**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended January 31, 2004**

 

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                   to                   **

 

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

 

**First Investors Financial ServicesGroup, Inc.**

(Exact Name ofRegistrant as Specified in its Charter)

 

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

 

**(713) 977-2600**

(Registrant’s TelephoneNumber, Including Area Code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý No o.

 

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

 

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

 

| **Class**                    |   | **Shares Outstanding At****March 10, 2004** |
|------------------------------|--------|---------------------------------------------|
| Common Stock-$.001 Par Value |   | 5,000,269                                   |

 

 

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

**AND SUBSIDIARIES**

 

**FORM 10-Q**

 

**JANUARY 31, 2004**

 

**TABLE OF CONTENTS**

 
| **Part I**     | **Financial Information** |                                                                                                                      |
|----------------|---------------------------|---------------------------------------------------------------------------------------------------------------------------|
|           |                      |                                                                                                                      |
|           | Item 1.                   | Financial Statements                                                                                                      |   |
|           |                      |                                                                                                                      |   |
|           |                      | Consolidated Balance Sheets  as of April 30, 2003 and January 31, 2004                                                    |   |
|           |                      |                                                                                                                      |   |
|           |                      | Consolidated  Statements of Operations for the Three Months and Nine Months Ended January  31, 2003 and 2004              |   |
|           |                      |                                                                                                                      |   |
|           |                      | Consolidated Statement of  Shareholders’ Equity and Comprehensive Income for the Nine Months Ended  January 31, 2004 |   |
|           |                      |                                                                                                                      |   |
|           |                      | Consolidated  Statements of Cash Flows for the Nine Months Ended January 31, 2003 and 2004                                |   |
|           |                      |                                                                                                                      |   |
|           |                      | 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 INVESTORS FINANCIAL SERVICES GROUP, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS****— APRIL30, 2003 AND JANUARY 31, 2004**

 
|                                                                                                                                                                           |   | **April 30,  2003  (Audited)** |        | **January 31,  2004  (Unaudited)** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|-------------|------------------------------------|------------|
| **ASSETS**                                                                                                                                                                     |   |                           |        |                               |       |
| Receivables Held for Investment, net                                                                                                                                           |   | $                              | 228,989,162 |                               | $          | 215,943,396 |   |
| Receivables Acquired for Investment, net                                                                                                                                       |   | 2,704,247                      |        | 1,476,380                          |       |
| Cash and Short-Term Investments, including restricted  cash of $19,302,651 and $32,159,902                                                                                     |   | 21,920,331                     |        | 33,601,694                         |       |
| Accrued Interest Receivable                                                                                                                                                    |   | 3,381,394                      |        | 2,684,960                          |       |
| Assets Held for Sale                                                                                                                                                           |   | 1,303,393                      |        | 1,132,148                          |       |
| Other Assets:                                                                                                                                                                  |   |                           |        |                               |       |
| Funds held under reinsurance agreement                                                                                                                                         |   | 3,993,341                      |        | 5,000,766                          |       |
| Deferred financing costs and other assets, net of  accumulated amortization and depreciation of $4,508,798 and $5,516,524                                                      |   | 5,594,948                      |        | 6,478,250                          |       |
| Current income taxes receivable                                                                                                                                                |   | 1,004,231                      |        | 42,190                             |       |
| Interest rate derivative positions                                                                                                                                             |   | 4,105,307                      |        | 988,606                            |       |
| Total assets                                                                                                                                                                   |   | $                              | 272,996,354 |                               | $          | 267,348,390 |   |
|                                                                                                                                                                           |   |                           | ** **  |                               | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                 |   |                           | ** **  |                               | ** ** |
| Debt:                                                                                                                                                                          |   |                           | ** **  |                               | ** ** |
| Warehouse credit facilities                                                                                                                                                    |   | $                              | 141,944,521 |                               | $          | 42,690,000 |   |
| Term notes                                                                                                                                                                     |   | 87,358,847                     |        | 186,254,914                        |       |
| Working capital facility                                                                                                                                                       |   | 8,714,518                      |        | 6,761,143                          |       |
| Other borrowings                                                                                                                                                               |   | 746,280                        |        | 746,280                            |       |
| Other Liabilities:                                                                                                                                                             |   |                           |        |                               |       |
| Accounts payable and accrued liabilities                                                                                                                                       |   | 1,709,208                      |        | 1,670,870                          |       |
| Deferred income taxes payable                                                                                                                                                  |   | 49,593                         |        | 583,817                            |       |
| Interest rate derivative positions                                                                                                                                             |   | 5,248,080                      |        | 1,340,736                          |       |
| Total liabilities                                                                                                                                                              |   | 245,771,047                    |        | 240,047,760                        |       |
|                                                                                                                                                                           |   |                           |        |                               |       |
| 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 5,000,269 outstanding at January 31, 2004 |   | 5,567                          |        | 5,567                              |       |
| Additional paid-in capital                                                                                                                                                     |   | 18,678,675                     |        | 18,678,675                         |       |
| Retained earnings                                                                                                                                                              |   | 10,481,696                     |        | 10,722,088                         |       |
| Accumulated other comprehensive loss – unrealized derivative,  net of taxes                                                                                               |   | (896,789                       | )           | (224,205                           | )          |
| Less, treasury stock, at cost, 540,400 and 566,400  shares                                                                                                                     |   | (1,775,865                     | )           | (1,881,495                         | )          |
| Total shareholders’ equity                                                                                                                                                |   | 26,493,284                     |        | 27,300,630                         |       |
| Total liabilities and shareholders’ equity                                                                                                                                |   | $                              | 272,996,354 |                               | $          | 267,348,390 |   |

 

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

 

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Three Months and Nine Months Ended January 31, 2003and 2004**

**(Unaudited)**

 

 
|                                                             |   | **For the Three Months  Ended January 31,** |       | **For the Nine Months  Ended January 31,** |       |
|------------------------------------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                             |   | **2003**                                    |       | **2004**                                   |       | **2003** |   | **2004** |   |
|                                                             |   |                                        |       |                                       |       |   |   |   |   |
| Interest Income                                                  |   | $                                           | 8,415,164  |                                       | $          | 7,499,053 |   | $ | 25,071,690 |   | $ | 23,493,418 |   |
| Interest Expense                                                 |   | 2,486,052                                   |       | 2,341,708                                  |       | 8,061,621 |   | 6,249,121 |   |
| Net interest income                                              |   | 5,929,112                                   |       | 5,157,345                                  |       | 17,010,069 |   | 17,244,297 |   |
| Provision for Credit Losses                                      |   | 2,814,888                                   |       | 3,324,302                                  |       | 7,453,438 |   | 9,986,006 |   |
| Net Interest Income After  Provision for Credit  Losses          |   | 3,114,224                                   |       | 1,833,043                                  |       | 9,556,631 |   | 7,258,291 |   |
| Other Income:                                                    |   |                                        |       |                                       |       |   |   |   |   |
| Servicing revenue                                                |   | 222,024                                     |       | 1,347,128                                  |       | 222,024 |   | 3,845,366 |   |
| Late fees and other                                              |   | 296,704                                     |       | 321,654                                    |       | 809,323 |   | 1,170,658 |   |
| Income from investment                                           |   | 145,078                                     |       | 273,612                                    |       | 145,078 |   | 818,095 |   |
| Other interest income                                            |   | 57,311                                      |       | 198,948                                    |       | 227,122 |   | 384,779 |   |
| Unrealized loss on interest  rate derivative  position           |   | (40,482                                     | )          | (26,923                                    | )          | (162,920 | ) | (33,232 | ) |
| Total other income                                               |   | 680,635                                     |       | 2,114,419                                  |       | 1,240,627 |   | 6,185,666 |   |
|                                                             |   |                                        |       |                                       |       |   |   |   |   |
| Costs and Expenses:                                              |   |                                        |       |                                       |       |   |   |   |   |
| Salaries and benefits                                            |   | 2,101,398                                   |       | 2,118,252                                  |       | 5,740,231 |   | 6,540,319 |   |
| Operating expense                                                |   | 269,060                                     |       | 1,057,867                                  |       | 942,852 |   | 2,953,435 |   |
| General and administrative                                       |   | 1,174,885                                   |       | 921,454                                    |       | 3,094,468 |   | 3,219,538 |   |
| Other interest expense                                           |   | 157,743                                     |       | 113,611                                    |       | 497,897 |   | 363,479 |   |
| Total costs and expenses                                         |   | 3,703,086                                   |       | 4,211,184                                  |       | 10,275,448 |   | 13,076,771 |   |
| Income Before Provision for  Income Taxes and  Minority Interest |   | 91,773                                      |       | (263,722                                   | )          | 521,810 |   | 367,186 |   |
| Provision (Benefit) for Income  Taxes:                           |   |                                        |       |                                       |       |   |   |   |   |
| Current                                                          |   | 36,092                                      |       | (40,623                                    | )          | 7,528 |   | (9,397 | ) |
| Deferred                                                         |   | —                                      |       | (55,607                                    | )          | 137,676 |   | 147,620 |   |
| Total provision for income  taxes                                |   | 36,092                                      |       | (96,230                                    | )          | 145,204 |   | 138,223 |   |
| Minority Interest                                                |   | (7,109                                      | )          | —                                     |       | 123,991 |   | (11,429 | ) |
| Net Income (Loss)                                                |   | $                                           | 62,790     |                                       | $          | (167,492 | ) | $ | 252,615 |   | $ | 240,392 |   |
|                                                             |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| Basic and Diluted Net Income  (Loss) per  Common Share           |   | $                                           | 0.01       |                                       | $          | (0.03 | ) | $ | 0.05 |   | $ | 0.05 |   |

 

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

 

4

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

 

**CONSOLIDATEDSTATEMENT OF****SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

 

**For the Nine Months Ended January 31, 2004**

**(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                                                |   | —            |   | —                           |   | 240,392                |   | —                        |       | —                                      |   | 240,392    |   |
| Reclassification into earnings, net of taxes of  $386,604 |   | —            |   | —                           |   | —                 |   | —                        |       | 672,584                                     |   | 672,584    |   |
| Comprehensive income                                      |   | —            |   | —                           |   | —                 |   | —                        |       | —                                      |   | 912,976    |   |
| Treasury stock purchases                                  |   | —            |   | —                           |   | —                 |   | (105,630                      | )          | —                                      |   | (105,630   | )      |
| Balance at January 31, 2004                               |   | $                 | 5,567  |                             | $      | 18,678,675             |   | $                             | 10,722,088 |                                        | $      | (1,881,495 | )      | $ | (224,205 | ) | $ | 27,300,630 |   |

 

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

 

5

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For theNine Months Ended January 31, 2003 and 2004**

**(Unaudited)**

 
|                                                                                     |   | **2003**    |       | **2004**     |       |
|------------------------------------------------------------------------------------------|--------|-------------|------------|--------------|------------|
|                                                                                     |   |        |       |         |       |
| Cash Flows From Operating  Activities:                                                   |   |        |       |         |       |
| Net income                                                                               |   | $           | 252,615    |         | $          | 240,392 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities — |   |        |       |         |       |
| Depreciation and amortization  expense                                                   |   | 2,991,483   |       | 2,809,815    |       |
| Provision for credit losses                                                              |   | 7,453,438   |       | 9,986,006    |       |
| Minority Interest                                                                        |   | 123,991     |       | (11,429      | )          |
| (Increase) decrease in:                                                                  |   |        |       |         |       |
| Restricted cash                                                                          |   | 191,316     |       | (12,857,251  | )          |
| Accrued interest receivable                                                              |   | (103,045    | )          | 696,434      |       |
| Funds held under reinsurance  agreement                                                  |   | (516,733    | )          | (1,007,425   | )          |
| Deferred financing costs and  other assets                                               |   | (239,783    | )          | (1,919,718   | )          |
| Deferred income taxes  receivable                                                        |   | 33,739      |       | —       |       |
| Current income tax receivable                                                            |   | 467,160     |       | 962,041      |       |
| Interest rate derivative  positions                                                      |   | (963,201    | )          | 3,789,285    |       |
| Increase (decrease) in:                                                                  |   |        | ** ** |         | ** ** |
| Accounts payable and accrued  liabilities                                                |   | (710,110    | )          | (38,338      | )          |
| Deferred income taxes payable                                                            |   | —      |       | 534,224      |       |
| Interest rate derivative  positions                                                      |   | 328,742     |       | (3,907,344   | )          |
| Net cash provided by (used in)  operating activities                                     |   | 9,309,612   |       | (723,308     | )          |
| Cash Flows From Investing  Activities:                                                   |   |        | ** ** |         | ** ** |
| Origination of Receivables  Held for Investment                                          |   | (87,652,331 | )          | (68,768,322  | )          |
| Purchase of Receivables  Acquired for Investment                                         |   | —      |       | (328,787     | )          |
| Principal payments from  Receivables Held for Investment                                 |   | 59,745,176  |       | 64,960,757   |       |
| Principal payments from  Receivables Acquired for Investment                             |   | 5,299,516   |       | 836,061      |       |
| Payments received on Assets  Held for Sale                                               |   | 4,960,503   |       | 5,401,736    |       |
| Purchase of investments                                                                  |   | (1,351,725  | )          | —       |       |
| Purchase of furniture and  equipment                                                     |   | (158,943    | )          | (136,567     | )          |
| Net cash provided by (used in)  investing activities                                     |   | (19,157,804 | )          | 1,964,878    |       |
| Cash Flows From Financing  Activities:                                                   |   |        | ** ** |         | ** ** |
| Proceeds from advances on—                                                          |   |        | ** ** |         | ** ** |
| Warehouse credit facilities                                                              |   | 162,744,020 |       | 108,416,068  |       |
| Term notes                                                                               |   | —      |       | 139,661,000  |       |
| Other borrowings                                                                         |   | 1,221,280   |       | —       |       |
| Principal payments made on—                                                         |   |        |       |         |       |
| Warehouse credit facilities                                                              |   | (62,725,472 | )          | (207,670,589 | )          |
| Term notes                                                                               |   | (82,956,188 | )          | (40,764,932  | )          |
| Acquisition term facility                                                                |   | (3,610,278  | )          | —       |       |
| Working capital facility                                                                 |   | (1,808,446  | )          | (1,953,375   | )          |
| Other borrowings                                                                         |   | (1,000,000  | )          | —       |       |
| Treasury stock purchased                                                                 |   | (1,260,865  | )          | (105,630     | )          |
| Net cash provided by (used in)  financing activities                                     |   | 10,604,051  |       | (2,417,458   | )          |
| Increase (Decrease) in Cash  and Short-Term Investments                                  |   | 755,859     |       | (1,175,888   | )          |
| Cash and Short-Term  Investments at Beginning of Period                                  |   | 585,727     |       | 2,617,680    |       |
| Cash and Short-Term  Investments at End of Period                                        |   | $           | 1,341,586  |         | $          | 1,441,792 |   |
| Supplemental Disclosures of  Cash Flow Information:                                      |   |        |       |         |       |
| Cash paid during the period  for—                                                   |   |        |       |         |       |
| Interest                                                                                 |   | $           | 7,249,044  |         | $          | 5,763,233 |   |
| Income taxes                                                                             |   | 5,372       |       | 5,815        |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

6

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

 

##### **NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

##### **January 31, 2004**

 

**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 ofJanuary 31, 2004, 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 $528 million as ofJanuary 31, 2004.

 

OnAugust 8, 2000, the Company entered into a partnership agreement whereby asubsidiary of the Company was the general partner owning 70 percent of thepartnership interests and First Union Investors, Inc. served as the limitedpartner and owned 30 percent of the partnership interests.  On September 19, 2003, First InvestorsFinancial Services, Inc. purchased the limited partnership interests previouslyheld by First Union Investors, Inc.  ThePartnership consists primarily of a portfolio of loans previously owned orsecuritized by FISC and certain other financial assets including charged-offaccounts owned by FISC.

 

OnDecember 24, 2002, the Company purchased a 40% ownership in common stock and aninvestment in the junior mezzanine debt of First Auto Receivables Corporation(“FARC”).  FARC purchased anapproximately $197.5 million portfolio of installment loan receivables from asubsidiary of Union Acceptance Corporation. FISC performs ongoing servicing and collection activities on theportfolio.

 

 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.

 

The results for theinterim periods are not necessarily indicative of the results of operationsthat may be expected for the fiscal year. In the opinion of management, theinformation furnished reflects all adjustments which are of a normal recurringnature and are necessary for a fair presentation of the Company’s financialposition as of January 31, 2004, and the results of its operations for the ninemonths ended January 31, 2003 and 2004, and its cash flows for the nine monthsended January 31, 2003 and 2004.

 

Theconsolidated financial statements for the interim periods have been preparedpursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations, although the Company believesthat the disclosures are adequate to make the information not misleading. Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements included in the Company’s 2003 Annual Reporton Form 10-K filed July 18, 2003.

 

7

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*TreasuryStock.  *On December 14, 2001, the Board of Directorsauthorized the Company to repurchase up to $2.5 million of the Company’soutstanding common stock.  Repurchasesof 21,000 and 5,000 shares with an average price of $4.03 and $4.20respectively, occurred during the quarters ended July 31, 2003, and January 31,2004 respectively.  As of January 31,2004, the Company has repurchased a total of $1.9 million in treasury stock.

 

*Receivables Held for Investment*.  Receivables Held for Investment representsthe aggregate outstanding balance of installment sales contracts and promissorynotes originated by the Company through its automobile dealer relationships ordirectly with consumers.  The Companyaccrues interest income monthly using the effective interest method. Interestincome also includes additional amounts received upon early payoffs of certainreceivables attributable to the difference between the principal balance of thereceivables calculated using the Rule of 78’s method and the principal balanceof the receivables calculated using the effective interest method. When areceivable becomes 90 days past due, the income accrual is suspended until thepayments become current. When a loan is charged off or the collateral isrepossessed, the remaining income accrual 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, at acquisition,the Company recognizes the excess of the loan’s scheduled contractual principaland contractual interest payments over its expected cash flows as an amountthat should not be accreted. The remaining amount, representing the excess ofthe loan’s expected cash flows over the amount paid, is accreted into interestincome over the remaining life of the loan. As a result of the amortization of the outstanding principal balance ofthe receivables portfolio, the majority of the remaining cash flows projectedconstitute default collections from obligors. Given the nature of the remaining cash flows of individual loans, theCompany determined that the timing of collections on these assets are much moreunpredictable than contractual cash flows from non-defaulted receivables,therefore in the periods subsequent to September 30, 2003 the Company followsthe guidance provided by Practice Bulletin 6*, Amortization of Discounts on Certain Acquired Loans*,and accounts for these assets utilizing the cost-recovery method.  Under this method, cash proceeds fromcollections are applied to first reduce the company’s basis in the assets.  Cash collected in excess of this cost basisis recognized as income when received.

 

*Other Income*.  Other Income consists of income receivedfrom servicing activities, late fees and other loan-related fees, income frominvestments, reinvestment revenue and unrealized loss on interest ratederivative positions.  Servicing revenueis accrued as services are rendered. Late fees and other loan-related fees arerecognized when received.  Income frominvestments and reinvestment revenue are accrued based on the respectiveinterest rate of such investment and unrealized loss on interest ratederivatives is recognized when incurred.

 

*Allowance for Credit Losses*.The Company calculates the allowance for credit losses in accordance withStatement of Financial Accounting Standards (SFAS) No. 5, *Accounting for Contingencies*.  SFAS No. 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 initiates efforts to make customer contact when the customer is threedays past due and becomes more aggressive as the loan becomes further pastdue.  Management reviews past due loansand considers various factors including payment history, job status and anyevents that may have occurred that prevent the customer from making apayment.  Through the evaluation, if itis determined that the loan is uncollectible, the collateral is typicallyrepossessed.  Generally this occurs at90 to 120 days past due.   Uponrepossession, the applicable Receivables Held for Investment and accruedinterest is written off.  The fair valueof the asset is recorded as 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

 

8

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between the fair valueestimate and the proceeds received.   Inthe event the collateral is unable to be located, the Company will write offthe entire balance after exhausting all collection efforts.

 

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, *Accounting for Stock Issued to Employees,*and related Interpretations in accounting for its plans.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*(with assumptions described in Note 9), to its stock option plans.

 
|                                                                                                                                                  |   | **For the Three Months  Ended January 31,** |       | **For the Nine Months  Ended January 31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|------------|--------------------------------------------|------------|
|                                                                                                                                                  |   | **2003**                                    |       | **2004**                                   |       | **2003** |   | **2004** |   |
| Net Income (Loss), as reported                                                                                                                        |   | $                                           | 62,790     |                                       | $          | (167,492 | ) | $ | 252,615 |   | $ | 240,392 |   |
|                                                                                                                                                  |   |                                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Deduct: Total stock option  plan compensation expense determined under fair value based method for awards  granted, modified or settled, net of taxes |   | 14,732                                      |       | 32,562                                     |       | 61,383 |   | 79,256 |   |
| Pro Forma Net Income  (Loss)                                                                                                                     |   | $                                           | 48,058     |                                       | $          | (200,054 | ) | $ | 191,232 |   | $ | 161,136 |   |
|                                                                                                                                                  |   |                                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |
| Basic and Diluted Net Income  (Loss) per Common Share, as reported                                                                                    |   | $                                           | 0.01       |                                       | $          | (0.03 | ) | $ | 0.05 |   | $ | 0.05 |   |
| Basic and Diluted Net Income  (Loss) per Common Share, pro forma                                                                                      |   | $                                           | 0.01       |                                       | $          | (0.04 | ) | $ | 0.04 |   | $ | 0.03 |   |

 

*Reclassifications. *Certain reclassifications have been made to the fiscal 2003 amounts tocomform with the fiscal 2004 presentation.

 

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

 

Receivables Held for Investment net, consist of the following:

 
|                                       |   | **April 30,  2003** |        | **January 31,  2004** |   |
|--------------------------------------------|--------|---------------------|-------------|-----------------------|--------|
| Receivables                                |   | $                   | 226,362,218 |                  | $      | 213,362,180 |   |
| Unamortized premium and  deferred fees (1) |   | 5,024,160           |        | 4,842,855             |   |
| Allowance for credit losses                |   | (2,397,216          | )           | (2,261,639            | )      |
| Net receivables                            |   | $                   | 228,989,162 |                  | $      | 215,943,396 |   |

 

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

 

9

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Activity in the allowance for credit losses was asfollows:

 
|                           |   | **For the Nine Months  Ended January 31,** |      |
|--------------------------------|--------|--------------------------------------------|-----------|
|                           |   | **2003**                                   |      | **2004** |   |
| Balance, beginning of period   |   | $                                          | 2,338,625 |   | $ | 2,397,216 |   |
| Provision for credit losses    |   | 7,453,438                                  |      | 9,986,006 |   |
| Charge-offs, net of recoveries |   | (7,390,804                                 | )         | (10,121,583 | ) |
| Balance, end of period         |   | $                                          | 2,401,259 |   | $ | 2,261,639 |   |

 

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

 

ReceivablesAcquired for Investment comprise loans previously originated by Auto LendersAcceptance Corporation and other third parties.  Loans originated by Auto Lenders Acceptance Corporation include aportfolio of warehouse loans and a portfolio of loans that were previouslysecuritized.  The securitized loans weresubsequently redeemed and funded through the FIACC credit facility.  Receivables Acquired for Investmentpreviously originated by Auto Lenders Acceptance Corporation were purchased ata discount relating to credit quality. As a result of the amortization of the outstanding principal balance ofthe receivables portfolio, the majority of the remaining cash flows projectedconstitute default collections from obligors. Given the nature of these remaining cash flows of individual loans, theCompany determined that the timing of collections on Receivables Acquired forInvestment was much more unpredictable than contractual cash flows fromnon-defaulted receivables, therefore under the guidance provided by PracticeBulletin 6*,Amortization of Discounts on Certain Acquired Loans*, will accountfor Receivables Acquired for Investment utilizing the cost-recovery methodbeginning September 30, 2003.  Underthis method, 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 LendersAcceptance Corporation were $2.7 million and $1.2 million as of April 30, 2003and January 31, 2004, respectively.

 

OnSeptember 30, 2003 the Company purchased $9.4 million of defaulted auto loanreceivables from an unrelated third party. These loans are included in Receivables Acquired for Investment on thebalance sheet as of January 31, 2004, in the amount of $294,323 and areaccounted for using the cost-recovery method. The Company may, from time to time, consider similar acquisitions in thefuture.

 

**5.****              Debt**

 

TheCompany finances its loan origination through two warehouse credit facilities.The Company’s credit facilities provide for one-year terms and have beenrenewed annually. Management of the Company believes that the credit facilitieswill continue to be renewed or extended or that it would be able to securealternate financing on satisfactory terms; however, there can be no assurancethat it will be able to do so. In January 2002 the Company issued $159 millionin asset-backed notes (“Term Notes”) secured by discrete pools of receivables.On November 20, 2003, the Company issued $140 million in Term Notes secured bya discrete pool of receivables. Substantially all receivables retained by the Company are pledged ascollateral for the credit facilities and the Term Notes. The weighted averageinterest rate for the Company’s secured borrowings including the effect ofprogram fees, dealer fees, and other comprehensive income (loss) amortizationwas 4% and 4.5% for the three months ended and 3.6% and 4.9% for the nine monthsended January 31, 2004 and January 31, 2003, respectively.

 

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*Warehouse Facilities as of January31, 2004*

 

| **Facility** |   | **Capacity** |        | **Outstanding** |   | **Interest Rate** |                           | **Fees**                                                                                             |                    | **Insurance**           |   | **Borrowing  Rate at  January 31,  2004** |   |
|--------------|--------|--------------|-------------|-----------------|--------|-------------------|--------------------------------|------------------------------------------------------------------------------------------------------|-------------------------|-------------------------|--------|-------------------------------------------|--------|
| FIARC        |   | $            | 150,000,000 |            | — |              | Commercial paper rate plus .3% |                                                                                                 | .25% of Unused Facility |                    | .35    | %                                         | 1.98   | % |
| FIRC         |   | $            | 50,000,000  |            | $      | 42,690,000        |                           | 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                                 |   | 2.34 | % |
|              |        |              |             |                 |        |                   |                                |                                                                                                      |                         |                         |        |                                           |        |  |  |

 

##### ***Warehouse Facilities – Credit Enhancement as of January 31,2004***

 

| **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 of Pittsburgh(“National Union”), which is a wholly-owned subsidiary of AmericanInternational Group.

 

Thepremiums that the Company paid during fiscal year 2003 for its three creditenhancement insurance 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.

 

InApril 1994, the Company organized First Investors Insurance Company (the“Insurance Subsidiary”) under the captive insurance company laws of the Stateof Vermont. The Insurance Subsidiary is an indirect wholly- owned subsidiary ofthe Company and is a party to a reinsurance agreement whereby the InsuranceSubsidiary reinsures 100 percent of the risk under the Company’s ALPI insurancepolicy. At the time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96 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

 

11

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and liquidity reserves ofthe Insurance Subsidiary, a trust account is maintained by National Union tosecure the Insurance Subsidiary’s obligations for losses it has reinsured.

### ** **

Theresult of the foregoing reinsurance structure is that National Union, as the“fronting” insurer under the captive arrangement, is unconditionally obligatedto the Company’s credit facility lenders for all losses covered by the ALPIpolicy, and the Company, through its Insurance Subsidiary, is obligated toindemnify National Union for all such losses. As of January 31, 2004, theInsurance Subsidiary had capital and surplus of $2,249,612 and unencumberedcash reserves of $1,998,987 in addition to the $3,251,779 trust account.

 

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

 

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

 

*WarehouseFacilities – Agents and Expirations*

 
| **Facility** |   | **Agent** |   | **Expiration**                                                              |   | **Event if not Renewed**                                                                                                                                                |   |
|--------------|--------|-----------|--------|-----------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| FIARC        |   | Wachovia  |   | December 2, 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 December 4, 2003, theFIRC facility was renewed, under similar terms and conditions, at the $50 millioncommitment level until December 2, 2004. On January 29, 2004, following a short-term extension of the originalmaturity date, the FIARC facility was renewed, under similar terms andconditions, to December 2, 2004.  Therewas no balance outstanding under the FIARC facility on January 31, 2004.

 

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

 

Thefollowing table contains pertinent information on the Term Notes as of January31, 2004.

 

| **Term Notes** |   | **Issuance Date** |   | **Issuance  Amount** |        | **Maturity Date** |              | **Outstanding** |   | **Interest  Rate** |   |
|----------------|--------|-------------------|--------|----------------------|-------------|-------------------|-------------------|-----------------|--------|--------------------|--------|
| 2002-A         |   | January 29, 2002  |   | $                    | 159,036,000 |              | December 15, 2008 |            | $      | 53,690,333         |   | 3.46 | % |
| 2003-A         |   | November 20, 2003 |   | $                    | 139,661,000 |              | April 20, 2011    |            | $      | 132,564,581        |   | 2.58 | % |

 

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Credit enhancement on thetwo Term Note is as follows:

 

| **Facility** |   | **Cash Reserve**                                                                                    |   | **Advance  Rate**                         |   | **Insurance** |   |
|--------------|--------|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|---------------|--------|
| 2002-A       |   | 2% of Initial Pool Balance including Pre-Funding  Amount                                            |   | 99% initial advance decreasing to 97%     |   | Surety Bond   |   |
| 2003-A       |   | 0.5% of Initial Pool Balance increasing to 2% of  Initial Pool Balance including Pre-Funding Amount |   | 96.5% initial advance decreasing to 96.1% |   | Surety Bond   |   |

 

TermNotes - On January 29, 2002, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2002-A(“2002 Auto Trust”) completed the issuance of $159,036,000 of 3.46% percentClass A asset-backed notes (“2002-A Term Notes”). The initial pool ofautomobile receivables transferred to the 2002 Auto Trust totaled $135,643,109,which were previously owned by FIRC and FIARC, secure the 2002-A TermNotes.  In addition to the issuance ofthe Class A Notes, the 2002 Auto Trust also issued $4,819,000 in Class B Notesthat were retained by the Company and pledged to secure the Working CapitalFacility as further described below. Proceeds from the issuance, which totaled $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 paperfacility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2002-A Term Note issuance,and (v) fund a cash reserve account of 2 percent or $2,712,862 of the initialreceivables pledged which will serve as a portion of the credit enhancement forthe transaction. The Class A Term Notes bear interest at 3.46 percent andrequire monthly principal reductions sufficient to reduce the balance of theClass A Term 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.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6 percent of the then current principal balance of the receivablespool.  As of April 30, 2003 and January31, 2004, the outstanding principal balances on the 2002-A Term Notes were$87,358,847 and $53,690,333 respectively.

 

OnNovember 20, 2003, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed theissuance of $139,661,000 of 2.58% percent Class A asset-backed notes (“2003-ATerm Notes”). The initial pool of automobile receivables transferred to the2003 Auto Trust totaled $114,726,891, which were previously owned by FIRC andFIARC, secure the 2003-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2002 Auto Trust also issued$5,065,891 in Class B Notes that were retained by the Company and pledged tosecure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,656,629 were used to (i) fund a $30,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2003-A TermNote issuance, and (v) fund an initial cash reserve account of 0.5% or $573,635of the initial receivables pledged.  TheClass A Term Notes bear interest at 2.58% and require monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 96.1percent of the outstanding balance of the underlying receivables pool. Thefinal maturity of the 2003-A Term Notes is April 20, 2011.    The Class B Notes do not bear interest butrequire principal reductions sufficient to reduce the balance of the Class BNotes to

 

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3.9 percent of theoutstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6percent of the then current principal balance of the receivables pool.  As of January 31, 2004, the outstandingprincipal balances on the 2003-A Term notes were $132,564,581.  As of January 31, 2004, $11,250,776 remainedin the Pre-Funding Account to finance additional loan originations.

 

*Acquisition Facility*.  On August 8, 2000, the Company entered intoan agreement with Wachovia Securities. Under the agreement, a partnership was created in which FIFS Acquisitionserved as the general partner and contributed its assets for a 70 percentinterest in the partnership and First Union Investors, Inc., an affiliate ofWachovia Securities, served as the limited partner with a 30 percent interestin the partnership (the “Partnership”). Pursuant to the refinancing, thePartnership issued Class A Notes in the amount of $19,204,362 and Class B Notesin the amount of $979,453 to VFCC, an affiliate of Wachovia Securities, theproceeds of which were used to retire the acquisition debt. The Class A Notesbear interest at VFCC’s commercial paper rate plus 0.95 percent per annum andamortize on a monthly basis by an amount necessary to reduce the Class A Notebalance as of the payment date to 75 percent of the outstanding principalbalance of Receivables Acquired for Investment, excluding Receivables Acquiredfor Investment that are applicable to FIACC, as of the previous month end. TheClass B Notes bear interest at VFCC’s commercial paper rate plus 5.38 percentper annum and amortize on a monthly basis by an amount which varied based onexcess cash flows received from Receivables Acquired for Investment afterpayment of servicing fees, trustee and back-up servicer fees, Class A Noteinterest and Class A Note principal, plus collections received on the TrustCertificates. 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. On September 19, 2003, First Investors Financial Services, Inc.purchased the limited partnership interests previously held by First UnionInvestors, Inc. and accordingly receives 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 was providedto a special-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.   The facilityoriginally consisted of a $9 million revolving tranche and a $4.5 million termloan tranche which amortizes monthly. The term loan tranche of this working capital facility was evidenced bythe Class B Notes issued in conjunction with the 2002 Auto Trust financing. Theremaining $9 million of the $13.5 million working capital facility revolvesmonthly 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. During 2002, the facility was modified to increase the interest ratefrom LIBOR plus 1.5% to LIBOR plus 2.25%. The commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.    In addition,the monthly principal amortization under the term loan tranche was increased tothe greater of $250,000 or the principal distributions made under the Class BNotes issued under the 2002 Auto Trust financing.  On December 4, 2003, the Working Capital Facility was

 

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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.  AtApril 30, 2003 and January 31, 2004, there was $8,714,518 and $6,761,143,respectively, outstanding under this facility.

 

TheCompany presently intends to seek a renewal of the working capital facilityfrom its lender prior to maturity. Should the facility not be renewed, the outstanding balance of thereceivables would be amortized in accordance with the borrowing base.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that this creditfacility will not be renewed.  If thefacility is not renewed, however, or if material changes are made to its termsand conditions, it could have a material adverse effect on the Company.

 

*Shareholder Loans –*OnDecember 3, 2001 the Company entered into an agreement with one of itsshareholders who is a member of its Board of Directors under which the Companymay, from time to time, borrow up to $2.5 million.  The proceeds of the borrowings will be utilized to fund certainprivate and open market purchases of the Company’s common stock pursuant to aStock Repurchase Plan authorized by the Board of Directors and for generalcorporate purposes.  Borrowings underthe facility bear interest at a fixed rate of 10 percent per annum.  The facility is unsecured and expresslysubordinated to the Company’s senior credit facilities. The facility matures onDecember 3, 2008 but may be repaid at any time unless the Company is in defaulton one of its other credit facilities. There was $746,280 outstanding underthis facility as of April 30, 2003 and January 31, 2004.

 

*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 January31, 2004.

 

*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.

 

On September 27, 2000, the Company entered into a swapunder which the Company would pay a fixed rate of 6.30 percent and receive theprevailing one month LIBOR rate 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.

 

15

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On June 1, 2001, the Company entered into interest rateswaps with an aggregate notional amount of $100 million and a maturity date ofApril 15, 2004.  Under the terms ofthese swaps, the Company will pay a floating rate based on one month LIBOR andreceive a fixed 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 nine months ended January 31, 2004 and as arequirement of the FIARC commercial paper facility, the Company entered intoten interest rate cap transactions at cap rates ranging from 6.5% to 7.5% withan amortizing notional balance that is expected to coincide with theoutstanding balance of the FIARC commercial paper facility. The interest ratecaps were not designated as hedges and, accordingly, changes in the fair valueof the interest rate caps are recorded as unrealized gains or losses andreflected in net income.  On December 2,2003, the Company terminated all interest rate caps outstanding in exchange forproceeds of $356,000.  The caps wereterminated following the repayment of all outstandings under the FIARC facilityfollowing the issuance of the 2003-A Term Notes.  As a result, a realized loss of $14,000 was incurred relative tothe aggregate market value of the interest rate caps.

 

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

 

Earningsper share amounts are based on the weighted average number of shares of commonstock and potential dilutive common shares outstanding during the period. Theweighted average number of shares used to compute basic and diluted earningsper share for the three months and nine months ended January 31, 2003 and 2004,are as follows:

 
|                                                                |   | **For the Three Months Ended  January 31,** |   | **For the Nine Months Ended  January 31,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                |   | **2003**                                    |   | **2004**                                   |   | **2003** |   | **2004** |   |
| Weighted average shares:                                            |   |                                        |   |                                       |   |   |   |   |   |
| Weighted average shares  outstanding for basic earnings per share   |   | 5,026,269                                   |   | 5,004,236                                  |   | 5,129,737 |   | 5,011,088 |   |
| Effect of dilutive stock  options and warrants                      |   | 8,331                                       |   | 77,291                                     |   | 4,044 |   | 69,042 |   |
| Weighted average shares  outstanding for diluted earnings per share |   | 5,034,600                                   |   | 5,081,527                                  |   | 5,133,781 |   | 5,080,130 |   |

 

Forthe three months ended January 31, 2003 and 2004, the Company had 697,656 and701,196 of stock options and stock warrants which were not included in the computationof diluted earnings per share.  For thenine months ended January 31, 2003 and 2004 the Company had 701,943 and 709,445of stock options and stock warrants which were not included in the computationof diluted earnings per share.  Thesewere not included in the computation of diluted earnings per share because todo so would have been antidilutive for the periods presented.  The number of shares of common stockavailable for issuance under the 1995 Employee Stock Option plan is 500,000shares.  Under the plan, 72,500 optionswere granted on September 11, 2002, 2,500 options were granted May 5, 2003 and 55,000 options were grantedon September 10, 2003.  The number of sharesof common stock available for issuance under the 2002 Non-employee DirectorStock Option plan is 500,000 shares. Under the plan, 100,000 options were granted on July 15, 2002 and120,000 options were granted July 15, 2003.

 

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

 

On December 24, 2002, the Company invested $475,061 fora 40% ownership in common stock in First Auto Receivables Corporation (“FARC”)and $712,591 for junior mezzanine debt of FARC.  FARC purchased a $197.5 million automobile loan portfolio fromUAFC-2 Corporation, a subsidiary of Union Acceptance Corporation, with proceedsfrom $186 million in senior bridge debt, $8.9 million of senior mezzanine debt,$1.8 million of junior mezzanine debt and $1.2 million of equity.   The bridge debt interest rate is LIBOR plus1%, the senior mezzanine interest rate is 22.5% and the junior mezzanineinterest rate is 25%.

 

TheCompany accounts for its ownership investment in FARC using the equity methodin accordance with APB Opinion 18.  Inaddition to the equity and debt investments, the Company performs loanservicing and collection activities on the portfolio.  For the nine months ended January 31, 2004, the Companyrecognized $1,087,922 of servicing revenue, $134,874 of interest income and$818,095 of equity in the income from investment in FARC.  The equity investment in FARC and juniormezzanine debt plus accrued interest are included in Deferred Financing Costsand Other Assets on the balance sheet.

 

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

 

In January 2003, the FASB issued FASBInterpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN46”)*.*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 enterprise holdsa 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.

 

InDecember 2003, the American Institute of Certified Public Accountants issuedStatement of Position (SOP) 03-3,*Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer*. SOP 03-3 addresses the accounting for loansacquired through a transfer (including a business combination) that havedifferences between their expected cash flows and their contractual cash flows,due in part to credit quality. The SOP requires that the excess of the expectedcash flows at acquisition to be collected over the acquirer’s initialinvestment be recognized on a level-yield basis over the loan’s life. Anyfuture excess of contractual cash flows over the original expected cash flowsis recognized as a future yield adjustment. Future decreases in actual cashflows over the original expected cash flows are recognized as an impairment andexpensed immediately. Valuation allowances can not be created or “carried over”in the initial accounting for loans acquired that are within the scope of theSOP. SOP 03-3 is effective for loans acquired in fiscal years beginning afterDecember 15, 2004. Loans acquired in fiscal years beginning on or beforeDecember 15, 2004 that the Company has accounted for using Practice Bulletin 6will account for decreases in cash flows expected to be collected under theprovisions of SOP 03-3 prospectively for fiscal years beginning after December15, 2004.

 

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

 

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a par value of $1.00. As of January 31, 2004, no shares have been issued.

 

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*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. As of January 31, 2004, a total of 321,500 options had been issuedand remained outstanding leaving a remaining 178,500 available under the plan.

 

Theexercise price of the option is payable in full upon exercise and payment maybe in cash, by delivery of shares of common stock (valued at their fair marketvalue at the time of exercise), or by a combination of cash and shares. At thediscretion of the Compensation Committee, options may be issued in tandem withstock appreciation rights entitling the option holder to receive an amount incash or in shares of common stock, or a combination thereof, equal in value toany increase since the date of grant in the fair market value of the CommonStock covered by the option.

 

*Non-Employee Director Stock 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.  As of January 31, 2004, atotal of 270,000 options had been issued under the plan, leaving a remaining230,000 available for issuance.  Optionsto purchase an additional 20,000 shares of stock were issued to a non-employeedirector prior to the adoption of the plan and remain outstanding.

 

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**ITEM 2****.****                             *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS***

## ** **

## **CriticalAccounting Policies**

 

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 used in the preparation of the Company’s consolidated financialstatements.

 

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

 

*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 income accrualis 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 the periods subsequent to September 30,2003 the Company follows the guidance provided by Practice Bulletin 6*,Amortization of Discounts on Certain Acquired Loans*, and accountsfor these 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*.  Other Income consists of income receivedfrom servicing activities, late fees and other loan-related fees, income frominvestments, reinvestment revenue and unrealized loss on interest ratederivative positions.  Servicing revenueis accrued as services are rendered. Late fees and other loan-related fees arerecognized when received.  Income frominvestments and reinvestment revenue are accrued based on the respectiveinterest rate of such investment and unrealized loss on interest ratederivatives is recognized when incurred.

 

*Allowance for Credit Losses*.  The Company calculates the allowance forcredit losses in accordance with SFAS No. 5*, Accounting for Contingencies.*   SFAS No. 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 initiates efforts to make customer contact when the customer is threedays past due and become more aggressive as the loan becomes further pastdue.  Management reviews past due loansand considers various factors including payment history, job status and anyevents that may have occurred that prevent the customer from making apayment.  Through the evaluation, if itis determined that the loan is uncollectible, the collateral is typicallyrepossessed.  Generally this occurs at90 to 120 days past due.   Uponrepossession, the uncollectable portion of Receivables Held for Investment and100% of accrued interest is written off. The fair value of the receivable is recorded as an Assets Held forSale.  Fair value is determined byestimating the proceeds of the

 

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collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile lessselling related expenses.  Aftercollection of all proceeds, the Company records an adjustment, positive ornegative, based on the difference between the fair value estimate and the trueproceeds received.   In the event thecollateral is unable to be located, the Company will write off the entirebalance after exhausting all collection efforts.

 

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 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.

 

*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*.  InJune 1998, the Financial 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 accountingcriteria are met.  In June 2000, theFASB issued SFAS No. 138*, Accounting for Certain Derivative Instruments andCertain Hedging Activities – an Amendment of FASB Statement No. 133.*

 

As of May 1, 2001 the Company designated its interestrate swaps and an interest rate cap with an aggregate notional value of$130,165,759 as cash flow hedges as defined under SFAS No. 133.  Accordingly, any changes in the fair valueof these instruments resulting from the mark-to-market process are recorded asunrealized gains or losses and reflected as an increase or reduction inshareholders’ equity through other accumulated comprehensive income(loss).  In connection with the decisionto enter into the $100 million floating rate swap on June 1, 2001, the Companyelected to change the designation of the $100 million fixed rate swap and notaccount 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 the period subsequent to May 31, 2001. The interest rate caps entered into asa requirement of the FIARC commercial paper facility are not designated ashedges and, accordingly, changes in the fair value are recorded as unrealizedgains or losses and reflected in net income. Giving the low interest rate environment, the company seeks to convertvariable rate debt to fixed interest rate debt.

 

*Stock-Based Compensation*.  The Company has an employee stock optionplan and a non-employee director stock option plan. The Company applies APBOpinion No. 25, *Accounting for Stock Issued to Employees,* and relatedInterpretations in accounting for its plans.

 

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**ManagedReceivables**

 

TheCompany’s managed receivables are (dollars in thousands):

 
|                                                                                  |   | **As of or for the  Nine Months Ended  January 31,** |       |
|---------------------------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                                                  |   | **2003**                                             |       | **2004** |   |
| Receivables Held for  Investment:                                                     |   |                                                 |       |   |   |
| Number                                                                                |   | 18,605                                               |       | 17,173 |   |
| Principal balance                                                                     |   | $                                                    | 226,534    |   | $ | 213,362 |   |
| Average principal balance of  receivables outstanding  during the  nine-month period  |   | $                                                    | 214,478    | ** ** | $ | 223,507 | ** ** |
| Average principal balance of  receivables outstanding  during the  three-month period |   | $                                                    | 219,111    |   | $ | 218,320 |   |
| Receivables Acquired for  Investment:                                                 |   |                                                 | ** ** |   | ** ** |
| Number                                                                                |   | 877                                                  |       | 743 |   |
| Principal balance                                                                     |   | $                                                    | 2,171      |   | $ | 1,476 |   |
|                                                                                  |   |                                                 |       |   |   |
| Other Servicing:                                                                      |   |                                                 | ** ** |   | ** ** |
| Number                                                                                |   | 11,055                                               |       | 20,268 |   |
| Principal balance                                                                     |   | $                                                    | 189,189    |   | $ | 313,551 |   |
|                                                                                  |   |                                                 |       |   |   |
| Total Managed Receivables  Portfolio:                                                 |   |                                                 | ** ** |   | ** ** |
| Number                                                                                |   | 30,537                                               |       | 38,184 |   |
| Principal balance                                                                     |   | $                                                    | 417,894    |   | $ | 528,389 |   |

 

**NetInterest Income**

 

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

 
|                                                                      |   | **Three Months Ended  January 31,** |       | **Nine Months Ended  January 31,** |       |
|---------------------------------------------------------------------------|--------|-------------------------------------|------------|------------------------------------|------------|
|                                                                      |   | **2003**                            |       | **2004**                           |       | **2003** |   | **2004** |   |
| Interest income (1):                                                      |   |                                |       |                               |       |   |   |   |   |
| Receivables Held for  Investment                                          |   | $                                   | 8,430      |                               | 7,499      |   | $ | 24,606 |   | $ | 23,502 |   |
| Receivables Acquired for  Investment and Investment in Trust Certificates |   | (15                                 | )          | **—**                         |       | 466 |   | (9 | ) |
|                                                                      |   | 8,415                               |       | 7,499                              |       | 25,072 |   | 23,493 |   |
| Interest expense:                                                         |   |                                | ** ** |                               | ** ** |   | ** ** |   | ** ** |
| Receivables Held for  Investment (2)                                      |   | 2,485                               |       | 2,342                              |       | 8,033 |   | 6,249 |   |
| Receivables Acquired for  Investment and Investment in Trust Certificates |   | 1                                   | ** ** | **—**                         |       | 29 | ** ** | **—** | ** ** |
|                                                                      |   | 2,486                               |       | 2,342                              |       | 8,062 |   | 6,249 |   |
| Net interest income                                                       |   | $                                   | 5,929      |                               | $          | 5,157 |   | $ | 17,010 |   | $ | 17,244 |   |
|                                                                           |        |                                     |            |                                    |            |  |  |  |  |  |  |  |  |

 

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(1)                                  Amounts shown are net of amortization of premiumand deferred fees and include interest written-off for receivables that wereimpaired or charged-off during the period.

(2)                                  Includes facility fees and fees on the unusedportion of the credit facilities.

 

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Thefollowing table sets forth information with regard to the Company’s netinterest spread, which represents the difference between the effective yield onReceivables Held for Investment and the Company’s average cost of debt utilizedto fund these receivables, and its net interest margin (averages based onmonth-end balances):

 
|                                                     |   | **Three Months Ended  January 31,** |   | **Nine Months Ended  January 31,** |   |
|----------------------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                                     |   | **2003**                            |   | **2004**                           |   | **2003** |   | **2004** |   |
| Receivables Held for  Investment:                        |   |                                |   |                               |   |   |   |   |   |
| Effective yield on Receivables  Held  for Investment (1) |   | 15.4                                | %      | 13.7                               | %      | 15.3 | % | 14.0 | % |
| Average cost of debt (2)                                 |   | 4.5                                 | %      | 4.0                                | %      | 4.9 | % | 3.6 | % |
| Net interest spread (3)                                  |   | 10.9                                | %      | 9.7                                | %      | 10.4 | % | 10.4 | % |
| Net interest margin (4)                                  |   | 10.9                                | %      | 9.5                                | %      | 10.3 | % | 10.3 | % |

 

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

 

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

 

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

 

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

 

Netinterest income is the difference between interest earned from the receivablesportfolio and interest expense incurred on the credit facilities used toacquire the receivables. Net interest income decreased 11.9% for the threemonths ended January 31, 2004 to $5.2 million from $5.9 million for the threemonths ended January 31, 2003.  Netinterest income increased 1.2% for the nine months ended January 31, 2004 to$17.2 million from $17.0 million for the nine months ended January 31, 2003.

 

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  January 31, 2003 to 2004** |   | **Nine Months Ended  January 31, 2003 to 2004** |   |
|-----------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------------|--------|
|                              |   | **Increase (Decrease)  Due to  Change in**       |   | **Total**                                       |   | **Increase (Decrease)  Due to  Change in** |   |   |   |
|                              |   | **Average Principal Amount**                     |   | **Average  Rate**                               |   | **Net  Increase (Decrease)** |   | **Average Principal Amount** |   | **Average Rate** |   | **Total Net Increase (Decrease)** |   |
|                              |   |                                             |   |                                            |   |   |   |   |   |   |   |   |   |
| Receivables Held for  Investment: |   |                                             |   |                                            |   |   |   |   |   |   |   |   |   |
| Interest income                   |   | $                                                | (30    | )                                               | $      | (901 | ) | $ | (931 | ) | $ | 1,036 |   | $ | (2,140 | ) | $ | (1,104 | ) |
| Interest expense                  |   | 197                                              |   | (340                                            | )      | (143 | ) | 490 |   | (2,273 | ) | (1,783 | ) |
| Net interest income               |   | $                                                | (227   | )                                               | $      | (561 | ) | $ | (788 | ) | $ | 546 |   | $ | 133 |   | $ | 679 |   |

 

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**Resultsof Operations**

 

*Three Monthsand Nine Months Ended January 31, 2004 and 2003 (dollars in thousands exceptearnings per share)*

 

*Key Factors.*Thecritical factors affecting the Company’s profitability during any period are  (i) loan origination volume and thecorresponding growth in receivables held for investment; (2) the level of netinterest spread, which is defined as the difference between the effective yieldon receivables held for investment and the cost of funds under the Company’sdebt utilized to finance these receivables; (3) the level of provision forcredit losses; (4) the amount of income derived from other activities; and (5)the ability of the Company to control operating expenses relative to the totalamount of the managed portfolio.

 

*ExecutiveSummary. *Net (loss)income for the three months ended January 31, 2004 was $(167) compared to $63for the three months ended January 31, 2003. Net income for the nine months ended January 31, 2004 was $240 comparedto $253 for the nine months ended January 31, 2003.  Basic and diluted earnings per common share was $(0.03) and $0.01for the three months ended January 31, 2004 and January 31, 2003, respectively.  Basic and diluted earnings per common sharewas $0.05 for the nine months ended January 31, 2004 and January 31, 2003.

 

Thedecline in net income for the three-month and nine-month periods ended January2004 compared to January 2003 is due to several factors including a decline ineffective yields and an increase in interest written-off for impairedloans.  Effective yields have declinedas a result of higher levels of charge-offs, a general decline in marketinterest rates and an increase in the percentage of the portfolio originateddirectly to consumers which typically carrylower interest rates.  Provisionexpense increased 18% during the three month period and 33% during the ninemonth period due to an increase in net charge-offs.  Net charge-offs have increased during the past two years as aresult of a significant decline in general economic conditions, highunemployment rates and a decline in wholesale used car prices which increasedloss severity.

 

These factors have been offset by a decrease in theCompany’s cost of debt as a result of a general decline in market interestrates, the increase in servicing income due to an increase in the portfolio ofreceivables serviced for third parties, the Company’s investment in FARC and aleveraging of the Company’s operating expense structure.  Total costs and expenses as a percentage ofaverage managed assets declined from 4.8% during the nine month period endedJanuary 31, 2003 to 3.0% for the nine month period ended January 31, 2004.

 

*InterestIncome*. Total interestincome for the three and nine months ended January 2004 decreased to $7,499 and$23,493 compared with $8,415 and $25,072 for the comparable periods in 2003.

 

The level of interest income, a primary driver offinancial results, is impacted by the average outstanding balance of theportfolio of receivables held for investment, the weighted average interestrate on receivables originated by the Company, the mix of direct and indirectlending activities and the level of early prepayments and charge-offs.  Interest income on Receivables Held forInvestment decreased****11% for the three months ended and 4% fornine months ended January 2004.  This isa reduction of 165 basis points, or an 11% decrease, in the yield onReceivables Held for Investment for the three-month period and 128 basispoints, or an 8%****decrease, in the yield for the nine-month period January 31,2004 compared to the same period for 2003. The primary reason for the reduction in yields for the three and ninemonths ended January 2004 is an increase in interest written-off for impairedloans and a lower weighted average interest rate on the performing portfoliowhich reflects the Company’s increased focus on receivables originated directlyto consumers which typically carry lower interest rates and the overallcompetitive environment for receivables originated through dealerships.  The decline in effective yields has beenoffset by a 4% increase in average portfolio outstanding for the nine-monthperiod 2004 compared to the nine-month period 2003.

 

Interest income on Receivables Acquired for Investmentfor the nine months ended January 2004 decreased to $0 compared to $500 for thenine months ended January 2003.  This is29 basis point reduction in total interest yield.  The decrease is due to the liquidation of performing assets.

 

*InterestExpense*. Interest expensein 2004 decreased for both the three-month and nine-month periods to $2,342 and$6,249 as compared to $2,486 and $8,062 in 2003. Interest expense onReceivables Held for

 

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Investmentdecreased 6% and 22% for the three month and nine month periods.  The reduction in interest expense isprimarily due to a general decline in overall market interest rates as a resultthe current economic environment and market rate reductions adopted by theFederal Reserve.  Interest ratesdecreased 51 and 130 basis points, on the outstanding borrowings for thethree-month and nine-month periods in 2004 compared to 2003.  This is offset by a 8% and 6% higher averagedebt outstanding for the three-months and nine-months ended 2004 compared to2003 and the negative impact of the Company’s decision to issue fixed rate TermNotes to minimize the risk of future market rate increases.  Longer term fixed rate Term Notes typicallycarry higher interest rates than shorter term floating rate debt.

 

*Provision forCredit Losses*. Theprovision for credit losses for the three months and nine months ended January2004 increased to $3,324 and $9,986 as compared to $2,815 and $7,453 in 2003.The increase in provision for credit losses is primarily due to weakenedeconomic conditions and the ability of customers to maintain comparableemployment.  Additionally, recoveryrates on repossessions have suffered due to decreasing prices and increasedincentives for new vehicles which decreases the demand and price for usedvehicles and negatively impacts recovery rates and loss severity.

 

Net charge-offs for the three months ended January 31,2004 increased to $3,427 from $2,633 in the prior year period.  The increase in net charge-offs for the threemonths ended January 2004 is primarily due to a 16% increase in losses fromrepossessions and a 13% increase in other losses.  Net charge-offs for the nine months ended January 31, 2004increased to $10,122 from $7,391 in the prior year period.  The increase in net charge-offs for the ninemonths ended January 2004 is primarily due to a 42% increase in losses onrepossession.

 

The level of provision for credit losses is a key driverof overall financial performance and should be positively impacted by improvementin general economic conditions, improvements in wholesale used car prices andlower net losses resulting from stricter underwriting controls adopted by theCompany during 2000 and 2001.  Anyadditional economic deterioration or further decline in wholesale used carprices will negatively impact provision expense as will increases in theoutstanding balance of receivables held for investment.

 

*Servicing Revenue*.  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.  On March 19, 2003 the Company entered into anagreement to provide loan servicing and collection activities on $276 millionof installment loan receivables for unrelated third parties.  Servicing revenue increased to $1,347 and$3,845 for the three months and nine months ended January 2004 compared to $222for both the three months and nine months ended January 2003.  The increase in servicing revenue for thethree-month and nine-months ended January 2004 is due to the 2004 periodscontaining servicing revenue for the full period represented. Revenue derivedfrom servicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

 

*Late Fees andOther Income*. Late feesand other income increased to $322 and $1,171 for the three-month and nine-monthperiods ended January 31, 2004, compared to $297 and $809 for the three-monthand nine-month periods ended January 31, 2003. The increase is attributable to 132% increase in fees related toproviding electronic payment services to our customers, offset by a 50%decrease in extension fee recognition. Additionally, the January 2004 periods reflect fee income receivedrelated to GAP Insurance and extended service contracts sold to consumers inconnection with the Company’s direct lending activities that are not present inthe January 2003 periods.

 

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

 

*Income from Investment.*Income from investment reflects 40% of total servicing revenue earned fromservicing activities performed by the Company for FARC and 40% of interestincome earned on junior mezzanine debt. Income from investment increased to $274 and $818 for the three monthsand nine months ended January 2004 compared to $145 for both the three monthsand nine months ended January 2003. The increase in income from investment forthe three-month and nine-month periods January 2004 is due to the 2004 periodscontaining income for the full period represented. Income from investments isimpacted by the outstanding balance of

 

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investments held, generalmarket interest rates and the profitability of FARC.  The Company anticipates that contributions from the FARCinvestment will continue to decline as the portfolio of receivables owned byFARC amortizes.

 

*Other Interest Income.*Other interest income increased to $199 and $385 for the three months and ninemonths ended January 2004 compared to $57 and $227 for the three months andnine months ended January 2003.  Theprimary reasons for the increase are related to interest earned on the juniormezzanine debt owed by FARC and the fact that the January 2004 periods reflectincome for the full three months and nine months represented compared to onlyone month in the January 2003 periods. Other interest income is impacted by the outstanding balance of thejunior mezzanine debt and general market interest rates.

 

*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 $27 and $33 forthree months and nine months ended January 31, 2004 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 $2,118 and $6,540 for the three monthsand nine months ended January 31, 2004, compared to $2,101 and $5,740 for thethree months and nine months ended January 31, 2003.  The increase is primarily due to higher benefits costs and higherstaffing levels required to accommodate the increase in the managed portfoliofrom the addition of the FARC assets and the March 19, 2003 loan servicing agreement.The overall number of employees of the Company is primarily correlated to (i)the total number of receivables managed, since the majority of the Company’semployees are related to loan collection activities and, (ii) originationgrowth rates which require additional marketing and credit underwritingpersonnel.

 

*OperatingExpenses.* Operatingexpenses increased to $1,058 and $2,953 for the three months and nine monthsended January 31, 2004 compared to $269 and $943 for the three months and ninemonths ended January 31, 2003.  Theincrease in operating expenses for the January 2004 period is due to theincreased servicing costs associated with an additional $476 million in loansfrom the December 24, 2002, FARC and the March 19, 2003, loan servicing agreements.  The three months and nine months endedJanuary 2003 reflect a single month’s servicing expense for the December 24,2002, FARC portfolio and no expenses associated with the March 19, 2003 loanservicing agreement.  Additionally, theCompany’s decision to grow the direct lending business in the January 2004periods increased expenses, particularly printing and postage costs, associatedwith the Company’s direct lending initiative. Overall operating expenses aregenerally correlated to the total number of receivables managed by the Company.

 

*General andAdministrative.* Generaland administrative expenses decreased to $921 for the three months endedJanuary 31, 2004 compared to $1,175 for the three months ended January 31,2003.  The three months ended January2004 experienced slightly lower occupancy, depreciation, legal and equipmentrepair costs when compared to the three months ended January 2003.  General and administrative expensesincreased to $3,220 for the nine months ended January 31, 2004 compared to$3,094 for the nine months ended January 31, 2003.  The increase in the January 2004 periods is primarily due to anincrease in liability insurance and higher accounting, legal and professionalexpenses.  General and administrativecosts tend to be more fixed in nature and not as dependent on the overall levelof managed receivables.

 

*Other InterestExpense*. Other interestexpense in 2004 decreased to $114 for the three-month period and $363 for thenine-month period as compared to $158 and $498, respectively, in 2003. Thedecrease was primarily due to a 34% reduction in the average outstandingborrowings on the Company’s working capital line for the three months endedJanuary 31, 2004, compared to 2003 and a 31% reduction in the average outstandingborrowings on the Company’s working capital line for the nine months endedJanuary 31, 2004, compared to 2003.

 

 

# **Liquidity and Capital Resources**

 

*Sources and Uses of Cash Flows*.  The Company’s business requires significantcash flow to support its operating activities. The principal cash requirementsinclude (i) amounts necessary to acquire receivables from

 

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dealers and fund requiredreserve accounts, (ii) amounts necessary to fund premiums for credit enhancementinsurance or other credit enhancement required by the Company’s financingprograms, and (iii) amounts necessary to fund costs to retain receivables,primarily interest expense. The Company also requires a significant amount ofcash flow for working capital to fund fixed operating expenses, primarilysalaries and benefits.

 

TheCompany’s most significant cash flow requirement is for the origination ofreceivables. The Company paid $17.1 million and $68.8 million for ReceivablesHeld for Investment for the three months and nine months ended January 31, 2004compared to $41.3 million and $87.7 million paid in the comparable 2003 period.

 

TheCompany funds loan origination through a combination of two warehouse creditfacilities. The FIRC credit facility generally permits the Company to borrow upto the outstanding principal balance of qualified receivables, not to exceed$50 million.  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 is obligated to meetcertain financial covenants.  Noncompliancemay significantly affect cash flow.

 

TheCompany’s most significant source of cash flow is the principal and interestpayments received from its receivables portfolios. The Company received suchpayments in the amount of $65 million for the nine months ended January 31,2004 and $59.7 million for the nine months ended 2003.  Such cash flow funds repayment of amountsborrowed under the Company’s credit facilities and other holding costs,primarily interest expense and servicing and custodial fees. During the ninemonths ended January 31, 2004, the Company required net cash of $3.8 million asthe receivables originated exceeded portfolio collections.  During the nine months ended January 31,2003, the Company required net cash of $28.1 million as the receivablesoriginated exceeded portfolio collections. The Company relies on borrowed funds to provide cash flow in periods ofgrowth.  As of January 31, 2004, theCompany had $157.3 million of available capacity in the FIRC and FIARC creditfacilities to fund future growth.

 

In addition to the cash flow generated from theprincipal and interest collections on its receivables portfolio, the Companycollects servicing fees funded from each of the credit facilities.  Servicing fees range from 1.4% to 2.5% ofthe outstanding principal balance of the loans in the portfolio.  Cash flow and servicing fees are receivedafter month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash available tofund operations.   At January 31, 2004and 2003, the Company’s unencumbered cash was $1,441,792 and $1,341,586,respectively.  The increase in availablecash is primarily due to an increase in the servicing fees from the managedportfolio.  Cash and servicing feescollected after month end, but related to the prior month activity totaled$655,670 and $1,890,646 as of January 31, 2004 and 2003, respectively.Management believes the unencumbered cash and cash inflows and amountsavailable under the working capital facility are adequate to fund cashrequirements for operations.  Inaddition, as of January 31, 2004, the Company had $150 million available underthe FIARC warehouse facility and an additional $11.9 million available in thepre-funding account from the 2003-A Term Note issuance.

 

 

**Delinquency andCredit 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$2,261,639 as of January 31, 2004 and $2,397,216 as of April 30, 2003 as apercentage of the Receivables Held for Investment of $213,362,180 as of January31, 2004 and $226,362,218 as of April 30, 2003 was 1.1% at January 31, 2004 andApril 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 90 to 120 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

 

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insurance coverage forall receivables.  In addition,receivables financed under the Auto Trust, FIARC and FIACC commercial paperfacilities do not carry default insurance. Provisions for credit losses of$9,986,006 and $7,453,438 have been recorded for the nine months ended January31, 2004 and January 31, 2003, respectively, for losses on receivables whichare either uninsured or which are reinsured by the Company’s captive insurancesubsidiary.

 

TheCompany calculates the allowance for credit losses in accordance with SFAS No.5, *Accountingfor Contingencies*.  SFAS No.114, *Accountingfor Creditors for Impairment of a Loan*, does not apply to theCompany since the Receivables Held for Investment are comprised of a largegroup of smaller 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 the reportingdate in order to calculate the number of loans that are 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. The allowancefor 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.

 

Thefollowing table summarizes the status and collection experience of receivablesby the Company (dollars in thousands):

 
|                                                                                         |   | **As of or for the Nine Months Ended  January 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                         |   | **2003**                                            |   | **2004** |   |
|                                                                                         |   | **Number**                                          |   | **Amount** |   | **Number** |   | **Amount** |   |
| Receivables Held for  Investment:                                                            |   |                                                |   |   |   |   |   |   |   |
| Delinquent amount outstanding  (1):                                                          |   |                                                |   |   |   |   |   |   |   |
| 30 – 59 days                                                                            |   | 373                                                 |   | $ | 3,865 |   | 224 |   | $ | 2,166 |   |
| 60 – 89 days                                                                            |   | 181                                                 |   | 2,004 |   | 101 |   | 1,108 |   |
| 90 days or more                                                                              |   | 526                                                 |   | 5,442 |   | 321 |   | 3,489 |   |
| Total delinquencies                                                                          |   | 1,080                                               |   | $ | 11,311 |   | 646 |   | $ | 6,763 |   |
| Total delinquencies as a  percentage of  outstanding  receivables                            |   | 5.8                                                 | %      | 5.0 | % | 3.8 | % | 3.1 | % |
| Net charge-offs as a  percentage of average  receivables  outstanding during the  period (2) |   |                                                |   | 4.6 | % |   |   | 6.0 | % |

 

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

 

(2)                                  The percentages have been annualized and are notnecessarily indicative of the results for a full year.

 

The decreasein the delinquency rate measured by dollar balance outstanding is primarily dueto (i) improved performance of loans which have been outstanding for two yearsor less which typically have a higher outstanding balance; and (ii) anincreased collections focus on higher outstanding balance which typically incura higher loss severity.  The decrease indelinquency rate measured by number outstanding is primarily due to the naturalcorrelation that exists between dollars delinquent and number of accountsdelinquent.

 

As ofJanuary 31, 2004, there were 475 accounts totaling $4,562,290 that were inbankruptcy status and were more than 30 days past due.  As of January 31, 2003, there were 483accounts totaling $5,583,256 that were in bankruptcy status and were more than30 days past due.  As of January 31,2004 and January 31, 2003, 90% and 86%, respectively, of the bankruptcydelinquencies filed for protection under Chapter 13.

 

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**New Accounting Pronouncements**

 

In January 2003, the FASB issued FASBInterpretation No. 46, *Consolidation of Variable Interest Entities*(“FIN46”)*.*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 (“variable interestentities”).  Variable interest entitieswill 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.

 

InDecember 2003, the American Institute of Certified Public Accountants issuedStatement of Position (SOP) 03-3,*Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer*. SOP 03-3 addresses the accounting for loansacquired through a transfer (including a business combination) that havedifferences between their expected cash flows and their contractual cash flows,due in part to credit quality. The SOP requires that the excess of the expectedcash flows at acquisition to be collected over the acquirer’s initialinvestment be recognized on a level-yield basis over the loan’s life. Anyfuture excess of contractual cash flows over the original expected cash flowsis recognized as a future yield adjustment. Future decreases in actual cashflows over the original expected cash flows are recognized as an impairment andexpensed immediately. Valuation allowances can not be created or “carried over”in the initial accounting for loans acquired that are within the scope of theSOP. SOP 03-3 is effective for loans acquired in fiscal years beginning afterDecember 15, 2004. Loans acquired in fiscal years beginning on or beforeDecember 15, 2004 that the Company has accounted for using Practice Bulletin 6will account for decreases in cash flows expected to be collected under theprovisions of SOP 03-3 prospectively for fiscal years beginning after December15, 2004.

 

 

**Forward LookingInformation**

 

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

 

TheCompany believes the factors discussed in its reports are important factorsthat could cause actual results to differ materially from those expressed inany forward looking statement made herein or elsewhere by the Company or on itsbehalf.  The factors listed are notnecessarily all of the important factors. Unpredictable or unknown factors not discussed could also have materialadverse effects on actual results.  TheCompany does not intend to update its description of important factors eachtime a potential important factor arises. The Company advises its stockholders that they should:  (1) be aware that important factors notdescribed herein could affect the accuracy of our forward looking statements,and (2) use caution and common sense when analyzing our forward lookingstatements in this document or elsewhere. All of such forward looking statements are qualified in their entiretyby this cautionary statement.

 

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**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.

 

As ofJanuary 31, 2004, the Company had $49.5 million of floating rate debtoutstanding. For every 1% increase in commercial paper or LIBOR, annualafter-tax earnings would decrease by approximately $314,015, assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates.  As ofJanuary 31, 2003, the Company had $115.4 million of floating rate debtoutstanding. For every 1% increase in commercial paper or LIBOR, annualafter-tax earnings would decrease by approximately $733,000, assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates. The impact of an increase in commercial paper orLIBOR will be mitigated, however, by certain interest rate caps purchased inconnection with the FIARC warehouse facility which would have limited themaximum LIBOR rate paid by the Company to 6.5% on $61.5 million of floatingrate debt as of January 31, 2003.

 

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

 

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried outan evaluation, under the supervision and with the participation of management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the Company’s disclosure controls and procedures as of theend of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were effective as of January 31, 2004 to provide reasonableassurance that information required to be disclosed in the Company’s 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.

 

Therehas been no change in the Company’s internal controls over financial reportingthat occurred during the nine months ended January 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

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**PART II**

 

**OTHER INFORMATION**

 

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

 

(a)          Exhibits

 
| 10.110 (r) |   | Amended and  Restated Trust Agreement dated November 20, 2003 between First Investors Auto  Funding Corporation and Deutsche Bank Trust Company Delaware.                                                                                                                                                                                           |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.111(r)  |   | Indenture dated  November 20, 2003 between First Investors Auto Owner Trust 2003-A and Wells  Fargo Bank Minnesota, National Association.                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.112(r)  |   | Sale and  Allocation Agreement dated November 20, 2003 between First Investors Auto  Owner Trust 2003-A, First Investors Auto Funding Corporation, First Investors  Servicing Corporation and Wells Fargo Bank Minnesota, National Association.                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.113(r)  |   | Insurance  Agreement dated November 20, 2003 between MBIA Insurance Corporation, First  Investors Servicing Corporation, First Investors Financial Services, Inc.,  First Investors Auto Funding Corporation, First Investors Auto Owner Trust  2003-A, Deutsche Bank Trust Company Delaware and Wells Fargo Bank Minnesota,  National Association. |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 31.1       |   | Certification of Chief Executive Officer pursuant to section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 31.2       |   | Certification of Chief Financial Officer pursuant to section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 32.1       |   | Certification of Chief Executive Officer pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
| 32.2       |   | Certification of Chief Financial Officer pursuant to section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                |
|       |   | Filed with this 10-Q                                                                                                                                                                                                                                                                                                                                |

 

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(b)         Reports on Form 8-K

 

Form8-K filed Dec 11, 2003, press release announcing October 31, 2003 financialresults.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                        | First Investors Financial  Services Group, Inc.   |
|-----------------------------|---------------------------------------------------|
|                        | (Registrant)                                      |
|                        |                                              |
| Date:  March 12 , 2004 | By: /s/TOMMY A. MOORE, JR.                        |
|                        | Tommy A. Moore, Jr.                               |
|                        | President and Chief Executive  Officer            |
|                        |                                              |
| Date: March 12, 2004        | By: /s/BENNIE H. DUCK                             |
|                        | Bennie H. Duck                                    |
|                        | Secretary, Treasurer and Chief  Financial Officer |

 

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