**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                    |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                             |
|       | **For the quarterly period ended  October 31, 2003**                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                             |
|       | **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 itsCharter)

 

| **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 AreaCode)

 

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.

 

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

 

| **Class**                    |   | **Shares Outstanding At  December  12, 2003** |
|------------------------------|--------|----------------------------------------------------|
| Common Stock-$.001 Par Value |   | 5,005,269                                          |

 

 

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**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC.**

**ANDSUBSIDIARIES**

 

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

 

### **OCTOBER31, 2003**

 

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

 
| **Part I**     | **Financial Information** |                                                                                                                     |
|----------------|---------------------------|--------------------------------------------------------------------------------------------------------------------------|
|           |                      |                                                                                                                     |   |
|           | Item  1.                  | Financial  Statements                                                                                                    |   |
|           |                      |                                                                                                                     |   |
|           |                      | Consolidated Balance Sheets  as of April 30, 2003 and October 31, 2003                                                   |   |
|           |                      |                                                                                                                     |   |
|           |                      | Consolidated  Statements of Operations for the Three Months and Six Months Ended October  31, 2002 and 2003              |   |
|           |                      |                                                                                                                     |   |
|           |                      | Consolidated  Statement of Shareholders’ Equity and Comprehensive Income for the Six Months  Ended October 31, 2003 |   |
|           |                      |                                                                                                                     |   |
|           |                      | Consolidated  Statements of Cash Flows for the Six Months Ended October 31, 2002 and 2003                                |   |
|           |                      |                                                                                                                     |   |
|           |                      | 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** |                      |

 

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**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

 

##### **CONSOLIDATEDBALANCE SHEETS** — APRIL 30, 2003 AND OCTOBER 31, 2003

 
|                                                                                                                                                                            |   | **April 30,  2003** |        | **October  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-------------|------------------------|--------|
|                                                                                                                                                                            |   | **(Audited)**       |        | **(Unaudited)**        |   |
| **ASSETS**                                                                                                                                                                      |   |                |        |                   |   |
| Receivables  Held for Investment, net                                                                                                                                           |   | $                   | 228,989,162 |                   | $      | 225,702,804 |   |
| Receivables  Acquired for Investment, net                                                                                                                                       |   | 2,704,247           |        | 1,921,036              |   |
| Cash  and Short-Term Investments, including restricted cash of $19,302,651 and  $17,783,678                                                                                     |   | 21,920,331          |        | 20,367,303             |   |
| Accrued  Interest Receivable                                                                                                                                                    |   | 3,381,394           |        | 3,150,084              |   |
| Assets  Held for Sale                                                                                                                                                           |   | 1,303,393           |        | 1,339,485              |   |
| Other  Assets:                                                                                                                                                                  |   |                |        |                   |   |
| Funds  held under reinsurance agreement                                                                                                                                         |   | 3,993,341           |        | 5,417,792              |   |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $4,508,798 and $5,127,826                                                      |   | 5,594,948           |        | 4,975,511              |   |
| Current  income taxes receivable                                                                                                                                                |   | 1,004,231           |        | —                 |   |
| Interest  rate derivative positions                                                                                                                                             |   | 4,105,307           |        | 2,333,811              |   |
| Total  assets                                                                                                                                                                   |   | $                   | 272,996,354 |                   | $      | 265,207,826 |   |
|                                                                                                                                                                            |   |                |        |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                  |   |                |        |                   |   |
| Debt:                                                                                                                                                                           |   |                |        |                   |   |
| Warehouse  credit facilities                                                                                                                                                    |   | $                   | 141,944,521 |                   | $      | 161,462,606 |   |
| Term  Notes                                                                                                                                                                     |   | 87,358,847          |        | 63,694,232             |   |
| Working  capital facility                                                                                                                                                       |   | 8,714,518           |        | 7,011,631              |   |
| Other  borrowings                                                                                                                                                               |   | 746,280             |        | 746,280                |   |
| Other  Liabilities:                                                                                                                                                             |   |                |        |                   |   |
| Accounts  payable and accrued liabilities                                                                                                                                       |   | 1,709,208           |        | 1,855,986              |   |
| Current  income taxes payable                                                                                                                                                   |   | —              |        | 2,090                  |   |
| Deferred  income taxes payable                                                                                                                                                  |   | 49,593              |        | 510,556                |   |
| Interest  rate derivative positions                                                                                                                                             |   | 5,248,080           |        | 2,659,518              |   |
| Total  liabilities                                                                                                                                                              |   | 245,771,047         |        | 237,942,899            |   |
|                                                                                                                                                                            |   |                |        |                   |   |
| Commitments  and Contingencies                                                                                                                                                  |   | —              |        | —                 |   |
| Minority  Interest                                                                                                                                                              |   | 732,023             |        | —                 |   |
| Shareholders’  Equity:                                                                                                                                                     |   |                |        |                   |   |
| Common  stock, $0.001 par value, 10,000,000 shares authorized, 5,566,669 shares  issued; 5,026,269 outstanding at April 30, 2003 and 5,005,269 outstanding at  October 31, 2003 |   | 5,567               |        | 5,567                  |   |
| Additional  paid-in capital                                                                                                                                                     |   | 18,678,675          |        | 18,678,675             |   |
| Retained  earnings                                                                                                                                                              |   | 10,481,696          |        | 10,889,580             |   |
| Accumulated  other comprehensive loss – unrealized derivative (losses), net of taxes                                                                                       |   | (896,789            | )           | (448,400               | )      |
| Less,  treasury stock, at cost, 540,400 and 561,400 shares                                                                                                                      |   | (1,775,865          | )           | (1,860,495             | )      |
| Total  shareholders’ equity                                                                                                                                                |   | 26,493,284          |        | 27,264,927             |   |
| Total  liabilities and shareholders’ equity                                                                                                                                |   | $                   | 272,996,354 |                   | $      | 265,207,826 |   |

 

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

 

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**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**For the ThreeMonths and Six Months Ended October 31, 2002 and 2003**

**(Unaudited)**

 
|                                                            |   | **For the  Three Months  Ended October 31,** |      | **For the  Six Months  Ended October 31,** |   |
|-----------------------------------------------------------------|--------|----------------------------------------------|-----------|--------------------------------------------|--------|
|                                                            |   | **2002**                                     |      | **2003**                                   |   | **2002** |   | **2003** |   |
|                                                            |   |                                         |      |                                       |   |   |   |   |   |
| Interest Income                                                 |   | $                                            | 8,145,189 |                                       | $      | 7,923,929 |   | $ | 16,656,526 |   | $ | 15,994,365 |   |
| Interest Expense                                                |   | 2,693,481                                    |      | 1,889,442                                  |   | 5,575,569 |   | 3,907,413 |   |
| Net interest income                                             |   | 5,451,708                                    |      | 6,034,487                                  |   | 11,080,957 |   | 12,086,952 |   |
| Provision for Credit Losses                                     |   | 2,270,000                                    |      | 3,269,741                                  |   | 4,638,550 |   | 6,661,704 |   |
| Net Interest Income After Provision for Credit  Losses          |   | 3,181,708                                    |      | 2,764,746                                  |   | 6,442,407 |   | 5,425,248 |   |
| Other Income:                                                   |   |                                         |      |                                       |   |   |   |   |   |
| Late fees and other                                             |   | 350,292                                      |      | 904,610                                    |   | 682,430 |   | 1,579,318 |   |
| Servicing Income                                                |   | —                                       |      | 1,223,605                                  |   | — |   | 2,498,238 |   |
| Unrealized loss on interest rate derivative  positions          |   | (85,282                                      | )         | (149,066                                   | )      | (122,438 | ) | (6,309 | ) |
| Total other income                                              |   | 265,010                                      |      | 1,979,149                                  |   | 559,992 |   | 4,071,247 |   |
| Operating Expenses:                                             |   |                                         |      |                                       |   |   |   |   |   |
| Salaries and benefits                                           |   | 1,789,993                                    |      | 2,186,774                                  |   | 3,638,833 |   | 4,422,067 |   |
| Other interest expense                                          |   | 178,107                                      |      | 120,728                                    |   | 340,154 |   | 249,868 |   |
| Other                                                           |   | 1,376,961                                    |      | 2,142,900                                  |   | 2,593,375 |   | 4,193,652 |   |
| Total operating expenses                                        |   | 3,345,061                                    |      | 4,450,402                                  |   | 6,572,362 |   | 8,865,587 |   |
| Income Before Provision for Income Taxes and  Minority Interest |   | 101,657                                      |      | 293,493                                    |   | 430,037 |   | 630,908 |   |
| Provision (Benefit) for Income Taxes:                           |   |                                         |      |                                       |   |   |   |   |   |
| Current                                                         |   | 181,966                                      |      | 33,528                                     |   | (28,564 | ) | 31,226 |   |
| Deferred                                                        |   | (155,449                                     | )         | 74,423                                     |   | 137,676 |   | 203,227 |   |
| Total provision for income taxes                                |   | 26,517                                       |      | 107,951                                    |   | 109,112 |   | 234,453 |   |
| Minority Interest                                               |   | 29,009                                       |      | (2,263                                     | )      | 131,100 |   | (11,429 | ) |
| Net Income                                                      |   | $                                            | 46,131    |                                       | $      | 187,805 |   | $ | 189,825 |   | $ | 407,884 |   |
|                                                            |   |                                         |      |                                       |   |   |   |   |   |
| Basic and Diluted Net Income per  Common Share                  |   | $                                            | 0.01      |                                       | $      | 0.04 |   | $ | 0.04 |   | $ | 0.08 |   |

 

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

 

4

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**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND**

**COMPREHENSIVE INCOME**

 

**For the SixMonths Ended October 31, 2003**

**(Unaudited)**

 
|                                                             |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock, at  cost** |       | **Accumulated  Other  Comprehensive  Loss** |   | **Total**   |   |
|------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|-------------------------------|------------|---------------------------------------------|--------|-------------|--------|
| Balance at April 30, 2003                                        |   | $                 | 5,567  |                             | $      | 18,678,675             |   | $                             | 10,481,696 |                                        | $      | (1,775,865) |   | $ | (896,789) |   | $ | 26,493,284 |   |
| Comprehensive income:                                            |   |              |   |                             |   |                   |   |                          |       |                                        |   |        |   |
| Net income                                                       |   | —            |   | —                           |   | 407,884                |   | —                        |       | —                                      |   | 407,884     |   |
| Reclassification  into earnings, net  of taxes of  $257,736 |   | —            |   | —                           |   | —                 |   | —                        |       | 448,389                                     |   | 448,389     |   |
| Comprehensive income                                             |   | —            |   | —                           |   | —                 |   | —                        |       | —                                      |   | 856,273     |   |
| Treasury  stock purchases                                        |   | —            |   | —                           |   | —                 |   | (84,630                       | )          | —                                      |   | (84,630     | )      |
| Balance  at October 31, 2003                                     |   | $                 | 5,567  |                             | $      | 18,678,675             |   | $                             | 10,889,580 |                                        | $      | (1,860,495  | )      | $ | (448,400 | ) | $ | 27,264,927 |   |

 

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

 

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**FIRST INVESTORS FINANCIAL SERVICESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended October 31,2002 and 2003**

**(Unaudited)**

** **
|                                                                                     |   | **2002**    |      | **2003**    |   |
|------------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|
|                                                                                     |   |        |      |        |   |
| Cash Flows From Operating  Activities:                                                   |   |        |      |        |   |
| Net income                                                                               |   | $           | 189,825   |        | $      | 407,884 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |   |        |      |        |   |
| Depreciation and amortization  expense                                                   |   | 1,908,358   |      | 1,860,309   |   |
| Provision for credit losses                                                              |   | 4,638,550   |      | 6,661,704   |   |
| Minority Interest                                                                        |   | 131,100     |      | (11,429     | )      |
| (Increase) decrease in:                                                                  |   |        |      |        |   |
| Restricted cash                                                                          |   | 2,118,538   |      | 1,518,973   |   |
| Accrued interest receivable                                                              |   | 3,415       |      | 231,310     |   |
| Funds held under reinsurance  agreement                                                  |   | (42,254     | )         | (1,424,452  | )      |
| Deferred financing costs and  other assets                                               |   | 20,606      |      | (60,279     | )      |
| Deferred income taxes  receivable                                                        |   | (85,271     | )         | —      |   |
| Current income tax receivable                                                            |   | 431,797     |      | 1,004,231   |   |
| Interest rate derivative  positions                                                      |   | (1,547,699  | )         | 2,219,885   |   |
| Increase (decrease) in:                                                                  |   |        |      |        |   |
| Accounts payable and accrued  liabilities                                                |   | (400,143    | )         | 146,780     |   |
| Current income taxes payable                                                             |   | —      |      | 2,090       |   |
| Deferred income taxes payable                                                            |   | —      |      | 460,963     |   |
| Interest rate derivative  positions                                                      |   | 1,187,239   |      | (2,588,562  | )      |
| Net cash provided by operating  activities                                               |   | 8,554,061   |      | 10,429,407  |   |
| Cash Flows From Investing  Activities:                                                   |   |        |      |        |   |
| Origination of Receivables  Held for Investment                                          |   | (46,293,981 | )         | (51,743,888 | )      |
| Origination of Receivables  Acquired for Investment                                      |   | —      |      | (328,787    | )      |
| Origination of Investment                                                                |   | —      |      | (3,068      | )      |
| Principal payments from  Receivables Held for Investment                                 |   | 40,537,738  |      | 43,639,170  |   |
| Principal payments from  Receivables Acquired for Investment                             |   | 3,998,464   |      | 391,404     |   |
| Payments received on Assets  Held for Sale                                               |   | 3,443,007   |      | 3,562,219   |   |
| Purchase of furniture and  equipment                                                     |   | (117,207    | )         | (46,465     | )      |
| Net cash provided by (used in)  investing activities                                     |   | 1,568,021   |      | (4,529,415  | )      |
| Cash Flows From Financing  Activities:                                                   |   |        |      |        |   |
| Proceeds from advances on—                                                          |   |        |      |        |   |
| Warehouse credit facilities                                                              |   | 73,567,506  |      | 89,171,068  |   |
| Other borrowings                                                                         |   | 1,221,280   |      | —      |   |
| Principal payments made on—                                                         |   |        |      |        |   |
| Warehouse credit facilities                                                              |   | (35,944,836 | )         | (69,652,984 | )      |
| Term Notes                                                                               |   | (44,304,577 | )         | (23,664,614 | )      |
| Acquisition term facility                                                                |   | (2,667,973  | )         | —      |   |
| Working capital facility                                                                 |   | (1,291,319  | )         | (1,702,887  | )      |
| Treasury stock purchased                                                                 |   | (1,260,865  | )         | (84,630     | )      |
| Net cash provided by (used in)  financing activities                                     |   | (10,680,784 | )         | (5,934,047  | )      |
| Increase (Decrease) in Cash  and Short-Term Investments                                  |   | (558,702    | )         | (34,055     | )      |
| Cash and Short-Term  Investments at Beginning of Period                                  |   | 585,727     |      | 2,617,680   |   |
| Cash and Short-Term  Investments at End of Period                                        |   | $           | 27,025    |        | $      | 2,583,625 |   |
| Supplemental Disclosures of  Cash Flow Information:                                      |   |        |      |        |   |
| Cash paid during the period  for—                                                   |   |        |      |        |   |
| Interest                                                                                 |   | $           | 5,294,926 |        | $      | 3,654,656 |   |
| Income taxes                                                                             |   | 4,643       |      | 3,658       |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

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**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES**

 

##### **NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

##### **October 31, 2003**

 

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

 

*Organization*. First Investors Financial Services Group, Inc.(First Investors) together with its wholly-owned and majority-ownedsubsidiaries (collectively referred to as the Company) is principally involvedin the business of originating and holding for investment retail installmentcontracts and promissory notes secured by new and used automobiles and lighttrucks (receivables) originated by factory authorized franchised dealers. As ofOctober 31, 2003, approximately 28 percent of Receivables Held for Investmentwere originated in Texas. The Company currently operates in 27 states.

 

OnOctober 2, 1998, the Company acquired First Investors Servicing Corporation(FISC) formerly known as Auto Lenders Acceptance Corporation. Headquartered inAtlanta, Georgia, FISC performs the servicing and collection functions for theportfolio of receivables under management, which totaled $571 million as ofOctober 31, 2003.

 

On August 8, 2000,the Company entered into a partnership agreement whereby a subsidiary of theCompany is the general partner owning 70 percent of the partnership interestsand First Union Investors, Inc. serves as the limited partner and owns 30percent 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 Partnershipconsists primarily of a portfolio of loans previously owned or securitized byFISC and certain other financial assets including charged-off accounts owned byFISC.

 

On December 24,2002, the Company purchased a 40% ownership in common stock  and an investment in the junior mezzaninedebt of First Auto Receivables Corporation (“FARC”).  FARC purchased an approximately $197.5 million portfolio ofinstallment loan receivables from a subsidiary of Union AcceptanceCorporation.  FISC performs ongoingservicing and collection activities on the portfolio.

 

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

 

**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.

 

Theresults for the interim periods are not necessarily indicative of the resultsof operations that may be expected for the fiscal year. In the opinion ofmanagement, the information furnished reflects all adjustments which are of anormal recurring nature and are necessary for a fair presentation of theCompany’s financial position as of October 31, 2003, and the results of itsoperations for the six months ended October 31, 2002 and 2003, and its cashflows for the six months ended October 31, 2002 and 2003.

 

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 areadequate to make the information not misleading. These financial statementsshould be read in conjunction with the audited consolidated financialstatements included in the Company’s 2003 Annual Report on Form 10-K filed July18, 2003.

 

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*TreasuryStock.  *On December 14, 2001, the Board of Directorsauthorized the Company to repurchase up to 5% of the Company’s outstandingcommon stock.  Repurchases of 170,000,370,400 and 21,000 shares with an average price of $3.03, $3.40 and $4.03respectively, occurred during the quarters ended January 31, 2002, July 31,2002 and July 31, 2003, respectively. There has been no other repurchaseactivity.

 

*Receivables Held for Investment*.  The Company accrues interest income monthlyusing the effective interest method. Interest income also includes additionalamounts received upon early payoffs of certain receivables attributable to thedifference between the principal balance of the receivables calculated usingthe Rule of 78’s method and the principal balance of the receivables calculatedusing the effective interest method. When a receivable becomes 90 days pastdue, the income accrual is suspended until the payments become current. When aloan is charged off or the collateral is repossessed, the remaining incomeaccrual is written off.

 

*Receivables Acquired for Investment*.  In connection with loans that were acquiredin a portfolio purchase by the Partnership, the Company estimates the amountand timing of undiscounted expected future principal and interest cash flows.For certain purchased loans, the amount paid for a loan reflects the Company’sdetermination that it is probable the Company will be unable to collect allamounts due according to the loan’s contractual terms. Accordingly, atacquisition, 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.  Given the nature of theremaining cash flows, the Company determined that the timing of collections onthese assets are much more unpredictable than contractual cash flows fromnon-defaulted receivables, therefore during the quarter ended October 31, 2003the Company followed the guidance provided by Practice Bulletin 6*,Amortization of Discounts on Certain Acquired Loans*, and account forthese assets utilizing the cost-recovery method.  Under this method, cash proceeds from collections are applied tofirst reduce the company’s basis in the assets.  Cash collected in excess of this cost basis is recognized asincome when received.

 

*Other Income*.  Servicing income is accrued as services arerendered. Other income includes late charge fees and is recognized ascollected.

 

*Allowance for Credit Losses*.  For receivables financed under the FIRCcredit facility, the Company purchases credit enhancement insurance fromthird-party insurers which covers the risk of loss upon default and certainother risks. The Company established a captive insurance subsidiary to reinsurethe credit enhancement insurance coverage. The credit enhancement insurancecoverage for all receivables is reinsured by FIIC.  All originations recorded by the Company are covered by creditenhancement insurance while pledged as collateral for the FIRC credit facility.Once receivables are transferred to the FIARC commercial paper facility, creditenhancement insurance is cancelled. In addition, no default insurance ispurchased for core receivables originated and financed under the FIACCcommercial paper facility. Accordingly, the Company is exposed to credit lossesfor all receivables and provides an allowance for such losses.

 

The Company initiatesefforts to make customer contact when the customer is three days past due andbecomes 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 determinedthat the loan is uncollectible, the collateral is repossessed.  Generally this occurs at 90 to 120 days pastdue.   Upon repossession, impairment isrecorded to write off Receivables Held for Investment and related accruedinterest.  The fair value of thereceivable is recorded as an Assets Held for Sale.  Fair value is determined by estimating the proceeds of thecollateral, which primarily are comprised of auction proceeds on the sale ofthe automobile less selling related expenses.  After collection of all proceeds, the Company records an adjustment,positive or negative, based on the difference between the fair value estimateand the true proceeds received.   In theevent the collateral is unable to be located, the Company will write off theentire balance after exhausting all collection efforts.

 

8

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TheCompany calculates the allowance for credit losses in accordance with Statementof Financial Accounting Standards (SFAS) No. 5, *Accounting for Contingencies*.  SFAS 114, *Accounting for Creditors for Impairmentof a Loan* does not apply to the Company since the Receivables Heldfor Investment are comprised of a large group of smaller balance homogenousloans that are evaluated collectively for impairment.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology utilized is a six-month migration analysis whereby theCompany compares the aging status of each loan from six months prior to theaging loan status as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate to impaired status.  Theestimated number of impairments is then multiplied by estimated loss per loan,which is estimated using historical information.   The computed reserve is then compared to the amount recorded foradequacy.  The Company compares thesix-month result to prior six-month periods to compare trends and evaluate anyother internal or external factors that may affect collectibility. Theallowance for credit losses is based on estimates and qualitative evaluationsand ultimate losses will vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in income in the period they become known.

 

*Stock-Based Compensation*.  The Company has an employee stock optionplan and a non-employee director stock option plan, which are described morefully in Note 9.  The Company appliesAPB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related Interpretations inaccounting for its plans.  The followingtable illustrates the effect on net income and earnings per share if theCompany had applied the fair value recognition provisions of SFAS No.123, *Accountingfor Stock-Based Compensation* (with assumptions described in Note 9),to its stock option plans.

 
|                                                                                                                                                  |   | **For the Three Months  Ended October 31,** |   | **For the Six Months  Ended October 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                                  |   | **2002**                                    |   | **2003**                                  |   | **2002** |   | **2003** |   |
| Net Income, as reported                                                                                                                               |   | $                                           | 46,131 |                                      | $      | 187,805 |   | $ | 189,825 |   | $ | 407,884 |   |
|                                                                                                                                                  |   |                                        |   |                                      |   |   |   |   |   |
| Deduct: Total stock option plan compensation expense  determined under fair value based method for awards granted, modified or  settled, net of taxes |   | 28,094                                      |   | 36,190                                    |   | 46,651 |   | 46,694 |   |
| Pro Forma Net Income                                                                                                                                  |   | $                                           | 18,037 |                                      | $      | 151,615 |   | $ | 143,174 |   | $ | 361,190 |   |
|                                                                                                                                                  |   |                                        |   |                                      |   |   |   |   |   |
| Basic and Diluted Net Income per Common Share, as  reported                                                                                           |   | $                                           | 0.01   |                                      | $      | 0.04 |   | $ | 0.04 |   | $ | 0.08 |   |
| Basic and Diluted Net Income per Common Share, pro  forma                                                                                             |   | $                                           | 0.00   |                                      | $      | 0.03 |   | $ | 0.03 |   | $ | 0.07 |   |

 

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

 

ReceivablesHeld for Investment net, consisted of the following:

 
|                                  |   | **April 30,  2003** |        | **October 31,  2003** |   |
|---------------------------------------|--------|---------------------|-------------|-----------------------|--------|
| Receivables                           |   | $                   | 226,362,218 |                  | $      | 222,978,270 |   |
| Unamortized premium and deferred fees |   | 5,024,160           |        | 5,088,104             |   |
| Allowance for credit losses           |   | (2,397,216          | )           | (2,363,570            | )      |
| Net receivables                       |   | $                   | 228,989,162 |                  | $      | 225,702,804 |   |

 

9

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Activityin the allowance for credit losses was as follows:

 
|                           |   | **For the Six Months  Ended October 31,** |      |
|--------------------------------|--------|-------------------------------------------|-----------|
|                           |   | **2002**                                  |      | **2003** |   |
| Balance, beginning of period   |   | $                                         | 2,338,625 |   | $ | 2,397,216 |   |
| Provision for credit losses    |   | 4,638,550                                 |      | 6,661,704 |   |
| Charge-offs, net of recoveries |   | (4,757,305                                | )         | (6,695,350 | ) |
| Balance, end of period         |   | $                                         | 2,219,870 |   | $ | 2,363,570 |   |

 

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

 

ReceivablesAcquired for Investment is comprised of loans previously originated by AutoLenders Acceptance Corporation and other third parties.  Loans originated by Auto Lenders AcceptanceCorporation include a portfolio of warehouse loans and a portfolio of loansthat were previously securitized.  Thesecuritized loans were subsequently redeemed and funded through the FIACCcredit facility.  Receivables Acquiredfor Investment previously originated by Auto Lenders Acceptance Corporationwere purchased at a discount relating to credit quality.  As a result of the amortization of theoutstanding principal balance of the receivables portfolio, the majority of theremaining cash flows projected constitute default collections fromobligors.  Given the nature of theseremaining cash flows, the Company determined that the timing of collections onReceivables Acquired for Investment was much more unpredictable thancontractual cash flows from non-defaulted receivables, therefore under theguidance provided by Practice Bulletin 6*, Amortization of Discounts on Certain Acquired Loans*,will account for Receivables Acquired for Investment going forward utilizingthe cost-recovery method.  Under thismethod, cash proceeds from collections are applied to first reduce thecompany’s basis in the assets.  Cashcollected in excess of this cost basis is recognized as income when received.Receivables Acquired for Investment previously originated by Auto Lenders AcceptanceCorporation were $2.7 million and $1.6 million as of April 30, 2003 and October31, 2003, respectively.

 

On September 30,2003 the Company purchased $9.4 million of defaulted auto loan receivables froman unrelated third party.  These loansare included in Receivables Acquired for Investment on the balance sheet as ofOctober 31, 2003, in the amount of $328,787 and are accounted for using thecost-recovery method.  The Company may,from time to time, consider similar acquisitions in the future.

 

**5.****     Debt**

 

The Companyfinances its loan origination through two warehouse credit facilities. TheCompany’s credit facilities provide for one-year terms and have been renewedannually. Management of the Company believes that the credit facilities willcontinue to be renewed or extended or that it would be able to secure alternatefinancing on satisfactory terms; however, there can be no assurance that itwill be able to do so. In January 2000 and January 2002, the Company issued$168 million and $159 million, respectively, in asset-backed notes (“TermNotes”) secured by discrete pools of receivables. Proceeds from the two noteissuances were used to repay outstanding borrowings under the various revolvingcredit facilities. Substantially all receivables retained by the Company arepledged as collateral for the credit facilities and the Term Notes. Theweighted average interest rate for the Company’s secured borrowings includingthe effect of program fees, dealer fees, and other comprehensive income (loss)amortization was 3.3% and 5.1% for the three months ended and 3.4% and 5.3% forthe six months ended October 31, 2003 and October 31, 2002, respectively.  On November 20, 2003, the Company issued$139.7 million in additional Term Notes secured by a discrete pool of receivables.  Proceeds from these notes were utilized to(i) pay-off all outstandings under the FIARC Facility; (ii) reduce theoutstandings under the FIRC Facility; and (iii) provide an additional $30million in fundings for additional receivables originations.

 

10

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*Warehouse Facilities as of October 31, 2003*

 
| **Facility** |   | **Capacity** |        | **Outstanding** |   | **Interest  Rate** |   | **Fees**                                                                                               |   | **Insurance**            |   | **Borrowing  Rate at  October 31,  2003** |   |
|--------------|--------|--------------|-------------|-----------------|--------|--------------------|--------|--------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|
| FIARC        |   | $            | 150,000,000 |            | $      | 96,787,606         |   | Commercial paper  rate plus .3%                                                                        |   | .25% of Unused  Facility |   | .35                                       | %      | 1.86 | % |
| FIRC         |   | $            | 75,000,000  |            | $      | 64,675,000         |   | 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                                 |   | 3.02 | % |

 

##### ***Warehouse Facilities - Credit Enhancement as of October 31,2003***

 

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

 

FIRC- In order to obtain a lower cost of funding, the Company has agreed under theFIRC credit facility to maintain credit enhancement insurance covering all ofits receivables pledged as collateral under this facility. The facility lendersare named as additional insureds under these policies. The coverages areobtained on each receivable at the time it is purchased by the Company and theapplicable premiums are prepaid for the life of the receivable. Each receivableis covered by three separate credit insurance policies, consisting of basicdefault insurance under a standard auto loan protection policy (known as “ALPI”insurance) together with certain supplemental coverages relating to physicaldamage and other risks. Solely at its expense, the Company carries thesecoverages and neither the vehicle purchasers nor the dealers are charged forthe coverages and they are usually unaware of their existence. The Company’sALPI insurance policy is written by National Union Fire Insurance Company ofPittsburgh (“National Union”), which is a wholly owned subsidiary of AmericanInternational Group.

 

The premiums thatthe Company paid during fiscal year 2003 for its three credit enhancementinsurance coverages, of which the largest component is basic ALPI insurance,represented approximately 3.9 percent of the principal amount of thereceivables originated during the year. Aggregate premiums paid for ALPIcoverage alone during the fiscal years ended April 30, 2001, 2002 and 2003 were$3,413,186, $2,382,031 and $4,141,328, respectively, and accounted for 3.0 percent,3.1 percent and 3.8 percent of the aggregate principal balance of thereceivables acquired during such respective periods.

 

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly- owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100 percent of the riskunder the Company’s ALPI insurance policy. At the time each receivable isinsured by National Union, the risk is automatically reinsured to its fullextent and approximately 96 percent of the premium paid by the Company toNational Union with respect to such receivable is ceded to the InsuranceSubsidiary. When a loss covered by the ALPI policy occurs, National Union paysit after the claim is processed, and National Union is then reimbursed in fullby the Insurance Subsidiary.  Inaddition to the monthly premiums and liquidity reserves of the InsuranceSubsidiary, a trust account is maintained by National Union to secure theInsurance Subsidiary’s obligations for losses it has reinsured.

 

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The result of theforegoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of October 31, 2003, the InsuranceSubsidiary had capital and surplus of $2,108,646 and unencumbered cash reservesof $2,426,237 in addition to the $3,241,554 trust account.

 

The ALPI coverageas well as the Insurance Subsidiary’s liability under the ReinsuranceAgreement, remains in effect for each receivable that is pledged as collateralunder the warehouse credit facility. Once receivables are transferred from FIRCto FIARC and financed under the commercial paper facility, ALPI coverage andthe Insurance Subsidiary’s liability under the Reinsurance Agreement iscancelled with respect to the transferred receivables. Any unearned premiumassociated with the transferred receivables is returned to the Company. TheCompany believes the losses its Insurance Subsidiary will be required toindemnify will be less than the premiums ceded to it. However, there can be noassurance that losses will not exceed the premiums ceded and the capital andsurplus of the Insurance Subsidiary.

 

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

 

 

*Warehouse Facilities –**Agentsand Expirations*

* *
| **Facility** |   | **Agent** |   | **Expiration**                                                              |   | **Event if  not Renewed**                                                                                                                                               |
|--------------|--------|-----------|--------|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |   | Wachovia  |   | January 31, 2004                                                            |   | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility                                     |
| FIRC         |   | Wachovia  |   | December 2,  2004. Capacity was reduced to $50 million on December 4, 2003. |   | 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 October 31, 2003, therequirement that the FIRC facility be reduced from $75 million to $50 millionwas extended until December 4, 2003. On December 4, 2003, the FIRC facility wasrenewed at the $50 million commitment level until December 2, 2004 undersubstantially similar terms and conditions. On November 20, 2003, the expiration date of the FIARC facility wasextended to January 31, 2004 to allow additional time for the completion offinal documentation and credit review by the lender.  There was no balance outstanding under the FIARC facility onNovember 20, 2003.

 

Management presentlyintends to seek further extensions to these warehouse facilities prior to thecurrent expiration dates.  Managementfurther considers its relationship with its lenders to be satisfactory and hasno reason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

The following tablecontains pertinent information on the Term Notes as of October 31, 2003.

 
| **Term Notes** |   | **Issuance  Date** |   | **Issuance  Amount** |        | **Maturity  Date** |               | **Outstanding** |   | **Interest  Rate** |   |
|----------------|--------|--------------------|--------|----------------------|-------------|--------------------|--------------------|-----------------|--------|--------------------|--------|
|           |   |               |   |                 |        |               |               |            |   |               |   |
| 2002-A         |   | January 29, 2002   |   | $                    | 159,036,000 |               | December 15,  2008 |            | $      | 63,694,232         |   | 3.46 | % |
|                |        |                    |        |                      |             |                    |                    |                 |        |                    |        |  |  |

 

Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% percent Class A asset-backednotes (“2002-A Term Notes”). The initial pool of automobile receivablestransferred to the 2002 Auto Trust totaled $135,643,109, which were previouslyowned by FIRC and FIARC, secure the 2002-A Term Notes.  In addition to the issuance of the Class ANotes, the 2002 Auto Trust also issued $4,819,000

 

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in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $159,033,471 were used to (i) fund a$25,000,000 pre-funding account to be used for future loan originations; (ii)repay all outstanding borrowings under the FIARC commercial paper facility,(iii) reduce the outstanding borrowings under the FIRC credit facility, (iv)pay transaction fees related to the 2002-A Term Note issuance, and (v) fund acash reserve account of 2 percent or $2,712,862 of the initial receivablespledged which will serve as a portion of the credit enhancement for thetransaction. The Class A Term Notes bear interest at 3.46 percent and requiremonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 97 percent 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 percent of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  Additional credit support isprovided by the cash reserve account, which equals 2 percent of the originalbalance of the receivables pool plus 2 percent of the original balance ofreceivables transferred under the pre-funding provision.  Further enhancement is provided through aninitial 1 percent overcollateralization which is required to be increased to 3percent through excess monthly principal and interest collections. In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6 percent of the then current principal balance of thereceivables pool.  As of April 30, 2003and October 31, 2003, the outstanding principal balances on the 2002-A TermNotes were $87,358,847 and $63,694,232 respectively.

 

On November 20,2003, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed the issuance of$139,661,000 of 2.58% percent Class A asset-backed notes (“2003-A Term Notes”).The initial pool of automobile receivables transferred to the 2003 Auto Trusttotaled $114,726,891, which were previously owned by FIRC and FIARC, secure the2003-A Term Notes.  In addition to theissuance of the Class A Notes, the 2002 Auto Trust also issued $5,065,891 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 $139,656,629 were usedto (i) fund a $30,000,000 pre-funding account to be used for future loanoriginations; (ii) repay all outstanding borrowings under the FIARC commercialpaper facility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2003-A Term Note issuance,and (v) fund an initial cash reserve account of 0.5% percent or $573,635 of theinitial receivables pledged which will increase to 2 percent of the originalreceivables balance through excess cash flow and serve as a portion of thecredit enhancement for the transaction. The Class A Term Notes bear interest at2.58 percent and require monthly principal reductions sufficient to reduce thebalance of the Class A Term Notes to 96.1 percent of the outstanding balance ofthe underlying receivables pool. The final maturity of the 2003-A Term Notes isApril 20, 2011.    The Class B Notes donot bear interest but require principal reductions sufficient to reduce thebalance of the Class B Notes to 3.9 percent of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  Additional creditsupport is provided by the cash reserve account, which will equal 2 percent ofthe original balance of the receivables pool plus 2 percent of the originalbalance of receivables transferred under the pre-funding provision when fullyfunded.  Further enhancement is providedthrough an initial 3 percent overcollateralization which is required to beincreased to 3.9 percent through excess monthly principal and interestcollections. In the event that certain asset quality covenants are not met, thereserve account target level will increase to 6 percent of the then currentprincipal balance of the receivables pool.

 

*Acquisition Facility*.  On October 2, 1998, the Company, through itsindirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFSAcquisition), entered into a $75 million non-recourse bridge financing facilitywith VFCC, an affiliate of Wachovia Securities, to finance the Company’sacquisition of FISC. Contemporaneously with the Company’s purchase of FISC,FISC transferred certain assets to FIFS Acquisition, consisting primarily of(i) all receivables owned by FISC as of the acquisition date, (ii) FISC’sownership interest in certain Trust Certificates and subordinated spread orcash reserve accounts related to two asset securitizations previously conductedby FISC, and (iii) certain other financial assets, including charged-offaccounts owned by FISC as of the acquisition date. These assets, along with a$1 million cash reserve account funded at closing, served as the collateral forthe bridge facility. The facility bore interest at VFCC’s commercial paper rateplus 2.35

 

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percent and expired onAugust 14, 2000. Under the terms of the facility, all cash collections from thereceivables or cash distributions to the certificate holder under thesecuritizations were first applied to pay FISC a servicing fee in the amount of3 percent on the outstanding balance of all owned or managed receivables andthen to pay interest on the facility. Excess cash flow available afterservicing fees and interest payments was utilized to reduce the outstandingprincipal balance on the indebtedness. In addition, one-third of the servicingfee paid to FISC was also utilized to reduce principal outstanding on theindebtedness.

 

On August 8, 2000,the Company entered into an agreement with Wachovia Securities to refinance theacquisition facility. Under the agreement, a partnership was created in whichFIFS Acquisition served as the general partner and contributed its assets for a70 percent interest in the partnership and First Union Investors, Inc., anaffiliate of Wachovia Securities, served as the limited partner with a 30percent interest in the partnership (the “Partnership”). Pursuant to therefinancing, the Partnership issued Class A Notes in the amount of $19,204,362and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which wereused to retire the acquisition debt. The Class A Notes bear interest at VFCC’scommercial paper rate plus 0.95 percent per annum and amortize on a monthly basisby an amount necessary to reduce the Class A Note balance as of the paymentdate to 75 percent of the outstanding principal balance of Receivables Acquiredfor Investment, excluding Receivables Acquired for Investment that areapplicable to FIACC, as of the previous month end. The Class B Notes bearinterest at VFCC’s commercial paper rate plus 5.38 percent per annum andamortize on a monthly basis by an amount which varied based on excess cashflows received from Receivables Acquired for Investment after payment ofservicing fees, trustee and back-up servicer fees, Class A Note interest andClass A Note principal, plus collections received on the Trust Certificates.The Class B Notes were paid in full on September 15, 2000.  After the Class B Notes were paid in full,all cash flows received after payment of Class A Note principal and interest,servicing fees and other costs, are distributed to the Partnership forsubsequent distribution to the partners based upon the respective partnershipinterests.  Beginning in November 2001,the partnership used excess cash flow to retire additional Class A Noteprincipal, thus no further partnership distributions were paid until the ClassA Notes were retired.  On February 20, 2003,the Class A Notes were fully paid.  OnSeptember 19, 2003, First Investors Financial Services, Inc. purchased thelimited partnership interests previously held by First Union Investors, Inc andaccordingly receive all excess cashflows.

 

*Working Capital Facility*.  On December 6, 2001, the Company enteredinto an agreement with Wachovia Securities to refinance the $11,175,000outstanding balance of the working capital term loan previously provided byBank of America and Wachovia and increase the size of the facility to $13.5million.  The renewal facility wasprovided to a special-purpose, wholly owned subsidiary of the Company, FirstInvestors Residual Funding LP.   Thefacility originally consisted of a $9 million revolving tranche and a $4.5million term loan tranche which amortizes monthly.  The term loan tranche of this working capital facility isevidenced by the Class B Notes issued in conjunction with the 2002 Auto Trustfinancing. The remaining $9 million of the $13.5 million working capital facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve accounts for each of the Company’sother credit facilities.  The facilityis secured solely by the residual cash flow and cash reserve accounts relatedto the Company’s warehouse credit facilities, the acquisition facility and theexisting and future term note facilities. On December 4, 2003, the facility was extended to December 2, 2004.  Under the terms of the renewal, the interestrate was increased to LIBOR plus 2.25%. In addition, the monthly principal amortization under the term loantranche was increased to the greater of $250,000 or the principal distributionsmade under the Class B Notes issued under the 2002 Auto Trust financing.  This amortization schedule will continue untilthe term loan tranche is repaid, leaving the remaining facility consisting ofthe $9 million revolving tranche. At April 30, 2003 and October 31, 2003, therewas $8,714,518 and $7,011,631, respectively, outstanding under this facility.

 

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 thatoutstandings under the facility could not exceed the lesser of a borrowing baseor the $9 million facility limit.

 

14

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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.

 

*Shareholder Loans –*OnDecember 3, 2001 the Company entered into an agreement with one of its  shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5million.  The proceeds of the borrowingswill be utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10 percent per annum. The facility is unsecured and expressly subordinated to the Company’s seniorcredit facilities. The facility matures on December 3, 2008 but may be repaidat any time unless the Company is in default on one of its other creditfacilities. There was $746,280 outstanding under this facility as of April 30,2003 and October 31, 2003.

 

*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 covenants governing these financing arrangements at October31, 2003.

 

*Interest Rate Management*.  The Company’s warehouse credit facilitiesbear interest at floating interest rates which are reset on a short-term basiswhile the secured Term Notes bear interest at a fixed rate of interest. TheCompany’s receivables bear interest at fixed rates that do not generally varywith a change in market interest rates. Since a primary contributor to theCompany’s profitability is its ability to manage its net interest spread, theCompany seeks to maximize the net interest spread while minimizing exposure tochanges in interest rates. In connection with managing the net interest spread,the Company may periodically enter into interest rate swaps or caps to minimizethe effects of market interest rate fluctuations on the net interest spread. Tothe extent that the Company has outstanding floating rate borrowings or haselected to convert a portion of its borrowings from fixed rates to floatingrates, the Company will be exposed to fluctuations in short-term interestrates.

 

On September 27, 2000, the Company entered into a swap under which theCompany would pay a fixed rate of 6.30 percent and receive the prevailing onemonth LIBOR rate plus 0.505 percent on a notional amount of $100 million.  Under the terms of the swap, the counterpartyhad the option of extending the swap for an additional three years to mature onApril 15, 2004 at a fixed rate of 6.42 percent.  On April 15, 2001, the counterparty exercised its extensionoption.

 

On June 1, 2001, the Company entered into interest rate swaps with anaggregate notional amount of $100 million and a maturity date of April 15,2004.  Under the terms of these swaps,the Company will pay a floating rate based on one month LIBOR and receive afixed rate of 5.025 percent.  Management elected to enter into these swap agreements to offset theuneconomical position of the existing pay fixed swap created by rapidlydeclining market interest rates.  Inconnection with the decision to enter into the $100 million floating rate swap,the Company elected to change the designation of the $100 million fixed rateswap from a cash flow hedge and not account for the instrument as a hedge underSFAS No. 133.   As a result, the changein fair value of the swaps is reflected in net income for periods subsequent toMay 31, 2001.

 

During the six months ended October 31, 2003 and as a requirement of theFIARC commercial paper facility, the Company entered into ten interest rate captransactions at cap rates ranging from 6.5% to 7.5% with an amortizing notionalbalance that is expected to coincide with the outstanding balance of the FIARCcommercial paper facility. The interest rate caps were not designated as hedgesand, accordingly, changes in the fair value of

 

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theinterest rate caps are recorded as unrealized gains or losses and reflected innet income.  On December 2, 2003, theCompany terminated all interest rate caps outstanding in exchange for proceedsof $356,000.  The caps were terminatedfollowing the repayment of all outstandings under the FIARC facility followingthe issuance of the 2003-A Term Notes. As a result, a realized loss of $14,000 was incurred relative to theaggregate 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 and sixmonths ended October 31, 2002 and 2003, are as follows:

 
|                                                                |   | **For the Three Months Ended  October 31,** |   | **For the Six Months Ended  October 31,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
|                                                                |   | **2002**                                    |   | **2003**                                  |   | **2002** |   | **2003** |   |
| Weighted average shares:                                            |   |                                        |   |                                      |   |   |   |   |   |
| Weighted average shares outstanding for basic earnings  per share   |   | 5,026,269                                   |   | 5,005,269                                 |   | 5,181,753 |   | 5,014,514 |   |
| Effect of dilutive stock options and warrants                       |   | 3,582                                       |   | 82,596                                    |   | 1,901 |   | 64,917 |   |
| Weighted average shares outstanding for diluted  earnings per share |   | 5,029,851                                   |   | 5,087,865                                 |   | 5,183,654 |   | 5,079,431 |   |

 

Forthe three months ended October 31, 2002 and 2003, the Company had 702,867 and695,891 of stock options and stock warrants which were not included in the computation of diluted earnings pershare.  For the six months ended October31, 2002 and 2003 the Company had 704,814 and 713,570 of stock options andstock warrants which were not included in the computation of diluted earningsper share.  These  were not included in the computation ofdiluted earnings per share because to do so would have been antidilutive forthe periods presented.  As discussed inthe proxy statement on August 5, 2002, the number of shares of common stockavailable for issuance under the 1995 Employee Stock Option plan was increasedto 500,000 shares.  Under the plan,72,500 options were granted on September 11, 2002,  2,500 options were granted May 5, 2003 and 55,000 options weregranted on September 10, 2003. Additionally, the 2002 Non-employee Director Stock Option plan wasestablished with a total of 500,000 shares of common stock available forissuance.  Under the plan, 100,000options were granted on July 15, 2002 and 120,000 options were granted July 15,2003.

 

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

 

OnDecember 24, 2002, the Company invested $475,061 for a 40% ownership in commonstock in First Auto Receivables Corporation (“FARC”) and $712,591 for juniormezzanine debt of FARC.  FARC purchaseda $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 plus 1%, the seniormezzanine interest rate is 22.5% and the junior mezzanine interest rate is 25%.

 

The Companyaccounts for its ownership investment in FARC using the equity method inaccordance with APB Opinion 18.  Inaddition to the equity and debt investments, the Company performs loan servicingand collection activities on the portfolio. For the six months ended October 31, 2003, the Company recognized$710,439 of servicing income, $106,285 of interest income and $544,483 ofequity in earnings of FARC.  Equity inearnings of FARC and interest income from junior mezzanine debt is included inLate Fees and Other Income on the income statement.  The equity investment in FARC and junior mezzanine debt plusaccrued interest are included in Deferred Financing Costs and Other Assets onthe balance sheet.

 

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

 

In January 2003, the FASB issued FASB InterpretationNo. 46, *Consolidation of Variable Interest Entities*(“FIN 46”)*.*FIN 46 clarifies the application of Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements,* for certain entities which do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties or in which equityinvestors do not have the****characteristics of a controlling financial interest (“variableinterest entities”).  Variable interestentities will be required to be consolidated by their primary beneficiary.  The primary beneficiary of a variableinterest entity is determined to be the party that absorbs a majority of theentity’s expected losses, receives a majority of its expected returns, or both,as a result of holding variable interests, which are ownership, contractual, orother pecuniary interests in an entity. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003 and to variable interest entities in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year or interim period beginning afterDecember 15, 2003, to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003. FIN 46applies to the Company as of the beginning of the applicable interim or annualperiod.  The Company does not anticipateFIN 46 will have a material effect on its financial statements.

 

**9.****     Shareholders’Equity**

 

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a par value of $1.00. As of October 31, 2003, no shares have been issued.

 

*Employee**Stock OptionPlan*.  In June 1995, theBoard of Directors adopted the Company’s 1995 Employee Stock Option Plan (thePlan). The Plan is administered by the Compensation Committee of the Board ofDirectors and provides that options may be granted to officers and other keyemployees for the purchase of up to 300,000 shares of common stock, subject toadjustment in the event of certain changes in capitalization. On September 10,2002, the number of shares of common stock available for issuance was increasedto 500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The Compensation Committeeselects the persons to receive options and determines the exercise price, theduration, any conditions on exercise and other terms of the options. In thecase of options intended to be incentive stock options, the exercise price maynot be less than 100 percent of the fair market value per share of common stockon the date of grant. With respect to non-qualified stock options, the exerciseprice may be fixed as low as 50 percent 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.

 

The exercise priceof the option is payable in full upon exercise and payment may be in cash, bydelivery of shares of common stock (valued at their fair market value at thetime of exercise), or by a combination of cash and shares. At the discretion ofthe Compensation Committee, options may be issued in tandem with stockappreciation rights entitling the option holder to receive an amount in cash orin shares of common stock, or a combination thereof, equal in value to anyincrease since the date of grant in the fair market value of the Common Stockcovered by the option.

 

*Non-Employee Director Stock OptionPlan* - In September 2002, the Non-Employee Stock Option Planwas established to further align the interests of the Company’s directors withthe interests of the shareholders, as well as attracting and retainingqualified directors.   The Board ofDirectors administers the plan and the options will not be qualified asincentive stock options.  A total of500,000 shares of common stock are available for issuance.  Option types will be automatic anddiscretionary. In September 2002 the Company approved an automatic grant of20,000 shares, 100,000 shares in total, for each non-employee director.  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 theCompany’s annual financial performance exceeds parameters established by theBoard.  No discretionary grants havebeen awarded.

 

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

 

## **Critical AccountingPolicies**

 

FinancialReporting Release No. 60, which was issued by the Securities and ExchangeCommission (“SEC”), requires all registrants to discuss critical accountingpolicies or methods used in the preparation of financial statements.  Note 2 to the consolidated financialstatements includes a summary of the significant accounting policies andmethods in preparation of the Company’s consolidated financial statements.

 

The preparation offinancial statements includes the use of estimates and assumptions that affectthe reported amounts of assets and liabilities and the reported amounts of netrevenues and expenses during the reporting periods. The following is a reviewof the more significant assumptions and estimates, as well as the accountingpolicies and methods used in the preparation of the consolidated financialstatements.

 

*Receivables Held for Investment*.  The Company accrues interest income monthlyusing the effective interest method. Interest income also includes additionalamounts received upon early payoffs of certain receivables attributable to thedifference between the principal balance of the receivables calculated usingthe Rule of 78’s method and the principal balance of the receivables calculatedusing the effective interest method. When a receivable becomes 90 days pastdue, the income accrual is suspended until the payments become current. When aloan is charged off or the collateral is repossessed, the remaining incomeaccrual is written off.

 

*Receivables Acquired for Investment*.  In connection with loans that were acquiredin a portfolio purchase by the Partnership, the Company estimates the amountand timing of undiscounted expected future principal and interest cash flows.For certain purchased loans, the amount paid for a loan reflects the Company’sdetermination that it is probable the Company will be unable to collect allamounts due according to the loan’s contractual terms. Accordingly, atacquisition, 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.  Given the nature of theremaining cash flows, the Company determined that the timing of collections onthese assets are much more unpredictable than contractual cash flows fromnon-defaulted receivables, therefore during the quarter ended October 31, 2003the Company followed the guidance provided by Practice Bulletin 6*,Amortization of Discounts on Certain Acquired Loans*, and account forthese assets utilizing the cost-recovery method.  Under this method, cash proceeds from collections are applied tofirst reduce the company’s basis in the assets.  Cash collected in excess of this cost basis is recognized asincome when received.

 

*Other Income*.  Servicing income is accrued as services arerendered. Other income includes late charge fees and is recognized ascollected.

 

*Allowance for Credit Losses*.  For receivables financed under the FIRCcredit facility, the Company purchases credit enhancement insurance fromthird-party insurers which covers the risk of loss upon default and certainother risks. The Company established a captive insurance subsidiary to reinsurethe credit enhancement insurance coverage. The credit enhancement insurancecoverage for all receivables is reinsured by FIIC.  All originations recorded by the Company are covered by creditenhancement insurance while pledged as collateral for the FIRC credit facility.Once receivables are transferred to the FIARC commercial paper facility, creditenhancement insurance is cancelled. In addition, no default insurance ispurchased for core receivables originated and financed under the FIACCcommercial paper facility. Accordingly, the Company is exposed to credit lossesfor all receivables and provides an allowance for such losses.

 

The Company initiatesefforts to make customer contact when the customer is three days past due andbecome 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 determinedthat the loan is uncollectible, the collateral is repossessed.  Generally this occurs at 90 to 120 days pastdue.   Upon repossession, impairment isrecorded to

 

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write off ReceivablesHeld for Investment and related accrued interest.  The fair value of the receivable is recorded as an Assets Heldfor Sale.  Fair value is determined byestimating the proceeds of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling relatedexpenses.   After collection of allproceeds, the Company records an adjustment, positive or negative, based on thedifference between the fair value estimate and the true proceeds received.   In the event the collateral is unable to belocated, the Company will write off the entire balance after exhausting allcollection efforts.

 

TheCompany calculates the allowance for credit losses in accordance with SFAS 5*, Accountingfor Contingencies.*  SFAS 114,*Accountingfor Creditors for Impairment of a Loan* does not apply to the Companysince the Receivables Held for Investment are comprised of a large group ofsmaller balance homogenous loans that are evaluated collectively forimpairment.

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology utilized is a six-month migration analysis whereby theCompany compares the aging status of each loan from six months prior to theaging loan status as of the reporting date. These factors are then applied to the aging status of each loan at thereporting date in order to calculate the number of loans that are expected tomigrate to impaired status.  Theestimated number of impairments is then multiplied by estimated loss per loan,which is based on historical information.  The computed reserve is then compared to the amount recorded foradequacy.  The Company compares thesix-month result to prior six-month periods to compare trends and evaluate anyother internal or external factors that may affect collectibility. Theallowance for credit losses is based on estimates and qualitative evaluations andultimate losses will vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,are reported in earnings in the period they become known.

 

*Deferred Financing Costs*.  The Company defers financing costs andamortizes the costs related to the respective warehouse credit facilities andterm notes over the estimated average life of the receivables financed underthose respective facilities as the provisions of such facility generallyprovide that receivables assigned to such facility would be allowed to amortizeshould the facilities not be extended. Deferred financing costs are expensed proportionately if borrowingcapacity is reduced.

 

*Derivatives*.  In June 1998, theFinancial Accounting Standards Board (FASB) issued SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities.* SFAS No. 133establishes accounting and reporting standards requiring that every derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded in the balance sheet as either an asset or liability atits fair value. The Statement requires that changes in the derivative’s fairvalue be recognized currently in earnings unless specific hedge accounting criteriaare met.  In June 2000, the FASB issuedSFAS No. 138*,Accounting for Certain Derivative Instruments and Certain Hedging Activities —an Amendment of FASB Statement No. 133.*

 

As of May 1, 2001 the Company designated its interest rate swaps and aninterest rate cap with an aggregate notional value of $130,165,759 as cash flowhedges as defined under SFAS No. 133. Accordingly, any changes in the fair value of these instrumentsresulting from the mark-to-market process are recorded as unrealized gains orlosses and reflected as an increase or reduction in shareholders’ equitythrough other accumulated comprehensive income (loss).  In connection with the decision to enterinto the $100 million floating rate swap on June 1, 2001, the Company electedto change the designation of the $100 million fixed rate swap and not accountfor the instrument as a hedge under SFAS No. 133.   As a result, the change in fair value of the swaps is reflectedin net income for the period subsequent to May 31, 2001.  The interest rate caps entered into as arequirement of the FIARC commercial paper facility are not designated as hedgesand, accordingly, changes in the fair value are recorded as unrealized gains orlosses and reflected in net income.

 

## ***Stock-Based Compensation***. The Company has an employee stock option plan and a non-employeedirector stock option plan. The Company applies APB Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related Interpretations inaccounting for its plans.

 

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## **General**

 

Net income for thethree months ended October 31, 2003 was $187,805 compared to $46,131 for thethree months ended October 31, 2002. Net income for the six months ended October 31, 2003 was $407,884compared to $189,825 for the six months ended October 31, 2002.  Earnings per common share were $0.08 and$0.04 for the six months ended October 31, 2003 and October 31, 2002,respectively.

 

## **Managed Receivables**

 

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

 
|                                                                                |   | **As of or for the  Six Months Ended  October  31,** |    |
|-------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                |   | **2002**                                                  |    | **2003** |   |
| Receivables Held for Investment:                                                    |   |                                                      |    |   |   |
| Number                                                                              |   | 17,801                                                    |    | 17,866 |   |
| Principal balance                                                                   |   | $                                                         | 209,431 |   | $ | 222,978 |   |
| Average principal balance of receivables outstanding  during the six-month period   |   | $                                                         | 211,109 |   | $ | 226,395 |   |
| Average principal balance of receivables outstanding  during the three-month period |   | $                                                         | 210,027 |   | $ | 225,452 |   |
| Receivables Acquired for Investment:                                                |   |                                                      |    |   |   |
| Number                                                                              |   | 1,393                                                     |    | 116 |   |
| Principal balance                                                                   |   | $                                                         | 3,850   |   | $ | 212 |   |
| Other Servicing:                                                                    |   |                                                      |    |   |   |
| Number                                                                              |   | —                                                    |    | 21,923 |   |
| Principal balance                                                                   |   | —                                                    |    | $ | 347,456 |   |
| Total Managed Receivables Portfolio:                                                |   |                                                      |    |   |   |
| Number                                                                              |   | 19,194                                                    |    | 39,905 |   |
| Principal balance                                                                   |   | $                                                         | 213,281 |   | $ | 570,647 |   |

 

## **Net Interest Income**

 

Thefollowing tables summarize the Company’s net interest income (dollars inthousands):

 
|                                                                          |   | **Three  Months Ended  October  31,** |   | **Six Months  Ended  October  31,** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------------------|--------|------------------------------------------|--------|
|                                                                          |   | **2002**                                   |   | **2003**                                 |   | **2002** |   | **2003** |   |
| Interest income (1):                                                          |   |                                       |   |                                     |   |   |   |   |   |
| Receivables Held for Investment                                               |   | $                                          | 8,033  |                                     | 7,924  |   | $ | 16,176 |   | $ | 16,003 |   |
| Receivables Acquired for Investment and Investment in  Trust Certificates (2) |   | 112                                        |   | —                                   |   | 481 |   | (9 | ) |
|                                                                          |   | 8,145                                      |   | 7,924                                    |   | 16,657 |   | 15,994 |   |
| Interest expense:                                                             |   |                                       |   |                                     |   |   |   |   |   |
| Receivables Held for Investment (3)                                           |   | 2,690                                      |   | 1,890                                    |   | 5,548 |   | 3,907 |   |
| Receivables Acquired for Investment and Investment in  Trust Certificates     |   | 3                                          |   | —                                   |   | 28 |   | — |   |
|                                                                          |   | 2,693                                      |   | 1,890                                    |   | 5,576 |   | 3,907 |   |
| Net interest income                                                           |   | $                                          | 5,452  |                                     | $      | 6,034 |   | $ | 11,081 |   | $ | 12,087 |   |
|                                                                               |        |                                            |        |                                          |        |  |  |  |  |  |  |  |  |

 

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(1)           Amountsshown are net of amortization of premium and deferred fees.

(2)           Amountsshown for the three and six months ended October 31, 2002 reflect $33 and $136,respectively, in net interest income related to minority interest.

(3)           Includesfacility fees and fees on the unused portion of the credit facilities.

 

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The following table sets forth information with regardto the Company’s net interest spread, which represents the difference betweenthe effective yield on Receivables Held for Investment and the Company’saverage cost of debt utilized to fund these receivables, and its net interestmargin (averages based on month-end balances):

 
|                                                    |   | **Three Months Ended  October 31,** |   | **Six Months Ended  October 31,** |   |
|---------------------------------------------------------|--------|-------------------------------------|--------|-----------------------------------|--------|
|                                                    |   | **2002**                            |   | **2003**                          |   | **2002** |   | **2003** |   |
| Receivables Held for Investment:                        |   |                                |   |                              |   |   |   |   |   |
| Effective yield on Receivables Held  for investment (1) |   | 15.3                                | %      | 14.0                              | %      | 15.3 | % | 14.1 | % |
| Average cost of debt (2)                                |   | 5.1                                 | %      | 3.3                               | %      | 5.3 | % | 3.4 | % |
| Net interest spread (3)                                 |   | 10.2                                | %      | 10.8                              | %      | 10.0 | % | 10.7 | % |
| Net interest margin (4)                                 |   | 10.2                                | %      | 10.7                              | %      | 10.1 | % | 10.7 | % |

 

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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)           Representsnet interest income as a percentage of average Receivables Held for Investmentoutstanding.

 

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 increased 10.7% for the threemonths ended October 31, 2003 to $6.0 million from $5.4 million for the threemonths ended October 31, 2002.  Netinterest income increased 9% for the six months ended October 31, 2003 to $12.1million from $11.1 million for the six months ended October 31, 2002.

 

Changesin the principal amount and rate components associated with the ReceivablesHeld for Investment and debt can be segregated to analyze the periodic changesin net interest income on such receivables. The following table analyzes thechanges attributable to the principal amount and rate components of netinterest income (dollars in thousands):

 
|                             |   | **Three  Months Ended  October 31, 2002 to 2003** |                           | **Six Months  Ended  October 31, 2002 to 2003** |              |
|----------------------------------|--------|---------------------------------------------------|--------------------------------|-------------------------------------------------|-------------------|
|                             |   | **Increase  (Decrease)  Due to  Change in**       |                           | **Total  Net  Increase  (Decrease)**            |              | **Increase  (Decrease)  Due to  Change in** |   | **Total Net  Increase  (Decrease)** |   |
| **Average  Principal  Amount**   |   | **Average  Rate**                                 | **Average  Principal  Amount** |                                            | **Average  Rate** |
|                             |   |                                              |                           |                                            |              |   |   |   |   |   |   |   |   |
| Receivables Held for Investment: |   |                                              |                           |                                            |              |   |   |   |   |   |   |   |   |
| Interest income                  |   | $                                                 | 590                            |                                            | $                 | (699 | ) | $ | (109 | ) | $ | 1,171 |   | $ | (1,344 | ) | $ | (173 | ) |
| Interest expense                 |   | 250                                               |                           | (1,051                                          | )                 | (801 | ) | 520 |   | (2,159 | ) | (1,640 | ) |
| Net interest income              |   | $                                                 | 340                            |                                            | $                 | 352 |   | $ | 692 |   | $ | 651 |   | $ | 815 |   | $ | 1,467 |   |

 

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**Results of Operations**

 

*Three Months and Six Months EndedOctober 31, 2003 and 2002 (dollars in thousands)*

 

*InterestIncome*. Interest incomefor the 2003 periods decreased to $7,924 and $15,994 compared with $8,145 and$16,657 for the comparable periods in 2002. Interest income on Receivables Heldfor Investment decreased 1% in 2003 compared to their respective periods in2002. This is due to a reduction of 124 basis points, or an 8% decrease, in theyield on the Receivables Held for Investment for the three-month period and 119basis points, or an 8% decrease, in the yield for the six-month period endedOctober 31, 2003 compared to the same period for 2002 offset by a 7% increasein average portfolio outstanding. Interest income on Receivables Acquired forInvestment decreased by 100% for the comparable three-month period and 100% forthe comparable six-month period. The decreases are primarily attributable to a94% reduction in the average principal balances of the Receivables Acquired forInvestment for the comparable three-month and six-month periods.

 

*InterestExpense*. Interest expensein 2003 decreased for both the three-month and six-month periods to $1,890 and$3,907 as compared to $2,693 and $5,576 in 2002. Interest expense onReceivables Held for Investment decreased 30% for their respectiveperiods.  The reduction is primarily dueto a decrease of 184 and 188 basis points, or decrease of 36%, in the interestrate on the outstanding borrowings in the three-month and six-month period in2003 compared to 2002.  This is offsetby a 9% higher average debt outstanding for the three-months and six-monthsended 2003 compared to 2002.

 

*Net InterestIncome*. Net interestincome increased to $6,034 and $12,087, an increase of 11% and 9% over thecomparable three-month and six-month periods in 2002. The increases resultedprimarily from lower cost of funds to finance the Receivables Held forInvestment offset by lower yields on the Receivables Held for Investment.

 

*Provision forCredit Losses*. Theprovision for credit losses for 2003 increased to $3,270 and $6,662 as comparedto $2,270 and $4,639 in 2002. The increase in provision for credit losses isprimarily due to weakened economic conditions and the ability of customers tomaintain comparable employment. Additionally, recovery rates on repossessions have suffered due todecreasing prices and increased incentives for new vehicles which decreased thedemand and price for used vehicles. Additionally, the average portfolio balance for the 2003 periods is$15,300 greater than the average portfolio balances of the 2002 periods.  Net charge-offs for the three-month periodended October 31, 2003 increased to $3,333 from $2,370 in the prior yearperiod.  Net charge-offs for thesix-month period ended October 31, 2003 increased to $6,695 from $4,757 in theprior year period.

 

*Servicing Income*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof First Auto Receivables Corporation (“FARC”).  FARC, which is 40% owned by the Company, purchased a portfolio ofapproximately $200 million of installment loan receivables.  Servicing income was $339 and $710respectively, for the three-month and six-month period ending October 31,2003.  On March 19, 2003 the Companyentered into an agreement to provide loan servicing and collection activitieson $276 million of installment loan receivables for unrelated third parties.  Servicing income was $884 and $1,788respectively, for the three-month and six-month period ending October 31, 2003.

 

*Late Fees andOther Income*. Late feesand other income increased to $905 and $1,579 for the three-month and six-monthperiod ended October 31, 2003, compared to $350 and $682 for the three-monthand six-month periods ended October 31, 2002. The increase is due to $296 and $544 for the three-month and six-monthperiods ended October 31, 2003, of income from the equity in the earnings ofFARC.  Additionally, the utilization ofour proprietary system for providing electronic payment services to ourcustomers increased our fee income related to this service by $300 for the sixmonths ended October 31, 2003 compared to the six months endedOctober 31, 2002.  Included in latefees and other income for the six months ended October 31, 2003 is $106 ofinterest income from junior mezzaninedebt in FARC.

 

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*Unrealized Loss on Interest RateDerivative Positions*. In conjunction with the adoption of SFAS 133, the Company is required toreport the fair value of interest rate derivative positions.  A net unrealized loss of $149 and $6 forthree months and six months ended October 31, 2003 is principally due to markto market movements on interest rate caps required for the FIARC creditfacility, offset by minor unrealized losses due to movements in the Company’s$100 million 6.42% pay fixed swap versus movements in the $100 million 5.025%pay floating swap.  These twoderivatives will not directly offset over the remaining term due to interestrate fluctuations between periods.

 

*Salaries andBenefit Expenses*.Salaries and benefit costs increased to $2,187 and $4,422 for the three monthsand six months ended October 31, 2003, compared to $1,790 and $3,639 for thethree months and six months ended October 31, 2002.  The increase is primarily due to higher benefits costs and highersalary expenses due to the increase in the managed portfolio from the additionof the FARC assets and the March 19, 2003 loan servicing agreement.

 

*Other InterestExpense*. Other interestexpense in 2003 decreased to $121 for the three-month period and $250 for thesix-month period as compared to $178 and $340, respectively, in 2002. Thedecrease was primarily due to a 31% reduction in the average outstandingborrowings on our working capital line for the three months ended October 31,2003, compared to 2002 and a 29% reduction in the average outstandingborrowings on our working capital line for the six months ended October 31,2003, compared to 2002.

 

*Other Expenses*. Other expenses increased to $2,143 and $4,194for the three months and six months ended October 31, 2003 compared to $1,377and $2,593 for the three months and six months ended October 31, 2002.  The increase is primarily attributable tothe increase in managed portfolio and start up expenses associated with theCompany’s direct lending business.  TheCompany’s managed portfolio as of October 31, 2003 totaled $571 million ofinstallment loans compared to $213 million as of October 31, 2002.

 

*Income BeforeProvision for Income Taxes and Minority Interest*.  For thethree months and six months ended October 31, 2003, income before provision forincome taxes and minority interest increased to $293 and $631 respectivelycompared to $102 and $430 for the comparable prior year period. Favorable costof funds and loan servicing income in the current periods are partially offsetby a higher loss provision and operating expenses associated with third partyservicing.

 

# **Liquidity andCapital Resources**

 

*Sources and Uses of Cash Flows*.  The Company’s business requires significantcash flow to support its operating activities. The principal cash requirementsinclude (i) amounts necessary to acquire receivables from dealers and fundrequired reserve accounts, (ii) amounts necessary to fund premiums 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 mostsignificant cash flow requirement is the origination of receivables. TheCompany paid $22.5 million and $51.7 million for  Receivables Held for Investment for the three months and sixmonths ended October 31, 2003 compared to $22.2 million and $46.3 million paidin the comparable 2002 period.

 

The Company fundsloan origination through a combination of two warehouse credit facilities. TheFIRC credit facility generally permits the Company to borrow up to theoutstanding principal balance of qualified receivables, not to exceed $50million.  Receivables that haveaccumulated in the FIRC credit facility may be transferred to the FIARCcommercial paper facility at the option of the Company. The FIARC commercialpaper facility provides an additional financing source up to $150 million.Additionally, the Company has transferred receivables from the warehouse creditfacilities and issued term notes. Substantially all of the Company’sreceivables are pledged to collateralize these credit facilities and termnotes.

 

The Company’s mostsignificant source of cash flow is the principal and interest payments receivedfrom its receivables portfolios. The Company received such payments in theamount of $43.6 million for the six months ended October 31, 2003 and $40.5million for the six months ended 2002. Such cash flow funds repayment of amounts borrowed under the Company’scredit facilities and other holding costs, primarily interest expense and

 

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servicing and custodialfees. During the six months ended October 31, 2003, the Company required netcash of $8.1 million as the receivable originated exceeded portfoliocollections.  During the six monthsended October 31, 2002, the Company required net cash of $5.8 million as thereceivables originated exceeded portfolio collections.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of October 31, 2003, the Company had $63.5 million of availablecapacity in the warehouse 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 principal balanceof the loans in the portfolio.  Cashflow and servicing fees are received after month end, but relate to the priormonth activity.  Thus upon filing of themonthly servicing statements, a portion of the restricted cash is converted tocash available to fund operations.   AtOctober 31, 2003 and 2002, the Company’s unencumbered cash was $2,583,625 and$27,025, respectively.  The increase inavailable cash is primarily due to an increase in the servicing fees from themanaged portfolio.  Cash and servicingfees collected after month end, but related to the prior month activity totaled$2,434,079 and $2,331,085 as of October 31, 2003 and 2002, respectively.Management believes the unencumbered cash and cash inflows are adequate to fundcash requirements for operations.

 

*Capitalization*.The Company finances its origination of receivables primarily through itscredit facilities.  The Company expectsto continue 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 itsreceivables portfolio expected in the foreseeable future. While the Company hasno reason to believe that these facilities will not continue to be available,their termination could have a material adverse effect on the Company’soperations if substitute financing on comparable terms was not obtained.

 

*Financing arrangements.*The Company finances its loan origination through two warehouse creditfacilities. The Company’s credit facilities provide for one-year terms and havebeen renewed annually. Management of the Company believes that the creditfacilities will continue to be renewed or extended or that it would be able tosecure alternate financing on satisfactory terms; however, there can be noassurance that it will be able to do so. In January 2000 and January 2002, theCompany issued $168 million and $159 million, respectively, in asset-backednotes (“Term Notes”) secured by discrete pools of receivables. Proceeds fromthe two note issuances were used to repay outstanding borrowings under thevarious revolving credit facilities. Substantially all receivables retained bythe Company are pledged as collateral for the credit facilities and the TermNotes. The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees, dealer fees, and other comprehensiveincome (loss) amortization was 3.3% and 5.1% for the three months ended and3.4% and 5.3% for the six months ended October 31, 2003 and October 31, 2002,respectively.  On November 20, 2003, theCompany issued $139.7 million in additional Term Notes secured by a discretepool of receivables.  Proceeds from thesenotes were utilized to (i) pay-off all outstandings under the FIARC Facility;(ii) reduce the outstandings under the FIRC Facility; and (iii) provide anadditional $30 million in fundings for additional receivables originations.

 

*Warehouse Facilities as of October 31, 2003*

 
| **Facility** |   | **Capacity** |        | **Outstanding** |   | **Interest  Rate** |   | **Fees**                                                                                               |   | **Insurance**            |   | **Borrowing  Rate at  October 31,  2003** |   |
|--------------|--------|--------------|-------------|-----------------|--------|--------------------|--------|--------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------------------------|--------|
| FIARC        |   | $            | 150,000,000 |            | $      | 96,787,606         |   | Commercial paper  rate plus .3%                                                                        |   | .25% of Unused  Facility |   | .35                                       | %      | 1.86 | % |
| FIRC         |   | $            | 75,000,000  |            | $      | 64,675,000         |   | 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                                 |   | 3.02 | % |

 

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##### ***Warehouse Facilities – Credit Enhancement as of October 31,2003***

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

 

FIRC- In order to obtain a lower cost of funding, the Company has agreed under theFIRC credit facility to maintain credit enhancement insurance covering all ofits receivables pledged as collateral under this facility. The facility lendersare named as additional insureds under these policies. The coverages areobtained on each receivable at the time it is purchased by the Company and theapplicable premiums are prepaid for the life of the receivable. Each receivableis covered by three separate credit insurance policies, consisting of basicdefault insurance under a standard auto loan protection policy (known as “ALPI”insurance) together with certain supplemental coverages relating to physicaldamage and other risks. Solely at its expense, the Company carries thesecoverages and neither the vehicle purchasers nor the dealers are charged forthe coverages and they are usually unaware of their existence. The Company’sALPI insurance policy is written by National Union Fire Insurance Company ofPittsburgh (“National Union”), which is a wholly owned subsidiary of AmericanInternational Group.

 

The premiums thatthe Company paid during fiscal year 2003 for its three credit enhancementinsurance coverages, of which the largest component is basic ALPI insurance,represented approximately 3.9 percent of the principal amount of thereceivables originated during the year. Aggregate premiums paid for ALPIcoverage alone during the fiscal years ended April 30, 2001, 2002 and 2003 were$3,413,186, $2,382,031 and $4,141,328, respectively, and accounted for 3.0percent, 3.1 percent and 3.8 percent of the aggregate principal balance of thereceivables acquired during such respective periods.

 

In April 1994, theCompany 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 percent of the risk under the Company’s ALPI insurance policy. Atthe time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96 percent of thepremium paid by the Company to National Union with respect to such receivableis ceded to the Insurance Subsidiary. When a loss covered by the ALPI policyoccurs, National Union pays it after the claim is processed, and National Unionis then reimbursed in full by the Insurance Subsidiary.  In addition to the monthly premiums andliquidity reserves of the Insurance Subsidiary, a trust account is maintainedby National Union to secure the Insurance Subsidiary’s obligations for lossesit has reinsured.  The result of theforegoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of October 31, 2003, the InsuranceSubsidiary had capital and surplus of $2,108,646 and unencumbered cash reservesof $2,426,237 in addition to the $3,241,554 trust account.

 

The ALPI coverageas well as the Insurance Subsidiary’s liability under the ReinsuranceAgreement, remains in effect for each receivable that is pledged as collateralunder the warehouse credit facility. Once receivables are transferred from FIRCto FIARC and financed under the commercial paper facility, ALPI coverage andthe Insurance Subsidiary’s liability under the Reinsurance Agreement iscancelled with respect to the transferred receivables. Any unearned premiumassociated with the transferred receivables is returned to the Company. TheCompany believes the losses its Insurance Subsidiary will be required toindemnify will be less than the premiums ceded to it. However, there can be noassurance that losses will not exceed the premiums ceded and the capital andsurplus of the Insurance Subsidiary.

 

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

 

*Warehouse Facilities – Agents andExpirations*

* *
| **Facility** |   | **Agent** |   | **Expiration**                                                              |   | **Event if  not Renewed**                                                                                                                                               |
|--------------|--------|-----------|--------|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |   | Wachovia  |   | January 31, 2004                                                            |   | Receivables  pledged would be allowed to amortize; however, no new receivables would be  allowed to transfer from the FIRC facility                                     |
| FIRC         |   | Wachovia  |   | December 2,  2004. Capacity was reduced to $50 million on December 4, 2003. |   | 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 October 31, 2003, therequirement that the FIRC facility be reduced from $75 million to $50 millionwas extended until December 4, 2003. On December 4, 2003, the FIRC facility wasrenewed at the $50 million commitment level until December 2, 2004 undersubstantially similar terms and conditions. On November 20, 2003, the expiration date of the FIARC facility wasextended to January 31, 2004 to allow additional time for the completion offinal documentation and credit review by the lender.  There was no balance outstanding under the FIARC facility onNovember 20, 2003.

 

Management presentlyintends to seek further extensions to these warehouse facilities prior to thecurrent expiration dates.  Managementfurther considers its relationship with its lenders to be satisfactory and hasno reason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

 

The following tablecontains pertinent information on the Term Notes as of October 31, 2003.

 
| **Term Notes** |   | **Issuance  Date** |   | **Issuance  Amount** |        | **Maturity  Date** |               | **Outstanding** |   | **Interest  Rate** |   |
|----------------|--------|--------------------|--------|----------------------|-------------|--------------------|--------------------|-----------------|--------|--------------------|--------|
|           |   |               |   |                 |        |               |               |            |   |               |   |
| 2002-A         |   | January 29, 2002   |   | $                    | 159,036,000 |               | December 15,  2008 |            | $      | 63,694,232         |   | 3.46 | % |
|                |        |                    |        |                      |             |                    |                    |                 |        |                    |        |  |  |

 

Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% percent Class A asset-backednotes (“2002-A Term Notes”). The initial pool of automobile receivablestransferred to the 2002 Auto Trust totaled $135,643,109, which were previouslyowned by FIRC and FIARC, secure the 2002-A Term Notes.  In addition to the issuance of the Class ANotes, the 2002 Auto Trust also issued $4,819,000 in Class B Notes that wereretained by the Company and pledged to secure the Working Capital Facility asdescribed below.  Proceeds from theissuance, which totaled $159,033,471 were used to (i) fund a $25,000,000pre-funding account to be used for future loan originations; (ii) repay all outstandingborrowings under the FIARC commercial paper facility, (iii) reduce theoutstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2002-A Term Note issuance, and (v) fund a cash reserveaccount of 2 percent or $2,712,862 of the initial receivables pledged whichwill serve as a portion of the credit enhancement for the transaction. TheClass A Term Notes bear interest at 3.46 percent and require monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 97percent of the outstanding balance of the underlying receivables pool. Thefinal 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 percent of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation provides credit enhancement for the Class A Notes.  Additional credit support is provided by thecash reserve account, which equals 2 percent of the original balance of thereceivables pool plus 2 percent of the original balance of receivablestransferred under the pre-funding provision. Further enhancement is provided through an initial 1 percentovercollateralization which is required to be increased to 3 percent throughexcess monthly principal and interest collections. In the event that certainasset quality covenants are not met, the reserve account target level willincrease to 6 percent of the then current principal balance of the receivablespool.  As of April 30, 2003 and October31, 2003, the outstanding principal balances on the 2002-A Term Notes were$87,358,847 and $63,694,232 respectively.

 

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On November 20,2003, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed the issuance of$139,661,000 of 2.58% percent Class A asset-backed notes (“2003-A Term Notes”).The initial pool of automobile receivables transferred to the 2003 Auto Trusttotaled $114,726,891, which were previously owned by FIRC and FIARC, secure the2003-A Term Notes.  In addition to theissuance of the Class A Notes, the 2002 Auto Trust also issued $5,065,891 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 $139,656,629 were usedto (i) fund a $30,000,000 pre-funding account to be used for future loanoriginations; (ii) repay all outstanding borrowings under the FIARC commercialpaper facility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2003-A Term Note issuance,and (v) fund an initial cash reserve account of 0.5% percent or $573,635 of theinitial receivables pledged which will increase to 2 percent of the originalreceivables balance through excess cash flow and serve as a portion of thecredit enhancement for the transaction. The Class A Term Notes bear interest at2.58 percent and require monthly principal reductions sufficient to reduce thebalance of the Class A Term Notes to 96.1 percent of the outstanding balance ofthe underlying receivables pool. The final maturity of the 2003-A Term Notes isApril 20, 2011.    The Class B Notes donot bear interest but require principal reductions sufficient to reduce thebalance of the Class B Notes to 3.9 percent of the outstanding balance of theunderlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  Additional creditsupport is provided by the cash reserve account, which will equal 2 percent ofthe original balance of the receivables pool plus 2 percent of the originalbalance of receivables transferred under the pre-funding provision when fullyfunded.  Further enhancement is providedthrough an initial 3 percent overcollateralization which is required to beincreased to 3.9 percent through excess monthly principal and interestcollections. In the event that certain asset quality covenants are not met, thereserve account target level will increase to 6 percent of the then currentprincipal balance of the receivables pool.

 

*Acquisition Facility*.  On October 2, 1998, the Company, through itsindirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFSAcquisition), entered into a $75 million non-recourse bridge financing facilitywith VFCC, an affiliate of Wachovia Securities, to finance the Company’sacquisition of FISC. Contemporaneously with the Company’s purchase of FISC,FISC transferred certain assets to FIFS Acquisition, consisting primarily of(i) all receivables owned by FISC as of the acquisition date, (ii) FISC’sownership interest in certain Trust Certificates and subordinated spread orcash reserve accounts related to two asset securitizations previously conductedby FISC, and (iii) certain other financial assets, including charged-offaccounts owned by FISC as of the acquisition date. These assets, along with a$1 million cash reserve account funded at closing, served as the collateral forthe bridge facility. The facility bore interest at VFCC’s commercial paper rateplus 2.35 percent and expired on August 14, 2000. Under the terms of thefacility, all cash collections from the receivables or cash distributions tothe certificate holder under the securitizations were first applied to pay FISCa servicing fee in the amount of 3 percent on the outstanding balance of allowned or managed receivables and then to pay interest on the facility. Excesscash flow available after servicing fees and interest payments was utilized toreduce the outstanding principal balance on the indebtedness. In addition,one-third of the servicing fee paid to FISC was also utilized to reduceprincipal outstanding on the indebtedness.

 

On August 8, 2000,the Company entered into an agreement with Wachovia Securities to refinance theacquisition facility. Under the agreement, a partnership was created in whichFIFS Acquisition served as the general partner and contributed its assets for a70 percent interest in the partnership and First Union Investors, Inc., anaffiliate of Wachovia Securities, served as the limited partner with a 30percent interest in the partnership (the “Partnership”). Pursuant to therefinancing, the Partnership issued Class A Notes in the amount of $19,204,362and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which wereused to retire the acquisition debt. The Class A Notes bear interest at VFCC’scommercial paper rate plus 0.95 percent per annum and amortize on a monthlybasis by an amount necessary to reduce the Class A Note balance as of thepayment date to 75 percent of the outstanding principal balance of ReceivablesAcquired for Investment, excluding Receivables Acquired for Investment that areapplicable to FIACC, as of the previous month end. The Class B Notes bearinterest at VFCC’s commercial paper rate plus 5.38 percent per annum andamortize on a monthly basis by an amount which varied based on excess cashflows received from Receivables Acquired for Investment after payment ofservicing fees, trustee and back-up servicer fees, Class A Note interest andClass A Note principal, plus collections received on the Trust Certificates. TheClass B Notes were paid in full on September 15, 2000.  After the Class B Notes were paid in full,all cash flows received after payment of Class A Note principal and interest,servicing fees and other costs, are distributed to the Partnership for subsequentdistribution to the partners based upon the respective partnershipinterests.  Beginning in November 2001,the partnership used excess cash flow to retire additional Class A Noteprincipal, thus no further partnership distributions were paid

 

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until the Class A Noteswere retired.  On February 20, 2003, theClass A Notes were fully paid.  OnSeptember 19, 2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc andaccordingly receive all excess cashflows.

 

*Working Capital Facility*.  On December 6, 2001, the Company enteredinto an agreement with Wachovia Securities to refinance the $11,175,000outstanding balance of the working capital term loan previously provided byBank of America and Wachovia and increase the size of the facility to $13.5million.  The renewal facility wasprovided to a special-purpose, wholly owned subsidiary of the Company, FirstInvestors Residual Funding LP.   Thefacility originally consisted of a $9 million revolving tranche and a $4.5million term loan tranche which amortizes monthly.  The term loan tranche of this working capital facility isevidenced by the Class B Notes issued in conjunction with the 2002 Auto Trustfinancing. The remaining $9 million of the $13.5 million working capitalfacility revolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve accounts for each of the Company’s othercredit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities, the acquisition facility and theexisting and future term note facilities. On December 4, 2003, the facility was extended to December 2, 2004.  Under the terms of the renewal, the interestrate was increased to LIBOR plus 2.25%. In addition, the monthly principal amortization under the term loantranche was increased to the greater of $250,000 or the principal distributionsmade under the Class B Notes issued under the 2002 Auto Trust financing.  This amortization schedule will continueuntil the term loan tranche is repaid, leaving the remaining facility consistingof the $9 million revolving tranche. At April 30, 2003 and October 31, 2003,there was $8,714,518 and $7,011,631, respectively, outstanding under thisfacility.

 

On December 4,2003, the Working Capital Facility was extended to December 2, 2004.  Under the terms of the extension, the monthlyamortization requirement was replaced with the requirement that outstandingsunder the facility could not exceed the lesser of a borrowing base or the $9million facility limit.  The Companypresently intends to seek a renewal of the working capital facility from itslender prior to maturity.  Should thefacility not be renewed, the outstanding balance of the receivables would beamortized in accordance with the borrowing base.  Management considers its relationship with its lenders to besatisfactory and has no reason to believe that this credit facility will not berenewed.  If the facility is notrenewed, however, or if material changes are made to its terms and conditions,it could have a material adverse effect on the Company.

 

*Shareholder Loans –*OnDecember 3, 2001 the Company entered into an agreement with one of its  shareholders who is a member of its Board ofDirectors under which the Company may, from time to time, borrow up to $2.5million.  The proceeds of the borrowingswill be utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10 percent per annum. The facility is unsecured and expressly subordinated to the Company’ssenior credit facilities. The facility matures on December 3, 2008 but may berepaid at any time unless the Company is in default on one of its other creditfacilities. There was $746,280 outstanding under this facility as of April 30,2003 and October 31, 2003.

 

*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 covenants governing these financing arrangements at October31, 2003.

 

*Interest Rate Management*.  The Company’s warehouse credit facilitiesbear interest at floating interest rates which are reset on a short-term basiswhile the secured Term Notes bear interest at a fixed rate of interest. TheCompany’s receivables bear interest at fixed rates that do not generally varywith a change in market interest rates. Since a primary contributor to theCompany’s profitability is its ability to manage its net interest spread, theCompany seeks to maximize the net interest spread while minimizing exposure tochanges in interest rates. In connection with managing the net interest spread,the Company may periodically enter into interest rate swaps or caps to minimizethe effects of market interest rate fluctuations on the net interest spread. Tothe extent that the Company has outstanding floating rate borrowings or haselected to convert a portion of its borrowings from fixed rates to floating rates,the Company will be exposed to fluctuations in short-term interest rates.

 

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On September 27, 2000, the Company entered into a swap under which theCompany would pay a fixed rate of 6.30 percent and receive the prevailing onemonth LIBOR rate plus 0.505 percent on a notional amount of $100 million.  Under the terms of the swap, thecounterparty had the option of extending the swap for an additional three yearsto mature on April 15, 2004 at a fixed rate of 6.42 percent.  On April 15, 2001, the counterpartyexercised its extension option.

 

OnJune 1, 2001, the Company entered into interest rate swaps with an aggregatenotional amount of $100 million and a maturity date of April 15, 2004.  Under the terms of these swaps, the Companywill pay a floating rate based on one month LIBOR and receive a fixed rate of5.025 percent.   Management elected toenter into these swap agreements to offset the uneconomical position of theexisting pay fixed swap created by rapidly declining market interestrates.  In connection with the decisionto enter into the $100 million floating rate swap, the Company elected tochange the designation of the $100 million fixed rate swap from a cash flowhedge and not account for the instrument as a hedge under SFAS No. 133.   As a result, the change in fair value ofthe swaps is reflected in net income for periods subsequent to May 31, 2001.

 

During the six months ended October 31, 2003 and as a requirement of theFIARC commercial paper facility, the Company entered into ten interest rate captransactions at cap rates ranging from 6.5% to 7.5% with an amortizing notionalbalance that is expected to coincide with the outstanding balance of the FIARCcommercial paper facility. The interest rate caps were not designated as hedgesand, accordingly, changes in the fair value of the interest rate caps arerecorded as unrealized gains or losses and reflected in net earnings.  On December 2, 2003, the Company terminatedall interest rate caps outstanding in exchange for proceeds of $356,000.  The caps were terminated following therepayment of all outstandings under the FIARC Facility following the issuanceof the 2003-A Term Notes.  As a result,a realized loss of $14,000 was incurred relative to the aggregate market valueof the interest rate caps as of October 31, 2003.

 

**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. An allowance for credit losses of$2,363,570 as of October 31, 2003 and $2,397,216 as of April 30, 2003 as apercentage of the Receivables Held for Investment of $222,978,270 as of October31, 2003 and $226,362,218 as of April 30, 2003 was 1.1% at October 31, 2003 and1.1% at April 30, 2003.

 

TheCompany considers a loan to be delinquent when the borrower fails to make ascheduled payment of principal and interest. Accrual of interest is suspendedwhen the payment from the borrower is over 90 days past due. Generally,repossession procedures are initiated 60 to 90 days after the payment default.

 

TheCompany retains the credit risk associated with the receivables acquired. TheCompany purchases credit enhancement insurance from third party insurers whichcovers the risk of loss upon default and certain other risks. The Companyestablished a captive insurance subsidiary to reinsure certain risks under thecredit enhancement insurance coverage for all receivables.  In addition, receivables financed under theAuto Trust, FIARC and FIACC commercial paper facilities do not carry defaultinsurance. Provisions for credit losses of $6,661,704 and $4,638,550 have beenrecorded for the six months ended October 31, 2003 and October 31, 2002,respectively, for losses on receivables which are either uninsured or which arereinsured by the Company’s captive insurance subsidiary.

 

The Company calculates the allowance for credit lossesin accordance with SFAS 5, *Accounting forContingencies*.  SFAS 114, *Accounting for Creditors for Impairment of a Loan*,does not apply to the Company since the Receivables Held for Investment arecomprised of a large group of smaller balance homogenous loans that areevaluated collectively for impairment.

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology utilized is asix-month migration analysis whereby the Company compares the aging status ofeach 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

 

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expected to migrate toimpaired status in the next six months. The estimated number of impairments is then multiplied by estimated lossper loan, which is based on historical information.  The computed reserve is then compared to the amount recorded foradequacy.  The Company compares thesix-month result to prior six-month periods to compare trends and evaluate anyother internal or external factors that may affect collectibility. Theallowance for credit losses is based on estimates and qualitative evaluationsand ultimate losses will 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.

 

The followingtable summarizes the status and collection experience of receivables by theCompany (dollars in thousands):

 
|                                                                                       |   | **As of or for the Six Months Ended October 31,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                       |   | **2002**                                          |   | **2003** |   |
|                                                                                       |   | **Number**                                        |   | **Amount** |   | **Number** |   | **Amount** |   |
| Receivables Held for Investment:                                                           |   |                                              |   |   |   |   |   |   |   |
| Delinquent amount outstanding (1):                                                         |   |                                              |   |   |   |   |   |   |   |
| 30 – 59 days                                                                          |   | 269                                               |   | $ | 3,176 |   | 274 |   | $ | 2,467 |   |
| 60 – 89 days                                                                          |   | 217                                               |   | 2,139 |   | 139 |   | 1,280 |   |
| 90 days or more                                                                            |   | 422                                               |   | 5,008 |   | 350 |   | 3,333 |   |
| Total delinquencies                                                                        |   | 908                                               |   | $ | 10,323 |   | 763 |   | $ | 7,080 |   |
| Total delinquencies as a percentage of  outstanding receivables                            |   | 5.1                                               | %      | 4.9 | % | 4.3 | % | 3.2 | % |
| Net charge-offs as a percentage of average  receivables outstanding during the  period (2) |   |                                              |   | 4.5 | % |   |   | 5.9 | % |

 

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(1)           Delinquentamounts outstanding do not include loans in bankruptcy status since collectionactivity is limited and highly regulated for bankrupt accounts.

 

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

 

The decrease in the delinquency rate measured bydollar balance outstanding is primarily due to (i) improved performance ofloans which have been outstanding for two years or less which typically have ahigher outstanding balance; and (ii) an increased collections focus on higheroutstanding balance which typically incur a higher loss severity.  The decrease in delinquency rate measured bynumber outstanding is primarily due to the natural correlation that existsbetween dollars delinquent and number of accounts delinquent.

 

As ofOctober 31, 2003, there were 514 accounts totaling $5,185,257 that were inbankruptcy status and were more than 30 days past due.  As of October 31, 2002, there were 444accounts totaling $5,147,035 that were in bankruptcy status and were more than30 days past due.  As of October 31,2003 and October 31, 2002, 90% and 82%, respectively, of the bankruptcy delinquenciesfiled for protection under Chapter 13.

 

The total number of delinquent accounts (30 days ormore) as a percentage of the number of outstanding receivables for theCompany’s portfolio of Receivables Acquired for Investment was 41.5%, or 48accounts, and 41.5%, or 194 accounts, as of October 31, 2003 and April 30,2003, respectively.  Delinquencies areincreasing principally due to the aging of the portfolio and relatively smallnumber of loans remaining in these portfolios. The loans that are remaining have higher delinquencies and this trend isexpected to continue until all loans are collected.

 

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**NewAccounting Pronouncements**

 

In January 2003, the FASB issued FASB InterpretationNo. 46, *Consolidation of Variable Interest Entities*(“FIN 46”)*.*FIN 46 clarifies the application of Accounting Research Bulletin No. 51, *ConsolidatedFinancial Statements,* for certain entities which do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties or in which equityinvestors do not have the****characteristics of a controlling financial interest (“variableinterest entities”).  Variable interestentities will be required to be consolidated by their primary beneficiary.  The primary beneficiary of a variableinterest entity is determined to be the party that absorbs a majority of theentity’s expected losses, receives a majority of its expected returns, or both,as a result of holding variable interests, which are ownership, contractual, orother pecuniary interests in an entity. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003 and to variable interest entities in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year or interim period beginning afterDecember 15, 2003, to variable interest entities in which an enterpriseholds a variable interest that it acquired before February 1, 2003. FIN 46applies to the Company as of the beginning of the applicable interim or annualperiod. The Company does not anticipate FIN 46 will have a material effect onits financial statements.

 

**Forward Looking Information**

 

Statements andfinancial discussion and analysis included in this report that are not historicalare considered to be forward-looking in nature. Forward-looking statementsinvolve a number of risks and uncertainties that may cause actual results todiffer materially from anticipated results. Specific factors that could causesuch differences include unexpected fluctuations in market interest rates,changes in economic conditions, changes in the competition for loans, or theinability to renew or obtain financing. Further information concerning risksand uncertainties is included in this report and the company’s other reportsfiled 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.

 

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

 

TheCompany relies almost exclusively on revolving credit facilities to fund itsorigination of receivables. Periodically, the Company will transfer receivablesfrom a revolving to a term credit facility. Currently, all of the Company’scredit facilities in combination with various swaps bear interest at floatingrates tied to either a commercial paper index or LIBOR.

 

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As of October 31, 2003,the Company had $168.5 million of floating rate debt outstanding. For every 1%increase in commercial paper or LIBOR, annual after-tax earnings would decreaseby approximately $1.1 million, assuming the Company maintains a level amount offloating rate debt and assuming an immediate increase in rates. The impact ofan increase in commercial paper or LIBOR will be mitigated, however, by certaininterest rate caps purchased in connection with the FIARC warehouse facilitywhich will limit the maximum LIBOR rate paid by the Company to 6.5% on $96.8million of floating rate debt as of October 31, 2003. As of October 31, 2002,the Company had $51.3 million of floating rate debt outstanding. For every 1%increase in commercial paper or LIBOR, annual after-tax earnings would decreaseby approximately $326,000, assuming the Company maintains a level amount offloating rate debt and assuming an immediate increase in rates. The impact ofan increase in commercial paper or LIBOR will be mitigated, however, by certaininterest rate caps purchased in connection with the FIARC warehouse facilitywhich would have limited the maximum LIBOR rate paid by the Company to 6.5% on$26.4 million of floating rate debt as of October 31, 2002.

 

**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 ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of October 31, 2003 to providereasonable assurance that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There has been no changein our internal controls over financial reporting that occurred during the sixmonths ended October 31, 2003 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

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

 

##### **OTHER INFORMATION**

 

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

 

(a)   Exhibits

 

31.1    Certificationof Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of2002.

 

31.2    Certificationof Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of2002.

 

32.1    Certificationof Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

32.2    Certificationof Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of2002.

 

Filedwith this 10-Q

 

(b)   Reports on Form8-K

 

Form8-K filed Sept 10, 2003, press release announcing July 31, 2003 financialresults.

 

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### **SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                           | First Investors Financial Services Group, Inc.   |
|--------------------------------|--------------------------------------------------|
|                           | (Registrant)                                     |
|                           |                                             |
| Date:  December 12 , 2003 | By: /s/TOMMY A. MOORE, JR.                       |
|                           | Tommy A. Moore, Jr.                              |
|                           | President and Chief Executive Officer            |
|                           |                                             |
| Date:  December 12, 2003       | By: /s/BENNIE H. DUCK                            |
|                           | Bennie H. Duck                                   |
|                           | Secretary, Treasurer and Chief Financial Officer |

 

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