**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-K**

 
| ý | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|------------|-------------------------------------------------------------------------------------------|
|   | ** ** | ** **                                                                                |
|   | ** ** | **For the fiscal year ended April 30, 2004**                                              |

 

**OR**

 
|  ̈ | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                         |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
|   | ** ** | **For the transition period from                             to                          ** |

 

**CommissionFile Number 0-26686**

 

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

(ExactName of Registrant as Specified in its Charter)

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

** **

**(713)977-2600**

(Registrant’sTelephone Number, Including Area Code)

 

Securities registeredpursuant to Section 12(b) of the Act:  **NONE**

Securities registeredpursuant to Section 12(g) of the Act:

 

| ** ** | **Title of each class**         | ** ** |
|------------|---------------------------------|------------|
| ** ** | Common Stock - $.001 par  value | ** ** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý  No  ̈.

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statement incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  ̈

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  Yes  ̈  No ý

 

The aggregate marketvalue of the voting stock of the registrant held by non-affiliates of theregistrant as of October 31, 2002, based on the closing price of the CommonStock on the NASDAQ National Market on said date, was $11,074,504.

 

There were 5,000,269shares of Common Stock of the registrant outstanding as of June 30, 2004.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s definitive proxystatement for its annual meeting of shareholders to be held on September 10,2004, which is to be filed with the Securities and Exchange Commission notlater than 120 days after April 30, 2004, are incorporated by reference intopart III hereof.

 

 

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**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC.**

**ANDSUBSIDIARIES**

 

**FORM 10-K**

**APRIL 30,2004**

 

**TABLE OFCONTENTS**

 

 
| **PART I**   | ** **                                                                                  |
|--------------|---------------------------------------------------------------------------------------------|
| Item  1.     | Business                                                                                    |   |
| Item  2.     | Properties                                                                                  |   |
| Item  3.     | Legal  Proceedings                                                                          |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                        |   |
|         |                                                                                        |
| **PART II**  | ** **                                                                                  |
| Item  5.     | Market  for Registrants’ Common Equity and Related Shareholder Matters                 |   |
| Item  6.     | Selected  Consolidated Financial Data                                                       |   |
| Item  7.     | Management’s  Discussion and Analysis of Financial Condition and Results Of Operations |   |
| Item  7A.    | Quantitative  and Qualitative Disclosures about Market Risks                                |   |
| Item  8.     | Financial  Statements and Supplementary Data                                                |   |
| Item  9.     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure       |   |
| Item  9A.    | Controls  and Procedures                                                                    |   |
|         |                                                                                        |
| **PART III** | ** **                                                                                  |
| Item  10.    | Directors  and Executive Officers                                                           |   |
| Item  11.    | Executive  Compensation                                                                     |   |
| Item  12.    | Security  Ownership of Certain Beneficial Owners and Management                             |   |
| Item  13.    | Certain  Relationships and Related Transactions                                             |   |
| Item  14.    | Principal  Accountant Fees and Services                                                     |   |
|         |                                                                                        |
| **PART IV**  | ** **                                                                                  |
| Item  15.    | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |   |

 

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**PART I**

 

**ITEM 1****.****  *BUSINESS***

 

**General**

 

First Investors FinancialServices Group, Inc., together with its wholly-owned subsidiaries, (“Company”)is a consumer finance company engaged in originating and holding for investmentretail installment sales contracts and promissory notes receivable secured bynew and used automobiles and light trucks arising from the sale of the vehicleby factory authorized franchised dealers or refinanced by the vehicle owner(consumer). The Company specializes in lending to consumers with impairedcredit profiles. Additionally, the Company has purchased receivables inportfolio acquisitions or from other third party originators. The Company doesnot utilize off-balance sheet securitization to finance its Receivables Heldfor Investment. As of April 30, 2004, the Company had Receivables Held forInvestment in the aggregate principal amount of approximately $207 millionhaving an effective yield of 13.9% and a net interest spread to the Company of10.3% (net of cost of funds and other carrying costs).

 

During the fiscal yearended April 30, 2003, the Company began performing servicing and collectionactivities for third parties through First Investors Servicing Corporation(“FISC”), a wholly owned subsidiary located in Atlanta, Georgia.  The total managed portfolio serviced by FISCwas approximately $488 million as of April 30, 2004.

 

**History**

 

The Company was organizedin 1989 by Tommy A. Moore, Jr. and Walter A. Stockard to conduct an automobilefinance business, with Mr. Moore providing the operating expertise and Mr.Stockard and members of his family furnishing the initial financial support.During the first three years of the Company’s existence, its operationsconsisted primarily of purchasing and pooling receivables for resale tofinancial institutions and others. In March 1992, the Company obtainedadditional capital from a group of private investors and expanded itsoperations and reoriented its business towards originating receivables forretention.  In October 1995, the Companycompleted the initial public offering of common stock which resulted in netproceeds of $18.5 million.

 

On October 2, 1998, theCompany completed the acquisition of First Investors Servicing Corporation (“FISC”),formally known as Auto Lenders Acceptance Corporation, from Fortis, Inc.Headquartered in Atlanta Georgia.  FISCengaged in essentially the same business as the Company and additionallyperformed servicing and collection activities on a portfolio of receivablesoriginated for investment as well as on a portfolio of receivables originatedand sold pursuant to two asset securitizations. As a result of the acquisition,the Company increased the total dollar value on its balance sheet ofreceivables, acquired an interest in certain trust certificates related to theasset securitizations and acquired certain servicing rights, along withfurniture, fixtures, equipment and technology to perform the servicing andcollection functions for the portfolio of receivables under management.

 

**Industry**

 

The automobile financeindustry is the second largest consumer finance market in the United States.Most automobile financing is provided by captive finance subsidiaries of majorautomobile manufacturers, banks, thrifts, credit unions and independent financecompanies such as the Company. The overall industry is generally segmentedaccording to the type of vehicle sold (new vs. used), the nature of thedealership (franchised vs. independent) and the credit characteristics of theborrower (prime vs. non-prime). The non-prime market is comprised ofindividuals who are relatively high credit risks and who have limited access totraditional financing sources, generally due to unfavorable past creditexperience, low income or limited financial resources and/or the absence orlimited extent of prior credit history.

 

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**Originating Dealer Base**

 

*General*.  The Company primarily originates receivablesfrom the new and used car departments of dealers that operate under franchisesfrom the major automobile manufacturers. The Company does not generally dobusiness with “independent” dealers who operate used car lots with nomanufacturer affiliation. No dealer or group of dealers (who are affiliatedwith each other through common ownership) accounted for more than 5% of thereceivables owned by the Company at April 30, 2004, and no dealer or group ofrelated dealers originated more than 5% of the receivables held by the Companyat that date. The volume and frequency of receivable originations fromparticular dealers vary widely with the size of the dealerships as well asmarket and competitive factors in the various dealership locations.

 

*Locationof Dealers*. Approximately 23% of the dealers with whom the Company has agreementsare located in Texas, where the Company has operated since 1989.  The Company’s expansion beyond Texas began in1992 and today the Company operates in28 states.

 

The following tablesummarizes, with respect to each state in which the Company operates, thenumber of receivables (and percentage of total receivables) outstanding whichwere originated by the Company from dealers in such state or purchased throughbulk portfolio acquisitions during the last two fiscal years:

 
| ** **     | ** ** | **Receivables Held for Investment** | ** ** |
|----------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **Year Ended  30-Apr-03**           | ** ** | **Year Ended  30-Apr-04** | ** ** |
| **State**      | ** ** | **Loan Count**                      | ** ** | **%** | ** ** | **Loan Count** | ** ** | **%** | ** ** |
| Texas          |       | 4,769                               |       | 25.7 | % | 4,565 |   | 28.0 | % |
| Georgia        |       | 3,421                               |       | 18.4 | % | 3,050 |   | 18.7 | % |
| Ohio           |       | 2,798                               |       | 15.1 | % | 2,119 |   | 13.0 | % |
| Oklahoma       |       | 1,747                               |       | 9.4 | % | 1,090 |   | 6.7 | % |
| Tennessee      |       | 678                                 |       | 3.7 | % | 672 |   | 4.1 | % |
| North Carolina |       | 610                                 |       | 3.3 | % | 588 |   | 3.6 | % |
| Missouri       |       | 813                                 |       | 4.4 | % | 581 |   | 3.6 | % |
| Florida        |       | 414                                 |       | 2.2 | % | 447 |   | 2.7 | % |
| Illinois       |       | 354                                 |       | 1.9 | % | 440 |   | 2.7 | % |
| California     |       | 175                                 |       | 0.9 | % | 406 |   | 2.5 | % |
| Colorado       |       | 425                                 |       | 2.3 | % | 313 |   | 1.9 | % |
| Michigan       |       | 421                                 |       | 2.3 | % | 301 |   | 1.9 | % |
| Virginia       |       | 383                                 |       | 2.1 | % | 270 |   | 1.7 | % |
| Arizona        |       | 167                                 |       | 0.9 | % | 198 |   | 1.2 | % |
| Indiana        |       | 153                                 |       | 0.8 | % | 194 |   | 1.2 | % |
| Kansas         |       | 220                                 |       | 1.2 | % | 161 |   | 1.0 | % |
| Washington     |       | 183                                 |       | 1.0 | % | 146 |   | 0.9 | % |
| Kentucky       |       | 139                                 |       | 0.7 | % | 121 |   | 0.7 | % |
| New Jersey     |       | 178                                 |       | 1.0 | % | 109 |   | 0.7 | % |
| All others (1) |       | 525                                 |       | 2.7 | % | 540 |   | 3.2 | % |
|           |       | 18,573                              |       | 100.0 | % | 16,311 |   | 100.0 | % |

 

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(1)          Includes dealers locatedin Connecticut, Delaware, Iowa, Idaho, Massachusetts, Maryland, Minnesota,Nebraska, Nevada, New Hampshire, Alabama, New York, Oregon, Pennsylvania, SouthCarolina, South Dakota, Utah, Vermont, New Mexico and Wisconsin.

 

2

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*MarketingRepresentatives*. The Company utilizes a system of regional marketing representatives torecruit, enroll and to provide new dealers with the Company’s underwritingguidelines and credit policies as well as to maintain relationships with theCompany’s existing dealers. The representatives are full-time employees whoreside in the region for which they are responsible.

 

In addition to solicitingand enrolling new dealers, the regional representatives assist new dealers inassimilating the Company’s system of credit application submission, review,acceptance and funding, as well as dealing with routine dealer relations on adaily basis. The role of the regional representatives is generally limited tomarketing the Company’s core finance programs and maintaining relationshipswith the Company’s originating dealer base. The representatives do not enterinto or modify dealer agreements on behalf of the Company, do not participatein credit evaluation or loan funding decisions and do not handle fundsbelonging to the Company or its dealers. Each representative reports to, and issupervised by, the Company’s sales and marketing manager in Houston.

 

It has been the policy ofthe Company to avoid the establishment of branch offices because it believesthat the expenses and administrative burden of such offices are generallyunjustified. Moreover, in view of the availability of modern data transmissiontechnology, the Company has concluded that the critical functions of creditevaluation and loan origination are best performed and controlled on acentralized basis from its Houston facility. Accordingly, as the marketingrepresentative system has operated satisfactorily, the Company does notcurrently expect to create branch offices.

 

**Financing Programs**

 

The Company originatesloans from two sources: (i) dealer indirect (the “core program”), and (ii)consumer direct. The core program generates approximately 51% of the Company’scurrent origination volume and consists of loans originated directly fromdealerships in states in which the Company operates.  Consumer direct originations contributeapproximately 49% of originations and involve applications for credit obtainedthrough direct marketing efforts from consumers who are primarily seeking toacquire a vehicle or refinance an existing automobile loan.

 

Credit applicationsgenerated by each of the above sources are forwarded to the Company’scentralized credit department in Houston with decisions made based on theCompany’s standard underwriting guidelines and credit scoring model. Theinternal credit decision and acceptance process is essentially the sameregardless of the origination source. Third party originators have no creditapproval authority and are subject to individual contracts that specify theobligations of the parties. Essentially all of the Company’s receivables areoriginated on a non-recourse basis.

 

In addition tooriginating receivables from dealers under the core program or making loansdirectly to consumers, the Company has acquired seasoned receivables inportfolio acquisitions or from other third party originators and may continueto do so from time to time.

 

The Company had activedealership agreements with 1,435 dealers at April 30, 2004. These arenon-exclusive agreements terminable at any time by either party and theyrequire no specific volume levels. The agreements with the core program dealerscontain customary representations and warranties concerning title to thereceivables sold, validity of the liens on the underlying vehicles, compliancewith applicable laws and related matters. Although the dealers are obligated topurchase receivables that do not conform to these warranties, the dealers donot guarantee collectibility or obligate themselves to purchase receivablessolely because of payment default. The receivables are originated at par or atprices that may reflect a discount or premium depending on the annualpercentage rates of particular receivables and the Company’s assessment ofrelative credit risk. The pricing and credit terms upon which the Companyagrees to originate receivables is governed by the Company’s credit policy anda credit score generated by the Company’s proprietary, empirical scoring model.

 

**Credit Evaluation**

 

*General*.  In connection with the origination of areceivable for purchase by the Company, the Company follows systematicprocedures designed to eliminate unacceptable risks. This involves a three-stepprocess in which (i) the creditworthiness of the borrower and the terms of theproposed transaction are evaluated and either approved,

 

3

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declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews areconducted by the Company. During the course of this process, the Company’scredit verification and funding personnel coordinate closely with the financeand insurance departments of the dealers or with individuals to whom theCompany lends directly. The Company has developed financing programs underwhich it approves loans that vary in pricing and loan terms depending on therelative credit risk determined for each loan. Credit or default risk isevaluated by the Company’s loan officers in conjunction with a proprietary,empirical credit scoring model developed from the Company’s 15 year database ofnon-prime lending results.

 

*CollateralVerification*. As a condition to the origination of each receivable by the Company, theCompany performs an individual audit evaluation consisting of personaltelephonic interviews with each vehicle purchaser to verify the details of thecredit application and to confirm that the material terms of the sale conformto the purchaser’s understanding of the transaction.  The Company will originate a receivable underits core program only after receipt and review of a satisfactory audit report.

 

**Servicing**

 

The Company believes thatcompetent, attentive and efficient loan servicing is as important as soundcredit evaluation for purposes of assuring the integrity of a receivable.

 

In addition to servicingits owned portfolio, in December 2002, the Company began servicing andcollection activities for third parties in exchange for servicing fees.  The Company completed two transactions duringthe fiscal year ended April 30, 2003, both of which related to portfolioacquisitions from collateral previously originated by Union AcceptanceCorporation.  Under the firsttransaction, the Company invested $475,061 for 40% of the common stock and$712,591 in junior mezzanine debt of First Auto Receivables Corporation(“FARC”). FARC purchased a $197.5 million automobile loan portfolio.  In addition to the equity and debtinvestments, the Company collects a fee for servicing the portfolio.  The second transaction was an agreement toservice, for a third party, a $276 million auto loan portfolio.  The Company will continue to seekopportunities to increase servicing income through investments in portfolioacquisitions.

 

**Portfolio Characteristics**

 

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

 

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

 

4

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Certain informationconcerning the Company’s obligors for the past two fiscal years (based oncredit information compiled at the time of loan origination) is set forth inthe following table:

 
| ** **                                      | ** ** | **April 30,** | ** ** |
|-------------------------------------------------|------------|---------------|------------|
| ** **                                      | ** ** | **2003**      | ** ** | **2004** | ** ** |
| Average monthly  gross income.                  |       | $             | 4,195      |   | $ | 4,300 |   |
| Average ratio of  consumer debt to gross income |       | 35            | %          | 36 | % |
| Average years in  current employment            |       | 7             |       | 7 |   |
| Average years in  current residence             |       | 6             |       | 6 |   |
| Residence owned                                 |       | 47            | %          | 52 | % |
| Residence rented                                |       | 46            | %          | 40 | % |
| Other residence  arrangements (1)               |       | 7             | %          | 8 | % |
|                                                 |            |               |            |  |  |  |  |

 

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(1)   Includesmilitary personnel and persons residing with relatives.

 

*PortfolioProfile*.  Inorder to manage the risks associated with the relatively high yields availablein the non- prime market, the Company endeavors to maintain a receivablesportfolio having characteristics that, in its judgment, reflect an optimalbalance between achievable yield and acceptable risk. The following table setsforth certain information concerning the composition of the Company’s portfolioas of the end of the past two fiscal years:

 
| ** **                                             | ** ** | **April  30,** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|
| ** **                                             | ** ** | **2003**            | ** ** | **2004** | ** ** |
| New Vehicles:                                          |       |                |       |   |   |
| Percentage of  portfolio (1)                           |       | 23                  | %          | 24 | % |
| Number of  receivables outstanding                     |       | 4,243               |       | 3,942 |   |
| Average amount  at date of acquisition                 |       | $                   | 21,277     |   | $ | 22,025 |   |
| Average term  (months) at date of acquisition (2)      |       | 66                  |       | 68 |   |
| Average  remaining term (months) (2)                   |       | 43                  |       | 44 |   |
| Average monthly  payment                               |       | $                   | 488        |   | $ | 495 |   |
| Average annual  percentage rate                        |       | 16.0                | %          | 15.5 | % |
| Used Vehicles:                                         |       |                |       |   |   |
| Percentage of  portfolio (1)                           |       | 77                  | %          | 76 | % |
| Number of  receivables outstanding                     |       | 14,330              |       | 12,369 |   |
| Average age of  vehicle at date of acquisition (years) |       | 2                   |       | 2 |   |
| Average amount  at date of acquisition                 |       | $                   | 16,378     |   | $ | 16,940 |   |
| Average term  (months) at date of acquisition (2)      |       | 59                  |       | 60 |   |
| Average  remaining term (months) (2)                   |       | 33                  |       | 34 |   |
| Average monthly  payment                               |       | $                   | 413        |   | $ | 420 |   |
| Average annual  percentage rate                        |       | 17.1                | %          | 16.3 | % |

 

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(1)          Calculated on the basisof number of receivables outstanding as of the date indicated.

(2)          Because the actual lifeof many receivables will differ from the stated term by reason of prepaymentsand defaults, data reflecting the average contractual term of receivablesincluded in a portfolio will not correspond with actual average life.

 

 

**Financing Arrangements**

 

*General.*  The Company’s financing strategy is toutilize credit and commercial paper facilities with financial institutions tofund originations.  When sufficientvolume is originated, the Company will complete an on balance sheetsecuritization and issue term notes, thereby freeing up capacity in thewarehouse and credit facilities. Additionally, the Company has a working capital term loan that isutilized for working capital and general corporate purposes.  Lastly, the Company has an agreement with oneof its shareholders, who is also a member of its Boardof Directors, to borrow up to $2.5 million. Proceeds of the borrowings are to be used to fund private and openmarket

 

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purchases of the Company’s commonstock pursuant to a Stock Repurchase Plan and for general corporate purposes.The following chart summarizes the borrowing status at April 30, 2004 underthese facilities:

 
| **Facility  Type**               | ** ** | **Outstanding  Balance** | ** **  | **Available  Credit** | ** **  | **Total**   | ** ** |
|----------------------------------|------------|--------------------------|-------------|-----------------------|-------------|-------------|------------|
| FIARC Commercial  Paper Facility |       | —                   |        | $                     | 150,000,000 |        | $          | 150,000,000 |   |
| FIRC Credit  Facility            |       | 42,705,810               |        | 7,294,190             |        | 50,000,000  |       |
| Term Notes                       |       | 164,718,190              |        | —                |        | 164,718,190 |       |
| Working Capital  Term Loan       |       | 8,761,143                |        | 238,857               |        | 9,000,000   |       |
| Shareholder                      |       | —                   |        | 2,500,000             |        | 2,500,000   |       |
| Total                            |       | $                        | 216,185,143 |                  | $           | 160,033,047 |       | $ | 376,218,190 |   |
|                                  |            |                          |             |                       |             |             |            |  |  |  |

 

Please see Note 7 to theconsolidated financial statements for further information regarding interestrates, expiration dates and other terms of the various facilities.

 

**Risk Areas**

 

*Warehouse**Credit**Facilities.* The Company’s creditand commercial paper facilities with financial institutions, collectivelyreferred to as warehouse credit facilities, are renewed periodically. OnDecember 4, 2003, the maturity date of the FIRC facility was extended to December2, 2004 and the FIRC capacity was reduced from $75 million to $50 million.  There were no other material changes to theterms and conditions of the facility. The FIARC commercial paper facility expired on January 31, 2004 and wasrenewed until December 2, 2004.  No othermaterial changes were made.  If thefacility is not extended beyond the maturity date, receivables pledged ascollateral would be allowed to amortize; however, no new receivables would beallowed to be funded under the credit facility. The Company intends to seek a renewal of the facilities from its lendersprior to maturity.  Management considersits relationship with its lenders to be satisfactory and has no reason tobelieve that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have amaterial adverse effect on the Company.

 

*TermNotes.*  TheCompany relies on its ability to pool and sell receivables in the asset-backedmarket in order to generate cash used to pay down the warehousefacilities.  Adverse terms or unfavorableoccurrences in the auto asset-backed market could make securitizations moreexpensive or could impair the ability to complete securitizations which wouldhave an adverse effect on the Company’s liquidity and financial position.

 

*LoanCovenants*.  Thedocumentation governing each of the Company’s financing arrangements containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience, and other matters. The breach of these covenants, ifnot cured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility and workingcapital facility or the termination of the commercial paper facilities. Throughthe operation of the collateral agency arrangements, which are in the nature ofa “lock-box” security device covering the collection of principal and intereston almost all of the Company’s receivables, such a default could cause theimmediate termination of the Company’s primary sources of liquidity. The Companywas not in default with respect to any covenants governing these financingarrangements at April 30, 2004.

 

*InterestRate Management*. The Company’s warehouse credit facilities bear interest at floatinginterest rates which are reset on a short-term basis while the secured TermNotes bear interest at a fixed rate of interest. The Company’s receivables bearinterest at fixed rates that generally do not vary with changes in marketinterest rates. Since a primary contributor to the Company’s profitability isits ability to manage its net interest spread, the Company seeks to maximizethe net interest spread while minimizing exposure to changes in interestrates.  Accordingly, the Company mayperiodically enter into interest rate swaps or caps to minimize the effects ofmarket interest rate fluctuations on the net interest spread. To the extentthat the Company has outstanding floating rate borrowings or has elected toconvert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.  Please see Market Risk under Item 7A forquantification.

 

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*CreditEnhancement — FIRC Credit Facility*.  In order to obtain a lower cost of funding, theCompany has agreed under the FIRC credit facility to maintain creditenhancement insurance covering all of its receivables pledged as collateralunder this facility. The facility lenders are named as additional insuredsunder these policies. The coverages are obtained on each receivable at the timeit is originated by the Company and the applicable premiums are prepaid for thelife of the receivable. Each receivable is covered by three separate creditinsurance policies, consisting of basic default insurance under a standard autoloan protection policy (known as “ALPI” insurance) together with certainsupplemental coverages relating to physical damage and other risks. Solely atits expense, the Company carries these coverages and neither the vehicle purchasersnor the dealers are charged for the coverages and they are usually unaware oftheir existence. The Company’s ALPI insurance policy is written by NationalUnion Fire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

 

The premiums that theCompany paid during its past fiscal year for its three creditenhancement insurance coverages, of which the largest component is the basicALPI insurance, represented approximately 3.9% of the principal amount of thereceivables originated during the year. Aggregate premiums paid for ALPIcoverage alone during the fiscal years ended April 30, 2002, 2003 and 2004 were$2,382,031, $4,141,328 and $3,066,131, respectively, and accounted for 3.1%,3.8% and 3.5% of the aggregate principal balance of the receivables originatedduring such respective periods.

 

 In April 1994, the Company organized FirstInvestors Insurance Company (the “Insurance Subsidiary”) under the captiveinsurance company laws of the State of Vermont. The Insurance Subsidiary is anindirect wholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100 percent of the riskunder the Company’s ALPI insurance policy. At the time each receivable isinsured by National Union, the risk is automatically reinsured to its fullextent and approximately 96 percent of the premium paid by the Company toNational Union with respect to such receivable is ceded to the InsuranceSubsidiary. When a loss covered by the ALPI policy occurs, National Union paysit after the claim is processed, and National Union is then reimbursed in fullby the Insurance Subsidiary. As of April 30, 2004, gross premiums had beenceded to the Insurance Subsidiary since its inception by National Union in theamount of $31,463,081 and the Insurance Subsidiary reimbursed National Unionfor aggregate reinsurance claims in the amount of $8,490,440. In addition tothe monthly premiums and liquidity reserves of the Insurance Subsidiary, atrust account is maintained by National Union to secure the InsuranceSubsidiary’s obligations for losses it has reinsured.

 

The result of theforegoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of April 30, 2004, the InsuranceSubsidiary had capital and surplus of $2,500,189 and unencumbered cash reservesof $1,205,263 in addition to the $3,265,274 trust account.

 

The ALPI coverage as wellas the Insurance Subsidiary’s liability under the Reinsurance Agreement,remains in effect for each receivable that is pledged as collateral under thewarehouse credit facility. Once receivables are transferred from FIRC to FIARCand financed under the commercial paper facility, ALPI coverage and theInsurance Subsidiary’s liability under the Reinsurance Agreement is cancelledwith respect to the transferred receivables. Any unearned premium associatedwith the transferred receivables is returned to the Company. The Companybelieves the losses its Insurance Subsidiary will be required to indemnify willbe less than the premiums ceded to it. However, there can be no assurance thatlosses will not exceed the premiums ceded and the capital and surplus of theInsurance Subsidiary.

 

*CreditEnhancement — FIARC Commercial Paper Facility.*  Enhancement for the FIARC commercial paperfacility is provided by a surety bond issued by MBIA Insurance Corporation. Thesurety bond provides payment of principal and interest to Variable FundingCapital Corporation (“VFCC”) in the event of payment default by FIARC. MBIA ispaid a surety premium equal to 0.35% per annum on the average outstandingborrowings under the facility. The surety bond is issued for a term to coincidewith the facility. Termination of the surety bond would result in default underthe FIARC commercial paper facility.

 

7

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*Credit Enhancement — Term Notes*.  A surety bond issued by MBIA InsuranceCorporation enhances the 2002-A Term Notes issued in January 2002. The suretybond provides payment of principal and interest to the note holders in theevent of payment default by the 2002-A Trust. MBIA is paid a surety premiumequal to 0.35% per annum on the outstanding balance of the 2002-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon December 15, 2008. Termination of the surety bond would result in defaultunder the governing documents.

 

A surety bond issued byMBIA Insurance Corporation enhances the 2003-A Term Notes issued in November 202003. The surety bond provides payment of principal and interest to the noteholders in the event of payment default by the 2003-A Trust. MBIA is paid asurety premium equal to 0.35% per annum on the outstanding balance of the2003-A Term Notes. The surety bond was issued for the term of the underlyingnotes, which mature on April 20, 2011. Termination of the surety bond wouldresult in default under the governing documents.

 

*Economy.** *Periods of weakenedeconomic condition and slow or negative growth will tend to have an unfavorableeffect on delinquencies, defaults and losses, particularly with non primeborrowers.  Recent periods have also beennegatively impacted by declining prices of used vehicles which increases lossesto the Company upon repossession.  Thesedecreasing prices are primarily due to heavy incentives being offered on newvehicles which have decreased the demand in the used market.  Losses have adverse effects on the Company’sliquidity and operating results.

 

*ServicerDefault.** *The Company performs servicing andcollection activities for its owned portfolio as well as two pools of loansowned or partially owned by third parties. Each of the servicing agreements identifies areas of servicer default whichare generally defined as the inability to protect the assets under agreement orfailing trigger tests of the portfolios. Triggers are related to negative default and loss performance ascompared to specified levels.  An eventof servicer default would have adverse effects on liquidity and profitabilityand could result in having the portfolios transferred to another servicer.

 

**Securitization**

 

Many finance companiessimilar to the Company engage in “securitization” transactions wherebyreceivables are pooled and conveyed to a trust or other special purpose entity,with interests in the entity being sold to investors. As the pooled receivablesamortize, finance charge collections are passed through to the investors at aspecified rate for the life of the pool and an interest in collections exceedingthe specified rate is retained by the sponsoring finance company. Foraccounting purposes, the sponsor often recognizes as revenue the discountedpresent value of this excess interest as estimated over the life of the pool.This revenue, or “gain on sale”, is recognized for the period in which thetransaction occurs.

 

The Company does not useoff-balance sheet financing structures for receivables originated by theCompany and therefore, recognizes interest income on the accrual method overthe life of the receivables rather than recording gains when those receivablesare sold. The Company does not currently intend to engage in off-balance sheetsecuritization transactions resulting in gains on sale of receivables.

 

**Employees**

 

The Company has 163 employeesas of April 30, 2004, including 59 located at its headquarters in Houston, 100located at its loan servicing center in Atlanta and 4regionalmarketing representatives. The Company’s employees are covered by group healthinsurance.  Effective May 1, 1994, theCompany adopted a participant-directed 401(k) retirement plan for itsemployees. An employee becomes eligible to participate in the plan immediatelyupon employment. The Company pays the administrative expenses of the 401(k)plan. The Company also matches a percentage of each participant’s voluntarycontributions up to a maximum voluntary contribution of 3% of the participant’scompensation. In fiscal years2004 and 2003, the Company recorded matching contributions to the 401(k) planof $40,062 and $32,548, respectively. Effective April 28, 1998, the Companyestablished a participant-directed Deferred Compensation Plan for certainexecutive officers of the Company.  Underthe terms of the Deferred Compensation Plan, the participants may elect to makecontributions to the plan that exceeds amounts allowed under the Company’s401(k) plan.  The Company pays theadministrative expenses of the Deferred

 

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Compensation Plan.  As of April 30, 2004 and 2003, the amountsinvested under the Deferred Compensation Plan totaled $267,111 and $236,378,respectively. The Company has no collective bargaining agreements and considersits employee relations to be satisfactory.

 

**Information Systems**

 

The Company utilizes advancedinformation management systems including a fully integrated software programdesigned to expedite each element in the receivables underwriting process,including the entry and verification of credit application data, creditanalysis and the communication of credit decisions to originating dealers. TheCompany also utilizes a number of analytical tools in managing credit riskincluding an empirical scoring model, trend and discriminant analysis, andpricing models which are designed to optimize yield given an expected defaultrate.

 

The servicing andcollection platform is provided by an application service provider throughwhich the Company accesses a mainframe system which is designed to providesupport for all collections and servicing activities including billing,collection process management, account activity history, repossessionmanagement, loan accounting information and payment posting.  The Company pays a monthly usage fee to theservice provider based on the number of accounts serviced.  The Company also utilizes auto dialersoftware that interfaces with the system and serves as an efficiency tool inthe collection process.

 

Both the front-end andback-end platforms are highly compatible from an integration standpoint withall loans boarded electronically following funding from the origination systemto the collection system.

 

In addition to its twoprimary operating systems, the Company also utilizes third-party software inits accounting, human resources, and data management functions, all of whichare products well known in the marketplace.

 

The Company believes thatits data processing and information management capacity is sufficient toaccommodate significantly increased volumes of receivables without materialadditional capital expenditures for this purpose.

 

**Competition**

 

The business of directand indirect lending for the origination of new and used automobiles isintensely competitive in the United States. Such financing is provided bycommercial banks, thrifts, credit unions, the large captive finance companiesaffiliated with automobile manufacturers, and many independent financecompanies such as the Company. Many of these competitors and potentialcompetitors have significantly greater financial resources than the Companyand, particularly in the case of the captive finance companies, enjoy readyaccess to large numbers of dealers. The Company believes that a number offactors including historical market orientations, traditional risk-aversionpreferences and in some cases regulatory constraints, have discouraged many ofthese entities from entering the non-prime sector of the market where theCompany operates. However, as competition intensifies, these well-capitalizedconcerns could enter the market, and the Company could find itself at acompetitive disadvantage.

 

The non-prime market inwhich the Company operates also consists of a number of both large andmid-sized independent finance companies doing business on a local, regional ornational basis, including some which are affiliated with captive financecompanies or large insurance groups. Reliable data regarding the number of suchcompanies and their market shares is unavailable; however, the market is highlyfragmented and intensely competitive.

 

**Regulation**

 

The operations of theCompany are subject to regulation, supervision and licensing under variousfederal and state laws and regulations. State consumer protection laws, motorvehicle installment sales acts and usury laws impose ceilings on permissiblefinance charges, require licensing of finance companies as consumer lenders,and prescribe many of the substantive provisions of the retail installmentsales contracts that the Company originates.

 

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Federal consumer credit statutes and regulations primarily requiredisclosure of credit terms in consumer finance transactions, although rulesadopted by the Federal Trade Commission (including the so-calledholder-in-due-course rule) also affect the substantive rights and remedies offinance companies originating automobile installment sales contracts.

 

The Company’s businessrequires it to hold consumer lending licenses issued by individual states,under which the Company is subject to periodic examinations. State consumercredit regulatory authorities generally enjoy broad discretion in therevocation and renewal of such licenses and the loss of one or more of these instates in which the Company conducts material business could adversely affectthe Company’s operations.

 

In addition to specificlicensing and consumer regulations applicable to the Company’s business, theCompany’s ability to enforce and collect its receivables is limited by severallaws of general application, including the Fair Debt Collection Practices Act,Federal bankruptcy laws and the Uniform Commercial Codes of the various states.These and similar statutes govern the procedures, and in many instances limitthe rights of creditors, in connection with asserting defaults, repossessingand selling collateral, realizing the proceeds thereof, and enforcingdeficiencies.

 

The Company’s insurancesubsidiary is subject to regulation by the Department of Banking, Insurance andSecurities of the State of Vermont. The plan of operation of the subsidiary,described above under “Financing Arrangements” and “Credit Enhancement”, wasapproved by the Department and any material changes in those operations wouldlikewise require the Department’s approval. The subsidiary is subject tominimum capital and surplus requirements, restrictions on dividend payments,annual reporting, and periodic examination requirements.

 

The Company believes thatits operations comply in all material respects with the requirements of lawsand regulations applicable to its business. These requirements and theinterpretations thereof, change from time to time and are not uniform among thestates in which the Company operates. The Company retains a specializedconsumer credit legal counsel that engages and supervises local legal counselin each state where the Company does business, to monitor compliance on anongoing basis and to respond to changes in applicable requirements as theyoccur.

 

**ITEM 2****.****  *PROPERTIES***

 

The Company’s principalphysical properties are its data processing and communications equipment andfurniture and fixtures, all of which the Company believes to be adequate fortheir intended use.

 

The Company’s offices insuburban Houston consist of approximately 17,028 square feet on the seventhfloor of an eight-story office building. This space is held under a leaserequiring average annual rentals of approximately $299,128 and expiring onFebruary 28, 2011, with an option to renew for five years at the market ratethen prevailing.

 

The Company’s offices insuburban Atlanta consist of approximately 27,467 square feet on the third andfourth floors of a four-story office building. This space is held under a leaserequiring average annual rentals of approximately $557,227 and expiring on June30, 2007, with an option to renew for two consecutive five-year periods at themarket rate then prevailing.  The Companyowns no real property.

 

**ITEM 3****.****  *LEGAL PROCEEDINGS***

 

The Company is not aparty to any material litigation and is currently not aware of any threatenedlitigation that could have a material adverse effect on the Company’s business,results of operations or financial condition.

 

**ITEM 4****.****  *SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS***

 

No matters were submittedto a vote of the Company’s securities holders during the fourth quarter of thepast fiscal year.

 

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**PART II**

 

**ITEM 5****.****  *MARKET FOR REGISTRANTS’COMMON EQUITY AND RELATED SHAREHOLDER**MATTERS***

*** ***

The Company’s commonstock has been traded on the NASDAQ National Market System, under the symbol “FIFS”since the completion of the Company’s initial public offering on October 4,1995. High and low closing prices of the common stock are set forth below forthe periods indicated.

 

| **Three  Months Ended** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|
| April 30, 2004          |       | $        | 5.60       |    | $          | 4.87 |   |
| January 31, 2004        |       | $        | 5.50       |    | $          | 3.81 |   |
| October 31, 2003        |       | $        | 5.10       |    | $          | 4.30 |   |
| July 31, 2003           |       | $        | 4.54       |    | $          | 3.92 |   |
| April 30, 2003          |       | $        | 4.25       |    | $          | 3.27 |   |
| January 31, 2003        |       | $        | 3.75       |    | $          | 2.36 |   |
| October 31, 2002        |       | $        | 3.44       |    | $          | 2.60 |   |
| July 31, 2002           |       | $        | 3.90       |    | $          | 3.25 |   |
| April 30, 2002          |       | $        | 3.90       |    | $          | 3.20 |   |
| January 31, 2002        |       | $        | 3.50       |    | $          | 3.10 |   |
| October 31, 2001        |       | $        | 3.89       |    | $          | 3.10 |   |
| July 31, 2001           |       | $        | 3.98       |    | $          | 3.20 |   |

 

As of June 30, 2004,there were approximately 21 shareholders of record of the Company’s commonstock.  The Company believes that thenumber of beneficial owners is significantly greater than the number ofshareholders of record.

 

The Company has notdeclared or paid any cash dividends on its common stock since its inception.The payment of cash dividends in the future will depend on the Company’searnings, financial condition and capital needs and on other factors deemedpertinent by the Company’s Board of Directors. It is currently the policy ofthe Board of Directors to retain earnings to finance the operation and expansionof the Company’s business.  The Companyhas no plans to pay cash dividends on the common stock in the foreseeablefuture.

 

During the twelve monthsended April 30, 2004, the Company repurchased 43,000 shares of commonstock.  The monthly detail of such repurchasesappears below.

 

| **Three  Months Ended** | ** ** | **# of Shares  Repurchased** | ** ** | **Wtd. Avg.  Price/Share** | ** ** |
|-------------------------|------------|------------------------------|------------|----------------------------|------------|
| July 31, 2003           |       | 21,000                       |       | $                          | 4.03       |   |
| October 31, 2003        |       | —                       |       | —                     |       |
| January 31, 2004        |       | 5,000                        |       | $                          | 4.20       |   |
| April 30, 2004          |       | 17,000                       |       | $                          | 5.31       |   |

 

**ITEM 6.****  *SELECTED CONSOLIDATEDFINANCIAL DATA***

 

The following selectedconsolidated financial data of the Company for each of the five fiscal yearsended April 30, 2004, has been derived from the audited consolidated financialstatements of the Company and should be read in conjunction with suchstatements (dollars in thousands, except share data).  The selected consolidated financial data forthe year ended April 30, 2000 balance sheet has been derived from the unauditedfinancial statements of the Company. As reflected in the Company’s Form 10-K/Afiled November 29, 2002, the Company restated its consolidated financialstatements as of April 30, 2002 and 2001, and for the three years ended April30, 2002 to correct for certain prior period misstatements that were discoveredby the Company as it was performing additional control procedures adoptedduring the first quarter 2003 period at the request of its new accounting firm,Grant Thornton LLP.  The restatementrelated to overstated balances that should have been identified by the Company

 

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upon conversion from a thirdparty servicer.  The restatement impactedcertain restricted cash, deferred expenses, receivables held for investment,and tax balances as reported, but it did not affect the Company’s freeliquidity position or debt position. The balance of retained earnings as ofApril 30, 1999 has been restated from amounts previously reported to reflect aretroactive charge of $1,248,918, after tax. Restricted cash, deferred expenses,receivables held for investment, and tax balances have been adjusted for therestatement for all applicable years.

 
| ** **                                                                                                                     | ** ** | **Year Ended April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                     | ** ** | **2000**                 | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Statement  of Operations:**                                                                                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Interest income                                                                                                                |       | $                        | 40,276     |   | $ | 44,365 |   | $ | 37,547 |   | $ | 32,940 |   | $ | 30,498 |   |
| Interest expense                                                                                                               |       | 16,510                   |       | 20,141 |   | 13,710 |   | 10,166 |   | 8,438 |   |
| Net interest  income                                                                                                           |       | 23,766                   |       | 24,224 |   | 23,837 |   | 22,774 |   | 22,060 |   |
| Provision for  credit losses                                                                                                   |       | 6,414                    |       | 8,351 |   | 8,941 |   | 10,338 |   | 12,428 |   |
| Loss on  Receivables Acquired for Investment and Trust Certificates                                                            |       | —                   |       | 400 |   | 1,260 |   | — |   | — |   |
| Net interest  income after provision for credit losses and loss on Receivables Acquired for  Investment and Trust Certificates |       | 17,352                   |       | 15,473 |   | 13,636 |   | 12,436 |   | 9,632 |   |
| Servicing revenue                                                                                                              |       | 1,293                    |       | 457 |   | — |   | 1,080 |   | 4,889 |   |
| Late fees and  other                                                                                                           |       | 1,297                    |       | 1,019 |   | 1,128 |   | 1,186 |   | 1,826 |   |
| Income from  investment                                                                                                        |       | —                   |       | — |   | — |   | 418 |   | 1,009 |   |
| Other interest  income                                                                                                         |       | 1,431                    |       | 1,544 |   | 682 |   | 283. |   | 460 |   |
| Unrealized loss  on interest rate derivative positions                                                                         |       | —                   |       | — |   | (121 | ) | (329 | ) | (34 | ) |
| Total other  income                                                                                                            |       | 4,021                    |       | 3,020 |   | 1,689 |   | 2,638 |   | 8,150 |   |
| Salaries and  benefits                                                                                                         |       | 9,132                    |       | 9,208 |   | 7,902 |   | 7,785 |   | 8,538 |   |
| Operating  expenses                                                                                                            |       | 1,696                    |       | 2,376 |   | 2,565 |   | 2,454 |   | 5,012 |   |
| General and  administrative                                                                                                    |       | 4,725                    |       | 4,702 |   | 4,238 |   | 3,554 |   | 3,723 |   |
| Other interest  income                                                                                                         |       | 1,153                    |       | 1,311 |   | 785 |   | 643 |   | 468 |   |
| Total operating  expenses                                                                                                      |       | 16,706                   |       | 17,597 |   | 15,490 |   | 14,436 |   | 17,741 |   |
| Income (Loss)  before provision (benefit) for income taxes and minority interest                                               |       | 4,667                    |       | 896 |   | (165 | ) | 638 |   | 41 |   |
| Provision  (Benefit) for income taxes                                                                                          |       | 1,703                    |       | 29 |   | (178 | ) | 191 |   | 19 |   |
| Minority  interest                                                                                                             |       | —                   |       | 815 |   | 322 |   | 114 |   | (11 | ) |
| Net income  (Loss)                                                                                                             |       | $                        | 2,964      |   | $ | 52 |   | $ | (309 | ) | $ | 333 |   | $ | 33 |   |
| Basic and  diluted net income (loss) per common share                                                                          |       | $                        | 0.53       |   | $ | 0.01 |   | $ | (0.06 | ) | $ | 0.07 |   | $ | 0.01 |   |

 
| ** **                                       | ** ** | **As of April 30,** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|
| ** **                                       | ** ** | **2000**            | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Balance  Sheet Data:**                         |       |                |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment, net            |       | $                   | 234,803    |   | $ | 247,770 |   | $ | 215,243 |   | $ | 228,989 |   | $ | 209,777 |   |
| Receivables  Acquired for Investment, net        |       | 21,888              |       | 26,121 |   | 9,020 |   | 2,704 |   | 1,190 |   |
| Investment in  Trust Certificates                |       | 5,849               |       | — |   | — |   | — |   | — |   |
| Interest rate  derivative positions              |       | —              |       | — |   | 3,119 |   | 4,105 |   | — |   |
| Other assets                                     |       | 38,942              |       | 38,269 |   | 38,531 |   | 37,198 |   | 34,789 |   |
| Total assets                                     |       | $                   | 301,482    |   | $ | 312,160 |   | $ | 265,913 |   | $ | 272,996 |   | $ | 245,756 |   |
| Debt:                                            |       |                |       |   |   |   |   |   |   |   |   |
| Term notes                                       |       | $                   | 151,104    |   | $ | 84,926 |   | $ | 183,260 |   | $ | 87,359 |   | $ | 164,718 |   |
| Acquisition term  facility                       |       | 26,212              |       | 11,126 |   | 3,671 |   | — |   | — |   |
| Warehouse credit  facilities                     |       | 77,545              |       | 168,250 |   | 31,213 |   | 141,945 |   | 42,706 |   |
| Working capital  facility                        |       | 13,300              |       | 12,825 |   | 11,798 |   | 8,715 |   | 8,761 |   |
| Other borrowings                                 |       | —              |       | — |   | 525 |   | 746 |   | — |   |
| Interest rate  derivative positions              |       | —              |       | — |   | 5,886 |   | 5,248 |   | — |   |
| Other  liabilities                               |       | 4,445               |       | 4,343 |   | 2,042 |   | 1,758 |   | 2,267 |   |
| Minority  interest                               |       | —              |       | 1,587 |   | 932 |   | 732 |   | — |   |
| Shareholders’  equity                       |       | 28,876              |       | 29,103 |   | 26,586 |   | 26,493 |   | 27,304 |   |
| Total  liabilities and shareholders’ equity |       | $                   | 301,482    |   | $ | 312,160 |   | $ | 265,913 |   | $ | 272,996 |   | $ | 245,756 |   |

 

*Reclassifications*.  Certain reclassifications have been made tothe 2000, 2001, 2002 and 2003 amounts to conform to the 2004 presentation.

 

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**ITEM 7****.****  *MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND**RESULTS OFOPERATIONS***

 

**CriticalAccounting Policies**

 

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

 

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

 

*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 forInvestment*.  TheCompany estimates the amount and timing of undiscounted expected futureprincipal and interest cash flows. For certain purchased loans, the amount paidfor a loan reflects the Company’s determination that it is probable the Companywill be unable to collect all amounts due according to the loan’s contractualterms. Accordingly, at acquisition, the Company recognizes the excess of theloan’s scheduled contractual principal and contractual interest payments overits expected cash flows as an amount that should not be accreted. The remainingamount, representing the excess of the loan’s expected cash flows over theamount paid, is accreted into interest income over the remaining life of theloan.  As a result of the amortization ofthe outstanding principal balance of the receivables portfolio, the majority ofthe remaining 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; in the periods subsequent to September30, 2003 the Company follows the guidance provided by Practice Bulletin 6*, Amortization of Discounts on Certain Acquired Loans*, andaccounts 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.

 

*OtherIncome*.  OtherIncome consists of income received from servicing activities, late fees andother loan-related fees, income from investments, reinvestment revenue andunrealized loss on interest rate derivative positions.  Servicing revenue is accrued as services arerendered. Late fees and other loan-related fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment and unrealized loss on interest rate derivatives is recognized whenincurred.

 

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

 

The Company initiatesefforts to make customer contact when the customer is one day past due andbecome more aggressive as the loan becomes further past due.  Management reviews past due loans andconsiders various factors including payment history, job status and any eventsthat may have occurred that prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs when a loan is 90 to120 days past due.  Upon repossession,the uncollectible portion of the loan and 100% of accrued interest is writtenoff.  The fair value of the collateral isrecorded as an Assets Held for Sale. Fair value is determined by estimating the proceeds of the collateral,which primarily are

 

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comprised of auction proceeds onthe sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the true proceeds received.  In the event the collateral is unable to belocated, the Company will write off the entire balance after exhausting all collectionefforts.

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology utilized is asix-month migration analysis whereby the Company compares the aging status ofeach loan from six months prior to the aging loan status as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  The computed reserve isthen compared to the amount recorded for adequacy.  The Company compares the six-month result toprior six-month periods to compare trends and evaluate any other internal orexternal factors that may affect collectibility. The allowance for creditlosses is based on estimates and qualitative evaluations and ultimate losseswill vary from current estimates. These estimates are reviewed periodically andas adjustments, either positive or negative, become necessary, are reported inearnings in the period they become known.

 

*DeferredFinancing Costs*. The Company defers financing costs and amortizes the costs related tothe respective warehouse credit facilities and term notes over the estimatedaverage life of the receivables financed under those respective facilities asthe provisions of such facility generally provide that receivables assigned tosuch facility would be allowed to amortize should the facilities not beextended.  Deferred financing costs areexpensed proportionately if borrowing capacity is reduced.

 

**General**

 

Net income for the yearended April 30, 2004, was $33,563 or $0.01 per common share.  Net income for the year ended April 30, 2003,was $332,618 or $0.07 per common share. In fiscal year 2004, the Companyexperienced a slightly lower net interest margin due to lower effectiveyields.  The Company experienced highercredit losses and collection expenses in fiscal year 2004.  These were offset by higher fee income and alower cost of funds in fiscal 2004.  Netloss for the year ended April 30, 2002 was $(309,012) or $(0.06) per commonshare.  The loss in fiscal year 2002 isprimarily due to a $1,260,000 loss or $882,000, net of minority interest, onReceivables Acquired for Investment. Additionally, during 2002 the Company amortized deferred financing costsand warrants of $602,162 related to restructuring of debt facilities.  See Results of Operations.

 

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**Overview**

 

The primary source of theCompany’s revenues is interest income from receivables retained as investmentsand servicing income, while its primary cost has been interest expense arisingfrom the financing of the Company’s investment in such receivables. Theprofitability of the Company has been determined by the growth of thereceivables portfolio, inclusion of two new servicing transactions, andeffective management of net interest income and fixed operating expenses. In fiscal2004, First Investors Servicing Corporation (“FISC”) performed servicing andcollection functions on an average portfolio balance of $573 million of loans.

 

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

 
| ** **                                                                                | ** ** | **As of or for the  Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                | ** ** | **2003**                                   | ** ** | **2004** | ** ** |
| Receivables Held for Investment:                                                          |       |                                       |       |   |   |
| Number                                                                                    |       | 18,573                                     |       | 16,311 |   |
| Principal balance                                                                         |       | $                                          | 226,362    |   | $ | 207,489 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                          | 217,163    |   | $ | 220,255 |   |
| Average principal balance of receivables outstanding  during the three-month period  |       | $                                          | 226,219    |   | $ | 210,401 |   |
| Receivables Acquired for Investment:                                                      |       |                                       |       |   |   |
| Number                                                                                    |       | 468                                        |       | 730 |   |
| Principal balance                                                                         |       | $                                          | 1,038      |   | $ | 1,190 |   |
| Other Servicing:                                                                          |       |                                       |       |   |   |
| Number                                                                                    |       | 26,090                                     |       | 18,508 |   |
| Principal balance                                                                         |       | $                                          | 431,870    |   | $ | 279,002 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                          | 108,213    |   | $ | 355,436 |   |
| Total Managed Receivables Portfolio:                                                      |       |                                       |       |   |   |
| Number                                                                                    |       | 45,131                                     |       | 35,549 |   |
| Principal balance                                                                         |       | $                                          | 659,270    |   | $ | 487,681 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                          | 345,708    |   | $ | 572,883 |   |

 

The following tablesummarizes the Company’s net interest income (dollars in thousands):

 
| ** **                                                                | ** ** | **Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                | ** ** | **2003**                 | ** ** | **2004** | ** ** |
| Interest income  (1):                                                     |       |                     |       |   |   |
| Receivables Held  for Investment                                          |       | $                        | 32,489     |   | $ | 30,507 |   |
| Receivables  Acquired for Investment and Investment in Trust Certificates |       | 451                      |       | (9 | ) |
|                                                                      |       | 32,940                   |       | 30,498 |   |
| Interest  expense:                                                        |       |                     |       |   |   |
| Receivables Held  for Investment (2)                                      |       | 10,136                   |       | 8,438 |   |
| Receivables  Acquired for Investment and Investment in Trust Certificates |       | 30                       |       | — |   |
|                                                                      |       | 10,166                   |       | 8,438 |   |
| Net interest income                                                       |       | $                        | 22,774     |   | $ | 22,060 |   |

 

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(1) Amounts shownare net of amortization of premium and deferred fees and include interestwritten-off for receivables that were impaired or charged-off during theperiod.

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

 

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The following table setsforth information with regard to the Company’s net interest spread, whichrepresents the difference between the effective yield on Receivables Held forInvestment and the Company’s average cost of debtutilized to fund these receivables, and its net interest margin (averages basedon month-end balances):

 
| ** **                                              | ** ** | **Year Ended  April 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **2003**                  | ** ** | **2004** | ** ** |
| Receivables Held  for Investment:                       |       |                      |       |   |   |
| Effective yield  on Receivables Held for Investment (1) |       | 15.0                      | %          | 13.9 | % |
| Average cost of  debt (2)                               |       | 4.6                       | %          | 3.7 | % |
| Net interest  spread (3)                                |       | 10.4                      | %          | 10.2 | % |
| Net interest  margin (4)                                |       | 10.3                      | %          | 10.0 | % |

 

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(1)   Representsinterest income as a percentage of average Receivables Held for Investmentoutstanding.

(2)   Representsinterest expense as a percentage of average debt outstanding.

(3)   Represents yieldon Receivables Held for Investment less average cost of debt.

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

 

The Company intends toincrease its receivables by increasing the amount of originations obtained fromits existing dealer base and by increasing the volume of originations in itsdirect lending business.  To the extentthat the Company’s receivables acquisitions exceed the extinguishment of receivablesthrough principal payments, payoffs or defaults, its receivables portfolio andinterest income will increase. The following table summarizes the activity inthe Company’s receivables portfolio (dollars in thousands):

 
| ** **                                     | ** ** | **Year Ended  April 30,** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **2003**                  | ** ** | **2004** | ** ** |
| Receivables Held  for Investment:              |       |                      |       |   |   |
| Principal  balance, beginning of period        |       | $                         | 212,927    |   | $ | 226,362 |   |
| Originations                                   |       | 111,854                   |       | 88,062 |   |
| Principal  payments and payoffs                |       | (81,009                   | )          | (87,638 | ) |
| Defaults prior  to liquidations and recoveries |       | (17,410                   | )          | (19,297 | ) |
| Principal  balance, end of period              |       | $                         | 226,362    |   | $ | 207,489 |   |

 

Receivables may be paidearlier than their contractual term, primarily due to prepayments andliquidation of collateral after defaults. See discussion on delinquency andcredit loss experience.

 

**Analysis of Net Interest Income**

 

Net interest income isthe difference between interest earned from the receivables portfolio andinterest expense incurred on the credit facilities used to acquire thereceivables. Net interest income was $22.1 million in 2004, a decrease of 3%when compared to amounts reported in 2003 and a decrease of 7% when compared toamounts reported in 2002.

 

The amount of netinterest income is the result of the relationship between the average principalamount of receivables held and average rate earned thereon and the averageprincipal amount of debt incurred to finance such receivables and the averagerates paid thereon. Changes in the principal amount and rate componentsassociated with the receivables and debt can be segregated to analyze theperiodic changes in net interest income. The following

 

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table analyzes the changesattributable to the principal amount and rate components of net interest income(dollars in thousands):

 
| ** **                        | ** ** | **Year Ended April 30,**                   | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2002 to 2003**                           | ** ** | **2003 to 2004** | ** ** |
| ** **                        | ** ** | **Increase  (Decrease)  Due to Change in** | ** ** | ** ** | ** ** | **Increase  (Decrease)  Due to Change in** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Average  Principal  Amount**             | ** ** | **Average  Rate** | ** ** | **Total Net  Increase  (Decrease)** | ** ** | **Average  Principal  Amount** | ** ** | **Average  Rate** | ** ** | **Total Net  Increase  (Decrease)** | ** ** |
| Receivables Held  for Investment: |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                          | (1,455     | ) | $ | (888 | ) | $ | (2,343 | ) | $ | 463 |   | $ | (2,445 | ) | $ | (1,982 | ) |
| Interest expense                  |       | (394                                       | )          | (2,619 | ) | (3,013 | ) | 404 |   | (2,103 | ) | (1,699 | ) |
| Net interest  income              |       | $                                          | (1,061     | ) | $ | 1,731 |   | $ | 670 |   | $ | 59 |   | $ | (342 | ) | $ | (283 | ) |

 

**Results of Operations**

 

***FiscalYear Ended April 30, 2004, Compared to Fiscal Year Ended April 30, 2003(dollars in thousands)***

 

*Key Factors.*The critical factors affecting the Company’s profitabilityduring any period are(i) loan originationvolume and the corresponding growth in receivables held for investment; (2) thelevel of net interest spread, which is defined as the difference between theeffective yield on receivables held for investment and the cost of funds underthe Company’s credit facilities and securitizations utilized to finance thesereceivables; (3) the level of provision for credit losses; (4) the amount ofincome derived from other activities; and (5) the ability of the Company tocontrol operating expenses relative to the total amount of the managedportfolio.

 

*Executive Summary.** *Net income for theyear ended April 30, 2004 was $34 compared to $333 for year ended April 30,2003.  Basic and diluted earnings percommon share were $0.01 and $0.07 for the years ended April 30, 2004 and April30, 2003, respectively.

 

The decline in net income for the year ended April 30,2004 compared to April 30, 2003 is due to several factors including (i) adecline in effective yields, (ii) an increase in provision expense and (iii) anincrease in total operating expenses. Effective yields have declined 7.42% from 2003 due to more interestreceivable being written-off for nonperforming loans, a general decline inmarket interest rates and an increase in the percentage of the portfolio originateddirectly to consumers which typicallycarries lower interest rates. Provision expense increased 20% during fiscal year 2004 due to anincrease in nonperforming loans.  Netcharge-offs have increased during the past two years as a result of a significantdecline in general economic conditions, high unemployment rates and a declinein wholesale used car prices which increased loss severity.  While total operating expenses as apercentage of the average managed portfolio decreased from 4.2% for the yearended April 30, 2003 to 3.1% for the year ended April 30, 2004, total dollarexpenses increased $3.3 million.  Themajority of the increase in dollar expenses relates to the increase in theaverage managed portfolio; however a significant amount of expenditures during2004 can be attributed to higher repossession rates, which increase collectioncosts, and a focus by the Company on growing the direct lending business whichcreated increased costs associated with salaries, postage and credit bureau fees.

 

These factors have been offsetby a 17% decrease in the Company’s cost of debt as a result of a generaldecline in market interest rates, a 352% increase in servicing income due to anincrease in the portfolio of receivables serviced for third parties, theCompany’s investment in First Auto Receivable Corporation (“FARC”) and aleveraging of the Company’s operating expense structure.

 

*Interest Income*. Total interest income for the year ended April30, 2004 decreased to $30,498 compared to $32,940 for the year ended April 30,2003.

 

The level of interest income, aprimary driver of financial results, is impacted by the average outstandingbalance of the portfolio of receivables held for investment, the weightedaverage interest rate on receivables

 

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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 decreased7% for theyear ended April 30, 2004 compared to the year ended April 30, 2003.  This is a reduction of 111 basis points, or a7% decrease, in the yield on Receivables Held for Investment for the year endedApril 30, 2004 compared the year ended April 30, 2003.  The reduction in yield for the year endedApril 30, 2004 is due to (i) an increase in interest written-off for impairedloans (ii) 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 (iii) the overallcompetitive environment for receivables originated through dealerships.  The decline in effective yields has beenpartially offset by a 1% increase in the average portfolio outstanding for theperiod ended April 30, 2004 compared to the period ended April 30, 2003.

 

Interest income on ReceivablesAcquired for Investment for the year ended April 30, 2004 decreased to $(9)compared to $451 for the year ended April 30, 2003.  The decrease is due to the liquidation ofperforming assets.

 

*Interest Expense*. Interest expense for the year ended April 30,2004 decreased to $8,438 compared to $10,166 for the year ended April 30, 2003.Interest expense on Receivables Held for Investment decreased 17% for the yearended April 30, 2004.  The reduction ininterest expense is primarily due to a general decline in overall marketinterest rates as a result the current economic environment and market ratereductions adopted by the Federal Reserve system which were offset by theCompany’s decision to lock in interest rates on $140 million of debt inNovember 2003 through the issuance of Term Notes to minimize the risk of futureinterest rate increases.  Longer termfixed rate Term Notes typically carry higher interest rates than shorter termfloating rate debt.  Interest ratesdecreased 92 basis points, or 20%, on the outstanding borrowings for the yearended April 30, 2004 compared to the year ended April 30, 2003.  This was offset by a 7% higher average debtoutstanding for the year ended April 30, 2004 compared to the year ended April30, 2003 as a result of a slightly higher average portfolio of Receivables Heldfor Investment and the impact of issuing Term Notes which includes a $30 millionprefunding component.

 

*Provision for Credit Losses*. The provision forcredit losses for the year ended April 30, 2004 increased to $12,428 ascompared to $10,338 for the year ended April 30, 2003. The increase inprovision for credit losses is primarily due to the Company’s assessment ofweakened economic conditions and the ability of customers to maintaincomparable employment.  Additionally,recovery rates on repossessions have suffered due to decreasing prices andincreased incentives for new vehicles which decreasesthe demand and price for used vehicles and negatively impacts recovery ratesand loss severity.

 

Netcharge-offs for the year ended April 30, 2004 increased to $12,626 compared to$10,279 for the year ended April 30, 2003. The increase in net charge-offs for the year ended April 30, 2004 isprimarily due to a 13% increase in losses from repossessions and a 300%increase in other losses which include losses related to customer bankruptciesand loans that were significantly delinquent and no longer supported bycollateral.

 

Thelevel of provision for credit losses is a key driver of overall financialperformance and should be positively impacted by improvement in generaleconomic conditions, improvements in wholesale used car prices and lower netlosses resulting from stricter underwriting controls adopted by the Companyduring 2000 and 2001.  Any additionaleconomic deterioration or further decline in wholesale used car prices willnegatively impact provision expense as will increases in the outstandingbalance of receivables held for investment.

 

*ServicingRevenue*.  OnDecember 24, 2002, the Company entered into an agreement to provide loanservicing and collection activities on behalf of FARC.  FARC, which is 40% owned by the Company, purchaseda portfolio of approximately $200 million of installment loan receivables.  On March 19, 2003, the Company entered intoan agreement to provide loan servicing and collection activities on $276million of installment loan receivables for unrelated third parties.  Servicing revenue increased to $4,889for the year ended April 30, 2004 compared to $1,080 foryear ended April 30, 2003.  The increasein servicing revenue for the year ended April 30, 2004 is due to the 2004period containing a full year of servicing revenue compared to a partial yearin 2003. Revenue derived from servicing activities will increase or decrease indirect proportion to the average outstanding balance of serviced receivables.

 

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*Late Fees and Other Income*. Late fees and otherincome increased to $1,825 for the year ended April 30, 2004, compared to$1,186 for the year ended April 30, 2003. The increase is attributable to a 132% increase in fees related toproviding electronic payment services to our customers.  Additionally, fiscal year 2004 reflects feeincome received related to GAP Insurance and extended service contracts sold toconsumers in connection with the Company’s direct lending activities that werenot present in fiscal year 2003.

 

Latefees and other income are driven by a number of factors including overalldelinquency rates, the percentage of customers utilizing electronic paymentproducts and growth rates in the Company’s direct lending business which will effect the ability of the Company to generate fee incomefrom marketing insurance and warranty products.

 

*Incomefrom Investment.* Income from investment reflects 40%of total servicing revenue earned from servicing activities performed by theCompany for FARC and 40% of interest income earned on junior mezzaninedebt.  Income from investment increasedto $1,009 for the year ended April 30, 2004 compared to $418 for the year endedApril 30, 2003. The increase in income from investment for fiscal year 2004 isdue to the 2004 period containing income for the entire fiscal year.  Fiscal year 2003 contains only a partialyear’s earnings.  Income from investmentsis impacted by the outstanding balance of investments held, general marketinterest rates and the profitability of FARC. The Company anticipates that contributions from the FARC investment willcontinue to decline as the portfolio of receivables owned by FARC amortizes.

 

*OtherInterest Income.*Other interest income increased to $460 forthe year ended April 30, 2004, compared to $283 for the year ended April 30,2003.  The primary reasons for theincrease are related to interest earned on the junior mezzanine debt owed byFARC and the fact that fiscal year 2004 reflects income for the full yearcompared to only four months in fiscal year 2003.  Other interest income is impacted by theoutstanding balance of the junior mezzanine debt and general market interestrates.

 

*Realizedand Unrealized Loss on Interest Rate Derivative Positions*.  In conjunction with the adoption of SFAS 133,the Company is required to report the fair value of interest rate derivativepositions.  A net realized loss of $(34)for the year ended April 30, 2004 is principally due to the termination ofthese positions.

 

*Salaries and Benefit Expenses*. Salaries and benefitexpense increased to $8,538 for the year ended April 30, 2004, compared to$7,786 for the year ended April 30, 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, the March 19, 2003 loan servicingagreement and an increase in direct lending activities. The overall number ofemployees of the Company is primarily correlated to (i) the total number of receivablesmanaged, since the majority of the Company’s employees are involved in loancollection activities and, (ii) origination growth rates which requireadditional marketing and credit underwriting personnel.

 

*Operating Expenses.* Operating expenses increased to $5,012 for the year ended April 30,2004, compared to $2,454 for the year ended April 30, 2003.  The increase in operating expenses for thefiscal year 2004 period is due to the increased servicing costs associated withan additional $476 million in loans from the December 24, 2002, FARC and theMarch 19, 2003, loan servicing agreements. Operating expenses for the year ended April 30, 2003 contain four monthsof servicing expense for the December 24, 2002, FARC portfolio and no expensesassociated with the March 19, 2003 loan servicing agreement.  Additionally, the Company’s decision to growthe direct lending business in fiscal year 2004 increased expenses,particularly printing, credit bureau and postage costs, associated with theCompany’s direct lending initiative. Overall operating expenses are generallycorrelated to the total number of receivables managed by the Company.

 

*General and Administrative.* General and administrative expenses increased to$3,723 for the year ended April 30, 2004, compared to $3,554 for the year endedApril 30, 2003.  The year ended April2004 experienced slightly higher equipment rental, bank service charges,commissions and liability insurance premiums when compared to the year endedApril 30, 2003.  General and administrativecosts tend to be more fixed in nature and not as dependent on the overall levelof managed receivables.

 

*Other Interest Expense*. Other interestexpense decreased to $468 for year ended April 30, 2004, compared to $643 forthe year ended April 30, 2003. The decrease was primarily due to a 25%reduction in the average

 

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outstanding borrowings on the Company’s working capital linefor the year ended April 30, 2004, compared to 2003.  Additionally, the shareholder loan in fiscalyear 2004 had 48% reduction in average outstanding borrowings compared tofiscal year 2003.  As of April 30, 2004the shareholder loan was fully paid.

 

***Fiscal Year Ended April 30, 2003,Compared to Fiscal Year Ended April 30, 2002 (dollars in thousands)***

 

*InterestIncome*. Interest income for 2003 decreased $4,607, or 12%, over 2002, primarilyas a result of a 4% decrease in the average principal balance of ReceivablesHeld for Investment 2002 to 2003 and a decrease in the effective yield from15.4% for 2002 to 15.0% in 2003. Additionally interest income on Receivables Acquired for Investmentdecreased by 83%. The decrease in interest income on Receivables Acquired forInvestment is attributable to a 74% decline in the average principal balancesof the Receivables Acquired for Investment for 2003 as compared to 2002.

 

*InterestExpense*. Interest expense for 2003 decreased by $3,544, or 26%, over 2002. Adecrease in the weighted average borrowings outstanding under credit and termfacilities of 3% resulted in $394 of this difference. These facilities are usedto fund Receivables Held for Investment. The weighted average cost of debt tofund Receivables Held for Investment decreased to 4.6% for the year ended April30, 2003, compared to 5.8% for the year ended April 30, 2002, accounting for$2,619 of the difference. Lastly, the interest expense on the ReceivablesAcquired for Investment decreased $531 resulting from a decrease in theweighted average borrowings outstanding of 85%.

 

*Provisionfor Credit Losses*. The provision for credit losses for 2003 increased by $1,397, or 16%,over 2002. The provision is affected by a) the amount of net charge offs and b)changes in the portfolio size. Net charge offs increased from $9,291 in fiscal2002 to $10,279 in fiscal 2003 due to an increase in the frequency ofrepossessions and lower recovery rates from the sales of repossessedvehicles.  The higher frequency isdirectly related to the weakened economic conditions and the resulting inabilityof certain customers to maintain comparable employment.  Lower recovery rates on repossessions are dueto an increase in supply of used vehicles and increased incentives for newvehicles which decreased the demand and price for used vehicles.  Contributing to the increase in charge offswas the provision impact of a growing portfolio. Based primarily on historicalloss experience of various aging categories, the Company provides a reserveequal to 1.1% of the outstanding principal balance of Receivables Held forInvestment.  Since the average portfoliosize decreased during fiscal 2002 and increased in 2003, a higher provisionexpense was incurred for 2003.

 

*Loss on Receivables Acquired forInvestment.*  Duringfiscal year 2002, a loss of $1,260 was recorded from Receivables Acquired forInvestment.  These assets are comprisedof loans previously originated by Auto Lenders Acceptance Corporation andinclude a portfolio of warehouse loans and a portfolio of loans that werepreviously securitized.  The securitizedloans were subsequently redeemed and funded through the FIACC creditfacility.  The 2002 loss is due to an 87basis point increase in the cumulative loss rate from 2001 for theseportfolios.  The increase in thecumulative loss rate was due to the higher loss frequency and severity in theseportfolios.  These loans are secured byolder vehicles which typically experience a larger drop in value in a weakauction market.

 

*ServicingRevenue.** *During the third and fourthquarter of fiscal 2003, FISC contracted with FARC and with an unrelated thirdparty to perform servicing and collection activities for two separate, distinctpools.  The gross servicing fee income of$1,080 relates to the income earned on these pools.

 

*Late Feesand Other Income*. Late fees and other income primarily represents late fees collected fromcustomers on past due accounts, fees for telephone pay service, interest incomeearned on short-term marketable securities and money market instruments, andequity investment income from an ownership interest.     Late fees and other income increased to $1,886 in 2003 from$1,810 in 2002 or a 4% increase. The increase is due to a 40% ownershipinterest in First Auto Receivables Corporation during fiscal 2003.  See Note 9 to the consolidated financialstatements for more information.  As aresult of the investment, $418 of investment income was recognized for thefiscal year 2003.  This increase isoffset by $398 lower reinvestment income earned on restricted cash balances dueprimarily to declining reinvestment interest rates.

 

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R*ealized andUnrealized Loss on Interest Rate Derivative Positions*.  In conjunction with the adoption of SFAS 133,the Company is required to report the fair value of interest rate derivativepositions.  Unrealized losses of $256 forfiscal year 2003 principally are due to negative mark to market movements dueto the declining interest rate environment on interest rate caps required forthe FIARC credit facility.  For fiscal year2002, the Company purchased both sides of the interest rate caps throughseparate subsidiaries and thus market movements offset. The remainingunrealized losses are due to movements in the $100 million 6.42% pay fixed swapversus movements in the $100 million 5.025% pay floating swap.  These two derivatives will not directlyoffset over the remaining term due to interest rate fluctuations betweenperiods.

 

*Salariesand Benefit Expenses.* Salaries and benefit costsdecreased to $7,879 in 2003 from $8,041 in 2002.  The decrease is primarily due to reducedheadcount needs related to the lower average portfolio and outsourcing aportion of collections to a third party service.  Salaries and benefits increased in the fourthquarter of fiscal 2003 due to the addition of two servicing portfolios.

 

*OtherInterest Expense.* Other interest expense decreased $142, or 18%, for the year ended April30, 2003 over the year ended April 30, 2002. The decrease is principallyrelated to a decrease in the average borrowings outstanding under the workingcapital facility of 16% and a 7% reduction in the interest rate.

 

*OtherExpenses*.  Otherexpenses decreased $750, or 11%, in fiscal 2003 primarily due to a $666decrease in amortization expense, of which $555 related to a 2002 terminationof a term loan working capital facility. Additionally, decreases in depreciation and telephone expense werepartially offset by higher 2003 expenses related to a higher managed portfolioand the ramp up of the direct lending business.

 

*Income BeforeProvision for Income Taxes and Minority Interest*.  During 2003, income before provision forincome taxes and minority interest increased by $803, or 487%, from 2002 as aresult of the factors discussed above.

 

**Liquidity and Capital Resources**

 

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

 

The Company’s most significant cash flow requirementis for the origination of receivables. The Company originated $90 million ofreceivables to be held for investment for 2004 compared to $114 million in2003.

 

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

 

The Company’s most significant source of cash flow isthe principal and interest payments received from its receivables portfolios.The Company received such payments in the amount of $119millionin 2004 and $113.4 million in 2003.  Suchcash flow funds repayment of amounts borrowed under the Company’s creditfacilities and other holding costs, primarily interest expense and servicingand custodial fees. During the fiscal year 2004, the Company required net cashof $2.4 million as the receivables originated exceeded portfoliocollections.  During the fiscal year2003, the Company required net cash of $33.2 million as the receivablesoriginated exceeded portfolio collections. The Company relies on borrowed funds to provide cash flow in periods ofgrowth.  As of April 30,

 

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2004, the Company had $157.3 million of available capacity in the FIRCand FIARC credit facilities to fund future growth.

 

In addition to the cash flow generated from the principal and interestcollections on its receivables portfolio, the Company collects servicing feesfunded from each of the credit facilities. Servicing fees range from 1.4% to 2.5% of the outstanding principalbalance of the loans in the portfolio. Cash flow and servicing fees are received after month end, but relate tothe prior month activity.  Thus upon filingof the monthly servicing statements, a portion of the restricted cash isconverted to cash available to fund operations. At April 30, 2004 and 2003 the Company’s unencumbered cash was$2,018,490 and $2,617,680 respectively. The decrease in available cash is primarily due to an increase inexpenditures related to the Company’s direct lending business.  Cash and servicing fees collected after monthend, but related to the prior month activity totaled $555,922 and $2,053,646 asof April 30, 2004 and 2003, respectively. Management believes the unencumberedcash and cash inflows and amounts available under the working capital facilityare adequate to fund cash requirements for operations.  In addition, as of April, 2004, the Companyhad $150 million available under the FIARC warehouse facility.

 

*Capitalization*.The Company expects to rely primarily on its credit facilities and the issuanceof secured term notes to acquire and retain receivables. The Company believesits existing credit facilities have adequate capacity to fund the increase ofthe receivables portfolio expected in the foreseeable future. While the Companyhas no reason to believe that these facilities will not continue to beavailable, their termination could have a material adverse effect on theCompany’s operations if substitute financing on comparable terms was notobtained.

 

*FinancingArrangements.* The Company finances its loanorigination through two warehouse credit facilities. The Company’s creditfacilities provide for one-year terms and have been renewed annually.Management of the Company believes that the credit facilities will continue tobe renewed or extended or that it would be able to secure alternate financingon satisfactory terms; however, there can be no assurance that it will be ableto do so. In January 2002 the Company issued $159 million in asset-backed notes(“Term Notes”) secured by discrete pools of receivables. On November 20, 2003,the Company issued $140 million in Term Notes secured by a discrete pool ofreceivables.  Substantially allreceivables retained by the Company are pledged as collateral for the creditfacilities and the Term Notes. The weighted average interest rate for theCompany’s secured borrowings including the effect of program fees, dealer fees,and other comprehensive income (loss) amortization was 3.7% and 4.6% for thefiscal years ending April 30, 2004 and 2003, respectively.

 

*Warehouse Facilities as of April 30, 2004*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** **                      | **Fees**                                                                                              | ** **              | **Insurance**           | ** ** | **Borrowing  Rate At  April 30,  2004** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|---------------------------------|-------------------------------------------------------------------------------------------------------|-------------------------|-------------------------|------------|-----------------------------------------|------------|
| FIARC        |       | $            | 150,000,000 |            | —     |              | Commercial paper rate  plus .3% |                                                                                                  | .25% of Unused Facility |                    | .35        | %                                       | 2.27       | % |
| FIRC         |       | $            | 50,000,000  |            | $          | 42,705,810        |                            | 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                               |       | 1.64 | % |
|              |            |              |             |                 |            |                   |                                 |                                                                                                       |                         |                         |            |                                         |            |  |  |

 

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*Warehouse Facilities – Credit Enhancement as ofApril 30, 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 to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders are named as additionalinsureds under these policies. The coverages are obtained on each receivable atthe time it is purchased by the Company and the applicable premiums are prepaidfor the life of the receivable. Each receivable is covered by three separatecredit insurance policies, consisting of basic default insurance under astandard auto loan protection policy (known as “ALPI” insurance) together withcertain supplemental coverages relating to physical damage and other risks.Solely at its expense, the Company carries these coverages and neither thevehicle purchasers nor the dealers are charged for the coverages and they areusually unaware of their existence. The Company’s ALPI insurance policy iswritten by National Union Fire Insurance Company of Pittsburgh (“NationalUnion”), which is a wholly-owned subsidiary of American International Group.

 

The premiums that the Company paid during fiscal year2003 for its three credit enhancement insurancecoverages, of which the largest component is basic ALPI insurance, representedapproximately 3.9% of the principal amount of the receivables originated duringthe year. Aggregate premiums paid for ALPI coverage alone during the fiscalyears ended April 30, 2003 and 2004 were $4,141,328 and $3,066,131,respectively, and accounted for 3.8% and 3.5% of the aggregate principalbalance of the receivables originated during such respective periods.

 

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100% of the risk under theCompany’s ALPI insurance policy. At the time each receivable is insured byNational Union, the risk is automatically reinsured to its full extent andapproximately 96% of the premium paid by the Company to National Union withrespect to such receivable is ceded to the Insurance Subsidiary. When a losscovered by the ALPI policy occurs, National Union pays it after the claim isprocessed, and National Union is then reimbursed in full by the InsuranceSubsidiary.  In addition to the monthlypremiums and liquidity reserves of the Insurance Subsidiary, a trust account ismaintained by National Union to secure the Insurance Subsidiary’s obligationsfor losses it has reinsured.

 

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofApril 30, 2004, the Insurance Subsidiary had capital and surplus of $2,500,189and unencumbered cash reserves of $1,205,263 in addition to the $3,265,274trust account.

 

The ALPI coverage as well as the Insurance Subsidiary’sliability under the Reinsurance Agreement, remains in effect for eachreceivable that is pledged as collateral under the warehouse credit facility.Once receivables are transferred from FIRC to FIARC and financed under thecommercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses itsInsurance Subsidiary will be required to indemnify will be less than thepremiums ceded to it. However, there can be no assurance that losses will notexceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

 

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

 

*Warehouse Facilities – 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 |       | 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 $50million commitment level until December 2, 2004.  On January 29, 2004, following a short-termextension of the original maturity date, the FIARC facility was renewed, undersimilar terms and conditions, to December 2, 2004.  There was no balance outstanding under theFIARC facility on April 30, 2004.

 

Management presently intends to seek further extensionsto these warehouse facilities prior to the current expiration dates.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that the FIRC andFIARC facilities will not be renewed at each of their respective expirationdates.

 

The following table contains pertinent information on the Term Notes asof April 30, 2004.

 
| **Term  Notes** | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** **  | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|-------------|-------------------|-------------------|-----------------|------------|---------------------|------------|
| 2002-A          |       | January 29, 2002  |       | $                     | 159,036,000 |              | December 15, 2008 |            | $          | 44,335,659          |       | 3.46 | % |
| 2003-A          |       | November 11, 2003 |       | $                     | 139,661,000 |              | April 20, 2011    |            | $          | 120,382,531         |       | 2.58 | % |

 

Credit enhancement on the two Term Notes 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   |

 

Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% Class A asset-backed notes(“2002-A Term Notes”). The initial pool of automobile receivables transferredto the 2002 Auto Trust

 

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totaled $135,643,109, which waspreviously owned by FIRC and FIARC, secure the 2002-A Term Notes.  In addition to the issuance of the Class A Notes, the 2002 Auto Trust also issued $4,819,000 in ClassB Notes that were retained by the Company and pledged to secure the WorkingCapital Facility as further described below. Proceeds from the issuance, which totaled $159,033,471 were used to (i)fund a $25,000,000 pre-funding account to be 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% 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 interestat 3.46% and requires monthly principal reductions sufficient to reduce thebalance of the Class A Term Notes to 97% of the outstanding balance of theunderlying receivables pool. The final maturity of the 2002-A Term Notes isDecember 15, 2008.  The Class B Notes donot bear interest but require principal reductions sufficient to reduce thebalance of the Class B Notes to 3% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30, 2003and April 30, 2004, the outstanding principal balances on the 2002-A Term Noteswere $87,358,847 and $44,335,659 respectively.

 

On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A(“2003 Auto Trust”) completed the issuance of $139,661,000 of 2.58% Class Aasset-backed notes (“2003-A Term Notes”). The initial pool of automobilereceivables transferred to the 2003 Auto Trust totaled $114,726,891, which waspreviously owned by FIRC and FIARC, secure the 2003-ATerm Notes.  In addition to the issuanceof the Class A Notes, the 2003 Auto Trust also issued$5,065,891 in Class B Notes that were retained by the Company and pledged tosecure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,656,629 were used to (i) fund a $30,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2003-A TermNote issuance, and (v) fund an initial cash reserve account of 0.5% or $573,635of the initial receivables pledged.  TheClass A Term Notes bear interest at 2.58% and requiresmonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 96.1% of the outstanding balance of the underlying receivablespool. The final maturity of the 2003-A Term Notes is April 20, 2011.  The Class B Notes do not bear interest butrequire principal reductions sufficient to reduce the balance of the Class BNotes to 3.9% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation provides credit enhancement for the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30, 2004,the outstanding principal balances on the 2003-A Term notes were $120,382,531.

 

*AcquisitionFacility*.  OnAugust 8, 2000, the Company entered into an agreement with WachoviaSecurities.  Under the agreement, apartnership was created in which FIFS Acquisition served as the general partnerand contributed its assets for a 70% interest in the partnership and FirstUnion Investors, Inc., an affiliate of Wachovia Securities, served as thelimited partner with a 30% interest in the partnership (the “Partnership”).Pursuant to the refinancing, the Partnership issued Class ANotes in the amount of $19,204,362 and Class B Notes in the amount of $979,453to VFCC, an affiliate of Wachovia Securities, the proceeds of which were usedto retire the acquisition debt. The Class A Notes bear interest at VFCC’s commercialpaper rate plus 0.95% per annum and amortize on a monthly basis by an amountnecessary to reduce the Class A Note balance as of the payment date to 75% ofthe outstanding principal balance of Receivables Acquired for Investment,excluding Receivables Acquired for Investment that are applicable to FIACC, asof the previous month end. The Class B Notes bear interest at VFCC’s commercialpaper rate plus 5.38% per annum and amortize on a monthly basis by an amountwhich varied based on excess cash flows received from Receivables Acquired forInvestment after payment of servicing fees, trustee and back-up servicer fees,Class A Note interest and Class A Note principal, plus collections received onthe Trust Certificates. The Class B Notes were paid in full on September 15,2000.  After the Class B Notes were paidin full, all cash flows received after payment of Class ANote principal and interest, servicing fees and other costs, are distributed tothe Partnership for subsequent distribution to the partners based upon therespective partnership interests. Beginning in November 2001, the partnership used excess cash flow toretire additional Class A Note principal, thus no further partnershipdistributions were paid until the Class A Notes were retired.  On February 20, 2003, the Class A Notes were fully paid. On September 19, 2003, First Investors Financial Services, Inc.purchased

 

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the limited partnership interestspreviously held by First Union Investors, Inc. and accordingly receives allexcess cashflows.

 

*WorkingCapital Facility*. On December 6, 2001, the Company entered into an agreement with WachoviaSecurities to refinance the $11,175,000 outstanding balance of the workingcapital term loan previously provided by Bank of America and Wachovia andincrease the size of the facility to $13.5 million.  The renewal facility was provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  The facility originallyconsisted of a $9 million revolving tranche and a $4.5 million term loantranche which amortizes monthly.  Theterm loan tranche of this working capital facility was evidenced by the Class BNotes issued in conjunction with the 2002 Auto Trust financing. The remaining$9 million of the $13.5 million working capital facility revolves monthly inaccordance with a borrowing base consisting of the overcollateralization amountand reserve accounts for each of the Company’s othercredit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities, the acquisition facility and theexisting and future term note facilities. 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, themonthly principal amortization under the term loan tranche was increased to thegreater of $250,000 or the principal distributions made under the Class B Notesissued under the 2002 Auto Trust financing. On December 4, 2003, the Working Capital Facility was extended toDecember 2, 2004.  Under the terms of theextension, the monthly amortization requirement was replaced with therequirement that outstandings under the facility could not exceed the lesser ofa borrowing base or the $9 million facility limit.  At April 30, 2003 and 2004, there was $8,714,518and $8,761,143, respectively, outstanding under this facility.

 

The Company presentlyintends to seek a renewal of the working capital facility from its lender priorto maturity.  Should the facility not berenewed, the outstanding balance of the receivables would be amortized in accordancewith the borrowing base.  Managementconsiders its relationship with its lenders to be satisfactory and has noreason to believe that this credit facility will not be renewed.  If the facility is not renewed, however, orif material changes are made to its terms and conditions, it could have amaterial adverse effect on the Company.

 

*ShareholderLoans.** *On December 3, 2001 the Companyentered into an agreement with one of its shareholders who isa member of its Board of Directors under which the Company may, from time totime, borrow up to $2.5 million.  Theproceeds of the borrowings will be utilized to fund certain private and openmarket purchases of the Company’s common stock pursuant to a Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $746,280 and $0outstanding under this facility as of April 30, 2003 and 2004 respectively.

 

*LoanCovenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance ofcredit enhancement insurance covering the receivables (if applicable), theobservance of certain financial covenants, the avoidance of certain levels ofdelinquency experience and other matters. The breach of these covenants, if notcured within the time limits specified, could precipitate events of defaultthat might result in the acceleration of the FIRC credit facility, the TermNotes and the working capital facility or the termination of the commercialpaper facilities. The Company was not in default with respect to any covenantsgoverning these financing arrangements at April 30, 2004.

 

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

 

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OnSeptember 27, 2000, the Company entered into a swap under which the Companywould pay a fixed rate of 6.30% and receive the prevailing one month LIBOR rateon a notional amount of $100 million. Under the terms of the swap, the counterparty had the option ofextending the swap for an additional three years to mature on April 15, 2004 ata fixed rate of 6.42%.  On April 15,2001, the counterparty exercised its extension option.

 

On June 1, 2001, the Companyentered into interest rate swaps with an aggregate notional amount of $100million and a maturity date of April 15, 2004. Under the terms of these swaps, the Company will pay a floating ratebased on one month LIBOR and receive a fixed rate of 5.025%.  Management elected to enter into these swapagreements to offset the uneconomical position of the existing pay fixed swapcreated by rapidly declining market interest rates.  In connection with the decision to enter intothe $100 million floating rate swap, the Company elected to change the designationof the $100 million fixed rate swap from a cash flow hedge and not account forthe instrument as a hedge under SFAS No. 133. As a result, the change in fair value of the swaps is reflected in netincome for periods subsequent to May 31, 2001.

 

Duringfiscal year 2004, as a requirement of the FIARC commercial paper facility, theCompany entered into various interest rate cap transactions at cap ratesranging from 6.5% to 7.5% with an amortizing notional balance that is expectedto coincide with the outstanding balance of the FIARC commercial paperfacility. The interest rate caps were not designated as hedges and,accordingly, changes in the fair value of the interest rate caps are recordedas unrealized gains or losses and reflected in net income.  On December 2, 2003, the Company terminatedall interest rate caps outstanding in exchange for proceeds of $356,000.  The caps were terminated following therepayment of all outstandings under the FIARC facility following the issuanceof the 2003-A Term Notes.  As a result, arealized loss of $14,000 was incurred relative to the aggregate market value ofthe interest rate caps.

 

**Delinquency and Credit Loss Experience**

 

The Company’s results ofoperations, financial condition and liquidity may be adversely affected bynonperforming receivables. The Company seeks to manage its risk of credit lossthrough (i) prudent credit evaluations, (ii) risk management activities, (iii)effective collection procedures, and (iv) bymaximizing recoveries on defaulted loans. The allowance for credit losses of$2,199,386 as of April 30, 2004 and $2,397,216 as of April 30, 2003 as apercentage of Receivables Held for Investment of $207,489,339 as of April 30,2004 and $226,362,218 as of April 30, 2003 was 1.1%.

 

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

 

The Company retains thecredit risk associated with the receivables originated. The Company purchasescredit enhancement insurance from third party insurers whichcovers the risk of loss upon default and certain other risks. TheCompany established a captive insurance subsidiary to reinsure certain risksunder the credit enhancement insurance coverage for all receivables.  In addition, receivables financed under theAuto Trust, FIARC and FIACC commercial paper facilities do not carry defaultinsurance.  Provisions for credit lossesof $12,428,175 and $10,337,718 have been recorded for the twelve months endedApril 30, 2004 and April 30, 2003, respectively.

 

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

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology utilized is asix-month migration analysis whereby the Company compares the aging status ofeach loan from six months prior to the aging loan status as of the reportingdate.  These factors are then applied tothe aging status of each loan at the reporting date in order to calculate thenumber of loans that are expected to migrate to impaired status in the next sixmonths.  The estimated number ofimpairments is then multiplied by estimated loss per loan, which is based onhistorical information.  The computedreserve is then

 

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

 

| ** **                                                                            | ** ** | **As of or for the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2003**                                  | ** ** | **2004** | ** ** |
| ** **                                                                            | ** ** | **Number  of Loans**                      | ** ** | **Amount** | ** ** | **Number  of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                     |       |                                      |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                   |       |                                      |       |   |   |   |   |   |   |
| 30 - 59 days                                                                          |       | 203                                       |       | $ | 1,909 |   | 186 |   | $ | 1,691 |   |
| 60 - 89 days                                                                          |       | 111                                       |       | 1,051 |   | 78 |   | 650 |   |
| 90 days or more                                                                       |       | 409                                       |       | 3,967 |   | 291 |   | 2,757 |   |
| Total  delinquencies                                                                  |       | 723                                       |       | $ | 6,927 |   | 555 |   | $ | 5,098 |   |
| Total  delinquencies as a percentage of outstanding receivables                       |       | 3.9                                       | %          | 3.1 | % | 3.4 | % | 2.5 | % |
| Net charge-offs  as a percentage of average receivables outstanding during the period |       |                                      |       | 4.7 | % |   |   | 5.7 | % |

 

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

 

The higher annualizedcharge-off rate results from a higher number of repossessions coupled withlower recovery rates on the repossessed collateral which is due to continuedeconomic weakness and a poor market for used vehicles.

 

As of April 30, 2004,there were 522 accounts totaling $4,942,694 that were in bankruptcy status andwere more than 30 days past due.  As ofApril 30, 2003, there were 621 accounts totaling $6,106,924 that were inbankruptcy status and were more than 30 days past due.  As of April 30, 2003 and 2004, 82% and 87%,respectively, of the bankruptcy delinquencies filed for protection underChapter 13.

 

**New Accounting Pronouncements**

 

In December 2003, the American Institute of CertifiedPublic Accountants issued Statement of Position (SOP) 03-3,*Accountingfor Certain Loans or Debt Securities Acquired in a Transfer*. SOP03-3 addresses the accounting for loans acquired through a transfer (includinga business combination) that have differences between their expected cash flowsand their contractual cash flows, due in part to credit quality. The SOPrequires that the excess of the expected cash flows at acquisition to becollected over the acquirer’s initial investment be recognized on a level-yieldbasis over the loan’s life. Any future excess of contractual cash flows overthe original expected cash flows is recognized as a future yield adjustment.Future decreases in actual cash flows over the original expected cash flows arerecognized as impairment and expensed immediately. Valuation allowances can notbe created or “carried over” in the initial accounting for loans acquired thatare within the scope of the SOP. SOP 03-3 is effective for loans acquired infiscal years beginning after December 15, 2004. The Company does not anticipate SOP 03-3 will have a material effect onthe Company’s financial statements.

 

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**ITEM 7A****.****  *QUANTATATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

The market riskdiscussion and the estimated amounts generated from the analysis that followsare forward-looking statements of market risk assuming certain adverse marketconditions occur. Actual results in the future may differ materially due tochanges in the Company’s product and debt mix, developments in the financialmarkets, and further utilization by the company of risk-mitigating strategiessuch as hedging.

 

The Company’s operatingrevenues are derived almost entirely from the collection of interest on thereceivables it retains and its primary expense is the interest that it pays onborrowings incurred to purchase and retain such receivables. The Company’scredit facilities bear interest at floating rates which are reset on ashort-term basis, whereas its receivables bear interest at fixed rates which donot generally vary with changes in interest rates. The Company is thereforeexposed primarily to market risks associated with movements in interest rateson its credit facilities. The Company believes that it takes the necessarysteps to appropriately reduce the potential impact of interest rate increaseson the Company’s financial position and operating performance.

 

The Company relies almostexclusively on revolving credit facilities to fund its origination ofreceivables. Periodically, the Company will transfer receivables from arevolving to a term credit facility. Currently all of the Company’s creditfacilities in bear interest at floating rates tied to either a commercial paperindex or LIBOR.

 

As of April 30, 2004, theCompany had $51.5 million of floating rate secured debt outstanding under theFIRC warehouse and working capital facilities.  For every 1% increase in LIBOR annualafter-tax earnings would decrease by approximately $271,145 assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates.  As of April30, 2003, the Company had $150.6 million of floating rate secured debtoutstanding net of swap and cap agreements. For every 1% increase in commercialpaper rates or LIBOR, annual after-tax earnings would decrease by approximately$957,000 assuming the Company maintains a level amount of floating rate debtand assuming an immediate increase in rates.

 

**Forward Looking Information**

 

Statements and financialdiscussion and analysis included in this report that arenot historical 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 throughout Item 1.

 

The Company believes thefactors discussed are important factors that could cause actual results todiffer materially from those expressed in any forward looking statement madeherein or elsewhere by the Company or on its behalf.  The factors listed are not necessarily all ofthe important factors.  Unpredictable orunknown factors not discussed herein could also have material adverse effectson actual results of matters that are the subject of forward lookingstatements.  The Company does not intendto update its description of important factors each time a potential importantfactor arises.  The Company advises itsstockholders that they should:  (1) beaware that important factors no described herein could affect the accuracy ofour forward looking statements, and (2) use caution and common sense whenanalyzing our forward looking statements in this document or elsewhere.  All of such forward looking statements arequalified in their entirety by this cautionary statement.

 

**ITEM 8****.****  *FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA***

 

The ConsolidatedFinancial Statements of the Company included in this Form 10-K are listed under Item 14(a). The Company is not required tofile any supplementary financial data under this item.

 

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**ITEM 9****.****  *CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE***

 

None.

 

**ITEM 9A****.****  *CONTROLS AND PROCEDURES***

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Companycarried out an evaluation, under the supervision and with the participation ofmanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of April 30, 2004 toprovide reasonable assurance that information required to be disclosed in theCompany’s reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

There has been no changein the Company’s internal controls over financial reporting that occurred duringthe quarter ended April 30, 2004 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

 

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**Part III**

 

**ITEM 10****.  *DIRECTORSAND EXECUTIVE OFFICERS***

 

Information responsive tothis item appears under the caption “Election of Directors” in the Company’sProxy Statement for the 2004 Annual Meeting of Shareholders expected to be heldon September 10, 2004, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

 

Information related to the nomination of directorsappears under the caption “Corporate Governance” in the Company’s ProxyStatement for the 2004 Annual Meeting of Shareholders expected to be held onSeptember 10, 2004, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

 

Information related to the Company’s Code of BusinessConduct and Ethics, adopted April 28, 2004, appears under the caption“Corporate Governance” in the Company’s Proxy Statement for the 2004 AnnualMeeting of Shareholders expected to be held on September 10, 2004, which is tobe filed with the Securities and Exchange Commission, and is incorporatedherein by reference.  The Code ofBusiness Conduct and Ethics has also been filed under Item 15 as an exhibit tothis Form 10-K.

 

The Audit Committee of the Board of Directors hasdesignated one or more persons as financial experts.  Information related to the financial expertdesignation and the Audit Committee appears under the caption “OtherInformation Concerning the Board of Directors” in the Company’s Proxy Statementfor the 2004 Annual Meeting of Shareholders expected to be held on September10, 2004, which is to be filed with the Securities and Exchange Commission, andis incorporated herein by reference.

 

**ITEM 11****.  *EXECUTIVECOMPENSATION***

 

Information responsive tothis item appears under the caption “Executive Compensation” in the Company’sProxy Statement for the 2004 Annual Meeting of Shareholders expected to be heldon September 10, 2004, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

 

**ITEM 12****.  *SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT***

 

Information responsive tothis item appears under the caption “Security Ownership of Management andCertain Beneficial Owners” in the Company’s Proxy Statement for the 2004 AnnualMeeting of Shareholders expected to be held on September 10, 2004, which is tobe filed with the Securities and Exchange Commission, and is incorporatedherein by reference.

 

**ITEM 13****.  *CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS***

 

Information responsive tothis item appears under the caption “Related Party Transactions” in theCompany’s Proxy Statement for the 2004 Annual Meeting of Shareholders expectedto be held on September 10, 2004, which is to be filed with the Securities andExchange Commission, and is incorporated herein by reference.

 

**ITEM 14****.  *PRINCIPALACCOUNTANT FEES AND SERVICES***

 

Information related tothis item appears under the caption “Proposal 2: Ratification of Appointment ofIndependent Auditors” in the Company’s proxy statement for the 2004 annualmeeting of shareholders expected to be held on September 10, 2004, which is tobe filed with the Securities and Exchange Commission, and is incorporatedherein by reference.

 

31

----

 

**Part IV**

 

**ITEM 15****.  *EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K***

 
| (a)    | *(1)(2) Financial Statements and Financial  Statement Schedules* |
|--------|------------------------------------------------------------------|
|   |                                                             |
|   | See Index to Consolidated Financial Statements on  Page F-1.     |
|   |                                                             |
|   | *(3) Exhibits*                                                   |
|   |                                                             |
|   | 2.1(j)                                                           |   | — |   | Stock Purchase Agreement, dated as of September 9,  1998, between First Investors Financial Services Group, Inc. and Fortis, Inc.  to purchase Auto Lenders Acceptance Corporation, a wholly-owned subsidiary of  Fortis, Inc. |
|   | 3.1(a)                                                           |   | — |   | Articles of Incorporation, as amended |
|   | 3.2(a)                                                           |   | — |   | Bylaws, as amended |
|   | 4.1(a)                                                           |   | — |   | Excerpts from the Articles of Incorporation, as  amended (included in Exhibit 3.1). |
|   | 4.3(a)                                                           |   | — |   | Specimen Stock Certificate |
|   | 10.5(a)                                                          |   | — |   | Credit Agreement dated as of October 16, 1992 among  F.I.R.C., Inc. (“FIRC”) and NationsBank of Texas, N.A., individually and as  agent for the banks party thereto, as amended by First Amendment to Credit  Agreement and Loan Documents dated as of November 5, 1993, Second Amendment  to Credit Agreement and Loan Documents dated as of March 3, 1994, Third  Amendment to Credit Agreement and Loan Documents dated as of March 17, 1995  and Fourth Amendment to Credit Agreement and Loan Documents dated as of July  7, 1995. |
|   | 10.6(a)                                                          |   | — |   | Intentionally omitted. |
|   |                                                             |   |   |   |   |
|   | 10.7(a)                                                          |   | — |   | Intentionally omitted. |
|   | 10.8(a)                                                          |   | — |   | Intentionally omitted. |
|   | 10.9(a)                                                          |   | — |   | Intentionally omitted. |
|   | 10.10(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.11(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.12(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.13(a)                                                         |   | — |   | Facultative Reinsurance Agreement between National  Fire Insurance Company of Pittsburgh and First Investors Insurance Company,  as reinsurer, dated as of May 26, 1995. |
|   | 10.14(a)                                                         |   | — |   | Blanket Collateral Protection Insurance Policy dated  October 5, 1992 issued by Agricultural Excess & Surplus Insurance Company  to FIRC as insured. |
|   | 10.15(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.16(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.17(a)                                                         |   | — |   | Lease Agreement between A.I.G. Realty, Inc. and  First Investors dated as of June 1, 1992, as amended by Amendment One dated  October 29, 1993 and Amendment Two dated October 26, 1994. |
|   | 10.18(a)                                                         |   | — |   | Intentionally omitted. |
|   | 10.21(a)                                                         |   | — |   | 1995 Employee Stock Option Plan of the Registrant. |
|   | 10.22(a)                                                         |   | — |   | Form of Stock Option Agreement between the  Registrant and Robert L. Clarke dated August 25, 1995. |
|   | 10.23(b)                                                         |   | — |   | Intentionally omitted. |
|   | 10.24(b)                                                         |   | — |   | Intentionally omitted. |
|   | 10.25(b)                                                         |   | — |   | Amendment Three dated October 10, 1995 to the Lease  Agreement between A.I.G. Realty, Inc. and the Registrant, filed as Exhibit  10.17. |
|   | 10.26(b)                                                         |   | — |   | Intentionally omitted. |
|   | 10.27(b)                                                         |   | — |   | Intentionally omitted. |
|   | 10.28(c)                                                         |   | — |   | Intentionally omitted. |
|   | 10.29(d)                                                         |   | — |   | Security Agreement dated as of October 22, 1996  among First Investors Auto Receivables Corporation, Enterprise Funding  Corporation, Texas Commerce Bank National Association, MBIA Insurance  Corporation, NationsBank N.A., and First Investors Financial Services, Inc. |
|        |                                                                  |  |  |  |  |  |

 

32

----

 
|   | 10.30(d) |   | — |   | Note Purchase Agreement dated as of October 22, 1996  between First Investors Auto Receivables Corporation and Enterprise Funding  Corporation.                                                                                                                                                                                                                        |
|--------|----------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.31(d) |   | — |   | Purchase Agreement dated as of October 22, 1996  between First Investors Financial Services, Inc. and First Investors Auto  Receivables Corporation.                                                                                                                                                                                                                   |
|   | 10.32(d) |   | — |   | Insurance Agreement dated as of October 1, 1996  among First Investors Auto Receivables Corporation, MBIA Insurance  Corporation, First Investors Financial Services, Inc., Texas Commerce Bank  National Association, and NationsBank N.A.                                                                                                                            |
|   |     |   |   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.33(d) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.34(d) |   | — |   | Amended and Restated Credit Agreement dated as of  October 30, 1996 among F.I.R.C., Inc. and NationsBank of Texas, N.A.,  individually and as Agent for the financial institutions party thereto.                                                                                                                                                                      |
|   | 10.35(d) |   | — |   | Amended and Restated Collateral Security Agreement  dated as of October 30, 1996 between F.I.R.C., Inc. and Texas Commerce Bank  National Association as collateral agent for the ratable benefit of  NationsBank of Texas, N.A. individually and as agent for the financial  institutions party to the Amended and Restated Credit Agreement filed as  Exhibit 10.34. |
|   | 10.36(d) |   | — |   | Amended and Restated Purchase Agreement dated as of  October 30, 1996 between First Investors Financial Services, Inc. and  F.I.R.C., Inc.                                                                                                                                                                                                                             |
|   | 10.37(d) |   | — |   | Amended and Restated Servicing Agreement between  F.I.R.C., Inc. and General Electric Capital Corporation.                                                                                                                                                                                                                                                             |
|   | 10.38(e) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.39(f) |   | — |   | First Amendment to the Amended and Restated Credit  Agreement dated January 31, 1997 by and among F.I.R.C., Inc. and NationsBank  of Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                               |
|   | 10.40(f) |   | — |   | Second Amendment to the Amended and Restated Credit  Agreement dated May 15, 1997 by and among F.I.R.C., Inc. and NationsBank of  Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                                  |
|   | 10.41(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.42(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.43(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.44(f) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.45(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.46(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.47(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.48(g) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.49(h) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.50(h) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.51(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.52(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.53(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.54(i) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.55(k) |   | — |   | Third Amendment to the Amended and Restated Credit  Agreement dated January 25, 1999 by and among F.I.R.C., Inc. and NationsBank  of Texas, N.A., individually and as agent for the banks party thereto.                                                                                                                                                               |
|   | 10.56(k) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.57(l) |   | — |   | Amendment Number 2 to Security Agreement dated March  31, 1999 among First Investors Auto Receivables Corporation, Enterprise  Funding Corporation, Chase Bank of Texas, National Association, Norwest Bank  Minnesota, National Association, MBIA Insurance Corporation, NationsBank  N.A., and First Investors Financial Services, Inc.                              |
|   | 10.58(l) |   | — |   | Amendment Number 1 to Note Purchase Agreement dated  as of March 31, 1999 among First Investors Auto Receivables Corporation and Enterprise  Funding Corporation.                                                                                                                                                                                                      |
|   | 10.59(l) |   | — |   | Amendment Number 1 to Insurance Agreement dated  March 31, 1999 among First Investors Auto Receivables Corporation, MBIA  Insurance Corporation, First Investors Financial Services, Inc., Auto Lenders  Acceptance Corporation, Norwest Bank Minnesota, National Association and  NationsBank, N.A.                                                                   |

 

33

----

 
|   | 10.60(l)  |   | — |   | Servicing Agreement dated March 31, 1999 among First  Investors Auto Receivables Corporation, Norwest Bank Minnesota, National  Association and Auto Lenders Acceptance Corporation.                                                                                                                                                                                                                                                                                                       |
|--------|-----------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.61(l)  |   | — |   | Guaranty dated March 31, 1999 by First Investors  Financial Services, Inc., First Investors Auto Receivables Corporation, Auto  Lenders Acceptance Corporation and Norwest Bank Minnesota, National  Association.                                                                                                                                                                                                                                                                          |
|   | 10.62(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.63(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.64(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.65(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.66(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.67(m)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.68(n)  |   | — |   | Administrative Services Agreement dated as of August  8, 2000 between Project Brave Limited Partnership and First Union Securities,  Inc.                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.69 (n) |   | — |   | Project Brave Limited Partnership Agreement of  Limited Partnership dated as of July 1, 2000.                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.70 (n) |   | — |   | Amended and Restated NIM Collateral Purchase  Agreement dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | 10.71 (n) |   | — |   | Amended and Restated Contract Purchase Agreement  dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.72 (n) |   | — |   | First Amendment to Amended and Restated NIM  Collateral Purchase Agreement dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.73 (n) |   | — |   | First Amendment to Servicing Agreement dated as of  September 13, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.74 (n) |   | — |   | First Amendment to Transfer and Servicing Agreement  dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | 10.75 (n) |   | — |   | Project Brave Limited Partnership Asset-Backed Notes  Indenture dated as of August 8, 2000.                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 10.76 (n) |   | — |   | Note Purchase Agreement between Project Brave  Limited Partnership as Issuer, First Union Securities, Inc., as Deal Agent,  the Note Investors named herein, First Union National Bank as Liquidity Agent  and Variable Funding Capital Corporation, as an Initial Note Investor, dated  as of August 8, 2000.                                                                                                                                                                             |
|   | 10.77 (n) |   | — |   | Supplemental Indenture No. 1 (Project Brave Limited  Partnership) dated as of September 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.78 (n) |   | — |   | Third Amendment to Security Agreement dated as of  September 13, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.79 (n) |   | — |   | Transfer and Servicing Agreement among Project Brave  Limited Partnership, Issuer, FIFS Acquisition Funding Company, L.L.C., as Transferor,  First Investors Servicing Corporation as Servicer and a Transferor Party,  ALAC Receivables Corp., as a Transferor Party, First Union Securities, Inc.,  as Deal Agent and Collateral Agent and Wells Fargo Bank Minnesota, National  Association as Backup Servicer, Collateral Custodian and Indenture Trustee  dated as of August 8, 2000. |
|   | 10.80 (o) |   | — |   | Second Amended and Restated Credit Agreement dated  as of November 15, 2000 Among F.I.R.C., Inc. as Borrower and the Financial  Institutions Now or Hereafter Parties Hereto as Banks and Bank of America, N.  A. as Agent.                                                                                                                                                                                                                                                                |
|   | 10.81 (o) |   | — |   | Third Amended and Restated Collateral Security  Agreement dated as of November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.82 (o) |   | — |   | Fourth Amendment to Amended and Restated Purchase  Agreement dated as of November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                |
|   | 10.83 (o) |   | — |   | First Amendment to Servicing Agreement dated as of  November 15, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.84 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.85 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.86 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.87 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.88 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.89 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.90 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.91 (o) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.92 (o) |   | — |   | Amendment No. 2 To Insurance Agreement for First  Investors Auto Receivables Corporation Revolving Automobile Receivables  Financing Facility dated as of November 29, 2000.                                                                                                                                                                                                                                                                                                               |
|   | 10.93 (o) |   | — |   | Amendment Number 3 To Security Agreement dated as of  November 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.94 (o) |   | — |   | Warrant No. 1 to Purchase 111,334 Shares of Common  Stock, $.01 par value.                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.95 (o) |   | — |   | Warrant No. 2 to Purchase 55,667 Shares of Common  Stock, $.01 par value.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | 10.96 (o) |   | — |   | Amendment Number 3 To Purchase Agreement dated as of  November 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.97 (o) |   | — |   | Amendment Number 1 To Servicing Agreement dated as of  November 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

34

----

 
|   | 10.98 (p) |   | — |   | First Omnibus Amendment to the Transaction Documents  dated December 6, 2001 between F.I.R.C., Inc., First Investors Financial  Services, Inc., First Investors Servicing Corporation, Bank of America, N.A.,  First Union Securities, Inc. and Wells Fargo Bank Minnesota, National  Association                                                                                                                               |
|--------|-----------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.99 (p) |   | — |   | Security Agreement dated December 6, 2001 between  First Investors Residual Funding L.P. and First Union Securities, Inc.                                                                                                                                                                                                                                                                                                       |
|   | 10.100(p) |   | — |   | Sale and Servicing Agreement dated December 6, 2001  between First Investors Residual Funding L.P., First Investors Financial  Services, Inc. and First Union Securities, Inc.                                                                                                                                                                                                                                                  |
|   | 10.101(p) |   | — |   | Note Purchase Agreement dated December 6, 2001 between  First Investors Residual Funding L.P, First Union Securities, Inc., First  Union National Bank and Variable Funding Capital Corporation                                                                                                                                                                                                                                 |
|   | 10.102(p) |   | — |   | Asset Purchase Agreement dated December 6, 2001  between First Investors Residual Funding L.P., FIFS Acquisition Funding  Company LLC, First Investors Auto Investment Corp. and First Investors Auto  Receivables Corporation                                                                                                                                                                                                  |
|   | 10.103(p) |   | — |   | Indenture dated January 1, 2002 between First  Investors Auto Owner Trust 2002-A, First Investors Financial Services, Inc.  and Wells Fargo Bank Minnesota, National Association                                                                                                                                                                                                                                                |
|   | 10.104(p) |   | — |   | Sale and Allocation Agreement dated January 1, 2002  between First Investors Auto Owner Trust 2002-A, First Investors Financial  Services, Inc., First Investors Servicing Corporation, First Investors Auto  Funding Corporation and Wells Fargo Bank Minnesota, National Association                                                                                                                                          |
|   | 10.105(p) |   | — |   | Amended and Restated Trust Agreement dated January  1, 2002 between First Investors Auto Funding Corporation and Bankers Trust  (Delaware)                                                                                                                                                                                                                                                                                      |
|   | 10.106(p) |   | — |   | First Omnibus Amendment to Transaction Documents  dated January 14, 2002 between First Investors Auto Receivables Corporation,  First Investors Financial Services, Inc., First Investors Servicing  Corporation, Enterprise Funding Corporation, Bank of America, N.A., Variable  Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance  Corporation, and Wells Fargo Bank Minnesota, National Association |
|   | 10.107(p) |   | — |   | Amendment No. 3 to Note Purchase Agreement dated  January 14, 2002 between First Investors Auto Receivables Corporation and  Variable Funding Capital Corporation                                                                                                                                                                                                                                                               |
|   | 10.108(p) |   | — |   | Amendment No. 4 to Security Agreement dated January  14, 2002 between First Investors Auto Receivables Corporation, First  Investors Financial Services, Inc., First Investors Servicing Corporation,  Variable Funding Capital Corporation, First Union Securities, Inc., MBIA  Insurance Corporation and Wells Fargo Bank Minnesota, National Association                                                                     |
|   | 10.109(q) |   | — |   | 2002 Non-Employee Director Stock Option Plan dated  July 18, 200                                                                                                                                                                                                                                                                                                                                                                |
|   | 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.                                                                              |
|   | 14.1      |   | — |   | Code of Business Conduct and  Ethics adopted April 28, 2004                                                                                                                                                                                                                                                                                                                                                                     |
|   | 21.1(j)   |   | — |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 23.1      |   | — |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                       |
|   | 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.                                                                                                                                                                                                                                                                                                                            |

 

----

| (a) |   | - |   | Exhibit previously filed with the Company’s  Registration Statement on Form S-1,   Registration No. 33-94336 and incorporated herein by reference. |
|-----|--------|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

35

----

 
| (b) |   | - |   | Exhibit previously filed on 1996 Form 10-K and  incorporated herein by reference.                            |
|-----|--------|---|--------|--------------------------------------------------------------------------------------------------------------|
| (c) |   | - |   | Exhibit previously filed on July 31, 1996 First  Quarter Form 10-Q and incorporated herein by reference.     |
| (d) |   | - |   | Exhibit previously filed on October 31, 1996 Second  Quarter Form 10-Q and incorporated herein by reference. |
| (e) |   | - |   | Exhibit previously filed on January 31, 1997 Third  Quarter Form 10-Q and incorporated herein by reference.  |
| (f) |   | - |   | Exhibit previously filed on July 31, 1997 First  Quarter Form 10-Q and incorporated herein by reference.     |
| (g) |   | - |   | Exhibit previously filed on January 31, 1998 Third  Quarter Form 10-Q and incorporated herein by reference.  |
| (h) |   | - |   | Exhibit previously filed on 1998 Form 10-K and  incorporated herein by reference.                            |
| (i) |   | - |   | Exhibit previously filed on October 31, 1998 Second  Quarter Form 10-Q and incorporated herein by reference. |
| (j) |   | - |   | Exhibit previously filed on October 2, 1998 Form 8-K  and incorporated herein by reference.                  |
| (k) |   | - |   | Exhibit previously filed on January 31, 1999 Third  Quarter Form 10-Q and incorporated herein by reference.  |
| (l) |   | - |   | Exhibit previously filed on 1999 Form 10-K and  incorporated herein by reference.                            |
| (m) |   | - |   | Exhibit previously filed on March 21, 2000 Third  Quarter Form 10-Q/A and incorporated herein by reference.  |
| (n) |   | - |   | Exhibit previously filed on October 31, 2000 Second  Quarter Form 10-Q and incorporated herein by reference. |
| (o) |   | - |   | Exhibit previously filed on January 31, 2001 Third  Quarter Form 10-Q and incorporated herein by reference.  |
| (p) |   | - |   | Exhibit previously filed on January 31, 2002 Third  Quarter Form 10-Q and incorporated herein by reference.  |
| (q) |   | - |   | Exhibit previously filed on July 31, 2002 First  Quarter Form 10-Q/A and incorporated herein by reference.   |
| (r) |   | - |   | Exhibit previously filed on January 31, 2004 Third  Quarter Form 10-Q and incorporated herein by reference.  |

 

(b)*  Reports on Form 8-K*

 

Form 8-K filed March 10, 2004 reporting third quarterfinancial results.

 

 

36

----

**SIGNATURES**

 

     Pursuant tothe requirements of the Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned thereunto duly authorized.

 

 
| ** ** | **First  Investors Financial Services Group, Inc.** |
|------------|-----------------------------------------------------|
|       | (Registrant)                                        |
|       |                                                |
| Date:      | July 20, 2004                                       |   | By: /s/ Tommy A. Moore,  Jr. |
| ** ** | **Tommy  A. Moore, Jr.**                            |
| ** ** | **President  and Chief Executive Officer**          |
| ** ** | **(Principal  Executive Officer)**                  |
|            |                                                     |  |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of First Investors FinancialServices Group, Inc. and in the capacities and on the date indicated.

 
| **Signature**                | ** **    | **Title**                                       |
|------------------------------|---------------|-------------------------------------------------|
|                         |          |                                            |
| /s/ Tommy A. Moore, Jr.      |          | President and Chief Executive Officer, Director |
| **Tommy  A. Moore, Jr.**     |          | (Principal Executive Officer)                   |
|                         |          |                                            |
| /s/  Bennie H. Duck     |          | Vice President and Chief Financial Officer      |
| **Bennie  H. Duck**          |          | (Principal Financial and Accounting Officer)    |
|                         |          |                                            |
| /s/ John H. Buck             |          | Director                                        |
| **John H.  Buck**            | ** **    | ** **                                      |
|                         |          |                                            |
| /s/  Robert L. Clarke   |          | Director                                        |
| **Robert  L. Clarke**        | ** **    | ** **                                      |
|                         |          |                                            |
| /s/  Seymour M. Jacobs  |          | Director                                        |
| **Seymour  M. Jacobs**       | ** **    | ** **                                      |
|                         |          |                                            |
| /s/  Roberto Marchesini |          | Director                                        |
| **Roberto  Marchesini**      | ** **    | ** **                                      |
|                         |          |                                            |
| /s/  Walter A. Stockard |          | Director                                        |
| **Walter  A. Stockard**      | ** **    | ** **                                      |
|                         |          |                                            |
| /s/ Walter A. Stockard,  Jr. |          | Director                                        |
| **Walter  A. Stockard, Jr.** |          |                                            |
|                         |          |                                            |
| /s/ Daniel M. Theriault      |          | Director                                        |
| **Daniel  M. Theriault**     | ** **    | ** **                                      |
| ** **                   | ** **    | ** **                                      |
| Date:                        | July 20, 2004 | ** **                                      | ** ** | ** ** |
|                              |               |                                                 |  |  |

 

37

----

 

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

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 
| Report  of Independent Registered Public Accounting Firm                                               |   |
|--------------------------------------------------------------------------------------------------------|--------|
|                                                                                                   |   |
| Consolidated  Balance Sheets as of April 30, 2003 and 2004                                             |   |
|                                                                                                   |   |
| Consolidated Statements of  Operations for the Years Ended April 30, 2002, 2003 and 2004               |   |
|                                                                                                   |   |
| Consolidated Statement of Shareholders’  Equity for the Years Ended April 30, 2002, 2003 and 2004 |   |
|                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the Years Ended April 30, 2002, 2003 and 2004               |   |
|                                                                                                   |   |
| Notes  to Consolidated Financial Statements                                                            |   |

 

F-1

----

 

**REPORT****OFINDEPENDENT REGISTERED**

**PUBLICACCOUNTING FIRM**

 

Board of Directors and Shareholders of First InvestorsFinancial Services Group, Inc.

 

We have audited the accompanying consolidated balancesheets of First Investors Financial Services Group, Inc. (a Texas corporation)and subsidiaries as of April 30, 2004 and 2003, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for each of thethree years in the period ended April 30, 2004. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of First Investors Financial Services Group, Inc. and subsidiaries asof April 30, 2004 and 2003, and the results of their operations and their cashflows for each of the three years in the period ended April 30, 2004, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
|                   |
| Houston, Texas         |
| July 8, 2004           |

 

F-2

----

 

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

**CONSOLIDATEDBALANCE SHEETS — APRIL 30, 2003 and 2004**

 

** **
| ** **                                                                                                                                                                               | ** ** | **2003**    | ** **  | **2004**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                                                                                               |       |        |        |        |       |
| Receivables Held  for Investment, net                                                                                                                                                    |       | $           | 228,989,162 |        | $          | 209,777,347 |   |
| Receivables  Acquired for Investment, net                                                                                                                                                |       | 2,704,247   |        | 1,190,230   |       |
| Cash and  Short-Term Investments, including restricted cash of  $19,302,651 and $19,036,747                                                                                         |       | 21,920,331  |        | 21,055,237  |       |
| Accrued Interest  Receivable                                                                                                                                                             |       | 3,381,394   |        | 2,576,023   |       |
| Assets Held for  Sale                                                                                                                                                                    |       | 1,303,393   |        | 851,426     |       |
| Other Assets:                                                                                                                                                                            |       |        |        |        |       |
| Funds held under  reinsurance agreement                                                                                                                                                  |       | 3,993,341   |        | 4,182,134   |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $4,508,798 and $5,759,477                                                               |       | 5,594,948   |        | 6,115,203   |       |
| Current income  taxes receivable                                                                                                                                                         |       | 1,004,231   |        | 8,212       |       |
| Interest rate  derivative positions                                                                                                                                                      |       | 4,105,307   |        | —      |       |
| Total assets                                                                                                                                                                             |       | $           | 272,996,354 |        | $          | 245,755,812 |   |
|                                                                                                                                                                                     |       |        |        |        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                           |       |        |        |        |       |
| Debt:                                                                                                                                                                                    |       |        |        |        |       |
| Warehouse credit  facilities                                                                                                                                                             |       | $           | 141,944,521 |        | $          | 42,705,810 |   |
| Term Notes                                                                                                                                                                               |       | 87,358,847  |        | 164,718,190 |       |
| Working capital  facility                                                                                                                                                                |       | 8,714,518   |        | 8,761,143   |       |
| Other borrowings                                                                                                                                                                         |       | 746,280     |        | —      |       |
| Other  Liabilities:                                                                                                                                                                      |       |        |        |        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                |       | 1,709,208   |        | 1,708,984   |       |
| Deferred income  taxes payable                                                                                                                                                           |       | 49,593      |        | 558,000     |       |
| Interest rate  derivative positions                                                                                                                                                      |       | 5,248,080   |        | —      |       |
| Total  liabilities                                                                                                                                                                       |       | 245,771,047 |        | 218,452,127 |       |
|                                                                                                                                                                                     |       |        |        |        |       |
| Commitments and  Contingencies                                                                                                                                                           |       | —      |        | —      |       |
| Minority  Interest                                                                                                                                                                       |       | 732,023     |        | —      |       |
| Shareholders’  Equity:                                                                                                                                                              |       |        |        |        |       |
| Common stock,  $0.001 par value, 10,000,000 shares authorized, 5,566,669 issued; 5,026,269  outstanding at April 30, 2003 and 5,583,669 issued; 5,000,269 outstanding at  April 30, 2004 |       | 5,567       |        | 5,584       |       |
| Additional  paid-in capital                                                                                                                                                              |       | 18,678,675  |        | 18,754,608  |       |
| Retained  earnings                                                                                                                                                                       |       | 10,481,696  |        | 10,515,258  |       |
| Accumulated  other comprehensive income – unrealized derivative losses, net of taxes                                                                                                |       | (896,789    | )           | —      |       |
| Less, treasury  stock, at cost, 540,400 and 583,400 shares                                                                                                                               |       | (1,775,865  | )           | (1,971,765  | )          |
| Total  shareholders’ equity                                                                                                                                                         |       | 26,493,284  |        | 27,303,685  |       |
| Total liabilities  and shareholders’ equity                                                                                                                                         |       | $           | 272,996,354 |        | $          | 245,755,812 |   |

 

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

 

F-3

----

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**For theYears Ended April 30, 2002, 2003 and 2004**

 
| ** **                                                                       | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                             |       |       |       |       |       |       |       |
| Interest Income                                                                  |       | $          | 37,547,770 |       | $          | 32,939,897 |       | $ | 30,498,270 |   |
| Interest Expense                                                                 |       | 13,710,371 |       | 10,165,739 |       | 8,437,766  |       |
| Net interest income                                                              |       | 23,837,399 |       | 22,774,158 |       | 22,060,504 |       |
| Provision for Credit Losses                                                      |       | 8,940,601  |       | 10,337,718 |       | 12,428,175 |       |
| Loss on Receivables Acquired for Investment and Trust Certificates               |       | 1,260,000  |       | —     |       | —     |       |
| Net Interest Income After Provision for Credit Losses                            |       | 13,636,798 |       | 12,436,440 |       | 9,632,329  |       |
| Other Income (Expense):                                                          |       |       |       |       |       |       |       |
| Servicing revenue                                                                |       | —     |       | 1,080,433  |       | 4,888,899  |       |
| Late fees and other                                                              |       | 1,128,653  |       | 1,185,629  |       | 1,825,406  |       |
| Income from investment                                                           |       | —     |       | 418,099    |       | 1,009,322  |       |
| Other interest income                                                            |       | 681,650    |       | 282,708    |       | 460,243    |       |
| Realized and unrealized loss on interest rate derivative positions               |       | (121,349   | )          | (329,059   | )          | (33,737    | )          |
| Total other income                                                               |       | 1,688,954  |       | 2,637,810  |       | 8,150,133  |       |
| Costs and Expenses:                                                              |       |       |       |       |       |       |       |
| Salaries and benefits                                                            |       | 7,902,868  |       | 7,785,835  |       | 8,538,033  |       |
| Operating expense                                                                |       | 2,564,566  |       | 2,453,523  |       | 5,012,009  |       |
| General and administrative                                                       |       | 4,238,200  |       | 3,553,975  |       | 3,722,842  |       |
| Other interest expense                                                           |       | 784,789    |       | 643,296    |       | 468,153    |       |
| Total operating expenses                                                         |       | 15,490,423 |       | 14,436,629 |       | 17,741,037 |       |
| Income (Loss) Before Provision (Benefit) for Income Taxes and Minority  Interest |       | (164,671   | )          | 637,621    |       | 41,425     |       |
| Provision (Benefit) for Income Taxes:                                            |       |       |       |       |       |       |       |
| Current                                                                          |       | 7,615      |       | (373,030   | )          | (66,139    | )          |
| Deferred                                                                         |       | (185,235   | )          | 564,220    |       | 85,430     |       |
| Total provision (benefit) for income taxes                                       |       | (177,620   | )          | 191,190    |       | 19,291     |       |
| Minority Interest                                                                |       | 321,961    |       | 113,813    |       | (11,429    | )          |
|                                                                             |       |       |       |       |       |       |       |
| Net Income (Loss)                                                                |       | $          | (309,012   | )          | $          | 332,618    |       | $ | 33,563 |   |
|                                                                             |       |       |       |       |       |       |       |
| Basic and Diluted Net Income (Loss) per Common Share                             |       | $          | (0.06      | )          | $          | 0.07       |       | $ | 0.01 |   |

 

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

 

F-4

----

 

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

**CONSOLIDATEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

**For theYears Ended April 30, 2002, 2003 and 2004**

 
| ** **                                                               | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock, at  cost** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                                                     |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Balance, April 30, 2001                                                  |       | $                 | 5,567      |                             | $          | 18,639,918             |       | $                             | 10,458,090 |                                                 | $          | —     |       | $ | — |   | $ | 29,103,575 |   |
| Comprehensive Income (loss):                                             |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Net loss                                                                 |       | —            |       | —                           |       | (309,012               | )          | —                        |       | —                                               |       | (309,012   | )          |
| Cumulative effect of accounting Change, net of tax benefit of $1,437,925 |       | —            |       | —                           |       | —                 |       | —                        |       | (2,501,595                                           | )          | (2,501,595 | )          |
| Unrealized gains (losses) on Derivatives, net of tax benefit of $28,970  |       | —            |       | —                           |       | —                 |       | —                        |       | (50,400                                              | )          | (50,400    | )          |
| Reclassification of earnings, net of taxes of $471,401                   |       | —            |       | —                           |       | —                 |       | —                        |       | 820,109                                              |       | 820,109    |       |
| Comprehensive loss                                                       |       |              |       |                             |       |                   |       |                          |       |                                                 |       | (2,040,898 | )          |
| Warrants issued                                                          |       | —            |       | 38,757                           |       | —                 |       | —                        |       | —                                               |       | 38,757     |       |
| Treasury stock purchases                                                 |       | —            |       | —                           |       | —                 |       | (515,000                      | )          | —                                               |       | (515,000   | )          |
| Balance, April 30, 2002                                                  |       | 5,567             |       | 18,678,675                       |       | 10,149,078             |       | (515,000                      | )          | (1,731,886                                           | )          | 26,586,434 |       |
|                                                                     |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Comprehensive income:                                                    |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
|                                                                     |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Net income                                                               |       | —            |       | —                           |       | 332,618                |       | —                        |       | —                                               |       | 332,618    |       |
| Unrealized gains  on derivatives, net of tax benefit of $4,201           |       | —            |       | —                           |       | —                 |       | —                        |       | 7,300                                                |       | 7,300      |       |
| Reclassification  of earnings, net of taxes of  $475,820            |       | —            |       | —                           |       | —                 |       | —                        |       | 827,797                                              |       | 827,797    |       |
| Comprehensive  income                                                    |       |              |       |                             |       |                   |       |                          |       |                                                 |       | 1,167,715  |       |
| Treasury stock  purchases                                                |       | —            |       | —                           |       | —                 |       | (1,260,865                    | )          | —                                               |       | (1,260,865 | )          |
| Balance, April  30, 2003                                                 |       | 5,567             |       | 18,678,675                       |       | 10,481,696             |       | (1,775,865                    | )          | (896,788                                             | )          | 26,493,284 |       |
|                                                                     |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Comprehensive income:                                                    |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
|                                                                     |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Net income                                                               |       | —            |       | —                           |       | 33,563                 |       | —                        |       | —                                               |       | 33,563     |       |
| Reclassification  of earnings, net of taxes of  $515,477            |       | —            |       | —                           |       | —                 |       | —                        |       | 896,788                                              |       | 896,788    |       |
| Comprehensive  income                                                    |       |              |       |                             |       |                   |       |                          |       |                                                 |       | 930,351    |       |
| Treasury stock  purchases                                                |       |              |       |                             |       |                   |       | (195,900                      | )          |                                                 |       | (195,900   | )          |
| Issuance of common stock                                                 |       | 17                |       | 75,933                           |       | —                 |       | —                        |       | —                                               |       | 75,950     |       |
| Balance, April  30, 2004                                                 |       | $                 | 5,584      |                             | $          | 18,754,608             |       | $                             | 10,515,258 |                                                 | $          | (1,971,765 | )          | — |   | $ | 27,303,685 |   |
|                                                                          |            |                   |            |                                  |            |                        |            |                               |            |                                                      |            |            |            |  |  |  |  |  |  |

 

The accompanying notesare an integral part of this consolidated financial statement.

 

F-5

----

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For theYears Ended April 30, 2002, 2003 and 2004**

 
| ** **                                                                               | ** ** | **2002**     | ** ** | **2003**     | ** ** | **2004**     | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                                                                                     |       |         |       |         |       |         |       |
| Cash Flows From Operating Activities:                                                    |       |         |       |         |       |         |       |
| Net income (loss)                                                                        |       | $            | (309,012   | )            | $          | 332,618      |       | $ | 33,563 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities – |       |         |       |         |       |         |       |
| Depreciation and amortization expense                                                    |       | 5,180,991    |       | 3,919,567    |       | 3,822,882    |       |
| Provision for credit losses                                                              |       | 8,940,601    |       | 10,337,718   |       | 12,428,175   |       |
| Minority interest                                                                        |       | 321,961      |       | 113,813      |       | (11,429      | )          |
| (Increase) decrease in:                                                                  |       |         |       |         |       |         |       |
| Accrued interest receivable                                                              |       | (32,850      | )          | (71,478      | )          | 805,371      |       |
| Restricted cash                                                                          |       | (870,034     | )          | 4,106,495    |       | 265,904      |       |
| Deferred financing costs and other assets                                                |       | (1,471,793   | )          | (601,449     | )          | (1,778,903   | )          |
| Funds held under reinsurance agreement                                                   |       | (242,152     | )          | (558,433     | )          | (188,794     | )          |
| Deferred income taxes receivable                                                         |       | (529,646     | )          | 529,646      |       | —       |       |
| Current income tax receivable                                                            |       | 448,496      |       | 399,241      |       | 996,019      |       |
| Interest rate derivative positions                                                       |       | (4,851,086   | )          | (151,010     | )          | 5,002,096    |       |
| Increase (decrease) in:                                                                  |       |         |       |         |       |         |       |
| Accounts payable and accrued liabilities                                                 |       | (1,565,697   | )          | (332,772     | )          | (224         | )          |
| Deferred income taxes payable                                                            |       | (735,212     | )          | 49,593       |       | 508,407      |       |
| Interest rate derivative positions                                                       |       | 5,885,940    |       | (637,860     | )          | (5,248,080   | )          |
| Net cash provided by operating activities                                                |       | 10,170,507   |       | 17,435,689   |       | 16,634,987   |       |
| Cash Flows From Investing Activities:                                                    |       |         |       |         |       |         |       |
| Origination of Receivables Held for Investment                                           |       | (78,474,896  | )          | (114,245,233 | )          | (90,050,875  | )          |
| Purchase of Receivables Acquired for Investment                                          |       | —       |       | —       |       | (328,787     | )          |
| Purchase of investments                                                                  |       | —       |       | (1,884,450   | )          | —       |       |
| Principal payments from Receivables Held for Investment                                  |       | 91,410,942   |       | 81,009,858   |       | 87,638,125   |       |
| Principal payments from Receivables Acquired for Investment                              |       | 16,124,077   |       | 6,002,312    |       | 1,122,210    |       |
| Payments received on assets held for sale                                                |       | 8,089,277    |       | 6,898,267    |       | 7,467,053    |       |
| Purchase of furniture and equipment                                                      |       | (571,301     | )          | (220,289     | )          | (382,929     | )          |
| Net cash provided by (used in) investing activities                                      |       | 36,578,099   |       | (22,439,535  | )          | 5,464,797    |       |
| Cash Flows From Financing Activities:                                                    |       |         |       |         |       |         |       |
| Proceeds from advances on—                                                          |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | 141,764,537  |       | 219,023,400  |       | 123,751,068  |       |
| Term notes                                                                               |       | 159,036,000  |       | —       |       | 139,661,000  |       |
| Working capital facility                                                                 |       | 13,500,000   |       | —       |       | 2,000,000    |       |
| Other borrowings                                                                         |       | 525,000      |       | 1,221,280    |       | —       |       |
| Principal payments made on—                                                         |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | (278,800,813 | )          | (108,292,312 | )          | (222,989,779 | )          |
| Term notes                                                                               |       | (60,702,087  | )          | (95,900,937  | )          | (62,301,657  | )          |
| Acquisition term facility                                                                |       | (7,455,285   | )          | (3,670,765   | )          | —       |       |
| Working capital facility                                                                 |       | (14,526,480  | )          | (3,084,002   | )          | (1,953,375   | )          |
| Other borrowings                                                                         |       | —       |       | (1,000,000   | )          | (746,280     | )          |
| Proceeds from the issuance of common stock                                               |       | —       |       | —       |       | 75,950       |       |
| Treasury stock purchased                                                                 |       | (515,000     | )          | (1,260,865   | )          | (195,900     | )          |
| Net cash provided by (used in) financing activities                                      |       | (47,174,128  | )          | 7,035,799    |       | (22,698,973  | )          |
| Increase (Decrease) in Cash and Short-Term Investments                                   |       | (425,522     | )          | 2,031,953    |       | (599,189     | )          |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 1,011,249    |       | 585,727      |       | 2,617,680    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $            | 585,727    |         | $          | 2,617,680    |       | $ | 2,018,491 |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |         |       |         |       |         |       |
| Cash paid (received) during the period for—                                         |       |         |       |         |       |         |       |
| Interest                                                                                 |       | $            | 13,330,558 |         | $          | 9,485,192    |       | $ | 7,807,027 |   |
| Income taxes                                                                             |       | (474,918     | )          | (307,267     | )          | (969,690     | )          |
| Non-cash financing activities—                                                      |       |         |       |         |       |         |       |
| Exchange of warrants for financing fees                                                  |       | $            | 38,757     |         | $          | —       |       | $ | — |   |

 

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

 

F-6

----

 

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

**NOTES****TOCONSOLIDATED FINANCIAL STATEMENTS**

**April 30,2002, 2003 and 2004**

 

**1.  TheCompany**

 

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

 

FIFS began operations inMay 1989 and is principally involved in the business of originating and holdingfor investment retail installment contracts and promissory notes secured by newand used automobiles originated by factory authorized franchised dealers ordirectly through consumers. As of April 30, 2004, approximately 28% ofreceivables held for investment had been originated in Texas. The Companycurrently operates in 28 states.

 

FIIC was organized underthe captive insurance company laws of the state of Vermont for the purpose ofreinsuring certain credit enhancement insurance policies that have been writtenby unrelated third party insurance companies.

 

On October 2, 1998, theCompany completed the acquisition of FISC and the operations of FISC areincluded in the consolidated results of the Company since the date ofacquisition. Headquartered in Atlanta, Georgia, FISC was engaged in essentiallythe same business as the Company and additionally performs servicing andcollection activities on a portfolio of receivables originated for investmentas well as on a portfolio of receivables originated and sold pursuant to twoasset securitizations. As a result of the acquisition, the Company increasedthe total dollar value on its balance sheet of receivables, acquired aninterest in certain trust certificates related to the asset securitizations andacquired certain servicing rights along with furniture, fixtures, equipment andtechnology to perform the servicing and collection functions for the portfolioof receivables under management.

 

On August 8, 2000, theCompany entered into a partnership agreement whereby a subsidiary of theCompany was the general partner owning 70% of the partnership interests andFirst Union Investors, Inc. served as the limited partner and owned 3% of thepartnership interests.  On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc.  The Partnership consists primarily of aportfolio of loans previously owned or securitized by FISC and certain otherfinancial assets including charged-off accounts owned by FISC.

 

On December 24, 2002, theCompany purchased 40% of common stock and an investment in the junior mezzaninedebt of First Auto Receivables Corporation (“FARC”).  FARC purchased an approximately $197.5million portfolio of installment loan receivables from a subsidiary of UnionAcceptance Corporation.  FISC performsongoing servicing and collection activities on the portfolio.

 

 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 a subsidiaryof Union Acceptance Corporation.

 

In total, at April 30,2004, FISC performs servicing and collection functions on a managed receivablesportfolio of approximately $488 million.

 

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**2. Significant Accounting Policies**

 

*Basis of Presentation*.  The consolidated financial statements includethe accounts of First Investors and its wholly-owned and majority-ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated. Investments in unconsolidated subsidiaries representing ownershipof at least 20% but less than 50% or where the Company otherwise exercisessignificant influence are accounted for under the equity method.

 

*Use of Estimates*.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. The mostsignificant estimates used by the Company relate to the allowance for creditlosses.  See Notes 3 and 4. Actualresults could differ from those estimates.

 

*Receivables Held for Investment*.  The Company originates automobile loans fromdealers and originates loans directly to consumers.  Fees and expenses of originating loans arecapitalized in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 91, *Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Initial Direct Costs ofLeases*.

 

Receivables are generallyoriginated from dealers at a premium or discount from the principal amountsfinanced by the borrower. The Company and the dealers negotiate this premium ordiscount, and such premium or discount is included in the carrying amount ofthe receivable. The basis in the receivables includes the costs to originate thereceivables from the dealer, plus or minus any fees paid or received related tothe origination of the receivables.

 

Also included in thecarrying amount of receivables is the insurance premium paid to third-partyinsurers, net of any premiums ceded to FIIC for reinsurance. The Companyamortizes the difference between the principal balance of the receivables andits carrying amount over the expected remaining life of the receivables usingthe interest method.

 

*Receivables Acquired forInvestment*.  The Companyestimates the amount and timing of undiscounted expected future principal andinterest cash flows. For certain purchased loans, the amount paid for a loanreflects the Company’s determination that it is probable the Company will beunable to collect all amounts due according to the loan’s contractual terms.Accordingly, at acquisition, the Company recognizes the excess of the loan’sscheduled contractual principal and contractual interest payments over itsexpected cash flows as an amount that should not be accreted. The remainingamount, representing the excess of the loan’s expected cash flows over theamount paid, is accreted into interest income over the remaining life of theloan.  As a result of the amortization ofthe outstanding principal balance of the receivables portfolio, the majority ofthe remaining 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; in the periods subsequent to September30, 2003 the Company follows the guidance provided by Practice Bulletin 6*, Amortization of Discounts on Certain Acquired Loans*, andaccounts 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.

 

*Income Recognition*.  For Receivables Held for Investment, theCompany accrues interest income monthly based upon contractual terms using theeffective interest method. Interest income also includes additional amountsreceived 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, income accrual is suspended until the payments become current. When a loanis charged off or the collateral is repossessed, the remaining income accrualis written off.  Other income includes latecharge fees and is recognized as collected. Servicing income is accrued as it is earned and intercompany amounts areeliminated upon consolidation.

 

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

 

The Company initiates efforts to make customer contactwhen the customer is one day past due and become more aggressive as the loanbecomes further past due.  Managementreviews past due loans and considers various factors including payment history,job status and any events that may have occurred that prevent the customer frommaking a payment.  Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed.  Generally thisoccurs at 90 to 120 days past due.  Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as an Assets Held for Sale.  In the event the collateral is unable to belocated, the Company will write off the entire balance after exhausting allcollection efforts.

 

The Company applies asystematic methodology in order to determine the amount of the allowance forcredit losses.  The specific methodologyutilized is a six-month migration analysis whereby the Company compares theaging status of each loan from six months prior to the aging loan status as ofthe reporting date.  These factors arethen applied to the aging status of each loan at the reporting date in order tocalculate the number of loans that are expected to migrate to impairedstatus.  The estimated number ofimpairments is then multiplied by estimated loss per loan, which is based onhistorical information.  The computedreserve is then compared to the amount recorded for adequacy.  The Company compares the six-month result toprior six-month periods to compare trends and evaluate any other internal orexternal factors that may affect collectibility. The allowance for creditlosses is based on estimates and qualitative evaluations and ultimate losseswill vary from current estimates. These estimates are reviewed periodically andas adjustments, either positive or negative, become necessary, are reported inearnings in the period they become known.

 

*Funds Held Under ReinsuranceAgreement*.  The Companyprovides financial assurance for the third party insurance company it reinsuresby maintaining premiums ceded to it in a restricted trust account for thebenefit of the third party insurance company. The reinsurance agreementprovides, among other things, that the funds held can be withdrawn by the thirdparty insurance company due to an insolvency of the Company or to reimburse thethird party insurance company for the Company’s share of losses paid by thethird party insurance company pursuant to the reinsurance agreement.

 

*Assets Held for Sale*.  The Company commences repossession proceduresagainst the underlying collateral when the Company determines that collectionefforts are likely to be unsuccessful. Upon repossession, the receivable iswritten down to the estimated fair value of the collateral, less the cost ofdisposition and plus the expected recoveries from third-party insurers, througha charge to the allowance for credit losses. Fair value is determined by estimating the proceeds of the collateral,which primarily are comprised of auction proceeds on the sale of theautomobile, less selling-related expenses. After collection of all proceeds, the Company records an adjustment,positive or negative, based on the difference between the fair value estimateand the proceeds received.

 

*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 expensedproportionately if borrowing capacity is reduced.

 

*Other Operating Expenses*.  Other operating expenses include primarilydepreciation expense, professional fees, service bureau fees, telephone,repossession related expenses, mail cost associated with the direct businessand rent.

 

*Income Taxes*.  The Company follows SFAS No. 109, whichprescribes that deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates applied to taxable income in the years in which thosetemporary differences are

 

F-9

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expected to be recoveredor settled. Under SFAS No. 109, the effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period that includesthe enactment date.

 

*Derivatives*. SFASNo. 133, *Accounting for Derivative Instruments and HedgingActivities,*as amended establishes accounting and reportingstandards requiring that every derivative instrument (including certainderivative instruments embedded in other contracts) be recorded in the balancesheet as either an asset or liability at its fair value. The Statement requiresthat changes in the derivative’s fair value be recognized currently in earningsunless specific hedge accounting criteria are met.

 

As of May 1, 2001, the Company designated its interest rate swaps and aninterest rate cap with an aggregate notional value of $130,165,759 as cash flowhedges as defined under SFAS No. 133. Accordingly, any changes in the fair value of these instrumentsresulting from the mark-to-market process are recorded as unrealized gains orlosses and reflected as an increase or reduction in shareholders’ equitythrough other accumulated comprehensive income (loss).  In connection with the decision to enter intoa $100 million floating rate swap on June 1, 2001, the Company elected tochange the designation of the existing $100 million fixed rate swap and notaccount for either instrument as a hedge under SFAS No. 133.  As a result, the change in fair value of theswaps is reflected in net income for the period subsequent to May 31,2001.  The swaps expired on April 15,2004.  The interest rate caps enteredinto during 2003 as a requirement of the FIARC commercial paper facility arenot designated as hedges and, accordingly, changes in the fair value arerecorded as unrealized gains or losses and reflected in net income.  As of April 30, 2004 the Company had nooutstanding derivatives.

 

*Earnings Per Share*.  Earnings per share amounts are calculatedbased on net income available to common shareholders divided by the weightedaverage number of shares of common stock outstanding.

 

*Furniture and Equipment*.  Furniture and equipment are carried at cost,less accumulated depreciation. Depreciable assets are amortized using thestraight-line method over the estimated useful lives (two to five years) of therespective assets.

 

*Cash and Short-Term Investments*.  The Company considers all investments with amaturity of three months or less when purchased to be short-term investmentsand treated as cash equivalents. See Note 5 for components of restricted cash.

 

*TreasuryStock. *On December 14, 2001, the Board of Directorsauthorized the Company to repurchase up to 5% of the Company’s outstandingcommon stock.  During the year endedApril 30, 2003, 370,400 shares were repurchased under this authorization at anaverage price of $3.40. During the year ended April 30, 2004, 43,000 shareswere repurchased at an average price of $4.56.

 

*Stock-Based Compensation*.  The Company has an employee stock option planand a non employee director stock option plan, which are described more fullyin Note 15.  The Company applies APBOpinion No. 25, *Accounting for Stock Issued to Employees,*and related Interpretations in accounting for its plans.  The following table illustrates the effect onnet income (loss) and earnings (loss) per share if the Company had applied thefair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation* (with assumptionsdescribed in Note 15), to its stock option plans.

 
| ** **                                                                                                                                            | ** ** | **Fiscal** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                                                            | ** ** | **2002**   | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                                                                  |       |       |       |   |   |   |   |
| Net Income  (Loss), as reported                                                                                                                       |       | $          | (309,012   | ) | $ | 332,618 |   | $ | 33,563 |   |
| Deduct: Total  stock option plan compensation expense determined under fair value based  method for awards granted, modified or settled, net of taxes |       | (58,027    | )          | (76,115 | ) | (111,681 | ) |
| Pro Forma Net  Income (Loss)                                                                                                                          |       | $          | (367,039   | ) | $ | 256,503 |   | $ | (78,118 | ) |
|                                                                                                                                                  |       |       |       |   |   |   |   |
| Basic and  Diluted Net Income (Loss) per Common Share, as reported                                                                                    |       | $          | (0.06      | ) | $ | 0.07 |   | $ | 0.01 |   |
| Basic and  Diluted Net Income (Loss) per Common Share, pro forma                                                                                      |       | $          | (0.07      | ) | $ | 0.05 |   | $ | (0.02 | ) |

 

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*Reclassifications*.  Certain reclassifications have been made tothe 2002 and 2003 amounts to conform to the 2004 presentation.

 

**3. Receivables Held for Investment**

 

The receivables generallyhave terms between 48 and 72 months and are collateralized by the underlyingvehicles.  Net receivable balancesconsisted of the following at April 30, 2003 and 2004:

 
| ** **                                 | ** ** | **2003**   | ** **  | **2004**   | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|
| Receivables                                |       | $          | 226,362,218 |       | $          | 207,489,339 |   |
| Unamortized  premium and deferred fees (1) |       | 5,024,160  |        | 4,487,394  |       |
| Allowance for  credit losses               |       | (2,397,216 | )           | (2,199,386 | )          |
| Net receivables                            |       | $          | 228,989,162 |       | $          | 209,777,347 |   |

 

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

 

At April 30, 2004, theweighted average remaining term of the receivable portfolio is 45 months andthe weighted average contractual interest rate is 15.4%.  Principal payments expected to be received onthe receivable portfolio, assuming no defaults and that payments are receivedin accordance with contractual terms are summarized in the followingtable.  Receivables may pay off prior tocontractual due dates, primarily due to defaults and early payoffs.

 
| **Year ending April 30,** | ** ** | ** ** | ** **  |
|---------------------------|------------|------------|-------------|
| 2005                      |       | $          | 57,788,745  |   |
| 2006                      |       | 67,326,380 |        |
| 2007                      |       | 78,438,137 |        |
| 2008                      |       | 3,936,077  |        |
|                      |       | $          | 207,489,339 |   |

 

Activity in the allowancefor credit losses for the years ended April 30, 2003 and 2004 was as follows:

 
| ** **                      | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|---------------------------------|------------|-------------|------------|-------------|------------|
| Balance,  beginning of year     |       | $           | 2,338,625  |        | $          | 2,397,216 |   |
| Provision for  credit losses    |       | 10,337,718  |       | 12,428,175  |       |
| Charge-offs, net  of recoveries |       | (10,279,127 | )          | (12,626,005 | )          |
| Balance, end of  year           |       | $           | 2,397,216  |        | $          | 2,199,386 |   |

 

**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 the remaining cash flows of individual loans, theCompany determined that the timing of collections on Receivables Acquired forInvestment was much more unpredictable than contractual cash flows fromnon-defaulted receivables, therefore

 

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under the guidanceprovided by Practice Bulletin 6*, Amortization ofDiscounts on Certain Acquired Loans*, Receivables Acquired forInvestment will be accounted for under the cost-recovery method beginningSeptember 30, 2003.  Under this method,cash proceeds from collections are applied to first reduce the Company’s basisin the assets.  Cash collected in excessof this cost basis is recognized as income when received. Receivables Acquiredfor Investment previously originated by Auto Lenders Acceptance Corporationwere $2,704,247 and $979,496 as of April 30, 2003 and April 30, 2004,respectively.

 

On September 30,2003 the Company purchased $9.4 million of defaulted auto loan receivables froman unrelated third party.  These loansare included in Receivables Acquired for Investment on the balance sheet as ofApril 30, 2004, in the amount of $210,735 and are accounted for using thecost-recovery method.  The Company may,from time to time, consider similar acquisitions in the future.

 

**5.  RestrictedCash**

 

The components ofrestricted cash at April 30, 2003 and 2004 are as follows:

 
| ** **                                                 | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Collection and  lockbox balances                           |       | $         | 10,891,236 |      | $          | 11,128,176 |   |
| Funds held in  trust for receivable funding                |       | 1,101,435 |       | (790,564  | )          |
| Warehouse credit  facility and Term Note reserves (Note 7) |       | 5,988,208 |       | 8,449,135 |       |
| Mark to market  collateral account                         |       | 1,071,772 |       | —    |       |
| Other                                                      |       | 250,000   |       | 250,000   |       |
| Total restricted  cash                                     |       | $         | 19,302,651 |      | $          | 19,036,747 |   |

 

**6.  DeferredFinancing Costs and Other Assets**

 

The components ofdeferred financing costs and other assets at April 30, 2003 and 2004 are asfollows:

 
| ** **                     | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Deferred  financing costs, net |       | $         | 1,499,626  |      | $          | 1,713,833 |   |
| Investments in  FARC           |       | 1,514,458 |       | 1,685,002 |       |
| Other, net                     |       | 704,472   |       | 967,977   |       |
| Loan service fee  receivable   |       | 478,414   |       | 483,862   |       |
| Software, net                  |       | 364,282   |       | 383,753   |       |
| Furniture and  equipment, net  |       | 583,432   |       | 353,381   |       |
| Deferred  compensation plan    |       | 236,378   |       | 267,111   |       |
| Prepaid  insurance             |       | 213,886   |       | 260,284   |       |
| Total                          |       | $         | 5,594,948  |      | $          | 6,115,203 |   |

 

**7.  Debt**

 

The Company finances its loan origination through twowarehouse credit facilities. The Company’s credit facilities provide forone-year terms and have been renewed annually. Management of the Companybelieves that the credit facilities will continue to be renewed or extended orthat it would be able to secure alternate financing on satisfactory terms;however, there can be no assurance that it will be able to do so. In January2002 the Company issued $159 million in asset-backed notes (“Term Notes”)secured by discrete pools of receivables. On November 20, 2003, the Companyissued $140 million in Term Notes secured by a discrete pool ofreceivables.  Substantially allreceivables retained by the Company are pledged as collateral for the credit facilitiesand the Term Notes. The weighted average interest rate for the Company’ssecured borrowings including the effect of program fees, dealer fees, and othercomprehensive income (loss) amortization was 3.7% and 4.6% for the fiscal yearsending April 30, 2004 and 2003, respectively.

 

F-12

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*Warehouse Facilities as of April 30, 2004*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** **                      | **Fees**                                                                                              | ** **              | **Insurance**           | ** ** | **Borrowing  Rate At    April 30,   2004** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|---------------------------------|-------------------------------------------------------------------------------------------------------|-------------------------|-------------------------|------------|-------------------------------------------------|------------|
| FIARC        |       | $            | 150,000,000 |            | —     |              | Commercial paper rate  plus .3% |                                                                                                  | .25% of Unused Facility |                    | .35        | %                                               | 2.27       | % |
| FIRC         |       | $            | 50,000,000  |            | $          | 42,705,810        |                            | 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                                       |       | 1.64 | % |
|              |            |              |             |                 |            |                   |                                 |                                                                                                       |                         |                         |            |                                                 |            |  |  |

 

 

*Warehouse Facilities – Credit Enhancement as ofApril 30, 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 to maintaincredit enhancement insurance covering the receivables pledged as collateralunder the FIRC credit facility. The facility lenders are named as additionalinsureds under these policies. The coverages are obtained on each receivable atthe time it is purchased by the Company and the applicable premiums are prepaidfor the life of the receivable. Each receivable is covered by three separatecredit insurance policies, consisting of basic default insurance under astandard auto loan protection policy (known as “ALPI” insurance) together withcertain supplemental coverages relating to physical damage and other risks.Solely at its expense, the Company carries these coverages and neither thevehicle purchasers nor the dealers are charged for the coverages and they areusually unaware of their existence. The Company’s ALPI insurance policy iswritten by National Union Fire Insurance Company of Pittsburgh (“NationalUnion”), which is a wholly-owned subsidiary of American International Group.

 

The premiums that the Company paid during fiscal year2003 for its three credit enhancement insurance coverages, of which the largestcomponent is basic ALPI insurance, represented approximately 3.9% of theprincipal amount of the receivables originated during the year. Aggregatepremiums paid for ALPI coverage alone during the fiscal years ended April 30,2003 and 2004 were $4,141,328 and $3,066,131, respectively, and accounted for3.8% and 3.5% of the aggregate principal balance of the receivables originatedduring such respective periods.

 

In April 1994, the Company organized First InvestorsInsurance Company (the “Insurance Subsidiary”) under the captive insurancecompany laws of the State of Vermont. The Insurance Subsidiary is an indirectwholly-owned subsidiary of the Company and is a party to a reinsuranceagreement whereby the Insurance Subsidiary reinsures 100% of the risk under theCompany’s ALPI insurance policy. At the time each receivable is insured by NationalUnion, the risk is automatically reinsured to its full extent and approximately96% of the premium paid by the Company to National Union with respect to suchreceivable is ceded to the Insurance Subsidiary. When a loss covered by theALPI policy occurs, National Union pays it after the claim is processed, andNational Union is then

 

F-13

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reimbursed in full by theInsurance Subsidiary.  In addition to themonthly premiums and liquidity reserves of the Insurance Subsidiary, a trustaccount is maintained by National Union to secure the Insurance Subsidiary’sobligations for losses it has reinsured.

 

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofApril 30, 2004, the Insurance Subsidiary had capital and surplus of $2,500,189and unencumbered cash reserves of $1,205,263 in addition to the $3,265,274trust account.

 

The ALPI coverage as well as the InsuranceSubsidiary’s liability under the Reinsurance Agreement, remains in effect foreach receivable that is pledged as collateral under the warehouse creditfacility. Once receivables are transferred from FIRC to FIARC and financedunder the commercial paper facility, ALPI coverage and the Insurance Subsidiary’sliability under the Reinsurance Agreement is cancelled with respect to thetransferred receivables. Any unearned premium associated with the transferredreceivables is returned to the Company. The Company believes the losses itsInsurance Subsidiary will be required to indemnify will be less than thepremiums ceded to it. However, there can be no assurance that losses will notexceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

 

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

 

*Warehouse Facilities – 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 |       | 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 $50million commitment level until December 2, 2004.  On January 29, 2004, following a short-termextension of the original maturity date, the FIARC facility was renewed, undersimilar terms and conditions, to December 2, 2004.  There was no balance outstanding under theFIARC facility on April 30, 2004.

 

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

 

The following table contains pertinent information on the Term Notes asof April 30, 2004.

 
| **Term  Notes** | ** ** | **Issuance Date** | ** ** | **Issuance   Amount** | ** **  | **Maturity Date** | ** **        | **Outstanding** | ** ** | **Interest   Rate** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|-------------|-------------------|-------------------|-----------------|------------|---------------------|------------|
| 2002-A          |       | January 29, 2002  |       | $                     | 159,036,000 |              | December 15, 2008 |            | $          | 44,335,659          |       | 3.46 | % |
| 2003-A          |       | November 11, 2003 |       | $                     | 139,661,000 |              | April 20, 2011    |            | $          | 120,382,531         |       | 2.58 | % |

 

F-14

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Credit enhancement on the two Term Notes 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   |

 

Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% Class A asset-backed notes(“2002-A Term Notes”). The initial pool of automobile receivables transferredto the 2002 Auto Trust totaled $135,643,109, which was previously owned by FIRCand FIARC, secure the 2002-A Term Notes. In addition to the issuance of the Class A Notes, the 2002 Auto Trustalso issued $4,819,000 in Class B Notes that were retained by the Company andpledged to secure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$159,033,471 were used to (i) fund a $25,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2002-A TermNote issuance, and (v) fund a cash reserve account of 2% or $2,712,862 of theinitial receivables pledged which will serve as a portion of the creditenhancement for the transaction. The Class A Term Notes bear interest at 3.46%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 97% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2002-A Term Notes is December 15,2008.    The Class B Notes do not bearinterest but require principal reductions sufficient to reduce the balance ofthe Class B Notes to 3% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  As of April 30, 2003 and April 30, 2004, theoutstanding principal balances on the 2002-A Term Notes were $87,358,847 and$44,335,659 respectively.

 

On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A(“2003 Auto Trust”) completed the issuance of $139,661,000 of 2.58% Class Aasset-backed notes (“2003-A Term Notes”). The initial pool of automobilereceivables transferred to the 2003 Auto Trust totaled $114,726,891, which waspreviously owned by FIRC and FIARC, secure the 2003-A Term Notes.  In addition to the issuance of the Class ANotes, the 2003 Auto Trust also issued $5,065,891 in Class B Notes that wereretained by the Company and pledged to secure the Working Capital Facility asfurther described below.  Proceeds fromthe issuance, which totaled $139,656,629 were used to (i) fund a $30,000,000pre-funding account to be used for future loan originations; (ii) repay alloutstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) pay transactionfees related to the 2003-A Term Note issuance, and (v) fund an initial cashreserve account of 0.5% or $573,635 of the initial receivables pledged.  The Class A Term Notes bear interest at 2.58%and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 96.1% of the outstanding balance of the underlyingreceivables pool. The final maturity of the 2003-A Term Notes is April 20,2011.  The Class B Notes do not bearinterest but require principal reductions sufficient to reduce the balance of theClass B Notes to 3.9% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2004, the outstandingprincipal balances on the 2003-A Term notes were $120,382,531.

 

F-15

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*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% interest inthe partnership and First Union Investors, Inc., an affiliate of WachoviaSecurities, served as the limited partner with a 30% interest in thepartnership (the “Partnership”). Pursuant to the refinancing, the Partnershipissued Class A Notes in the amount of $19,204,362 and Class B Notes in theamount of $979,453 to VFCC, an affiliate of Wachovia Securities, the proceedsof which were used to retire the acquisition debt. The Class A Notes bearinterest at VFCC’s commercial paper rate plus 0.95% per annum and amortize on amonthly basis by an amount necessary to reduce the Class A Note balance as ofthe payment date to 75% of the outstanding principal balance of ReceivablesAcquired for Investment, excluding Receivables Acquired for Investment that areapplicable to FIACC, as of the previous month end. The Class B Notes bearinterest at VFCC’s commercial paper rate plus 5.38% per annum and amortize on amonthly basis by an amount which varied based on excess cash flows receivedfrom Receivables Acquired for Investment after payment of servicing fees,trustee and back-up servicer fees, Class A Note interest and Class A Noteprincipal, plus collections received on the Trust Certificates. The Class BNotes were paid in full on September 15, 2000. After the Class B Notes were paid in full, all cash flows received afterpayment of Class A Note principal and interest, servicing fees and other costs,are distributed to the Partnership for subsequent distribution to the partnersbased upon the respective partnership interests.  Beginning in November 2001, the partnershipused excess cash flow to retire additional Class A Note principal, thus nofurther partnership distributions were paid until the Class A Notes wereretired.  On February 20, 2003, the ClassA Notes were fully paid.  OnSeptember 19, 2003, First Investors Financial Services, Inc. purchased thelimited partnership interests previously held by First Union Investors, Inc.and accordingly receives all excess cashflows.

 

*Working Capital Facility*.  On December 6, 2001, the Company entered intoan agreement with Wachovia Securities to refinance the $11,175,000 outstandingbalance of the working capital term loan previously provided by Bank of Americaand Wachovia and increase the size of the facility to $13.5 million.  The renewal facility was provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.   The facility originallyconsisted of a $9 million revolving tranche and a $4.5 million term loantranche which amortizes monthly.  Theterm loan tranche of this working capital facility was evidenced by the Class BNotes issued in conjunction with the 2002 Auto Trust financing. The remaining$9 million of the $13.5 million working capital facility revolves monthly inaccordance with a borrowing base consisting of the overcollateralization amountand reserve accounts for each of the Company’s other credit facilities.  The facility is secured solely by the residualcash flow and cash reserve accounts related to the Company’s warehouse creditfacilities, the acquisition facility and the existing and future term notefacilities.  During 2002, the facilitywas modified to increase the interest rate from LIBOR plus 1.5% to LIBOR plus2.25%.  The commitment fee paid on thetotal available amount of the facility was maintained at 1.5%.    In addition, the monthly principalamortization under the term loan tranche was increased to the greater of$250,000 or the principal distributions made under the Class B Notes issuedunder the 2002 Auto Trust financing.  OnDecember 4, 2003, the Working Capital Facility was extended to December 2,2004.  Under the terms of the extension,the monthly amortization requirement was replaced with the requirement thatoutstandings under the facility could not exceed the lesser of a borrowing baseor the $9 million facility limit.  AtApril 30, 2003 and 2004, there was $8,714,518 and $8,761,143, respectively,outstanding under this facility.

 

The Company presentlyintends to seek a renewal of the working capital facility from its lender priorto maturity.  Should the facility not berenewed, the outstanding balance of the receivables would be amortized inaccordance with the borrowing base. Management considers its relationship with its lenders to besatisfactory and has no reason to believe that this credit facility will not berenewed.  If the facility is not renewed,however, or if material changes are made to its terms and conditions, it couldhave a material adverse effect on the Company.

 

*Shareholder Loans. *On December 3, 2001 theCompany entered into an agreement with one of its shareholders who is a memberof its Board of Directors under which the Company may, from time to time,borrow up to $2.5 million.  The proceedsof the borrowings will be utilized to fund certain private and open marketpurchases of the Company’s common stock pursuant to a Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3,

 

F-16

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2008 but may be repaid at any time unless the Company is in default onone of its other credit facilities. There was $746,280 and $0 outstanding under this facility as of April30, 2003 and 2004 respectively.

 

*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of the FIRCcredit facility, the Term Notes and the working capital facility or thetermination of the commercial paper facilities. The Company was not in defaultwith respect to any financial covenants governing these financing arrangementsat April 30, 2004.

 

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

 

On September 27, 2000, theCompany entered into a swap under which the Company would pay a fixed rate of6.30% and receive the prevailing one month LIBOR rate on a notional amount of$100 million.  Under the terms of theswap, the counterparty had the option of extending the swap for an additionalthree years to mature on April 15, 2004 at a fixed rate of 6.42%.  On April 15, 2001, the counterparty exercisedits extension option.

 

On June 1, 2001, the Companyentered into interest rate swaps with an aggregate notional amount of $100million and a maturity date of April 15, 2004. Under the terms of these swaps, the Company will pay a floating ratebased on one month LIBOR and receive a fixed rate of 5.025%.  Management elected to enter into these swapagreements to offset the uneconomical position of the existing pay fixed swapcreated by rapidly declining market interest rates.  In connection with the decision to enter intothe $100 million floating rate swap, the Company elected to change thedesignation of the $100 million fixed rate swap from a cash flow hedge and notaccount for the instrument as a hedge under SFAS No. 133.   As a result, the change in fair value of theswaps is reflected in net income for periods subsequent to May 31, 2001.

 

Duringfiscal year 2004, as a requirement of the FIARC commercial paper facility, theCompany entered into various interest rate cap transactions at cap ratesranging from 6.5% to 7.5% with an amortizing notional balance that is expectedto coincide with the outstanding balance of the FIARC commercial paper facility.The interest rate caps were not designated as hedges and, accordingly, changesin the fair value of the interest rate caps are recorded as unrealized gains orlosses and reflected in net income.  OnDecember 2, 2003, the Company terminated all interest rate caps outstanding inexchange for proceeds of $356,000.  Thecaps were terminated following the repayment of all outstandings under theFIARC facility following the issuance of the 2003-A Term Notes.  As a result, a realized loss of $14,000 wasincurred relative to the aggregate market value of the interest rate caps.

 

F-17

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**8.  IncomeTaxes**

 

The temporary differenceswhich give rise to deferred tax assets (liabilities) are as follows at April30, 2003 and 2004, respectively:

 
| ** **                                | ** ** | **2003**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets related to:          |       |       |       |       |       |
| Allowance for  credit losses              |       | $          | 879,656    |       | $          | 807,852 |   |
| Net operating  loss carryforward          |       | 520,718    |       | (40,043    | )          |
| Derivatives                               |       | 607,717    |       | —     |       |
| Accrued expenses                          |       | 184,792    |       | 100,765    |       |
|                                      |       | 2,192,883  |       | 868,574    |       |
| Deferred tax  liabilities related to:     |       |       |       |       |       |
| Receivables Held  for Investment, net     |       | (1,207,593 | )          | (1,017,854 | )          |
| Receivables  Acquired for Investment, net |       | (1,034,883 | )          | (408,720   | )          |
|                                      |       | (2,242,476 | )          | (1,426,574 | )          |
| Net deferred tax  assets (liabilities)    |       | $          | (49,593    | )          | $          | (558,000 | ) |

 

The provision (benefit)for income taxes on income before income taxes and minority interest for theyears ended April 30, 2002, 2003 and 2004, consists of the following:

 
| ** **      | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Current —  |       |     |       |     |       |     |       |
| Federal         |       | $        | —     |     | $          | (381,137 | )          | $ | (75,161 | ) |
| State           |       | 7,615    |       | 8,107    |       | 9,022    |       |
|            |       | $        | 7,615      |     | $          | (373,030 | )          | $ | (66,139 | ) |
| Deferred — |       |     |       |     |       |     |       |
| Federal         |       | $        | (173,503   | )        | $          | 564,220  |       | $ | 85,430 |   |
| State           |       | (11,732  | )          | —   |       | —   |       |
|            |       | $        | (185,235   | )        | $          | 564,220  |       | $ | 85,430 |   |

 

The following isreconciliation between the effective income tax rate and the applicablestatutory federal income tax rate for the years ended April 30, 2002, 2003 and2004.

 
| ** **                                | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax —  statutory rate         |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  tax, net of federal benefit |       | 2.0      | %          | 2.0      | %          | 2.0      | %          |
| Minority  Interest                        |       | 71.4     | %          | (6.5     | )%         | 10.1     | %          |
| Non-deductible  expenses                  |       | .5       | %          | .5       | %          | .5       | %          |
| Effective income  tax rate                |       | 107.9    | %          | 30.0     | %          | 46.6     | %          |

 

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

 

On December 24, 2002, theCompany invested $475,061 for a 40% ownership in common stock in First AutoReceivables Corporation (“FARC”) and $712,591 for junior mezzanine debt ofFARC.  FARC purchased a $197.5 millionautomobile loan portfolio from UAFC-2 Corporation, a subsidiary of Union AcceptanceCorporation, with proceeds from $186 million in senior bridge debt, $8.9million of senior mezzanine debt, $1.8 million of junior

 

F-18

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mezzaninedebt and $1.2 million of equity.   Thebridge debt interest rate is LIBOR plus 1%, the senior mezzanine interest rateis 22.5% and the junior mezzanine interest rate is 25%.

 

The Companyaccounts for its ownership investment in FARC using the equity method inaccordance with APB Opinion 18.  Inaddition to the equity and debt investments, the Company performs loanservicing and collection activities on the portfolio.  For the twelve months ended April 30, 2004,the Company recognized $1,352,234 of servicing revenue, $161,750 of interestincome and $1,009,322 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.

 

**10.    NewAccounting Pronouncements**

 

In December 2003, the American Institute of CertifiedPublic Accountants issued Statement of Position (SOP) 03-3,*Accountingfor Certain Loans or Debt Securities Acquired in a Transfer*. SOP03-3 addresses the accounting for loans acquired through a transfer (includinga business combination) that have differences between their expected cash flowsand their contractual cash flows, due in part to credit quality. The SOPrequires that the excess of the expected cash flows at acquisition to becollected over the acquirer’s initial investment be recognized on a level-yieldbasis over the loan’s life. Any future excess of contractual cash flows overthe original expected cash flows is recognized as a future yield adjustment.Future decreases in actual cash flows over the original expected cash flows arerecognized as impairment and expensed immediately. Valuation allowances can notbe created or “carried over” in the initial accounting for loans acquired thatare within the scope of the SOP. SOP 03-3 is effective for loans acquired infiscal years beginning after December 15, 2004. TheCompany does not anticipate SOP 03-3 will have a material effect on itsfinancial statements.

 

**11.  CreditRisks**

 

Approximately 28%of the Company’s Receivables Held for Investment by principal balance at April30, 2004, represents receivables originated from dealers located in Texas. Theeconomy of Texas is primarily dependent on petroleum and natural gas productionand sales of related supplies and services, petrochemical operations, light andmedium manufacturing operations, computer and computer service businesses,agribusiness and tourism. Job losses in any or all of these primary economicsegments of the Texas economy may result in a significant increase indelinquencies or defaults in the Company’s receivable portfolio. While vehiclessecure the receivables, it is not expected that the value of the vehicles ifrepossessed and sold by the Company would be sufficient to recover theprincipal outstanding under any defaulted loans.

 

**12.  MarketRisks**

 

The market riskdiscussion and the estimated amounts generated from the analysis that followsare forward-looking statements of market risk assuming certain adverse marketconditions occur. Actual results in the future may differ materially due tochanges in the Company’s product and debt mix, developments in the financialmarkets, and further utilization by the Company of risk-mitigating strategiessuch as hedging.

 

The Company’soperating revenues are derived almost entirely from the collection of intereston the receivables it retains and its primary expense is the interest that itpays on borrowings incurred to purchase and retain such receivables. TheCompany’s credit facilities bear interest at floating rates which are reset ona short-term basis, whereas its receivables bear interest at fixed rates whichdo not generally vary with changes in interest rates. The Company is thereforeexposed primarily to market risks associated with movements in interest rateson its credit facilities. The Company believes that it takes the necessarysteps to appropriately reduce the potential impact of interest rate increaseson the Company’s financial position and operating performance.

 

The Company relies almost exclusively on revolvingcredit facilities to fund its origination of receivables. Periodically, theCompany will transfer receivables from a revolving to a term credit facility.Currently, all of the Company’s credit facilities bear interest at floatingrates tied to either a commercial paper index or LIBOR.

 

F-19

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As of April 30, 2004, theCompany had $51.5 million of floating rate secured debt outstanding under theFIRC warehouse and working capital facilities. For every 1 percent increase in LIBOR annual after-tax earnings woulddecrease by approximately $271,145 assuming the Company maintains a levelamount of floating rate debt and assuming an immediate increase in rates.  As of April 30, 2003, the Company had $150.6million of floating rate secured debt outstanding net of swap and capagreements. For every 1 percent increase in commercial paper rates or LIBOR,annual after-tax earnings would decrease by approximately $957,000 assuming theCompany maintains a level amount of floating rate debt and assuming animmediate increase in rates.

 

**13.  FairValue of Financial Instruments**

 

The following tablesummarizes the carrying amounts and estimated fair values of the Company’sfinancial instruments for those financial instruments whose carrying amountsdiffer from their estimated fair values. SFAS No. 107, *DisclosuresAbout Fair Value of Financial Instruments,* defines the fair value ofa financial instrument as the amount at which the instrument could be exchangedin a current transaction between willing parties. The carrying amounts shown inthe table are included in the balance sheet under the indicated captions.

 
| ** **                       | ** ** | **April 30, 2003**   | ** **  | **April 30, 2004** | ** ** |
|----------------------------------|------------|----------------------|-------------|--------------------|------------|
| ** **                       | ** ** | **Carrying  Amount** | ** **  | **Fair Value**     | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Financial assets  —         |       |                 |        |               |       |   |   |   |   |
| Receivables Held  for Investment |       | $                    | 226,362,218 |               | $          | 227,176,099 |   | $ | 207,489,339 |   | $ | 210,292,409 |   |
| Financial  liabilities —    |       |                 |        |               |       |   |   |   |   |
| Term Notes                       |       | $                    | 87,358,847  |               | $          | 89,504,236 |   | $ | 164,718,190 |   | $ | 167,597,201 |   |

 
| ** **                    | ** ** | **Notional  Amount** | ** **  | **Fair Value** | ** ** | **Notional  Amount** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|----------------------|-------------|----------------|------------|----------------------|------------|----------------|------------|
| Financial  instruments — |       |                 |        |           |       |                 |       |           |       |
| Swap agreements               |       | $                    | 200,000,000 |           | $          | (1,409,296           | )          | —         |       | — |   |
| Cap agreements                |       | $                    | 90,024,414  |           | $          | 266,523              |       | —         |       | — |   |

 

The following methods andassumptions were used to estimate the fair value of each category of financialinstruments:

 

*Cash and Short-Term Investments,Other Receivables, Accounts Payable and Accrued Liabilities*.  The carrying amounts approximate fair valuebecause of the short maturity and market interest rates of those instruments.

 

*Receivables Held for Investment*.  The fair values were estimated by discountingexpected cash flows at a risk-adjusted rate of return deemed to be appropriatefor investors in such receivables. Expected cash flows take into considerationmanagement’s estimates of prepayments, defaults and recoveries.

 

*Receivables Acquired forInvestment*.  Thecarrying value approximates fair value. The fair values were estimated bydiscounting expected cash flows at a risk-adjusted rate of return deemed to beappropriate for investors in such receivables. Expected cash flows take intoconsideration management’s estimates of prepayments, defaults and recoveries.

 

*Term Notes*.  The fair value was estimated by discountingcash payments using current rates and comparative maturities. Expected cash paymentstake into consideration prepayments, defaults and recoveries on the underlyingcollateral.

 

*Credit Facilities*.  The carrying amount approximates fair valuebecause of the floating interest rates on the credit facilities.

 

*Swap Agreements*.  The fair value was estimated based on thepayment the Company would have to make to or receive from the swap counterpartyto terminate the swap agreements.

 

*Cap Agreements*.  The fair value was estimated based on thepayment the Company would receive from the cap counterparty to terminate thecap agreements.

 

F-20

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**14.  DefinedContribution Plan**

 

Effective May 1, 1994,the Company adopted a participant-directed 401(k) retirement plan for itsemployees. An employee becomes eligible to participate in the plan immediatelyupon employment. The Company pays the administrative expenses of the 401(k)plan. The Company also matches a percentage of each participant’s voluntarycontributions up to a maximum voluntary contribution of 3 percent of theparticipant’s compensation. In fiscal year 2003 and 2004, the Company madematching contributions to the 401(k) plan in the amounts of $32,548 and$40,062, respectively. Effective April 28, 1998, the Company established aparticipant-directed Deferred Compensation Plan for certain executive officersof the Company.  Under the terms of theDeferred Compensation Plan, the participants may elect to make contributions tothe plan that exceeds amounts allowed under the Company’s 401(k) plan.  The Company pays the administrative expensesof the Deferred Compensation Plan.  As ofApril 30, 2003 and April 30, 2004, the amounts invested under the DeferredCompensation Plan totaled $236,378 and $267,111, respectively.

 

**15. Shareholders’ Equity**

 

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of April 30, 2004, no shares have been issued.

 

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employees forthe purchase of up to 300,000 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. In no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan. As of April 30, 2004, a total of 282,500 options had been issuedand remained outstanding leaving a remaining 217,500 available under the plan.

 

The exercise price of theoption is payable in full upon exercise and payment may be in cash, by deliveryof shares of common stock (valued at their fair market value at the time ofexercise), or by a combination of cash and shares. At the discretion of theCompensation Committee, options may be issued in tandem with stock appreciationrights entitling the option holder to receive an amount in cash or in shares ofcommon stock, or a combination thereof, equal in value to any increase sincethe date of grant in the fair market value of the common stock covered by theoption.

 

*Non-Employee Director StockOption Plan* - In September 2002, the Non-Employee StockOption Plan was established to further align the interests of the Company’sdirectors with the interests of the shareholders, as well as attracting andretaining qualified directors.   TheBoard of Directors administers the plan and the options will not be qualifiedas incentive stock options.  A total of500,000 shares of common stock are available for issuance.  Option types will be automatic anddiscretionary.   Automatic grants of20,000 shares for each non-employee director, or 100,000 shares total,  were approved in September 2002.  Subsequent automatic grants of an option topurchase 20,000 shares shall be made to each non-employee director on July 15theach year, beginning July 15, 2003. The plan also gives the Board of Directorsdiscretionary authority to provide for additional option grants if theCompany’s annual financial performance exceeds parameters established by theBoard.  No discretionary grants have beenawarded.  As of April 30, 2004, atotal of 290,000 options had been issued under the plan, leaving a remaining210,000 available for issuance.

 

F-21

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A summary of the statusof the Company’s stock option plans for the years ended April 30, 2002, 2003and 2004 is presented below:

 

| ** **                                             | ** ** | **Shares  Under****Option** | ** ** | **Weighted  Average  Exercise****Price** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|------------------------------------------|------------|
| Outstanding at  April 30, 2001                         |       | 363,000                     |       | $                                        | 6.18       |   |
| Forfeited                                              |       | (32,500                     | )          | $                                        | 6.40       |   |
| Outstanding at  April 30, 2002                         |       | 330,500                     |       | $                                        | 6.16       |   |
| Granted                                                |       | 172,500                     |       | $                                        | 2.95       |   |
| Outstanding at  April 30, 2003                         |       | 503,000                     |       | $                                        | 5.06       |   |
| Granted                                                |       | 177,500                     |       | $                                        | 4.65       |   |
| Forfeited and  Expired                                 |       | (91,000                     | )          | $                                        | 4.62       |   |
| Exercised                                              |       | (17,000                     | )          | $                                        | 4.47       |   |
| Outstanding at  April 30, 2004                         |       | 572,500                     |       |                                     |       |
| Options  available for future grants at April 30, 2004 |       | 427,500                     |       |                                     |       |

 
| ** **                                              | ** ** | **Fiscal** | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2002**   | ** ** | **2003** | ** ** | **2004** | ** ** |
| Options  exercisable at end of year                     |       | 188,700    |       | 232,800 |   | 245,333 |   |
| Weighted average  exercise price of options exercisable |       | $          | 7.25       |   | $ | 6.86 |   | $ | 6.11 |   |
| Weighted average  fair value of options granted         |       | NA         |       | $ | 1.06 |   | $ | 1.36 |   |
|                                                         |            |            |            |  |  |  |  |  |  |  |

 

Following is a summary ofthe status of options outstanding at April 30, 2004:

 
| **Range of  Exercise  Price** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Contractual  Life in Years** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|
| $4.75                         |       | $                                     | 4.75       |                     | 50,000     |                     | 50,000     |                                              |       | (1) |
| $11.00                        |       | $                                     | 11.00      |                     | 20,000     |                     | 20,000     |                                              |       | (1) |
| $ 2.95                   |       | $                                     | 2.95       |                     | 155,000    |                     | 44,333     |                                              | 8.62       |   |
| $3.98 -$5.25                  |       | $                                     | 3.38       |                     | 279,000    |                     | 63,500     |                                              | 6.75       |   |
| $6.75 -$7.38                  |       | $                                     | 7.37       |                     | 33,500     |                     | 32,500     |                                              | 3.27       |   |
| $11.00                        |       | $                                     | 11.00      |                     | 35,000     |                     | 35,000     |                                              | 1.40       |   |
|                          |       |                                  |       | 572,500                  |       | 245,333                  |       |                                              |       |

 

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(1)          The option willterminate one year after the Director ceases to be a member of the Board ofDirectors, except that in the event of the Director’s death while serving as aDirector the option would be exercisable by his heirs or representatives of hisestate for a period of two years after date of death.

 

F-22

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The fair value of eachoption is estimated on the date of grant using the Black-Scholes option pricingmodel.  The following weighted-averageassumptions were used:

 
| ** **                         | ** ** | **Fiscal** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2002**   | ** ** | **2003** | ** ** | **2004** | ** ** |
| Risk free  interest rate           |       | No grants  |       | 4.0 | % | 3.8 | % |
| Expected life of  options in years |       | No grants  |       | 4.8 |   | 4.6 |   |
| Expected stock  price volatility   |       | No grants  |       | 34 | % | 30 | % |
| Expected  dividend yield           |       | No grants  |       | 0 | % | 0 | % |

 

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions including the expected stock price volatility. Because theCompany’s employee stock options have characteristics significantly differentfrom those of traded options, and because changes in the subjective inputassumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

**16. Commitments and Contingencies**

 

*Employment Agreement*.   As of April 30, 2004, the Company was not aparty to any employment agreements.

 

*Litigation*.  The Company from time to time becomesinvolved in various routine legal proceedings which are incidental to thebusiness. Management of the Company vigorously defends such matters. As ofApril 30, 2004, management believes there are no such legal proceedings thatwill have a material adverse impact on the Company’s financial position orresults of operations.

 

*Leases*.  The Company is a party to a lease agreementfor office space in Houston that expires on February 28, 2011. The Company isparty to a lease agreement for office space in Atlanta which expires on June30, 2007. Rent expense for office space and other operating leases for theyears ended April 30, 2002, 2003 and 2004, was  $910,816, $813,504 and $764,283, respectively. Required minimum leasepayments for the remaining terms of the above leases are:

 

| **Year ending April 30,** |   |      |      |
|---------------------------|--------|-----------|-----------|
| 2005                      |   | $         | 1,079,622 |   |
| 2006.                     |   | 1,125,887 |      |
| 2007                      |   | 1,032,475 |      |
| 2008                      |   | 418,994   |      |
| 2009                      |   | 324,038   |      |
| Thereafter                |   | 577,533   |      |
|                           |        |           |           |  |

 

F-23

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**17. Earnings Per Share**

 

Earnings per shareamounts are based on the weighted average number of shares of common stock andpotential dilutive common shares outstanding during the period. The weighted averagenumber of shares used to compute basic and diluted earnings per share for theyears ended April 30, 2002, 2003 and 2004 are as follows:

 
| ** **                                                          | ** ** | **For the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
| Weighted average  shares:                                           |       |                             |       |   |   |   |   |
| Weighted average  shares outstanding for basic earnings per share   |       | 5,510,068                        |       | 5,104,438 |   | 5,008,427 |   |
| Effect of  dilutive stock options and warrants                      |       | —                           |       | 7,339 |   | 84,906 |   |
| Weighted average  shares outstanding for diluted earnings per share |       | 5,510,068                        |       | 5,111,777 |   | 5,093,333 |   |

 

At April 30, 2004, theCompany had 621,631 employee stock options and warrants and 70,000 directoroptions which were not included in the computation of diluted earnings pershare because to do so would have been antidilutive for the period presented.

 

**18. Quarterly Financial Data (Unaudited)**

 

The table below setsforth the unaudited consolidated operating results by quarter for the yearended April 30, 2004.

 
| ** **                                            | ** ** | **For the Three Months Ended,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **July 31, 2003**               | ** ** | **October 31, 2003** | ** ** | **January 31, 2004** | ** ** | **April 30, 2004** | ** ** |
|                                                  |       |                            |       |   |   |   |   |   |   |
| Interest Income                                       |       | $                               | 8,070,436  |   | $ | 7,923,929 |   | $ | 7,499,053 |   | $ | 7,004,853 |   |
| Interest Expense                                      |       | 2,017,971                       |       | 1,889,442 |   | 2,341,708 |   | 2,188,645 |   |
| Net Income  (Loss)                                    |       | 220,079                         |       | 187,805 |   | (167,492 | ) | (206,829 | ) |
| Basic and  Diluted Net Income (Loss) per Common Share |       | $                               | 0.04       |   | $ | 0.04 |   | $ | (0.03 | ) | $ | (0.04 | ) |

 

The table below setsforth the unaudited consolidated operating results by quarter for the yearended April 30, 2003.

 
| ** **                                     | ** ** | **For the Three Months Ended,** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **July 31, 2002**               | ** ** | **October 31, 2002** | ** ** | **January 31, 2003** | ** ** | **April 30, 2003** | ** ** |
|                                           |       |                            |       |   |   |   |   |   |   |
| Interest Income                                |       | $                               | 8,511,337  |   | $ | 8,145,189 |   | $ | 8,415,164 |   | $ | 7,868,207 |   |
| Interest Expense                               |       | 2,882,088                       |       | 2,693,481 |   | 2,486,052 |   | 2,104,118 |   |
| Net Income                                     |       | 143,693                         |       | 46,131 |   | 62,790 |   | 80,004 |   |
| Basic and  Diluted Net Income per Common Share |       | $                               | 0.03       |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.02 |   |

 

F-24

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