and the working capital facility or thetermination of the commercial paper facilities. The Company was not in defaultwith respect to any financial covenants governing these financing arrangementsat July 31, 2005.

 

*InterestRate Management*.  The Company’s warehouse credit facilities andworking capital facilities bear interest at floating interest rates which arereset on a short-term basis while the secured Term Notes bear interest at afixed rate of interest. The Company’s receivables bear interest at fixed ratesthat do not generally vary with a change in market interest rates. Since aprimary contributor to the Company’s profitability is its ability to manage itsnet interest spread, the Company seeks to maximize the net interest spreadwhile minimizing exposure to changes in interest rates. In connection withmanaging the net interest spread, the Company may periodically enter intointerest rate swaps or caps to minimize the effects of market interest ratefluctuations on the net interest spread. To the extent that the Company hasoutstanding floating rate borrowings or has elected to convert a portion of itsborrowings from fixed rates to floating rates, the Company will be exposed tofluctuations in short-term interest rates.

 

OnJuly 18, 2005, as a requirement of the FIARC commercial paper facility, theCompany entered into an interest rate cap transaction, with a strike rate of6%.  The aggregate initial notionalamount of the cap was $18,803,810 which amortizes over six years.  The Company paid $58,826 in premium topurchase this cap.  The interest rate capwas not designated as a hedge, and accordingly, changes in the fair value ofthe interest rate cap is recorded as an unrealized loss and is reflected in netincome.  During the three months endedJuly 31, 2005, the Company recorded an unrealized loss of $2,682 that isincluded as a separate caption of other income.

 

Duringfiscal year 2005, as a requirement of the FIARC commercial paper facility, theCompany entered into nine interest rate cap transactions, with strike ratesbetween 5% and 6%.  The aggregate initialnotional amount of the caps was $126,086,843 which amortized over six years.  The Company paid an aggregate of $1,213,097in premiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes inthe fair value of the interest rate caps were recorded as unrealized gains orlosses and reflected in net income.  OnApril 28, 2005, the Company terminated all interest rate caps outstanding inexchange for proceeds of $840,000.  Thecaps were terminated following the repayment of all balances outstanding underthe FIARC facility prior to the issuance of the 2005-A term notes.  As a result, a realized loss of $373,097 wasincurred relative to the aggregate market value of the interest rate caps.

 

**Delinquency and Credit Loss Experience**

 

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 $2,192,778as of July 31, 2005 and $2,248,599 as of April 30, 2005 as a percentage ofReceivables Held for Investment of $292,825,928 as of July 31, 2005 and $244,940,526as of April 30, 2005 was 0.7% and 0.9%, respectively.

 

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The Company considers aloan to be delinquent when the borrower fails to make a scheduled payment ofprincipal and interest. Accrual of interest is suspended when the payment fromthe borrower is over 90 days past due. Generally, repossession procedures areinitiated 90 to 120 days after the payment default.

 

The Company retains thecredit risk associated with the receivables originated. The Company purchasescredit enhancement insurance from third party insurers which covers the risk ofloss upon default and certain other risks. The Company established a captiveinsurance subsidiary to reinsure certain risks under the credit enhancementinsurance coverage for all receivables. In addition, receivables financed under the Auto Trust and FIARCcommercial paper facilities do not carry default insurance.  Provisions for credit losses of $1,651,411and $2,442,105 have been recorded for the three months ended July 31, 2005 andJuly 31, 2004, respectively.

 

The Company calculates the allowance for credit lossesin accordance with SFAS No. 5*, Accounting forContingencies.*  SFAS No. 114, *Accounting for Creditors for Impairment of a Loan* does notapply to loans currently held by the Company because they are comprised of alarge group of smaller balance homogenous loans that are evaluated collectivelyfor impairment.

 

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyis a six-month migration analysis whereby the Company compares the aging statusof each loan from six months prior to the aging loan status as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During the quarter endedApril 30, 2005, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  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 for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

 

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The following table sets forth certain informationregarding the Company’s delinquency and charge-off experience over its last twofiscal years (dollars in thousands):

 
| ** **                                                                                | ** ** | **For the three months ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **Number  of Loans**                    | ** ** | **Amount** | ** ** | **Number  of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held for Investment:                                                          |       |                                    |       |   |   |   |   |   |   |
| Delinquent amount outstanding (1):                                                        |       |                                    |       |   |   |   |   |   |   |
| 30 - 59 days                                                                              |       | 318                                     |       | $ | 2,753 |   | 130 |   | $ | 1,003 |   |
| 60 - 89 days                                                                              |       | 78                                      |       | 669 |   | 36 |   | 297 |   |
| 90 days or more                                                                           |       | 211                                     |       | 2,167 |   | 51 |   | 367 |   |
| Total delinquencies                                                                       |       | 607                                     |       | $ | 5,589 |   | 217 |   | $ | 1,667 |   |
| Total  delinquencies as a percentage of outstanding receivables                           |       | 3.7                                     | %          | 2.7 | % | 1.1 | % | 0.6 | % |
| Net charge-offs  as a percentage of average receivables outstanding during the period (2) |       |                                    |       | 4.7 | % |   |   | 2.5 | % |

 

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

 

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

 

Thelower annualized charge-off rate results from an improving economic environmentcoupled with an increase in the Company’s direct to consumer lending program.

 

As of July 31, 2005,there were 318 accounts totaling $3,297,434 that were in bankruptcy status andwere more than 30 days past due.  As ofJuly 31, 2004, there were 519 accounts totaling $4,793,472 that were inbankruptcy status and were more than 30 days past due.  As of July 31, 2005 and 2004, 88% and 93%,respectively, of the bankruptcy delinquencies filed for protection underChapter 13.

 

**NewAccounting Pronouncements**

 

In December 2003, theAmerican Institute of Certified Public Accountants issued Statement of Position(SOP) 03-3,*Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer*. SOP 03-3 addresses the accounting for loansacquired through a transfer (including a business combination) that havedifferences between their expected cash flows and their contractual cash flows,due in part to credit quality. The SOP requires that the excess of the expectedcash flows at acquisition to be collected over the acquirer’s initialinvestment be recognized on a level-yield basis over the loan’s life. Anyfuture excess of contractual cash flows over the original expected cash flowsis recognized as a future yield adjustment. Future decreases in actual cashflows over the original expected cash flows are recognized as impairment andexpensed immediately. Valuation allowances can not be created or “carried over”in the initial accounting for loans acquired that are within the scope of theSOP. SOP 03-3 is effective for loans acquired in fiscal years beginning afterDecember 15, 2004.  The Company does notanticipate SOP 03-3 will have a material effect on its financial statements.

 

In December 2004, the FASBissued SFAS No. 123(R), *Share-Based Payment - arevision to SFAS No. 123,**Accounting for Stock-BasedCompensation*(“SFAS No. 123(R)”) that addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.SFAS No. 123(R) eliminates the ability to account for share-based compensationtransactions using APB Opinion No. 25, *Accounting for StockIssued to Employees*, and generally requires instead that suchtransactions be accounted for using a fair-value-based method.

 

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SFAS No. 123(R) is effectiveas of the beginning of the fiscal year that begins after June 15, 2005. SFAS123(R) applies to all awards granted after the required effective date and tosuch awards modified, repurchased, or cancelled after that date. The cumulativeeffect of initially applying SFAS No. 123(R), if any, is recognized as of therequired effective date. As of the required effective date, all public entitiesthat used the fair-value-based method for either recognition or disclosureunder SFAS No. 123 will apply SFAS No. 123(R) using a modified version of theprospective application. Under that transition method, compensation cost isrecognized on or after the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS No.123 for either recognition or pro forma disclosures. For periods before therequired effective date, those entities may elect to apply a modified versionof retrospective application under which financial statements for prior periodsare adjusted on a basis consistent with the pro forma disclosures required forthose periods by SFAS No. 123. The Company has not yet completed its evaluationof the impact that SFAS No. 123(R) will have on its financial position andresults 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 itsreports are important factors that could cause actual results to differmaterially from those expressed in any forward looking statement made herein orelsewhere by the Company or on its behalf. The factors listed are not necessarily all of the importantfactors.  Unpredictable or unknownfactors not discussed could also have material adverse effects on actualresults.  The Company does not intend toupdate its description of important factors each time a potential importantfactor arises.  The Company advises itsstockholders that they should:  (1) beaware that important factors not described herein could affect the accuracy ofour forward looking statements, and (2) use caution and common sense whenanalyzing our forward looking statements in this document or elsewhere.  All of such forward looking statements arequalified in their entirety by this cautionary statement.

 

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

 

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 differmaterially due to changes in the Company’s product and debt mix, developmentsin the financial markets, and further utilization by the company ofrisk-mitigating strategies such as hedging.

 

The Company’s operating revenues are derived almostentirely from the collection of interest on the receivables it retains and itsprimary expense is the interest that it pays on borrowings incurred to purchaseand retain such receivables. The Company’s credit facilities bear interest atfloating rates which are reset on a short-term basis, whereas its receivablesbear interest at fixed rates which do not generally vary with changes ininterest rates. The Company is therefore exposed primarily to market risksassociated with movements in interest rates on its credit facilities. TheCompany believes that it takes the necessary steps to appropriately reduce thepotential impact of interest rate increases on the Company’s financial positionand operating performance.

 

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 acommercial paper index or LIBOR.

 

Asof July 31, 2005, the Company had $84.7 million of floating rate secured debtoutstanding under the FIRC warehouse and working capital facilities.  For every 1% increase in LIBOR annualafter-tax earnings would decrease by approximately $0.6 million assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates.  As of July31, 2004, the Company had $70.4 million of floating rate

 

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secured debt outstandingnet of swap and cap agreements. For every 1% increase in commercial paper ratesor LIBOR, annual after-tax earnings would decrease by approximately $0.4million assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates.

 

**ITEM 4.****          CONTROLS AND PROCEDURES**

 

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of July 31, 2005 to provide reasonable assurancethat information required to be disclosed in our reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

 

There has been no changein our internal controls over financial reporting that occurred during thethree months ended July 31, 2005 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

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###### **PART II**

 

##### **OTHERINFORMATION**

 

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

 
| (a)    | Exhibits            |
|--------|---------------------|
|   |                |
|   | 31.1                | Certification of Chief  Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   | 31.2                | Certification of Chief  Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   | 32.1                | Certification of Chief  Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   | 32.2                | Certification of Chief  Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|   |                |   |
|   |                | Filed with this 10-Q |
|   |                |   |
| (b)    | Reports on Form 8-K |

 

Form 8-K filed July 15, 2005, press releaseannouncing fiscal year end April 30, 2005 financial results.

 

### **SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                                 | First  Investors Financial Services Group, Inc.   |   |
|--------------------------------------|---------------------------------------------------|--------|
|                                 | (Registrant)                                      |   |
|                                 |                                              |
|   Date: September 8,  2005 | By:  /s/TOMMY A. MOORE, JR.                       |
|                                 | Tommy  A. Moore, Jr.                              |
|                                 | President  and Chief Executive Officer            |
|                                 |                                              |
|   Date: September 8,  2005 | By:  /s/BENNIE H. DUCK                            |
|                                 | Bennie  H. Duck                                   |
|                                 | Secretary,  Treasurer and Chief Financial Officer |

 

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