**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K**
| x          | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                        |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | ** **                                                                                                                                                                                                                                                                                                       |
|       | **For the fiscal year ended April  30, 2006**                                                                                                                                                                                                                                                                    |
|       | ** **                                                                                                                                                                                                                                                                                                       |
| **OR**     |
| ** ** |
|  ̈     | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                    |
|       | ** **                                                                                                                                                                                                                                                                                                       |
|       | **For the transition period from                         to                       ** |

 

**Commission File 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                           |   | (I.R.S. Employer     |
| Incorporation or  Organization)                            |   | Identification  No.) |
| ** **                                                 |   | ** **           |
| **675  Bering Drive, Suite 710**                           |   | ** **           |
| **Houston,  Texas**                                        |   | **77057**            |
| (Address of  Principal Executive Offices)                  |   | (Zip Code)           |
|                                                       |   |                 |
| **(713) 977-2600**                                         |
| (Registrant’s  Telephone Number, Including Area Code) |

 

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

Securitiesregistered pursuant to Section 12(g) of the Act:
|                                 | **Title of each class** | ** ** |
|---------------------------------|-------------------------|------------|
| Common Stock -  $.001 par value |

 

Indicate by check mark if the registrantis a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ̈  No x

Indicate by check mark if the registrantis not required to file reports pursuant to Section 13 or Section 15(d) of theAct.

Yes  ̈  No x

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

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ̈

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

Largeaccelerated filer   ̈  Accelerated filer   ̈  Non-accelerated filer  x

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.  Yes  ̈  No x

The aggregatemarket value of the voting stock of the registrant held by non-affiliates ofthe registrant as of June 30, 2006 based on the closing price of the CommonStock on the Over The Counter Bulletin Board Market on said date was$21,972,411.

There were 4,454,193 shares of CommonStock of the registrant outstanding as of June 30, 2006.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the registrant’s definitive proxy statement for its annual meeting ofshareholders to be held on September 7, 2006, which is to be filed with theSecurities and Exchange Commission not later than 120 days after April 30,2006, are incorporated by reference into part III hereof.

 

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

**FORM 10-KAPRIL 30, 2006**

**TABLE OF CONTENTS**
|              | ** **                                                                                  | ** ** |
|--------------|---------------------------------------------------------------------------------------------|------------|
| **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 Financial Services Group,Inc., together with its wholly-owned subsidiaries, (“Company”) is a consumerfinance company engaged in originating and holding for investment retailinstallment sales contracts and promissory notes receivable secured by new andused automobiles and light trucks arising from the sale of the vehicle byfactory 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, 2006, the Company had Receivables Held forInvestment in the aggregate principal amount of approximately $369 millionhaving an effective yield of 12.5% and a net interest spread of 7.8% (net ofcost of funds and other carrying costs).

The Company performs servicing andcollection activities for third parties through First Investors ServicingCorporation (“FISC”), a wholly owned subsidiary located in Atlanta,Georgia.  The total managed portfolioserviced by FISC was approximately $475 million as of April 30, 2006.

**History**

The Company was organized in 1989 byTommy A. Moore, Jr. and Walter A. Stockard to conduct an automobile financebusiness, with Mr. Moore providing the operating expertise and Mr. Stockard andmembers of his family furnishing the initial financial support. During thefirst three years of the Company’s existence, its operations consistedprimarily of purchasing and pooling receivables for resale to financialinstitutions and others. In March 1992, the Company obtained additional capitalfrom a group of private investors and expanded its operations and reorientedits business towards originating receivables for retention.  In October 1995, the Company completed theinitial public offering of common stock which resulted in net proceeds of $18.5million.

On October 2, 1998, the Company completedthe acquisition of First Investors Servicing Corporation (“FISC”), formerlyknown as Auto Lenders Acceptance Corporation, from Fortis, Inc. Headquarteredin Atlanta, Georgia.  FISC engaged inessentially the same business as the Company and additionally performedservicing and collection activities on a portfolio of receivables originatedfor investment as well as on a portfolio of receivables originated and soldpursuant to two asset securitizations. As a result of the acquisition, theCompany increased the total dollar value on its balance sheet of receivables,acquired an interest in certain trust certificates related to the assetsecuritizations and acquired certain servicing rights, along with furniture,fixtures, equipment and technology to perform the servicing and collectionfunctions for the portfolio of receivables under management.

**Industry**

The automobile finance industry is thesecond largest consumer finance market in the United States. Most automobilefinancing is provided by captive finance subsidiaries of major automobilemanufacturers, banks, thrifts, credit unions and independent finance companiessuch as the Company. The overall industry is generally segmented according to thetype of vehicle sold (new vs. used), the nature of the dealership (franchisedvs. independent) and the credit characteristics of the borrower (prime vs.non-prime). The non-prime market is comprised of individuals who are relativelyhigh credit risks and who have limited access to traditional financing sources,generally due to unfavorable past credit experience, low income or limitedfinancial resources and/or the absence or limited extent of prior credithistory.

**Originating Base**

*General*.  The Company primarily originates receivablesfrom refinancing existing loans originally financed from an outside third partyand the new and used car departments of dealers that operate under franchisesfrom the

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majorautomobile manufacturers. The Company does not generally do business with “independent”dealers who operate used car lots with no manufacturer affiliation. No dealeror group of dealers (who are affiliated with each other through commonownership) accounted for more than 5% of the receivables owned by the Companyat April 30, 2006, and no dealer or group of related dealers originated morethan 5% of the receivables held by the Company at that date. The volume andfrequency of receivable originations from particular dealers vary widely withthe size of the dealerships as well as market and competitive factors in thevarious dealership locations.

*Location of Dealers*.  Approximately 48% of the dealers with whomthe Company has agreements are located in Texas, where the Company has operatedsince 1989, 22% in Georgia and 13% in Tennessee.  The Company’s expansion beyond Texas began in1992.  Currently, the Company is licensedto conduct business in 21 states for direct to consumer loans and 23 states forindirect loans, and is actively originating loans in 17 states for both directto consumer loans and indirect loans.

The following table summarizes, withrespect to each state in which the Company operates, the number of receivables(and percentage of total receivables) outstanding which were originated by theCompany from refinancing existing loans originally financed from an outsidethird party, dealers in such states or purchased through bulk portfolioacquisitions:
|                    | ** ** | **Receivables Held for Investment** | ** ** |
|--------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **As of**                                     | ** ** | **As of** | ** ** |
| ** **         | ** ** | **30-Apr-05**                                      | ** ** | **30-Apr-06** | ** ** |
| **State (1)** | ** ** | **Loan Count**                                | ** ** | **%** | ** ** | **Loan Count** | ** ** | **%** | ** ** |
| Texas              |       | 5,018                                              |       | 27.7 | % | 6,910 |   | 30.2 | % |
| Georgia            |       | 3,149                                              |       | 17.4 | % | 3,569 |   | 15.6 | % |
| Ohio               |       | 1,918                                              |       | 10.6 | % | 1,918 |   | 8.4 | % |
| California         |       | 857                                                |       | 4.7 | % | 1,632 |   | 7.1 | % |
| Florida            |       | 751                                                |       | 4.1 | % | 1,330 |   | 5.8 | % |
| North Carolina     |       | 533                                                |       | 3.0 | % | 1,058 |   | 4.6 | % |
| Tennessee          |       | 607                                                |       | 3.4 | % | 976 |   | 4.3 | % |
| Illinois           |       | 710                                                |       | 3.9 | % | 767 |   | 3.3 | % |
| Indiana            |       | 435                                                |       | 2.4 | % | 684 |   | 3.0 | % |
| Missouri           |       | 589                                                |       | 3.3 | % | 654 |   | 2.9 | % |
| Arizona            |       | 298                                                |       | 1.6 | % | 442 |   | 1.9 | % |
| Washington         |       | 73                                                 |       | 0.4 | % | 350 |   | 1.5 | % |
| South Carolina     |       | 165                                                |       | 0.8 | % | 303 |   | 1.3 | % |
| Oklahoma           |       | 580                                                |       | 3.2 | % | 271 |   | 1.2 | % |
| Colorado           |       | 249                                                |       | 1.4 | % | 249 |   | 1.1 | % |
| All others (2)     |       | 2,194                                              |       | 12.1 | % | 1,796 |   | 7.8 | % |
|               |       | 18,126                                             |       | 100.0 | % | 22,909 |   | 100.0 | % |

 

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(1)             Representsobligor’s current state of residence

(2)             Includesloans located in Alabama, Arkansas, Connecticut, Delaware, Iowa, Idaho, Kansas,Kentucky, Massachusetts, Maryland, Michigan, Minnesota, Mississippi, Nebraska,Nevada, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania,South Dakota, Utah, Vermont, Virginia, West Virginia and Wisconsin.

*Marketing Representatives*.  The Company utilizes a system of regionalmarketing representatives to recruit, enroll and to provide new dealers withthe Company’s underwriting guidelines and credit policies as well as tomaintain relationships with the Company’s existing dealers. The representativesare full-time employees who reside in the region for which they areresponsible.

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In addition to soliciting and enrollingnew dealers, the regional representatives assist new dealers in assimilatingthe Company’s system of credit application submission, review, acceptance andfunding, as well as dealing with routine dealer relations on a daily basis. Therole of the regional representatives is generally limited to marketing theCompany’s core finance programs and maintaining relationships with the Company’soriginating dealer base. The representatives do not enter into or modify dealeragreements on behalf of the Company, do not participate in credit evaluation orloan funding decisions and do not handle funds belonging to the Company or itsdealers. Each representative reports to, and is supervised by, the Company’ssales and marketing manager in Houston.

It has been the policy of the Company toavoid the establishment of branch offices because it believes that the expensesand administrative burden of such offices are generally unjustified. Moreover,in view of the availability of modern data transmission technology, the Companyhas concluded that the critical functions of credit evaluation and loanorigination are best performed and controlled on a centralized basis from itsHouston facility. Accordingly, as the marketing representative system hasoperated satisfactorily, the Company does not currently expect to create branchoffices.

**Financing Programs**

The Company originates loans from twosources: (i) dealer indirect and (ii) consumer direct. The dealer indirectprogram generated 35% of the Company’s origination volume for the year endedApril 30, 2006, and consisted of loans originated directly from dealerships instates in which the Company operates. Consumer direct originations contributed 65% of origination volume forthe year ended April 30, 2006, and involved applications for credit obtainedthrough direct marketing efforts from consumers who are primarily seeking toacquire a vehicle or refinance an existing automobile loan.

Credit applications generated by each ofthe above sources are forwarded to the Company’s centralized credit departmentin Houston with decisions made based on the Company’s standard underwritingguidelines and credit scoring model. The internal credit decision andacceptance process is essentially the same regardless of the originationsource. Third party originators have no credit approval authority and aresubject to individual contracts that specify the obligations of the parties.Essentially all of the Company’s dealer indirect receivables are originated ona non-recourse basis.

In addition to originating receivablesfrom dealers under the core program or making loans directly to consumers, theCompany has acquired seasoned receivables in portfolio acquisitions or fromother third party originators and may continue to do so from time to time.

The Company had active dealershipagreements with 273 dealers at April 30, 2006 compared to 1,477 at April 30,2005. The decrease in active dealership agreements is due to a large number ofdealerships having little or no volume, whose agreements were deactivated.  These are non-exclusive agreements terminableat any time by either party and they require no specific volume levels. Theagreements with the dealers contain customary representations and warrantiesconcerning title to the receivables sold, validity of the liens on theunderlying vehicles, compliance with applicable laws and related matters.Although the dealers are obligated to purchase receivables that do not conformto these warranties, the dealers do not guarantee collectibility or obligatethemselves to purchase receivables solely because of payment default. Thereceivables are originated at par or at prices that may reflect a discount orpremium depending on the annual percentage rates of particular receivables andthe Company’s assessment of relative credit risk. The pricing and credit termsupon which the Company agrees to originate receivables is governed by theCompany’s credit policy and a credit score generated by the Company’sproprietary, empirical scoring model.

**Credit Evaluation**

In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which(i) the creditworthiness of the borrower and the terms of the proposedtransaction are evaluated and either approved, declined or modified by theCompany’s credit verification department, (ii) the loan documentation andcollateralization is reviewed by the Company’s funding department, and (iii)additional collateral verification procedures and customer interviews areconducted by the Company. During the course of this process, the Company’scredit verification and funding personnel coordinate closely with the financeand insurance departments of the dealers or with individuals to whom

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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 and loan pricing models developed from the Company’s18 year database of non-prime lending results.

In addition to this credit underwritingprocess, and prior to the origination of a receivable by the Company, theCompany performs additional procedures to validate the details of the creditapplication, including income and/or employment information, to verify that thecollateral is insured, and to confirm that the material terms of the saleconform to the purchaser’s understanding of the transaction.  The Company will originate a receivable onlyafter receipt and review of a satisfactory audit report.

**Servicing**

The Company believes that competent,attentive and efficient loan servicing is as important as sound creditevaluation for purposes of assuring the integrity of a receivable.

In addition to servicing its ownedportfolio, in December 2002, the Company began servicing and collectionactivities for third parties in exchange for servicing fees.   The Company completed two transactionsduring the 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, mileage on theautomobile and other factors.

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

Certain information concerning the Company’sobligors for the past two fiscal years (based on credit information compiled atthe time of loan origination) is set forth in the following table:
| ** **                                      | ** ** | **April 30,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2005**           | ** ** | **2006** | ** ** |
| Average monthly  gross income                   |       | $                  | 4,468      |   | $ | 4,528 |   |
| Average ratio of  consumer debt to gross income |       | 37                 | %          | 37 | % |
| Average years in  current employment            |       | 7                  |       | 7 |   |
| Average years in  current residence             |       | 6                  |       | 6 |   |
| Residence owned                                 |       | 52                 | %          | 52 | % |
| Residence rented                                |       | 40                 | %          | 42 | % |
| Other residence  arrangements (1)               |       | 8                  | %          | 6 | % |
|                                                 |            |                    |            |  |  |  |  |

 

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(1)             Includesmilitary personnel and persons residing with relatives.

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*Portfolio Profile*.  In order to manage the risks associated withthe relatively high yields available in the non- prime market, the Companyendeavors to maintain a receivables portfolio having characteristics that, inits judgment, reflect an optimal balance between achievable yield andacceptable risk. The following table sets forth certain information concerningthe composition of the Company’s portfolio as of the end of the past two fiscalyears:
| ** **                                             | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **2005**           | ** ** | **2006** | ** ** |
| New Vehicles:                                          |       |               |       |   |   |
| Percentage of portfolio (1)                            |       | 23                 | %          | 22 | % |
| Number of receivables outstanding                      |       | 3,669              |       | 4,403 |   |
| Average amount at date of origination                  |       | $                  | 22,708     |   | $ | 23,750 |   |
| Average term (months) at date of origination (2)       |       | 68                 |       | 70 |   |
| Average remaining term (months) (2)                    |       | 44                 |       | 47 |   |
| Average monthly payment                                |       | $                  | 490        |   | $ | 497 |   |
| Average annual percentage rate                         |       | 14.5               | %          | 14.3 | % |
| Used Vehicles:                                         |       |               |       |   |   |
| Percentage of portfolio (1)                            |       | 77                 | %          | 78 | % |
| Number of receivables outstanding                      |       | 14,457             |       | 18,506 |   |
| Average age of vehicle at date of origination  (years) |       | 2                  |       | 2 |   |
| Average amount at date of origination                  |       | $                  | 18,392     |   | $ | 19,297 |   |
| Average term (months) at date of origination (2)       |       | 61                 |       | 63 |   |
| Average remaining term (months) (2)                    |       | 53                 |       | 45 |   |
| Average monthly payment                                |       | $                  | 423        |   | $ | 432 |   |
| Average annual  percentage rate                        |       | 13.8               | %          | 14.1 | % |

 

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(1)             Calculated on thebasis of dollar value of receivables outstanding as of the date indicated.

(2)             Becausethe actual life of many receivables will differ from the stated term by reasonof prepayments and defaults, data reflecting the average contractual term ofreceivables included in a portfolio will not correspond with actual averagelife.

**FinancingArrangements**

*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 alimited partnership that is affiliated with a current shareholder and member ofthe board of directors, to borrow up to $2.5 million.  Proceeds of the borrowings are to be used tofund private and open market purchases of the Company’s common stock pursuantto a Stock Repurchase Plan and for general corporate purposes. The followingchart summarizes the borrowing status at April 30, 2006, under thesefacilities:
| **Facility Type**           | ** ** | **Outstanding  Balance** | ** **  | **Available  Credit** | ** ** | **Total**   | ** ** |
|----------------------------------|------------|--------------------------|-------------|-----------------------|------------|-------------|------------|
| FIRC Credit  Facility            |       | $                        | 47,079,677  |                  | $          | 2,920,323   |       | $ | 50,000,000 |   |
| FIARC Commercial  Paper Facility |       | —                   |        | 150,000,000           |       | 150,000,000 |       |
| Term Notes                       |       | 316,584,564              |        | —                |       | 316,584,564 |       |
| Working Capital  Term Loan       |       | 16,454,329               |        | 7,045,671             |       | 23,500,000  |       |
| Shareholder                      |       | 2,500,000                |        | —                |       | 2,500,000   |       |
| Total                            |       | $                        | 382,618,570 |                  | $          | 159,965,994 |       | $ | 542,584,564 |   |

 

Please see Note 7 to the consolidatedfinancial statements for further information regarding interest rates,expiration dates and other terms of the various facilities.

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**Risk Areas**

*Warehouse**Credit**Facilities.* The Company’s credit and commercial paperfacilities with financial institutions, collectively referred to as warehousecredit facilities, are renewed periodically. On December 15, 2005, the maturitydate of the FIRC facility was extended to February 14, 2007.  No other material changes were made.  The FIARC commercial paper facility expiredon February 15, 2006, and after an extension through March 16, 2006 was reneweduntil February 14, 2007.  In connectionwith the renewal, the Company obtained approval from the lender to eliminatethe requirement that a surety bond be maintained to provide additionalenhancement to the commercial paper investors. As a result, the 0.35% surety bond premium and the 0.25% unused suretybond premium were eliminated.  Inexchange, the Company agreed to increase the program fee paid to the lenderfrom 0.30% to 0.55% and to increase the unused fee paid to the lender from0.25% to 0.30%.  If the facility is notextended beyond the maturity date, receivables pledged as collateral would beallowed to amortize; however, no new receivables would be allowed to be fundedunder the credit facility.  The Companyintends to seek a renewal of the facilities from its lenders prior tomaturity.  Management considers itsrelationship with its lenders to be satisfactory and has no reason to believethat these credit facilities will not be renewed.  If these facilities are not renewed, however,or if material changes are made to its terms and conditions, it could have amaterial adverse effect on the Company.

*Term Notes.*  The Company relies on its ability to pool andsell receivables in the asset-backed market in order to generate cash used topay down the warehouse facilities. Adverse terms or unfavorable occurrences in the auto asset-backed marketcould make securitizations more expensive or could impair the ability to completesecuritizations which would have an adverse effect on the Company’s liquidityand financial position.

*Loan Covenants*.  The documentation governing each of theCompany’s financing arrangements contains numerous covenants relating to theCompany’s business, the maintenance of credit enhancement insurance coveringthe receivables (if applicable), the observance of certain financial covenants,the avoidance of certain levels of delinquency experience, and other matters.The breach of these covenants, if not cured within the time limits specified,could precipitate events of default that might result in the acceleration ofthe FIRC credit facility and working capital facility or the termination of thecommercial paper facilities. Through the operation of the collateral agencyarrangements, which are in the nature of a “lock-box” security device coveringthe collection of principal and interest on almost all of the Company’sreceivables, such a default could cause the immediate termination of theCompany’s primary sources of liquidity. The Company was not in default withrespect to any covenants governing these financing arrangements at April 30,2006.

*Interest Rate Management*.  The Company’s warehouse credit facilitiesbear interest at floating interest rates which are reset on a short-term basiswhile the secured Term Notes bear interest at a fixed rate of interest. TheCompany’s receivables bear interest at fixed rates that generally do not varywith changes 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.  Accordingly,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.  Please see Market Risk under Item7A for quantification.

*Credit Enhancement — FIRC CreditFacility*.  In order to obtaina lower cost of funding, the Company has agreed under the FIRC credit facilityto maintain credit enhancement insurance covering all of its receivablespledged as collateral under this facility. The facility lenders are named asadditional insureds under these policies. The coverage is obtained on eachreceivable at the time it is originated by the Company and the applicablepremiums are prepaid for the life of the receivable. Each receivable is coveredby three separate credit insurance policies, consisting of basic defaultinsurance under a standard auto loan protection policy (known as “ALPI”insurance) together with certain supplemental coverages relating to physicaldamage and other risks. Solely at its expense, the Company carries thesecoverages and neither the vehicle purchasers nor the dealers are charged forthe coverages and they are usually unaware of their existence. The Company’sALPI insurance policy is written by National Union Fire Insurance Company ofPittsburgh (“National Union”), which is a wholly-owned subsidiary of AmericanInternational Group.

The premiums that the Company paid duringits past fiscal year for its three credit enhancement insurance coverages, ofwhich the largest component is the basic ALPI insurance, representedapproximately 1.9% of the

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principalamount of the receivables originated during the year. Aggregate premiums paidfor ALPI coverage alone during the fiscal years ended April 30, 2004, 2005 and2006 were $3,066,131, $3,669,198, and $3,768,534, respectively, and accountedfor 3.5%, 2.3% and 1.4% of the aggregate principal balance of the receivablesoriginated during such respective periods.

 InApril 1994, the Company organized First Investors Insurance Company (the “InsuranceSubsidiary”) under the captive insurance company laws of the State of Vermont.The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Companyand is a party to a reinsurance agreement whereby the Insurance Subsidiaryreinsures 100 percent of the risk under the Company’s ALPI insurance policy. Atthe time each receivable is insured by National Union, the risk isautomatically reinsured to its full extent and approximately 96% of the premiumpaid by the Company to National Union with respect to such receivable is cededto the Insurance Subsidiary. When a loss covered by the ALPI policy occurs,National Union pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. As of April 30, 2006, grosspremiums had been ceded to the Insurance Subsidiary since its inception byNational Union in the amount of $38,876,337 and the Insurance Subsidiaryreimbursed National Union for aggregate reinsurance claims in the amount of$9,785,667. In addition to the monthly premiums and liquidity reserves of theInsurance Subsidiary, a trust account is maintained by National Union to securethe Insurance Subsidiary’s obligations for losses it has reinsured.

The result of the foregoing reinsurancestructure is that National Union, as the “fronting” insurer under the captivearrangement, is unconditionally obligated to the Company’s credit facilitylenders for all losses covered by the ALPI policy, and the Company, through itsInsurance Subsidiary, is obligated to indemnify National Union for all suchlosses. As of April 30, 2006, the Insurance Subsidiary had capital and surplusof $2,766,495 and unencumbered cash reserves of $1,442,680 in addition to$3,430,734 in a trust account.

The ALPI coverage as well as theInsurance Subsidiary’s liability under the Reinsurance Agreement, remains ineffect for each receivable that is pledged as collateral under the warehousecredit facility. Once receivables are transferred from FIRC to FIARC andfinanced under the commercial paper facility, ALPI coverage and the InsuranceSubsidiary’s liability under the Reinsurance Agreement is cancelled with respectto the transferred receivables. Any unearned premium associated with thetransferred receivables is returned to the Company. The Company believes thelosses its Insurance Subsidiary will be required to indemnify will be less thanthe premiums ceded to it. However, there can be no assurance that losses willnot exceed the premiums ceded and the capital and surplus of the InsuranceSubsidiary.

*Credit Enhancement — Term Note*.  A surety bond issued by MBIA InsuranceCorporation enhances the 2003-A Term Notes issued on November 20, 2003. Thesurety bond provides payment of principal and interest to the note holders inthe event of payment default by the 2003-A Trust. MBIA is paid a surety premiumequal to 0.35% per annum on the outstanding balance of the 2003-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon April 20, 2011. Termination of the surety bond would result in default underthe governing documents.

A surety bond issued by MBIA InsuranceCorporation enhances the 2005-A Term Notes issued on May 5, 2005. The suretybond provides payment of principal and interest to the note holders in theevent of payment default by the 2005-A Trust. MBIA is paid a surety premiumequal to 0.35% per annum on the outstanding balance of the 2005-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon July 16, 2012. Termination of the surety bond would result in default underthe governing documents.

A surety bond issued by MBIA InsuranceCorporation enhances the 2006-A Term Notes issued on January 26, 2006. Thesurety bond provides payment of principal and interest to the note holders inthe event of payment default by the 2006-A Trust. MBIA is paid a surety premiumequal to 0.28% per annum on the outstanding balance of the 2006-A Term Notes.The surety bond was issued for the term of the underlying notes, which matureon April 15, 2013. Termination of the surety bond would result in default underthe governing documents.

*Economy. *Periods of weakened economic conditionand slow or negative growth will tend to have an unfavorable effect ondelinquencies, defaults and losses, particularly with non-prime borrowers.  Recent periods have been positively impactedby increasing wholesale prices of used vehicles which decreases losses to theCompany upon repossession.  Losses haveadverse effects on the Company’s liquidity and operating results.

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*Servicer Default. *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 defaultwhich are generally defined as the inability to protect the assets under agreementor failing 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 companies similar to theCompany engage in “securitization” transactions whereby receivables are pooledand conveyed to a trust or other special purpose entity, with interests in theentity being sold to investors. As the pooled receivables amortize, financecharge collections are passed through to the investors at a specified rate forthe life of the pool and an interest in collections exceeding the specifiedrate is retained by the sponsoring finance company. For accounting purposes,the sponsor often recognizes as revenue the discounted present value of thisexcess interest as estimated over the life of the pool. This revenue, or “gainon sale”, is recognized for the period in which the transaction occurs.

The Company does not use off-balancesheet financing structures for receivables originated by the Company andtherefore, recognizes interest income on the accrual method over the life ofthe receivables rather than recording gains when those receivables are sold. TheCompany does not currently intend to engage in off-balance sheet securitizationtransactions resulting in gains on sale of receivables.

**Employees**

The Company had 193 employees as of April30, 2006, including 100 located at its headquarters in Houston, 89 located atits loan servicing center in Atlanta and 4****regionalmarketing representatives. The Company’s employees are covered by group healthinsurance.  Effective May 1, 1994, theCompany adopted a participant-directed 401(k) retirement plan for its employees.An employee becomes eligible to participate in the plan effective the firstenrollment period after 90 days of employment. The Company pays theadministrative expenses of the 401(k) plan. The Company also matches apercentage of each participant’s voluntary contributions up to a maximumvoluntary contribution of 3% of the participant’s compensation. In fiscal years2006, 2005, and 2004, the Company recorded matching contributions to the 401(k)plan of $42,168, $23,425, and $40,062, respectively.  Effective April 28, 1998, the Companyestablished a participant-directed Deferred Compensation Plan for certainexecutive officers of the Company.  TheDeferred Compensation Plan was terminated during the fourth quarter of thefiscal year 2005 in response to changes in the tax law associated with suchplans.  The assets in the plan weredistributed to the particpants.

**Information Systems**

The Company utilizes advanced informationmanagement systems including a fully integrated software program designed toexpedite each element in the receivables underwriting process, including theentry and verification of credit application data, credit analysis and thecommunication of credit decisions to originating dealers. The Company alsoutilizes a number of analytical tools in managing credit risk including anempirical scoring model, trend and discriminant analysis, and pricing modelswhich are designed to optimize yield given an expected default rate.

The servicing and collection platform isprovided by an application service provider through which the Company accessesa mainframe system which is designed to provide support for all collections andservicing activities including billing, collection process management, accountactivity history, repossession management, loan accounting information andpayment posting.  The Company pays amonthly usage fee to the service provider based on the number of accountsserviced.  The Company also utilizes autodialer software that interfaces with the system and serves as an efficiencytool in the collection process.

Both the front-end and back-end platformsare highly compatible from an integration standpoint with all loans boardedelectronically following funding from the origination system to the collectionsystem.

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In addition to its two primary operatingsystems, the Company also utilizes third-party software in its accounting,human resources, and data management functions, all of which are products wellknown in the marketplace.

The Company believes that its dataprocessing and information management capacity is sufficient to accommodatesignificantly increased volumes of receivables without material additionalcapital expenditures for this purpose.

**Competition**

The business of direct and indirectlending for the origination of new and used automobiles is intenselycompetitive in the United States. Such financing is provided by commercialbanks, thrifts, credit unions, the large captive finance companies affiliatedwith automobile manufacturers, and many independent finance companies such asthe Company. Many of these competitors and potential competitors havesignificantly greater financial resources than the Company, and particularly inthe case of the captive finance companies, enjoy ready access to large numbersof dealers. The Company believes that a number of factors including historicalmarket orientations, traditional risk-aversion preferences and in some casesregulatory constraints, have discouraged many of these entities from enteringthe non-prime sector of the market where the Company operates. However, ascompetition intensifies, these well-capitalized concerns could enter themarket, and the Company could find itself at a competitive disadvantage.

The non-prime market in which the Companyoperates also consists of a number of both large and mid-sized independentfinance companies doing business on a local, regional or national basis,including some which are affiliated with captive finance companies or largeinsurance groups. Reliable data regarding the number of such companies andtheir market shares is unavailable; however, the market is highly fragmentedand intensely competitive.

**Regulation**

The operations of the Company are subjectto regulation, supervision and licensing under various federal and state lawsand regulations. State consumer protection laws, motor vehicle installmentsales acts and usury laws impose ceilings on permissible finance charges,require licensing of finance companies as consumer lenders, and prescribe manyof the substantive provisions of the retail installment sales contracts thatthe Company originates. Federal consumer credit statutes and regulationsprimarily require disclosure of credit terms in consumer finance transactions,although rules adopted 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 business requires it tohold consumer lending licenses issued by individual states, under which theCompany is subject to periodic examinations. State consumer credit regulatoryauthorities generally enjoy broad discretion in the revocation and renewal ofsuch licenses and the loss of one or more of these in states in which the Companyconducts material business could adversely affect the Company’s operations.

In addition to specific licensing andconsumer regulations applicable to the Company’s business, the Company’sability to enforce and collect its receivables is limited by several laws ofgeneral application, including the Fair Debt Collection Practices Act, Federalbankruptcy laws and the Uniform Commercial Codes of the various states. Theseand similar statutes govern the procedures, and in many instances limit therights of creditors, in connection with asserting defaults, repossessing andselling collateral, realizing the proceeds thereof, and enforcing deficiencies.

The Company’s insurance subsidiary issubject to regulation by the Department of Banking, Insurance and Securities ofthe State of Vermont. The plan of operation of the subsidiary, described aboveunder “Financing Arrangements” and “Credit Enhancement”, was approved by theDepartment and any material changes in those operations would likewise requirethe Department’s approval. The subsidiary is subject to minimum capital andsurplus requirements, restrictions on dividend payments, annual reporting, andperiodic examination requirements.

The Company believes that its operationscomply in all material respects with the requirements of laws and regulationsapplicable to its business. These requirements and the interpretations thereof,change from time to time and are not uniform among the states in which theCompany operates. The Company retains a specialized consumer

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creditlegal counsel that engages and supervises local legal counsel in each statewhere the Company does business, to monitor compliance on an ongoing basis andto respond to changes in applicable requirements as they occur.

**ITEM 2.  *PROPERTIES***

The Company’s principal physicalproperties are its data processing and communications equipment and furnitureand fixtures, all of which the Company believes to be adequate for theirintended use.

The Company’s offices in suburban Houstonconsist of approximately 17,304 square feet on the seventh floor of aneight-story office building. This space is held under a lease requiring averageannual rentals of approximately $311,384 and expiring on February 28, 2011,with an option to renew for five years at the market rate then prevailing.

The Company’s offices in suburban Atlantaconsist of approximately 28,133 square feet on the third and fourth floors of afour-story office building. This space is held under a lease requiring averageannual rentals of approximately $519,000 and expiring on December 31, 2015,with an option to renew for an additional five years at the market rate thenprevailing.  The Company owns no realproperty.

**ITEM 3.  *LEGAL PROCEEDINGS***

Other than as discussed herin, theCompany is not a party to any material litigation and is currently not aware ofany threatened litigation that could have a material adverse effect on theCompany’s business, results of operations or financial condition.

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

No matters were submitted to a vote ofthe Company’s securities holders during the fourth quarter of the past fiscalyear.

**PART II**

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

The Company’s commonstock was traded on the NASDAQ National Market System, under the symbol “FIFS”from the completion of the Company’s initial public offering on October 4, 1995through December 1, 2004.  On December 2,2004, the Company’s common stock started trading on the over-the-counter bulletinboard market. High and low closing prices of the common stock are set forthbelow for the periods indicated.
| Three Months Ended | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------|------------|----------|------------|---------|------------|
| April 30, 2006               |       | $        | 8.00       |    | $          | 6.91 |   |
| January 31, 2006             |       | $        | 8.30       |    | $          | 6.15 |   |
| October 31, 2005             |       | $        | 6.50       |    | $          | 4.51 |   |
| July 31, 2005                |       | $        | 4.75       |    | $          | 4.53 |   |
| April 30, 2005               |       | $        | 5.00       |    | $          | 4.25 |   |
| January 31, 2005             |       | $        | 5.25       |    | $          | 4.00 |   |
| October 31, 2004             |       | $        | 5.35       |    | $          | 4.00 |   |
| July 31, 2004                |       | $        | 5.51       |    | $          | 4.57 |   |
| 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 |   |

 

Asof May 31, 2006, there were approximately 20 shareholders of record of theCompany’s common stock.  The Companybelieves that the number of beneficial owners is significantly greater than thenumber of shareholders of record.

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The Company has not declared or paid anycash dividends on its common stock since its inception. The payment of cashdividends in the future will depend on the Company’s earnings, financialcondition and capital needs and on other factors deemed pertinent by theCompany’s Board of Directors. It is currently the policy of the Board ofDirectors to retain earnings to finance the operation and expansion of theCompany’s business.  The Company has noplans to pay cash dividends on the common stock in the foreseeable future.

During the twelve monthsended April 30, 2006 and 2005, the Company repurchased -0- and 588,576 sharesof common stock, respectively.  Thequarterly detail of such repurchases appears below.
| Three Months Ended | ** ** | **# of Shares  Repurchased** | ** ** | **Wtd. Avg.  Price/Share** | ** ** |
|------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| July 31, 2004                |       | —                                 |       | —                          |       |
| October 31, 2004             |       | 900                                    |       | $                               | 4.35       |   |
| January 31, 2005             |       | 587,676                                |       | $                               | 4.24       |   |
| April 30, 2005               |       | —                                 |       | —                          |       |
| July 31, 2005                |       | —                                 |       | —                          |       |
| October 31, 2005             |       | —                                 |       | —                          |       |
| January 31, 2006             |       | —                                 |       | —                          |       |
| April 30, 2006               |       | —                                 |       | —                          |       |

 

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

The following selected consolidatedfinancial data of the Company for each of the five fiscal years ended April 30,2006, has been derived from the audited consolidated financial statements ofthe Company and should be read in conjunction with such statements (dollars inthousands, except per share data).  Asreflected in the Company’s Form 10-K filed November 29, 2002, the Companyrestated its consolidated financial statements as of April 30, 2002 and 2001,and for the three years ended April 30, 2002 to correct for certain priorperiod misstatements that were discovered by the Company as it was performingadditional control procedures adopted during the first quarter 2003 period atthe request of its new accounting firm, Grant Thornton LLP.  The restatement related to overstatedbalances that should have been identified by the Company upon conversion from athird party servicer.  The restatementimpacted certain restricted cash, deferred expenses, receivables held forinvestment, and tax balances as reported, but it did not affect the Company’sfree liquidity position or debt position. Restricted cash, deferred expenses,receivables held for investment, and tax balances have been adjusted for therestatement for all applicable years.

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| ** **                                                                                                                    | ** ** | **Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2002**                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Statement  of Operations:**                                                                                                 | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                                                               |       | $                                       | 37,547     |   | $ | 32,940 |   | $ | 30,498 |   | $ | 28,272 |   | $ | 39,300 |   |
| Interest expense                                                                                                              |       | 13,710                                  |       | 10,166 |   | 8,438 |   | 7,616 |   | 15,042 |   |
| Net interest income                                                                                                           |       | 23,837                                  |       | 22,774 |   | 22,060 |   | 20,656 |   | 24,258 |   |
| Provision for  credit losses                                                                                                  |       | 8,941                                   |       | 10,338 |   | 12,428 |   | 9,520 |   | 7,503 |   |
| Loss on  Receivables Acquired for Investment and Trust Certificates                                                           |       | 1,260                                   |       | — |   | — |   | — |   | — |   |
| Net interest income after provision for credit  losses and loss on Receivables Acquired for Investment and Trust Certificates |       | 13,636                                  |       | 12,436 |   | 9,632 |   | 11,136 |   | 16,755 |   |
| Servicing  revenue                                                                                                            |       | —                                  |       | 1,080 |   | 4,889 |   | 3,398 |   | 1,884 |   |
| Other finance  charges and fees                                                                                               |       | 1,176                                   |       | 1,220 |   | 1,666 |   | 2,439 |   | 2,432 |   |
| Insurance  products                                                                                                           |       | —                                  |       | — |   | 107 |   | 735 |   | 928 |   |
| Income from  investment                                                                                                       |       | —                                  |       | 418 |   | 1,009 |   | 669 |   | 413 |   |
| Other interest  income                                                                                                        |       | 682                                     |       | 283 |   | 460 |   | 427 |   | 1,371 |   |
| Other income                                                                                                                  |       | —                                  |       | — |   | 139 |   | 660 |   | 586 |   |
| Realized and  unrealized loss on interest rate derivative positions                                                           |       | (121                                    | )          | (329 | ) | (34 | ) | (373 | ) | (175 | ) |
| Total other income                                                                                                            |       | 1,737                                   |       | 2,672 |   | 8,236 |   | 7,955 |   | 7,439 |   |
| Salaries and  benefits                                                                                                        |       | 7,902                                   |       | 7,785 |   | 8,538 |   | 8,917 |   | 10,506 |   |
| Operating  expenses                                                                                                           |       | 2,613                                   |       | 2,488 |   | 5,098 |   | 4,801 |   | 3,965 |   |
| General and  administrative                                                                                                   |       | 4,238                                   |       | 3,554 |   | 3,723 |   | 3,732 |   | 4,655 |   |
| Other interest  expense                                                                                                       |       | 785                                     |       | 643 |   | 468 |   | 565 |   | 1,323 |   |
| Total operating expenses                                                                                                      |       | 15,538                                  |       | 14,470 |   | 17,827 |   | 18,015 |   | 20,449 |   |
| Income (Loss)  before provision (benefit) for income taxes and minority interest                                              |       | (165                                    | )          | 638 |   | 41 |   | 1,076 |   | 3,745 |   |
| Provision  (Benefit) for income taxes                                                                                         |       | (178                                    | )          | 191 |   | 19 |   | 392 |   | 1,300 |   |
| Minority  interest                                                                                                            |       | 322                                     |       | 114 |   | (11 | ) | — |   | — |   |
| Net income  (Loss)                                                                                                            |       | $                                       | (309       | ) | $ | 333 |   | $ | 33 |   | $ | 684 |   | $ | 2,445 |   |
|                                                                                                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| Basic net income  (loss) per common share                                                                                     |       | $                                       | (0.06      | ) | $ | 0.07 |   | $ | 0.01 |   | $ | 0.14 |   | $ | 0.55 |   |
| Diluted net income  (loss) per common share                                                                                   |       | $                                       | (0.06      | ) | $ | 0.07 |   | $ | 0.01 |   | $ | 0.14 |   | $ | 0.53 |   |

 
| ** **                                       | ** ** | **As of April 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **2002**                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Balance  Sheet Data:**                         |       |                               |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment, net            |       | $                                  | 224,263    |   | $ | 231,693 |   | $ | 210,967 |   | $ | 249,618 |   | $ | 377,399 |   |
| Restricted cash                                  |       | 23,409                             |       | 19,303 |   | 19,037 |   | 19,097 |   | 25,538 |   |
| Interest rate  derivative positions              |       | 3,119                              |       | 4,105 |   | — |   | — |   | — |   |
| Other assets                                     |       | 15,122                             |       | 17,895 |   | 15,752 |   | 14,795 |   | 16,351 |   |
| Total assets                                     |       | $                                  | 265,913    |   | $ | 272,996 |   | $ | 245,756 |   | $ | 283,510 |   | $ | 419,288 |   |
| Debt:                                            |       |                               |       |   |   |   |   |   |   |   |   |
| Term notes                                       |       | $                                  | 183,260    |   | $ | 87,359 |   | $ | 164,718 |   | $ | 70,051 |   | $ | 316,585 |   |
| Acquisition term facility                        |       | 3,671                              |       | — |   | — |   | — |   | — |   |
| Warehouse credit facilities                      |       | 31,213                             |       | 141,945 |   | 42,706 |   | 171,562 |   | 47,080 |   |
| Working capital facility                         |       | 11,798                             |       | 8,715 |   | 8,761 |   | 10,500 |   | 16,454 |   |
| Other borrowings                                 |       | 525                                |       | 746 |   | — |   | 2,500 |   | 2,500 |   |
| Interest rate  derivative positions              |       | 5,886                              |       | 5,248 |   | — |   | — |   | — |   |
| Other  liabilities                               |       | 2,042                              |       | 1,758 |   | 2,267 |   | 3,405 |   | 8,549 |   |
| Minority  interest                               |       | 932                                |       | 732 |   | — |   | — |   | — |   |
| Shareholders’  equity                       |       | 26,586                             |       | 26,493 |   | 27,304 |   | 25,492 |   | 28,120 |   |
| Total  liabilities and shareholders’ equity |       | $                                  | 265,913    |   | $ | 272,996 |   | $ | 245,756 |   | $ | 283,510 |   | $ | 419,288 |   |

 

*Reclassifications*.  Certain reclassifications have been made tothe 2002, 2003, 2004 and 2005 amounts to conform to the 2006 presentation.

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**ITEM 7*.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS***

**CriticalAccounting Policies**

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

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

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

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

*Advertising Costs. *The Company expenses advertising costs as incurred.

*Allowancefor Credit Losses*.  TheCompany calculates the allowance for credit losses in accordance with SFAS No.5*, Accounting for Contingencies.*   SFAS No. 114, *Accountingby Creditors for Impairment of a Loan,* does not apply to loanscurrently held by the Company because they are comprised of a large group ofsmaller balance homogenous loans that are evaluated collectively forimpairment.

The Companyinitiates efforts to make customer contact as early as when the customer is oneday past due and become more aggressive as the loan becomes further pastdue.  Management reviews past due loansand considers various factors including payment history, job status and anyevents that may have occurred that prevent the customer from making apayment.  Through the evaluation, if itis determined that the loan is uncollectible, the collateral is typicallyrepossessed.  Generally this occurs at 60to 90 days after the loan becomes past due.  Upon repossession, the uncollectible portion of the loan and 100% ofaccrued interest is written off.  Thefair value of the collateral is recorded in Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised of auctionproceeds on the sale of the automobile less selling related expenses.  After collection of all proceeds, the Companyrecords an adjustment, positive or negative, based on the difference betweenthe fair value estimate and the proceeds received.  In the event the collateral cannot be locatedor if the customer refuses to pay and is not subject to bankruptcy courtprotection, the Company will write off the entire balance of the loan once itreaches 180 days past due.  If thecustomer is subject to bankruptcy court protection, the loan generally remainsin bankruptcy status as long as payments are being received from thetrustee.  If a payment is missed, theCompany seeks to repossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

The Companyapplies a systematic methodology in order to determine the amount of theallowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Company comparesthe aging status of each loan from six months prior to the aging loan status asof the 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

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migrate to impairedstatus.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective forthe quarter ended April 30, 2005, the Company elected to increase its allowancefor loan losses against loans that were greater than 120 days past due andloans in which the collateral had been assigned for repossession but had notyet been repossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

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

**General**

Netincome for the year ended April 30, 2006, was $2,445,153 or $0.55 per commonshare.  Net income for the years endedApril 30, 2005, was $683,529 or $0.14 per common share.  For the year ended April 30, 2006, theCompany experienced a significant increase in loan origination volume, aresulting growth in the average portfolio of receivables outstanding, lowercredit losses, an increase in other interest income, and lowercollection-related expenses than for the year ended April 30, 2005.  These were partially offset by lowerservicing revenue, lower net interest margin due to lower effective yields, ahigher cost of borrowing for the year ended April 30, 2006, and higher salaryexpense to support the increase in origination volume.  Net income for the year ended April 30, 2004,was $33,563 or $0.01 per common share. See Results of Operations.

**Overview**

Theprimary source of the Company’s revenues is interest income from receivablesretained as investments and servicing income, while its primary cost has beeninterest expense arising from the financing of the Company’s investment in suchreceivables. The profitability of the Company has been impacted by the growthof the receivables portfolio, inclusion of two new servicing transactions, andeffective management of net interest income and fixed operating expenses. Infiscal 2006, First Investors Servicing Corporation (“FISC”) performed servicingand collection functions on an average portfolio balance of $475 million ofloans.

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TheCompany’s managed receivables are (dollars in thousands):
| ** **                                                                           | ** ** | **As of or for the** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                           | ** ** | **Year Ended April 30,**  | ** ** |
| ** **                                                                           | ** ** | **2005**                                 | ** ** | **2006** | ** ** |
| Receivables Held for Investment:                                                     |       |                                     |       |   |   |
| Number                                                                               |       | 18,126                                   |       | 22,909 |   |
| Principal balance                                                                    |       | $                                        | 245,582    |   | $ | 368,878 |   |
| Average principal balance of  receivables outstanding during the twelve-month period |       | $                                        | 220,397    |   | $ | 314,227 |   |
| Average principal balance of  receivables outstanding during the three-month period  |       | $                                        | 235,752    |   | $ | 349,794 |   |
| Other Servicing:                                                                     |       |                                     |       |   |   |
| Number                                                                               |       | 14,166                                   |       | 9,944 |   |
| Principal balance                                                                    |       | $                                        | 193,763    |   | $ | 105,712 |   |
| Average principal balance of  receivables outstanding during the twelve-month period |       | $                                        | 238,421    |   | $ | 145,964 |   |
| Total Managed Receivables Portfolio:                                                 |       |                                     |       |   |   |
| Number                                                                               |       | 32,292                                   |       | 32,853 |   |
| Principal balance                                                                    |       | $                                        | 439,345    |   | $ | 474,590 |   |
| Average principal balance of  receivables outstanding during the twelve-month period |       | $                                        | 458,818    |   | $ | 460,191 |   |

 

Thefollowing table sets forth information with regard to the Company’s netinterest spread, which represents the difference between the effective yield onReceivables Held for Investment and the Company’s average cost of debt utilizedto fund these receivables, and its net interest margin (averages based onmonth-end balances):
| ** **                                              | ** ** | **Year Ended  April 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2005**                            | ** ** | **2006** | ** ** |
| Receivables Held  for Investment:                       |       |                                |       |   |   |
| Effective yield on Receivables Held for Investment  (1) |       | 12.9                                | %          | 12.5 | % |
| Average cost of debt (2)                                |       | 3.5                                 | %          | 4.7 | % |
| Net interest spread (3)                                 |       | 9.4                                 | %          | 7.8 | % |
| Net interest  margin (4)                                |       | 9.4                                 | %          | 7.7 | % |

 

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(1)             Represents interestincome as a percentage of average Receivables Held for Investment outstanding.

(2)             Represents interestexpense as a percentage of average debt outstanding.

(3)             Represents yield onReceivables Held for Investment less average cost of debt.

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

TheCompany intends to increase its receivables by increasing the amount oforiginations obtained from its existing dealer base and by increasing thevolume of originations in its direct lending business.  To the extent that the Company’s receivablesacquisitions exceed the extinguishment of receivables through principalpayments, payoffs or defaults, its receivables portfolio and interest incomewill increase. The following table summarizes the activity in the Company’sreceivables portfolio (dollars in thousands):

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| ** **                                    | ** ** | **Year Ended  April 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2005**                            | ** ** | **2006** | ** ** |
| Receivables Held  for Investment:             |       |                                |       |   |   |
| Principal balance, beginning of period        |       | $                                   | 208,679    |   | $ | 245,582 |   |
| Originations                                  |       | 158,017                             |       | 254,313 |   |
| Principal payments and payoffs                |       | (100,915                            | )          | (108,100 | ) |
| Defaults prior to liquidations and recoveries |       | (20,199                             | )          | (22,917 | ) |
| Principal  balance, end of period             |       | $                                   | 245,582    |   | $ | 368,878 |   |

 

Receivablesmay be paid earlier than their contractual term, primarily due to prepaymentsand liquidation of collateral after defaults. See discussion on delinquency andcredit loss experience.

**Analysis of Net Interest Income**

Netinterest income is the difference between interest earned from the receivablesportfolio and interest expense incurred on the credit facilities used toacquire the receivables. Net interest income was $24.3 million in 2006, anincrease of 17.4% when compared to amounts reported in 2005 and an increase of10.0% when compared to amounts reported in 2004.

Theamount of net interest income is the result of the relationship between theaverage principal amount of receivables held and average rate earned thereonand the average principal amount of debt incurred to finance such receivablesand the average rates paid thereon. Changes in the principal amount and ratecomponents associated with the receivables and debt can be segregated toanalyze the periodic changes in net interest income. The following tableanalyzes the changes attributable to the principal amount and rate componentsof net interest income (dollars in thousands):

|                                   | ** ** | **Year Ended April 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2004 to 2005**              | ** ** | **2005 to 2006** | ** ** |
| ** **                        | ** ** | **Increase  (Decrease)**                | ** ** | ** ** | ** ** | **Increase  (Decrease)** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Due to Change in**     | ** ** | ** ** | ** ** | **Due to Change in** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Average**                             | ** ** | ** ** | ** ** | **Total Net** | ** ** | **Average** | ** ** | ** ** | ** ** | **Total Net** | ** ** |
| ** **                        | ** ** | **Principal**                           | ** ** | **Average** | ** ** | **Increase** | ** ** | **Principal** | ** ** | **Average** | ** ** | **Increase** | ** ** |
| ** **                        | ** ** | **Amount**                              | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **(Decrease)** | ** ** |
| Receivables Held  for Investment: |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                       | (100       | ) | $ | (2,127 | ) | $ | (2,227 | ) | $ | 12,127 |   | $ | (1,099 | ) | $ | 11,028 |   |
| Interest expense                  |       | (355                                    | )          | (467 | ) | (822 | ) | 3,528 |   | 3,898 |   | 7,426 |   |
| Net interest  income              |       | $                                       | 255        |   | $ | (1,660 | ) | $ | (1,405 | ) | $ | 8,599 |   | $ | (4,997 | ) | $ | 3,602 |   |

 

**Results of Operations**

***FiscalYear Ended April 30, 2006, Compared to Fiscal Year Ended April 30, 2005(dollars in thousands)***

*Key Factors.*The critical factors affecting theCompany’s profitability during any period are (i) loan origination volume and the corresponding growth inreceivables held for investment; (ii) the level of net interest spread, whichis defined as the difference between the effective yield on receivables heldfor investment and the cost of funds under the Company’s credit facilities andsecuritizations utilized to finance these receivables; (iii) the level ofprovision for credit losses; (iv) the amount of income derived from otheractivities; and (v) the ability of the Company to control operating expensesrelative to the total amount of the managed portfolio.

*Executive Summary. *Netincome for the year ended April 30, 2006 was $2,445 compared to $684 for theyear ended April 30, 2005.  Basicearnings per common share were $0.55 and $0.14 and diluted earnings per commonshare were $0.53 and $0.14 for the years ended April 30, 2006, and April 30,2005, respectively.

The 258% increasein net income for the year ended April 30, 2006 compared to April 30, 2005 isdue primarily to an increase in net interest income and other interest income,and a decline in provision for credit losses during the

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2006 period.  The increase in net interest income was dueto a 43% increase in the average portfolio of Receivables Held for Investment,partially offset by (i) a 46% increase in the average debt balance and (ii) an increasein the average cost of debt from 3.5% during 2005 to 4.7% during 2006 as aresult of two securitizations and an increase in overall market interest ratesas a result of the current economic environment and market rate increasesadopted by the Federal Reserve Board. Provision for credit losses decreased 21% during the year as a result oflower repossessions and charge-offs and improving recovery rates.  This improvement in overall credit quality isdue to (i) improvements in general economic conditions including a lowerunemployment rate, (ii) an increase in the percentage of loans originated underthe Direct Program which exhibit much lower default rates than the IndirectProgram and (iii) higher recovery rates on the sale of repossessedcollateral due to improvements in the used car market.  Other interest income increased 134% due to(i) an increase in average cash due to increased collections as a result of a43% increase in the average portfolio of Receivables Held for Investment in2006 and (ii) an increase in overall market interest rates as a result of thecurrent economic environment and market rate increases adopted by the FederalReserve Board.

These factors were partially offset by (i) a 45% decrease in servicingincome, (ii) an 18% increase in salaries and benefits, and (iii) a 381%increase in legal fees.  The decline inservicing revenue and income from investment is due to a decrease in theportfolio of receivables serviced for third parties and a decrease in the portfolioof receivables serviced on behalf of FARC. The increase in salaries and benefits is primarily due to a 61% increasein the average portfolio of Receivables Held for Investment, partially offsetby a decrease in staff due to the decrease in the Company’s servicedportfolio.  The increase in legal fees isprimarily due to settlement costs and legal fees totaling $800 associated withdefending and settling a lawsuit brought against a wholly-owned subsidiary ofthe Company.

*Interest Income*.Total interest income for the year ended April 30, 2006 increased to $39,300compared to $28,272 for the year ended April 30, 2005.

The level of interest income, a primary driver of financial results, isimpacted by the average outstanding balance of the portfolio of ReceivablesHeld for Investment, the weighted average interest rate on receivablesoriginated by the Company, the mix of direct and indirect lending activitiesand the level of prepayments and charge-offs. Interest income on Receivables Held for Investment increased****39% for the year ended April 30, 2006 compared to the yearended April 30, 2005.  This is primarilydue to a 43% increase in the average portfolio of Receivables Held forInvestment, partially offset by a 35 basis point reduction in the averageeffective yield  during the year endedApril 30, 2006  due to (i) a lowerweighted average interest rate on the performing portfolio which reflects theCompany’s increased focus on receivables originated directly to consumers whichtypically carry lower interest rates and (ii) the overall competitiveenvironment for receivables originated through dealerships.

*Interest Expense*.Interest expense for the year ended April 30, 2006 increased to $15,042compared to $7,616 for the year ended April 30, 2005. Interest expense onReceivables Held for Investment increased 98% for the year ended April 30,2006.  The increase in interest expenseis primarily due to (i) a 46% increase in the average debt outstanding during2006 due to a 43% increase in the average portfolio of Receivables Held forInvestment and (ii) an increase in the average cost of debt from 3.5% during2005 to 4.7% during 2006 as a result of two securitizations and an increase inoverall market interest rates as a result of the current economic environmentand market rate increases adopted by the Federal Reserve Board.

*Provision for Credit Losses*. The provision for credit losses for the year ended April 30, 2006decreased to $7,503 as compared to $9,520 for the year ended April 30, 2005.The decrease in provision for credit losses is primarily due to (i) improvingeconomic trends, (ii) a change in portfolio mix to loans originated directlywith the customer which typically have a lower loss frequency and (iii) theincrease in recovery rates on repossessions and general defaults.

Net charge-offs for the year ended April 30, 2006decreased to $7,420 compared to $9,470 for the year ended April 30, 2005.  The decrease in net charge-offs for the yearended April 30, 2006 is primarily due to (i) a decrease in loss frequency andloss severity from repossessions and (ii) an increase in recoveries fromdefaulted loans.

The level of provision for credit losses is a key driverof overall financial performance and should be positively impacted byimprovement in general economic conditions, improvements in wholesale used carprices and lower delinquency rates and net losses projected for the portfolioof Receivables Held for Investment.  Anyadditional

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economic deterioration or decline in wholesale used carprices will negatively impact provision expense to the extent that these eventscause an increase in delinquency rates, bankruptcy rates or net charge-offrates in the portfolio of Receivables Held for Investment.

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$1,884****for the year ended April 30, 2006compared to $3,399 for year ended April 30, 2005.  The decrease in servicing revenue for theyear ended April 30, 2006 is due to the liquidation of serviced receivablesduring 2006.  Revenue derived fromservicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

* Insurance Products. *Insurance productsrevenue increased to $928 for year ended April 30, 2006, compared to $735 forthe year ended April 30, 2005.  Theincrease is due to an increase of 61% in loan originations for the year endedApril 30, 2006.  This is partially offsetby lower gross margins due to the Company’s increased costs in purchasing theinsurance products.  Insurance productsrevenue is primarily driven by growth rates in the Company’s direct lendingbusiness which will affect the ability of the Company to generate fee incomefrom marketing insurance and warranty products.

*Income from Investment*.  Income from investment decreased to $413 forthe year ended April 30, 2006 compared to $669****forthe year ended April 30, 2005.  Thedecrease in income from investment is due to the liquidation of servicedreceivables during the year.  Revenuederived from income from investment will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

*OtherInterest Income.* Other interest income increased to $1,371for the year ended April 30, 2006, compared to $427 for the year ended April30, 2005.  The increase in other interestincome is due to (i) an increase in average cash due to increased collectionsas a result of a 43% increase in the average portfolio of Receivables Held forInvestment in 2006, (ii) an increase in restricted cash due to prefundingaccounts related to securitizations,  and(iii) an increase in overall market interest rates as a result of the currenteconomic environment and market rate increases adopted by the Federal ReserveBoard.

*Realized and Unrealized Loss on Interest RateDerivative Positions*. In conjunction with the adoption of SFAS 133, the Company is required toreport the fair value of interest rate derivative positions.  The net losses of $175 for the year endedApril 30, 2006 and $373 for the year ended April 30, 2005 are principally dueto the termination and mark to market of these positions.  The realized loss recognized during 2006 and2005 was the result of the termination of certain interest rate cap agreementswhich are required by the credit enhancement provider under the FIARC CreditFacility. The agreements were terminated in connection with the issuance of the2005-A term notes on May 5, 2005 and the issuance of the 2006-A term notesissued on January 26, 2006.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to $10,505 for the year endedApril 30, 2006, compared to $8,917 for the year ended April 30, 2005.  The increase is primarily due to an increasein staff due to a 61% increase in loan originations for the year ended April30, 2006.  This is partially offset by adecrease in staff associated with a decrease in the Company’s servicedportfolio.  The overall number ofemployees of the Company is primarily correlated to (i) the total number ofreceivables managed, since the majority of the Company’s employees are involvedin loan collection activities and (ii) origination growth rates which require additionalmarketing and credit underwriting personnel.

*Operating Expenses.* Operating expenses decreased to $3,965 for the year ended April 30,2006, compared to $4,801 for the year ended April 30, 2005.  The decrease in operating expenses for thefiscal year 2006 period is due to the decreased servicing costs associated withimprovements in delinquency and repossession rates and a decline in totalmanaged receivables.  Overall operatingexpenses are generally correlated to the total number of receivables managed bythe Company, delinquency and repossession rates and the composition of loansoriginated between indirect and direct consumer loans.  The decrease for the year ended April 30,2006 was primarily due to an increase in the dollar amount of expenses whichthe Company was able to capitalize as deferred acquisition costs.  Although expenses increased during the year,the Company was able to capitalize a higher level of these expenses due to thesignificant increase in origination volume and increased efficiency in its loanorigination functions.  The decline in

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operatingexpenses was also positively impacted by lower collection-related costs as aresult of improving credit quality.

*General and Administrative.* General and administrative expenses increased to $4,655 for the yearended April 30, 2006, compared to $3,732 for the year ended April 30,2005.  The year ended April 30, 2006experienced an increase in professional fees due to the Company’s defense of aclass action lawsuit.  General andadministrative costs tend to be more fixed in nature and not as dependent onthe overall level of managed receivables.

For the year ended April 30, 2006, the Company incurred legal expenses of$350 and settlement costs of $450 in connection with its defense and settlementof a class action lawsuit filed against a wholly-owned subsidiary allegingviolations of the Fair Credit Reporting Act. The Company’s decision to settle the lawsuit was prompted by the trialcourt’s granting the plaintiff’s motion for summary judgment on January 20,2006.  The Company and its counselbelieve that the court’s ruling is contrary to the statute and the facts in thecase, and believe that an appeal would be successful.  However, given the trial court’s ruling, theCompany concluded that settlement is preferable to continuing to incur thecosts associated with the appeal and defense of the lawsuit.

*Other Interest Expense*. Other interest expense increased to $1,323 for year ended April 30,2006, compared to $565 for the year ended April 30, 2005. The increase wasprimarily due to (i) a 40% increase for the year ended April 30, 2006 in theaverage outstanding borrowings on the Company’s working capital line and (ii)the related party note having an outstanding balance of $2,500 for the entireyear ended April 30, 2006, as compared to an outstanding balance of $2,500 forone month for the year ended April 30, 2005.

***Fiscal Year Ended April 30, 2005, Compared to Fiscal Year Ended April30, 2004 (dollars in thousands)***

*Interest Income*.Total interest income for the year ended April 30, 2005 decreased to $28,272compared to $30,498 for the year ended April 30, 2004.

The level of interest income, a primary driver of financial results, isimpacted by the average outstanding balance of the portfolio of ReceivablesHeld for Investment, the weighted average interest rate on receivablesoriginated by the Company, the mix of direct and indirect lending activitiesand the level of early prepayments and charge-offs.  Interest income on Receivables Held for Investmentdecreased****7% for the year ended April 30, 2005compared to the year ended April 30, 2004. This is a reduction of 97 basis points, or a 7% decrease, in the yieldon Receivables Held for Investment for the year ended April 30, 2005 comparedthe year ended April 30, 2004.  Thereduction in yield for the year ended April 30, 2005 is due to (i) a lowerweighted average interest rate on the performing portfolio which reflects theCompany’s increased focus on receivables originated directly to consumers whichtypically carry lower interest rates and (ii) the overall competitiveenvironment for receivables originated through dealerships.

*Interest Expense*.Interest expense for the year ended April 30, 2005 decreased to $7,616 comparedto $8,438 for the year ended April 30, 2004. Interest expense on ReceivablesHeld for Investment decreased 10% for the year ended April 30, 2005.  The reduction in interest expense isprimarily due to the expiration of certain interest rate swaps in April2004 which was offset by increasing short term interest rates during 2005 and adecline in the average debt outstanding during 2005.  The average cost of debt decreased23 basis points, or 6%, on the outstanding borrowings for the year ended April30, 2005, compared to the year ended April 30, 2004, while the averageoutstanding debt declined by 4% as a result of a slightly lower averageportfolio of Receivables Held for Investment.

*Provision for Credit Losses*. The provision for credit losses for the year ended April 30, 2005 decreasedto $9,520 as compared to $12,428 for the year ended April 30, 2004. Thedecrease in provision for credit losses is primarily due to (i) improvingeconomic trends, (ii) a change in portfolio mix to loans originated directlywith the customer which typically have a lower loss frequency and (iii) theincrease in recovery rates on repossessions and general defaults.

Net charge-offs for the year ended April 30, 2005decreased to $9,470 compared to $12,626 for the year ended April 30, 2004.  The decrease in net charge-offs for the yearended April 30, 2005 is primarily due to (i) a decrease in loss frequency andloss severity from repossessions and (ii) an increase in recoveries fromdefaulted loans.

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The level of provision for credit losses is a key driverof overall financial performance and should be positively impacted byimprovement in general economic conditions, improvements in wholesale used carprices and lower delinquency rates and net losses projected for the portfolioof Receivables Held for Investment.  Anyadditional economic deterioration or decline in wholesale used car prices willnegatively impact provision expense to the extent that these events cause anincrease in delinquency rates, bankruptcy rates or net charge-off rates in theportfolio of Receivables Held for Investment.

*Servicing Revenue*.  On December 24, 2002, the Company enteredinto an agreement to provide loan servicing and collection activities on behalfof FARC.  FARC, which is 40% owned by theCompany, purchased a portfolio of approximately $200,000 of installment loanreceivables.  On March 19, 2003, theCompany entered into an agreement to provide loan servicing and collectionactivities on $276,000 of installment loan receivables for unrelated thirdparties.  Servicing revenue decreased to$3,399****for the year ended April 30, 2005compared to $4,889 for year ended April 30, 2004.  The decrease in servicing revenue for theyear ended April 30, 2005 is due to the liquidation of serviced receivablesduring 2005.  Revenue derived fromservicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

*Other Finance Charges and Fees.* Other finance charges and fees increased to $2,439 for the year endedApril 30, 2005, compared to $1,666 for the year ended April 30, 2004.  The increase is attributable to (i)increased collections and payments allocated to late fees and other income as aresult of changes made to the methodology under which the Company allocatedcash received to interest, uncollected fees and principal and (ii) an increasein loans originated for a third party.  Income derived from late fees and collectionactivities are recognized when received, and therefore can be potentiallyvolatile from period to period based on overall cash collection, seasonality,delinquency rates and other factors.

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

*Insurance Products.*Insurance products revenue increased to $735 for the year ended April 30,2005 from $107 for the year ended April 30, 2004.  The increase is due to the Company sellinginsurance products for the entire year ended April 30, 2005 as opposed to theCompany only selling insurance products for part of the year for the year endedApril 30, 2004.

*Income from Investment.* Income frominvestment reflects 40% of total servicing revenue earned from servicingactivities performed by the Company for FARC and 40% of interest income earnedon junior mezzanine debt.  Income frominvestment decreased to $669 for the year ended April 30, 2005 compared to$1,009 for the year ended April 30, 2004. The decrease in income frominvestment for fiscal year 2005 is due to the liquidation of the FARC portfolioduring 2005.  Income from investments is impactedby the outstanding balance of investments held, general market interest ratesand the profitability of FARC.  TheCompany anticipates that contributions from the FARC investment will continueto decline as the portfolio of receivables owned by FARC amortizes.

*Other Interest Income.* Otherinterest income decreased to $427 for the year ended April 30, 2005, comparedto $460 for the year ended April 30, 2004. Other interest income is impacted by and comprised of the outstandingbalance of the junior mezzanine debt owned by FARC, interest earned onovernight deposits, and general market interest rates.

*Realized and Unrealized Loss on Interest RateDerivative Positions*. In conjunction with the adoption of SFAS 133, the Company is required toreport the fair value of interest rate derivative positions.  The net losses of $373 for the year endedApril 30, 2005 and $34 for the year ended April 30, 2004 are principally due tothe termination and mark to market of these positions.   The realized loss recognized during 2005 wasthe result of the termination of certain interest rate cap agreements which arerequired by the credit enhancement provider under the FIARC Credit Facility.The agreements were terminated in connection with the issuance of the 2005-A termnotes on May 5, 2005.

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to $8,917 for the year endedApril 30, 2005, compared to $8,538 for the year ended April 30, 2004.  The increase is primarily due to (i) higherbenefits costs and higher staffing levels required to accommodate the increasein direct lending activities, and (ii) an increase

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intemporary labor to support increased origination volume.  This is partially offset by a decrease insalaries and benefits due to the consolidation and restructuring of certainmanagement positions and a decline in loan collections and customer servicepersonnel as a result of the decline in total managed receivables.  The overall number of employees of theCompany is primarily correlated to (i) the total number of receivables managed,since the majority of the Company’s employees are involved in loan collectionactivities and (ii) origination growth rates which require additionalmarketing and credit underwriting personnel.

*Operating Expenses.* Operating expenses decreased to $4,801 for the year ended April 30,2005, compared to $5,098 for the year ended April 30, 2004.  The decrease in operating expenses for thefiscal year 2005 period is due to the decreased servicing costs associated withimprovements in delinquency and repossession rates and a decline in totalmanaged receivables.  Overall operatingexpenses are generally correlated to the total number of receivables managed bythe Company, delinquency and repossession rates and the composition of loansoriginated between indirect and direct consumer loans.

*General and Administrative.* General and administrative expenses increased to $3,732 for the yearended April 30, 2005, compared to $3,723 for the year ended April 30,2004.  General and administrative coststend to be more fixed in nature and not as dependent on the overall level ofmanaged receivables.

*Other Interest Expense*. Other interest expense increased to $565 for year ended April 30, 2005,compared to $468 for the year ended April 30, 2004. The increase was primarilydue to (i) a 23% increase in the average outstanding borrowings on the Company’sworking capital line and (ii) an increase in the average interest rate of 6.8%for the year ended April 30, 2005, compared to 2004.

**Liquidity and Capital Resources**

*Sourcesand Uses of Cash Flows*. The Company’s business requires significant cash flow to support itsoperating activities. The principal cash requirements include (i) amountsnecessary to acquire receivables from dealers and fund required reserveaccounts, (ii) amounts necessary to fund premiums for credit enhancementinsurance or other credit enhancements required by the Company’s financingprograms, and (iii) amounts necessary to fund costs to retain receivables,primarily interest expense. The Company also requires a significant amount ofcash flow for working capital to fund fixed operating expenses, primarilysalaries and benefits.

The Company’s mostsignificant cash flow requirement is for the origination of receivables. The Companyoriginated $254 million of Receivables Held for Investment for 2006 compared to$158 million in 2005.

The Company fundsloan originations through a combination of two warehouse credit facilities. TheFIRC credit facility generally permits the Company to borrow up to theoutstanding principal balance of qualified receivables, not to exceed $50million.  Receivables that haveaccumulated in the FIRC credit facility may be transferred to the FIARCcommercial paper facility at the option of the Company. The FIARC commercialpaper facility provides an additional financing source of up to $150 million.Additionally, the Company has transferred receivables from the warehouse creditfacilities and issued term notes. Substantially all of the Company’s receivablesare pledged to collateralize these credit facilities and term notes.  The Company is obligated to meet certainfinancial covenants.  Noncompliance maysignificantly affect cash flow.

The Company’s mostsignificant source of cash flow is the principal and interest payments receivedfrom its receivable portfolios.  TheCompany received such payments in the amount of $146****millionin 2006 and $129 million in 2005.  Thesefunds are used to repay the amounts borrowed under the Company’s creditfacilities and other holding costs, primarily interest expense and servicingand custodial fees.  During the yearsended April 30, 2006 and 2005, the Company required net cash of $108 millionand $29 million, respectively, as the receivables originated exceeded portfoliocollections.  The Company relies onborrowed funds to provide cash flow in periods of growth.  As of April 30, 2006, the Company had $153million of available capacity in the FIRC and FIARC credit facilities to fundfuture growth.

In addition to the cash flow generated from theprincipal and interest collections on its receivables portfolio, the Companycollects servicing fees.  Servicing feesrange from 1.4% to 2.5% of the outstanding principal balance of the loans inthe portfolio.  Cash flow and servicingfees are received after month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash

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available to fund operations.  AtApril 30, 2006 and 2005 the Company’s unencumbered cash was $3,380,367 and$2,413,738 respectively.  Cash andservicing fees collected after year-end, but related to the prior year’sactivity totaled $153,661 and $271,127 as of April 30, 2006 and 2005,respectively.  The decrease in cash andservicing fees collected after year-end is primarily due to the decrease in theamount of third party loans serviced as of April 30, 2006.  Management believes the unencumbered cash andcash inflows and amounts available under the working capital facility areadequate to fund cash requirements for operations.

*ContractualObligations. *Thefollowing table summarizes the expected scheduled payments, excluding interest,where applicable, under the Company’s contractual obligations:
| ** **                                      | ** ** | **Payments due by period** | ** **  |
|-------------------------------------------------|------------|-------------------------------------------|-------------|
| **Contractual Obligations**                | ** ** | **Total**                                 | ** **  | **<1 yr** | ** ** | **1-3 yrs** | ** ** | **3-5 yrs** | ** ** | **>5 yrs** | ** ** |
| Warehouse credit  facility obligations (1) |       | $                                         | 47,079,677  |   | $ | 18,911,189 |   | $ | 24,749,323 |   | $ | 3,419,165 |   | $ | — |   |
| Term note  obligation (1)                       |       | 316,584,564                               |        | 127,167,195 |   | 166,425,389 |   | 22,991,980 |   | — |   |
| Working capital  facility obligation (1)        |       | 16,454,329                                |        | 6,609,453 |   | 8,649,879 |   | 1,194,997 |   | — |   |
| Related party  note obligation                  |       | 2,500,000                                 |        | — |   | 2,500,000 |   | — |   | — |   |
| Operating lease  obligations                    |       | 6,833,310                                 |        | 999,095 |   | 1,592,570 |   | 1,631,184 |   | 2,610,461 |   |
| Total                                           |       | $                                         | 389,451,880 |   | $ | 153,686,932 |   | $ | 203,917,161 |   | $ | 29,237,326 |   | $ | 2,610,461 |   |

 

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(1)               Yearlycontractual obligations may vary as principal payments are determined by cashreceived on the underlying asset, and may differ from the expected scheduledpayments.

*Capitalization*. TheCompany expects to rely primarily on its credit facilities and the issuance ofsecured term notes to acquire and retain receivables. The Company believes itsexisting credit facilities have adequate capacity to fund the increase of thereceivables portfolio expected in the foreseeable future. While the Company hasno reason to believe that these facilities will not continue to be available,their termination could have a material adverse effect on the Company’soperations if substitute financing on comparable terms was not obtained.

*FinancingArrangements.*** **The Company finances its loanoriginations 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-backednotes (“Term Notes”) secured by discrete pools of receivables. These notes weresubsequently called and redeemed in March, 2005.  In November, 2003, the Company issued $140million in Term Notes secured by a discrete pool of receivables.  In May, 2005, the Company issued $175 millionin Term Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189million in Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees and dealer fees was 4.5% and 3.5% for thefiscal years ending April 30, 2006 and 2005, respectively.

*Warehouse Facilities as of April30, 2006*

| Facility | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** **                       | **Fees**                                                                                                  | ** **                 | **Insurance**             | ** ** | **Borrowing  Rate At  April 30,  2006** | ** ** |
|----------|------------|--------------|-------------|-----------------|------------|------------------------|----------------------------------|-----------------------------------------------------------------------------------------------------------|----------------------------|---------------------------|------------|---------------------------------------------------|------------|
| FIARC    | ** ** | $            | 150,000,000 |            | —     |                   | Commercial  paper  rate plus .3% |                                                                                                      | .25%  of  Unused  Facility |                      | .35        | %                                                 | 4.9        | % |
| FIRC     | ** ** | $            | 50,000,000  |            | $          | 47,079,677             |                             | Option of a) Base  Rate, which is the  higher of prime  rate or fed  funds plus .5%  or b) LIBOR plus .5% |                       | .25% of  Unused  Facility |       | See below                                         |       | 5.5 | % |
|          |            |              |             |                 |            |                        |                                  |                                                                                                           |                            |                           |            |                                                   |            |  |  |

 

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*Warehouse Facilities - CreditEnhancement as of April 30, 2006*

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

 

FIRC- In order to obtain a lower cost of funding, the Company has agreed tomaintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders are named asadditional insureds under these policies. The coverages are obtained on eachreceivable at the time it is originated by the Company and the applicablepremiums are prepaid for the life of the receivable. Generaly, each receivableis covered by three separate credit insurance policies, consisting of basic defaultinsurance under a standard auto loan protection policy (known as “ALPI”insurance) together with certain supplemental coverages relating to physicaldamage and other risks.  The Companycarries these coverages at its sole expense, and neither the vehicle purchasersnor the dealers are charged for the coverages nor are they usually aware oftheir existence. The Company’s ALPI insurance policy is written by NationalUnion Fire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

The premiums that theCompany paid during fiscal year 2006 for its three credit enhancement insurancecoverages, of which the largest component is basic ALPI insurance, representedapproximately 1.9% of the principal amount of the receivables originated duringthe year. Aggregate premiums paid for ALPI coverage alone during the fiscalyears ended April 30, 2004, 2005 and 2006 were $3,066,131, $3,669,198, and$3,768,534, respectively, and accounted for 3.5%, 2.3% and 1.4% of theaggregate principal balance of the receivables originated during suchrespective periods.

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

The result of 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, 2006, the Insurance Subsidiaryhad capital and surplus of $2,766,495 and unencumbered cash reserves of$1,442,680 in addition to $3,430,734 in a trust account.

The ALPI coverageas well as the Insurance Subsidiary’s liability under the ReinsuranceAgreement, remains in effect for each receivable that is pledged as collateralunder the warehouse credit facility. Once receivables are transferred from FIRCto FIARC and financed under the commercial paper facility, ALPI coverage andthe Insurance Subsidiary’s liability under the Reinsurance Agreement iscancelled with respect to the transferred receivables. Any unearned premiumassociated with the transferred receivables is returned to the Company. TheCompany believes the losses its Insurance Subsidiary will be required to indemnifywill be less than the premiums ceded to it. However, there can be no assurancethat losses will not exceed the premiums ceded and the capital and surplus ofthe Insurance Subsidiary.

FIARC– Credit Enhancement for the FIARC warehouse facility is provided to thecommercial paper investors by a 6% overcollaterization level and a cash reserveaccount equal to 1% of the receivables held by FIARC.  The Company is not a guarantor of, orotherwise a party to, such commercial paper.

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*Warehouse Facilities – Agents andExpirations*
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**     | ** ** | **Event if not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 14,  2007 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 14,  2007 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

OnDecember 4, 2003, the FIRC facility was renewed, under similar terms andconditions, at the $50 million commitment level until December 2, 2004, and wassubsequently extended until February 14, 2007. On June 15, 2004, the FIRC facility was extended to $65 million, andreverted back to $50 million on September 13, 2004.  As of April 30, 2005 and 2006, there was$43.6 and $47.1 million, respectively, outstanding.

OnJanuary 29, 2004, following a short-term extension of the original maturitydate, the FIARC facility was renewed, under similar terms and conditions, toDecember 2, 2004, and was subsequently extended until February 14, 2007.  In connection with the renewal, the Companyobtained approval from the lender to eliminate the requirement that a suretybond be maintained to provide additional enhancement to the commercial paperinvestors.  As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated.  In exchange, the Company agreed to increasethe program fee paid to the lender from 0.30% to 0.55% and to increase the unusedfee paid to the lender from 0.25% to 0.30%. As of April 30, 2005 and 2006, there was $127.9 and $-0- million,respectively, outstanding.

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

The following tablecontains pertinent information on the Term Notes as of April 30, 2006.
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|-------------|------------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A              |       | November  11, 2003     |       | $                    | 139,661,000 |                   | April  20, 2011    |            | $          | 37,714,745         |       | 2.58 | % |
| 2005-A Class 2      |       | May  5, 2005           |       | $                    | 106,493,000 |                   | July  16, 2012     |            | $          | 106,161,988        |       | 4.23 | % |
| 2006-A Class 1      |       | January  26, 2006      |       | $                    | 32,000,000  |                   | January  16, 2007  |            | $          | 15,647,831         |       | 4.57 | % |
| 2006-A Class 2      |       | January  26, 2006      |       | $                    | 47,000,000  |                   | March  16, 2009    |            | $          | 47,000,000         |       | 4.87 | % |
| 2006-A Class 3      |       | January  26, 2006      |       | $                    | 74,000,000  |                   | February  15, 2011 |            | $          | 74,000,000         |       | 4.93 | % |
| 2006-A Class 4      |       | January 26, 2006       |       | $                    | 36,060,000  |                   | April 15, 2013     |            | $          | 36,060,000         |       | 5.00 | % |

 

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Credit enhancement on theTerm Note is as follows:

| Facility | ** ** | **Cash Reserve**                                                                                     | ** ** | **Advance  Rate**                           | ** ** | **Insurance** |
|----------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2003-A   |       | 0.5% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 96.5% initial  advance decreasing to 96.1%  |       | Surety Bond   |
| 2005-A   |       | 1.0% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 97.0% initial  advance decreasing to 95.75% |       | Surety Bond   |
| 2006-A   |       | 1.0% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 98.5% initial  advance decreasing to 96.75% |       | Surety Bond   |

 

Term Notes- On November 20, 2003, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2003-A (“2003 Auto Trust”)completed the issuance of $139,661,000 of 2.58% Class A asset-backed notes (“2003-ATerm Notes”). The initial pool of automobile receivables transferred to the2003 Auto Trust totaled $114,726,891, which was previously owned by FIRC andFIARC, secure the 2003-A Term Notes.  Inaddition to the issuance of the Class A Notes, the 2003 Auto Trust also issueda $5,065,891 Class B Note that was retained by the Company and pledged tosecure the Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$139,656,629 were used to (i) fund a $30,000,000 pre-funding account to be usedfor future loan originations; (ii) repay all outstanding borrowings under theFIARC commercial paper facility, (iii) reduce the outstanding borrowings underthe FIRC credit facility, (iv) pay transaction fees related to the 2003-A termnote issuance, and (v) fund an initial cash reserve account of 0.5% or $573,635of the initial receivables pledged.  TheClass A Term Notes bear interest at 2.58% and requires monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 96.1%of the outstanding balance of the underlying receivables pool. The finalmaturity of the 2003-A Term Notes is April 20, 2011.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 3.9% of the outstanding balance of the underlying receivablespool.  A surety bond issued by MBIAInsurance Corporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  As of April 30, 2005 and 2006, theoutstanding principal balances on the 2003-A term notes were $70,050,511 and$37,714,745, respectively.

On May 5, 2005,the Company, through its indirect, wholly-owned subsidiary First Investors AutoOwner Trust 2005-A (“2005 Auto Trust”) completed the issuance of $69,000,000 of3.57% Class A-1 asset-backed notes and $106,493,000 of 4.23% Class A-2asset-backed notes (collectively “2005-A Term Notes”), for a total of$175,493,000 of asset backed notes. The initial pool of automobile receivablestransferred to the 2005 Auto Trust totaled $150,920,721, which was previouslyowned by FIRC and FIARC, and secures the 2005-A Term Notes.  In addition to the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued a $5,427,619 Class B Notethat was retained by the Company and pledged to secure the Working CapitalFacility as further described below. Proceeds from the issuance, which totaled $175,487,827 were used to (i)fund a $29,999,898 pre-funding account to be used for future loan originations;(ii) repay all outstanding borrowings under the FIARC commercial paperfacility, (iii) reduce the outstanding borrowings under the FIRC creditfacility, (iv) pay transaction fees related to the 2005-A Term Note issuance,and (v) fund an initial cash reserve account of 1% or $1,509,207 of theinitial receivables pledged.  The ClassA-1 and Class A-2 Term Notes bear interest at 3.57% and 4.23%, respectively,and requires monthly principal reductions sufficient to reduce the balance ofthe Class A Term Notes to 95.75% of the outstanding balance of the underlyingreceivables pool. The final maturity of the Class A-1 and Class A-2 Term Notesis December 17, 2007 and July 16, 2012, respectively.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 4.25% of the outstanding balance of the

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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 2% ofthe then current principal balance of the receivables pool.  As of April 30, 2006, the outstanding principal balances on the 2005-A ClassA-1 and Class A-2 term notes were $-0- and $106,161,988, respectively.

On January 26,2006, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2006-A (“2006 Auto Trust”) completed the issuance of$32,000,000 of 4.57% Class A-1 asset-backed notes, $47,000,000 of 4.87% ClassA-2 asset-backed notes, $74,000,000 of 4.93% Class A-3 asset-backed notes, and$36,060,000 of 5.00% Class A-4 asset-backed notes (collectively “2006-A TermNotes”), for a total of $189,060,000 of asset backed notes. The initial pool ofautomobile receivables transferred to the 2006 Auto Trust totaled $151,939,112,was previously owned by FIRC and FIARC, and secures the 2006-A Term Notes.  In addition to the issuance of the Class A-1,Class A-2, Class A-3, and Class A-4 notes, the 2006 Auto Trust also issued a$2,879,112 Class B Note that was retained by the Company and pledged to securethe Working Capital Facility as further described below.  Proceeds from the issuance, which totaled$188,445,709 were used to (i) fund a $40,000,000 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 2006-A TermNote issuance, and (v) fund an initial cash reserve account of 1% or$1,519,391 of the initial receivables pledged. The 2006-A Term Notes require monthly principal reductions sufficient toreduce the balance of the notes to 96.75% of the outstanding balance of theunderlying receivables pool. The final maturity of the Class A-1, Class A-2,Class A-3, and Class A-4 Term Notes is January 16, 2007, March 16, 2009,February 15, 2011, and April 15, 2013, respectively.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 3.25% 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 thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2006, the outstanding principal balances on the 2006-A Class A-1,Class A-2, Class A-3, and Class A-4 term notes were $15,647,831, $47,000,000,$74,000,000 and $36,060,000, respectively.

*      Working Capital Facility*.  The facility is provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities and the existing and future term notefacilities.  The outstanding borrowingsunder the facility bear interest at one-month LIBOR plus 2.25%.  In addition, a commitment fee of 1.5% is paidon the total amount of this facility.  OnOctober 26, 2004, the Working Capital Facility was extended until October 10,2005, increasing the commitment amount from $9 million to $13.5 million.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23.5 million, and was subsequentlyextended on February 15, 2006 until February 14, 2007.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  As of April 30,2005 and 2006, there was $10,500,000 and $16,454,329, respectively, outstandingunder this facility.

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

*RelatedParty Loans. *OnDecember 3, 2001 the Company entered into an agreement with one of itsshareholders who is a member of its Board of Directors under which the Companymay, from time to time, borrow up to $2.5 million.  On December 6, 2004, the original $2.5million shareholder loan was replaced with a $2.5 million loan containingidentical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors  The proceeds of the borrowingshave been utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the

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Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2.5 millionoutstanding under these facilities as of April 30, 2005 and 2006.  For the fiscal years ended April 30, 2004,2005, 2006, the Company recorded interest expense under these facilities of$67,676, $17,808 and $250,000, 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 financialand non-financial covenants governing these financing arrangements at April 30,2006.

*InterestRate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bear interestat floating interest rates which are reset on a short-term basis while thesecured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage its net interest spread, the Companyseeks to maximize the net interest spread while minimizing exposure to changesin interest rates. In connection with managing the net interest spread, theCompany may periodically enter into interest rate swaps or caps to minimize theeffects of market interest rate fluctuations on the net interest spread. To theextent that the Company has outstanding floating rate borrowings or has electedto convert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

During fiscal year2006, as a requirement of the FIARC commercial paper facility, the Companyentered into seven interest rate cap transactions, with a strike rate of6%.  The aggregate initial notionalamount of the caps was $131,710,159 which amortizes over six years.  The Company paid $449,746 in premium topurchase these caps.  The interest rate caps were not designated ashedges, and accordingly, changes in the fair value of the interest rate capsare recorded as realized gains or losses and reflected in net income OnJanuary 26, 2006, the Company terminated all interest rate caps outstanding inexchange for proceeds of $275,000.  Thecaps were terminated following the repayment of all balances outstanding underthe FIARC facility prior to the issuance of the 2006-A Term Notes.  As a result, a realized loss of $174,746 wasincurred relative to the aggregate market value of the interest rate caps.

During fiscal year 2005, as a requirement of the FIARC commercial paperfacility, the Company entered into nine interest rate cap transactions, withstrike rates between 5% and 6%.  Theaggregate initial notional amount of the caps was $126,086,843 which amortizedover six years.  The Company paid anaggregate of $1,213,097 in premiums to purchase these caps.  The interest rate caps were not designated ashedges, and accordingly, changes in the fair value of the interest rate capsare recorded as unrealized gains or losses and reflected in net income.  On April 28, 2005, the Company terminated allinterest rate caps outstanding in exchange for proceeds of $840,000.  The caps were terminated following therepayment of all amounts outstanding under the FIARC facility prior to theissuance of the 2005-A term notes.  As aresult, a realized loss of $373,097 was incurred relative to the aggregatemarket value of the interest rate caps.

During fiscal year 2004, as a requirement of the FIARCcommercial paper facility, the Company entered into various interest rate captransactions at cap rates ranging from 6.5% to 7.5% with an amortizing notionalbalance that is expected to coincide with the outstanding balance of the FIARCcommercial paper facility. The interest rate caps were not designated as hedgesand, accordingly, changes in the fair value of the interest rate caps wererecorded as 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 issuance ofthe 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**

TheCompany’s results of operations, financial condition and liquidity may beadversely affected by nonperforming receivables. The Company seeks to manageits risk of credit loss through (i) prudent credit evaluations, (ii) riskmanagement activities, (iii) effective collection procedures, and (iv) bymaximizing recoveries

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ondefaulted loans. The allowance for credit losses of $2,332,342 as of April 30,2006 and $2,248,599 as of April 30, 2005 as a percentage of Receivables Heldfor Investment of $368,878,300 as of April 30, 2006 and $245,581,749 as ofApril 30, 2005 was 0.6% and 0.9%, respectively.

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

TheCompany retains the credit risk associated with the receivables originated. TheCompany purchases credit enhancement insurance from third party insurers whichcover the risk of loss upon default and certain other risks. The Companyestablished a captive insurance subsidiary to reinsure certain risks under thecredit enhancement insurance coverage for all receivables.  In addition, receivables financed under theAuto Trust, FIARC and FIACC commercial paper facilities do not carry defaultinsurance.  Provisions for credit lossesof $7,503,245, $9,519,607, and $10,337,718 have been recorded for the yearsended April 30, 2006, April 30, 2005, and April 30, 2004, respectively.

The Companycalculates the allowance for credit losses in accordance with SFAS No. 5*, Accounting for Contingencies.* SFAS No. 114, *Accounting by 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 Companyapplies a systematic methodology in order to determine the amount of theallowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Company comparesthe aging status of each loan from six months prior to the aging 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 the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted.  Based on this, the Company has assigned a specificallowance against these loans equal to the outstanding balance of loans inthese categories less the estimated recovery amount based on current dataregarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,they are reported in earnings in the period they become known.

28

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Thefollowing table sets forth certain information regarding the Company’sdelinquency and charge-off experience over its last two fiscal years (dollarsin thousands):

|                                                                                       | ** ** | **As of or for the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                                                          | ** ** | **2006** | ** ** |
| ** **                                                                            | ** ** | **Number**                                                                        | ** ** | ** ** | ** ** | **Number** | ** ** | ** ** | ** ** |
| ** **                                                                            | ** ** | **of Loans**                                                                 | ** ** | **Amount** | ** ** | **of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held for  Investment:                                                     |       |                                                                              |       |   |   |   |   |   |   |
| Delinquent amount  outstanding (1):                                                   |       |                                                                              |       |   |   |   |   |   |   |
| 30 - 59 days                                                                          |       | 164                                                                               |       | $ | 1,414 |   | 106 |   | $ | 1,016 |   |
| 60 - 89 days                                                                          |       | 40                                                                                |       | 404 |   | 31 |   | 148 |   |
| 90 days or more                                                                       |       | 71                                                                                |       | 496 |   | 14 |   | 156 |   |
| Total delinquencies                                                                   |       | 275                                                                               |       | $ | 2,314 |   | 151 |   | $ | 1,320 |   |
| Total delinquencies as  a percentage of outstanding receivables.                      |       | 1.6                                                                               | %          | 0.9 | % | 0.7 | % | 0.4 | % |
| Net charge-offs as a percentage of average receivables outstanding during  the period |       |                                                                              |       | 4.3 | % |   |   | 2.4 | % |

 

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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 lower annualized charge-off rateresults from a lower number of repossessions coupled with higher recovery rateson the repossessed collateral.

As of April 30, 2006, there were 239accounts totaling $2,462,970 that were in bankruptcy status and were more than30 days past due.  As of April 30, 2005,there were 483 accounts totaling $4,627,082 that were in bankruptcy status andwere more than 30 days past due.   As ofApril 30, 2006 and 2005, 92% and 90%, respectively, of the bankruptcydelinquencies filed for protection under Chapter 13.

**New Accounting Pronouncements**

InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140* (“SFAS 155”). This statement amends SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities* (“SFAS 133”), and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* and resolves issues addressed in SFAS133 Implementation Issue No. D1, “Application of Statement 133 toBeneficial Interest in Securitized Financial Assets”. This Statement:(a) permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminatesrestrictions on a qualifying special-purpose entity’s ability to hold passivederivative financial instruments that pertain to beneficial interests that areor contain a derivative financial instrument. The standard also requirespresentation within the financial statements that identifies those hybridfinancial instruments for which the fair value election has been applied andinformation on the income statement impact of the changes in fair value ofthose instruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginningJanuary 1, 2007 although early adoption is permitted as of the beginningof an entity’s fiscal year. The provisions of SFAS 155 are not expected to havea financial statement impact at adoption; however, the standard could affectthe future income recognition for securitized financial assets because theremay be more embedded derivatives identified with changes in fair valuerecognized in net income.

InMay 2005, SFAS No. 154, *Accounting Changes andError Corrections*, was issued. This statement applies to allvoluntary changes in accounting principles and requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciples, unless this would be impracticable. This statement also makes adistinction between “retrospective application” of an accounting principle andthe “restatement” of financial

29

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statements toreflect the correction of an error. This statement is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005. The Company does not expect the adoption of this interpretation tohave a material impact on its financial position, cash flows and results ofoperations.

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

SFASNo. 123(R) is effective as of the beginning of the fiscal year that beginsafter June 15, 2005. SFAS 123(R) applies to all awards granted after therequired effective date and to such awards modified, repurchased, or cancelledafter that date. The cumulative effect of initially applying SFAS No. 123(R),if any, is recognized as of the required effective date. As of the requiredeffective date, all public entities that used the fair-value-based method foreither recognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R)using a modified version of prospective application. Under that transitionmethod, compensation cost is recognized on or after the required effective datefor the portion of outstanding awards for which the requisite service has notyet been rendered, based on the grant-date fair value of those awardscalculated under SFAS No. 123 for either recognition or pro forma disclosures.For periods before the required effective date, those entities may elect toapply a modified version of retrospective application under which financialstatements for prior periods are adjusted on a basis consistent with the proforma disclosures required for those periods by SFAS No. 123.  The Company expects compensation expenserelated to SFAS No. 123(R) to be approximately $169,000 for the fiscal yearending April 30, 2007.

**ITEM 7A.****                   *****QUANTATATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

The market risk discussion and theestimated amounts generated from the analysis that follows are forward-lookingstatements of market risk assuming certain adverse market conditions occur.Actual results in the future may differ materially due to changes in theCompany’s product and debt mix, developments in the financial markets, andfurther utilization by the company of risk-mitigating strategies such ashedging.

The Company’s operating revenues arederived almost entirely from the collection of interest on the receivables itretains and its primary expense is the interest that it pays on borrowingsincurred to purchase and retain such receivables. The Company’s creditfacilities bear interest at floating rates which are reset on a short-termbasis, whereas its receivables bear interest at fixed rates which do notgenerally vary with changes in interest rates. The Company is therefore exposedprimarily to market risks associated with movements in interest rates on itscredit facilities. The Company believes that it takes the necessary steps toappropriately reduce the potential impact of interest rate increases on theCompany’s financial position and operating performance.

The Company relies almost exclusively onrevolving credit facilities to fund its origination of receivables.Periodically, the Company will transfer receivables from a revolving to a termcredit facility. Currently all of the Company’s credit facilities bear interestat floating rates tied to either a commercial paper index or LIBOR.

As of April 30, 2006, the Company had$63.5 million of floating rate secured debt outstanding.  For every 1% increase in the commercial paperrate or LIBOR annual after-tax earnings would decrease by approximately $416,148assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of April 30, 2005, the Company had $182.1 million of floating ratesecured debt outstanding.  For every 1%increase in commercial paper rates or LIBOR, annual after-tax earnings woulddecrease by approximately $1,192,507 assuming the Company maintains a levelamount of floating rate debt and assuming an immediate increase in rates.

**Forward Looking Information**

Statements and financial discussion andanalysis included in this report that are not historical are considered to beforward-looking in nature. Forward-looking statements involve a number of risksand uncertainties that may cause

30

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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 the factorsdiscussed are important factors that could cause actual results to differmaterially from those expressed in any forward looking statement made herein orelsewhere by the Company or on its behalf. The factors listed are not necessarily all of the importantfactors.  Unpredictable or unknownfactors not discussed herein could also have material adverse effects on actualresults of matters that are the subject of forward looking statements.  The Company does not intend to update itsdescription of important factors each time a potential important factorarises.  The Company advises itsstockholders that they should:  (1) beaware that important factors not described herein could affect the accuracy ofour forward looking statements, and (2) use caution and common sense whenanalyzing our forward looking statements in this document or elsewhere.  All of such forward looking statements arequalified in their entirety by this cautionary statement.

**ITEM 8.****                       *****FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA***

TheConsolidated Financial Statements of the Company included in this Form 10-K arelisted under Item 14(a). The Company is not required to file any supplementaryfinancial data under this item.

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

None.

**ITEM 9A.****              *****CONTROLSAND PROCEDURES***

In accordance with Exchange Act Rules 13a-15 and15d-15, the Company carried out an evaluation, under the supervision and withthe participation of management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective as of April 30,2006 to provide reasonable assurance that information required to be disclosedin the Company’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.

Therehas been no change in the Company’s internal controls over financial reportingthat occurred during the year ended April 30, 2006 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrols over financial reporting, other than increased controls surroundingthe Company’s reporting for income taxes. Historically, the Company has utilized third parties to prepare federaland state tax returns, and to provide accounting entries to record differencesbetween the current and deferred tax accounts on the Company’s balancesheet.  In an effort to provide adequateassurances that federal and state tax returns continue to be filed in a timelyand accurate manner, and specifically to ensure that entries made to recordcurrent and deferred tax assets and liabilities are fully documented, theCompany has instituted additional reconciliation and testing procedures whichwill enhance internal controls and provide additional information to managementon the nature of these assets and liabilities. The Company has also elected to engage a national accounting firm toprovide advisory and compliance services with respect to the Company’s federaland state tax obligations.

31

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** **

**PartIII**

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

Information responsive to this itemappears under the caption “Election of Directors” in the Company’s ProxyStatement for the 2006 Annual Meeting of Shareholders expected to be held onSeptember 6, 2006, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

Informationrelated to the nomination of directors appears under the caption “CorporateGovernance” in the Company’s Proxy Statement for the 2006 Annual Meeting ofShareholders expected to be held on September 6, 2006, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

Informationrelated to the Company’s Code of Business Conduct and Ethics, adopted April 28,2004, appears under the caption “Corporate Governance” in the Company’s ProxyStatement for the 2006 Annual Meeting of Shareholders expected to be held onSeptember 6, 2006, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.  The Code of Business Conduct and Ethics hasalso been filed under Item 15 as an exhibit to this Form 10-K.

TheAudit Committee of the Board of Directors has designated one or more persons asfinancial experts.  Information relatedto the financial expert designation and the Audit Committee appears under thecaption “Other Information Concerning the Board of Directors” in the Company’sProxy Statement for the 2006 Annual Meeting of Shareholders expected to be heldon September 6, 2006, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

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

Information responsive to this itemappears under the caption “Executive Compensation” in the Company’s ProxyStatement for the 2006 Annual Meeting of Shareholders expected to be held onSeptember 6, 2006, 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 to this itemappears under the caption “Security Ownership of Management and CertainBeneficial Owners” in the Company’s Proxy Statement for the 2006 Annual Meetingof Shareholders expected to be held on September 6, 2006, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

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

Information responsive to this itemappears under the caption “Related Party Transactions” in the Company’s ProxyStatement for the 2006 Annual Meeting of Shareholders expected to be held onSeptember 6, 2006, which is to be filed with the Securities and ExchangeCommission, and is incorporated herein by reference.

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

Information related to this item appearsunder the caption “Proposal 2: Ratification of appointment of IndependentAuditors” in the Company’s proxy statement for the 2006 annual meeting ofshareholders expected to be held on September 6, 2006, which is to be filedwith the Securities and Exchange Commission, and is incorporated herein byreference.

32

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** **

**PartIV**

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

(a)  *(1)(2) FinancialStatements and Financial Statement Schedules*

See Index toConsolidated 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.                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                                                                                                                                                                                                                                              |

 

33

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| 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.                                                                   |
| 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.                                                                                                                                                                                                                                                                                                                                                 |

 

34

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| 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.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                                                                                                                                                                                                                                                                                                          |

 

35

----

 
|           |   | 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, 2002                                                                                                                                                                                                                                                                                                                                                               |
| 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.                                                                              |
| 10.114(s) | — | Amended and Restated Trust Agreement dated May 5,  2005 between First Investors Auto Funding Corporation and Deutsche Bank Trust  Company Delaware.                                                                                                                                                                                                                                                                             |
| 10.115(s) | — | Indenture dated May 5, 2005 between First Investors  Auto Owner Trust 2005-A and Wells Fargo Bank Minnesota, National Association.                                                                                                                                                                                                                                                                                              |
| 10.116(s) | — | Sale and Allocation Agreement dated May 5, 2005  between First Investors Auto Owner Trust 2005-A, First Investors Auto Funding  Corporation, First Investors Servicing Corporation and Wells Fargo Bank  Minnesota, National Association.                                                                                                                                                                                       |
| 10.117(s) | — | Insurance Agreement dated May 5, 2005 between MBIA  Insurance Corporation, First Investors Servicing Corporation, First Investors  Financial Services, Inc., First Investors Auto Funding Corporation, First  Investors Auto Owner Trust 2005-A, Deutsche Bank Trust Company Delaware and  Wells Fargo Bank Minnesota, National Association.                                                                                    |
| 10.118(s) | — | Servicing Agreement dated May  5, 2005 between Wells Fargo Bank Minnesota, National Association and First  Investors Auto Owner Trust 2005-A.                                                                                                                                                                                                                                                                                   |
| 10.119(s) | — | Administration Agreement dated  May 5, 2005 between Wells Fargo Bank Minnesota, National Association, First  Investors Financial Services, Inc. and First Investors Auto Owner Trust  2005-A.                                                                                                                                                                                                                                   |
| 10.120(s) | — | Contribution Agreement dated  May 5, 2005 between First Investors Financial Services, Inc. and First  Investors Auto Funding Corporation.                                                                                                                                                                                                                                                                                       |
| 10.121(t) | — | 2005 Employee Stock Option  Plan of the Registrant.                                                                                                                                                                                                                                                                                                                                                                             |
| 10.122(t) | — | Amendment No. 5 to Note  Purchase Agreement dated August 15, 2005, between First Investors Residual  Funding LP, Variable Funding Capital Corporation, Wachovia Bank, NA, and  Wachovia Capital Markets, LLC.                                                                                                                                                                                                                   |
| 10.123(t) | — | Amendment No. 7 to Security Agreement  dated August 15, 2005, between First Investors Residual Funding LP, First  Investors Financial Services, Inc., and Wachovia Capital Markets, LLC.                                                                                                                                                                                                                                        |
| 10.124(u) | — | Amended and Restated Trust  Agreement dated January 26, 2006 between First Investors Auto Funding  Corporation and Wells Fargo Delaware Trust Company.                                                                                                                                                                                                                                                                          |
| 10.125(u) | — | Indenture dated January 26,  2006 between First Investors Auto Owner Trust 2006-A and Wells Fargo Bank,  National Association.                                                                                                                                                                                                                                                                                                  |
| 10.126(u) | — | Sale and Allocation Agreement  dated January 26, 2006 between First Investors Auto Owner Trust                                                                                                                                                                                                                                                                                                                                  |

 

36

----

 
|           |    | 2006-A, First Investors Auto  Funding Corporation, First Investors Servicing Corporation and Wells Fargo  Bank, National Association.                                                                                                                                                                                                   |
|-----------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.127(u) | —  | Insurance Agreement dated  January 26, 2006 between MBIA Insurance Corporation, First Investors  Servicing Corporation, First Investors Financial Services, Inc., First  Investors Auto Funding Corporation, First Investors Auto Owner Trust 2006-A,  Wells Fargo Delaware Trust Company, and Wells Fargo Bank, National  Association. |
| 10.128(u) | —  | Servicing Agreement dated  January 26, 2006 between Wells Fargo Bank, National Association, First  Investors Auto Owner Trust 2006-A, and First Investors Servicing Corporation.                                                                                                                                                        |
| 10.129(u) | —  | Administration Agreement dated January 26, 2006  between Wells Fargo Bank, National Association, First Investors Financial  Services, Inc. and First Investors Auto Owner Trust 2006-A.                                                                                                                                                 |
| 10.130(u) | —  | Contribution Agreement dated  January 26, 2006 between First Investors Financial Services, Inc. and First  Investors Auto Funding Corporation.                                                                                                                                                                                          |
|      | 14.1(s) | —                                                                                                                                                                                                                                                                                                                                  | 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. |
|-----|---|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| (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.                                            |
| (s) | - | Exhibit previously filed on 2004 Form 10-K and  incorporated herein by reference.                                                                      |
| (t) | - | Exhibit previously filed on 2005 Form 10-K and  incorporated herein by reference.                                                                      |
| (u) | - | Exhibit previously filed on October 31, 2005 Second  Quarter Form 10-Q and incorporated herein by reference.                                           |

 

37

----

 
| (v) | - | Exhibit previously filed on January 31, 2006 Third  Quarter Form 10-Q and incorporated herein by reference. |
|-----|---|-------------------------------------------------------------------------------------------------------------|

 

(b)*  Reports on Form 8-K*

Form8-K filed March 9, 2006 reporting third quarter financial results.

38

----

 

**SIGNATURES**

Pursuant to the requirements of the Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis Annual Report on Form 10-K to be signed on its behalf by the undersignedthereunto duly authorized.
|        | **First  Investors Financial Services Group, Inc.** |
|--------|-----------------------------------------------------|
|   | (Registrant)                                        |
|   |                                                |
| Date:  | 7/27/06                                             |   | By: /s/ Tommy A. Moore, Jr. |
|   | **Tommy  A. Moore, Jr.**                            |
|   | **President  and Chief Executive Officer**          |
|   | **(Principal  Executive Officer)**                  |
|        |                                                     |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of First Investors Financial Services Group, Inc. and in thecapacities 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, Jr. |       | Director                                        |
| **Walter  A. Stockard, Jr.** |       |                                            |
|                         |       |                                            |
| /s/ Daniel M. Theriault      |       | Director                                        |
| **Daniel  M. Theriault**     |       |                                            |
|                         |       |                                            |
| Date:                        | 7/27/06    |                                            |   |   |
|                              |            |                                                 |  |  |

 

39

----

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

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**
|                                                                                                        | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|
| Report of Independent Registered  Public Accounting Firm                                               |       |
|                                                                                                   |       |
| Consolidated Balance Sheets as of  April 30, 2005 and 2006                                             |       |
|                                                                                                   |       |
| Consolidated Statements of  Earnings for the Years Ended April 30, 2004, 2005 and 2006                 |       |
|                                                                                                   |       |
| Consolidated Statement of  Shareholders’ Equity for the Years Ended April 30, 2004, 2005 and 2006 |       |
|                                                                                                   |       |
| Consolidated Statements of  Cash Flows for the Years Ended April 30, 2004, 2005 and 2006               |       |
|                                                                                                   |       |
| Notes to Consolidated Restated Financial Statements                                                    |       |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

Boardof Directors and Shareholders of First Investors Financial Services Group, Inc.

Wehave audited the accompanying consolidated balance sheets of First InvestorsFinancial Services Group, Inc. (a Texas corporation) and subsidiaries as ofApril 30, 2006 and 2005, and the related consolidated statements of earnings,shareholders’ equity and cash flows for each of the three years in the periodended April 30, 2006. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of First InvestorsFinancial Services Group, Inc. and subsidiaries as of April 30, 2006 and 2005,and the results of their operations and their cash flows for each of the threeyears in the period ended April 30, 2006, in conformity with accountingprinciples generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
| Houston, Texas         |
| July 7, 2006           |

F-2

----

 

**FIRST INVESTORS FINANCIAL SERVICESGROUP, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS — APRIL 30, 2005 and 2006**
| ** **                                                                                                                                                                               | ** ** | **2005**    | ** **  | **2006**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                                                                                               |       |        |        |        |       |
| Receivables Held for  Investment, net                                                                                                                                                    |       | $           | 249,618,154 |        | $          | 377,398,623 |   |
| Cash and Short-Term  Investments                                                                                                                                                         |       | 2,413,738   |        | 3,380,367   |       |
| Restricted Cash                                                                                                                                                                          |       | 19,096,858  |        | 25,538,237  |       |
| Accrued Interest  Receivable                                                                                                                                                             |       | 2,239,798   |        | 3,218,275   |       |
| Assets Held for Sale                                                                                                                                                                     |       | 942,774     |        | 959,537     |       |
| Other Assets:                                                                                                                                                                            |       |        |        |        |       |
| Funds held under  reinsurance agreement                                                                                                                                                  |       | 4,174,814   |        | 3,430,434   |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $2,684,543 and $3,514,077                                                               |       | 5,019,030   |        | 5,362,274   |       |
| Current income  taxes receivable                                                                                                                                                         |       | 5,233       |        | —      |       |
| Total assets                                                                                                                                                                             |       | $           | 283,510,399 |        | $          | 419,287,747 |   |
| ** **                                                                                                                                                                               | ** ** | ** **  | ** **  | ** **  | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                           | ** ** | ** **  | ** **  | ** **  | ** ** |
| Debt:                                                                                                                                                                                    |       |        |        |        |       |
| Warehouse credit  facilities                                                                                                                                                             |       | $           | 171,562,153 |        | $          | 47,079,677 |   |
| Term notes                                                                                                                                                                               |       | 70,050,511  |        | 316,584,564 |       |
| Working capital  facility                                                                                                                                                                |       | 10,500,000  |        | 16,454,329  |       |
| Related party  note                                                                                                                                                                      |       | 2,500,000   |        | 2,500,000   |       |
| Other Liabilities:                                                                                                                                                                       |       |        |        |        |       |
| Accounts payable  and accrued liabilities                                                                                                                                                |       | 2,495,260   |        | 6,396,987   |       |
| Income taxes                                                                                                                                                                             |       | —      |        | 1,385,563   |       |
| Deferred income  taxes payable                                                                                                                                                           |       | 910,807     |        | 766,223     |       |
| Total  liabilities                                                                                                                                                                       |       | 258,018,731 |        | 391,167,343 |       |
|                                                                                                                                                                                     |       |        |        |        |       |
| Commitments and  Contingencies                                                                                                                                                           | ** ** | **—**  | ** **  | **—**  | ** ** |
| Shareholders’ Equity:                                                                                                                                                               |       |        |        |        |       |
| Common stock,  $0.001 par value, 10,000,000 shares authorized, 5,583,669 issued; 4,411,693  outstanding at April 30, 2005 and 5,626,169 issued; 4,454,193 outstanding at  April 30, 2006 |       | 5,584       |        | 5,627       |       |
| Additional  paid-in capital                                                                                                                                                              |       | 18,754,608  |        | 18,938,148  |       |
| Retained  earnings                                                                                                                                                                       |       | 11,198,788  |        | 13,643,941  |       |
| Less, treasury  stock, at cost, 1,171,976 shares                                                                                                                                         |       | (4,467,312  | )           | (4,467,312  | )          |
| Total  shareholders’ equity                                                                                                                                                         |       | 25,491,668  |        | 28,120,404  |       |
| Total liabilities and  shareholders’ equity                                                                                                                                         |       | $           | 283,510,399 |        | $          | 419,287,747 |   |

 

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

F-3

----

 

**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGSFor the Years Ended April 30, 2004, 2005 and 2006**
| ** **                                                         | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                               |       |       |       |       |       |       |       |
| Interest  Income                                                   |       | $          | 30,498,270 |       | $          | 28,271,721 |       | $ | 39,300,092 |   |
| Interest  Expense                                                  |       | 8,437,766  |       | 7,615,756  |       | 15,041,743 |       |
| Net interest income                                                |       | 22,060,504 |       | 20,655,965 |       | 24,258,349 |       |
| Provision  for Credit Losses                                       |       | 12,428,175 |       | 9,519,607  |       | 7,503,245  |       |
| Net  Interest Income After Provision for Credit Losses             |       | 9,632,329  |       | 11,136,358 |       | 16,755,104 |       |
| Other  Income (Expense):                                           |       |       |       |       |       |       |       |
| Servicing revenue                                                  |       | 4,888,899  |       | 3,398,623  |       | 1,883,897  |       |
| Other finance charges and fees                                     |       | 1,665,798  |       | 2,438,678  |       | 2,431,857  |       |
| Insurance products                                                 |       | 107,236    |       | 735,219    |       | 927,595    |       |
| Income from investment                                             |       | 1,009,322  |       | 668,774    |       | 413,354    |       |
| Other interest income                                              |       | 460,243    |       | 426,630    |       | 1,371,217  |       |
| Other income                                                       |       | 138,536    |       | 660,443    |       | 586,410    |       |
| Realized and unrealized loss on interest rate derivative positions |       | (33,737    | )          | (373,097   | )          | (174,746   | )          |
| Total other income                                                 |       | 8,236,297  |       | 7,955,270  |       | 7,439,584  |       |
| Costs  and Expenses:                                               |       |       |       |       |       |       |       |
| Salaries and benefits                                              |       | 8,538,033  |       | 8,916,984  |       | 10,505,451 |       |
| Operating expense                                                  |       | 5,098,173  |       | 4,801,002  |       | 3,965,284  |       |
| General and administrative                                         |       | 3,722,842  |       | 3,731,936  |       | 4,655,377  |       |
| Other interest expense                                             |       | 468,153    |       | 565,282    |       | 1,323,139  |       |
| Total operating expenses                                           |       | 17,827,201 |       | 18,015,204 |       | 20,449,251 |       |
|                                                               |       |       |       |       |       |       |       |
| Income  Before Provision for Income Taxes and Minority Interest    |       | 41,425     |       | 1,076,424  |       | 3,745,437  |       |
| Provision  (Benefit) for Income Taxes:                             |       |       |       |       |       |       |       |
| Current                                                            |       | (66,139    | )          | 40,088     |       | 291,104    |       |
| Deferred                                                           |       | 85,430     |       | 352,807    |       | 1,009,180  |       |
| Total provision (benefit) for income taxes                         |       | 19,291     |       | 392,895    |       | 1,300,284  |       |
| Minority  Interest                                                 |       | (11,429    | )          | —     |       | —     |       |
|                                                               |       |       |       |       |       |       |       |
| Net  Income                                                        |       | $          | 33,563     |       | $          | 683,529    |       | $ | 2,445,153 |   |
|                                                               |       |       |       |       |       |       |       |
| Basic  Net Income per Common Share                                 |       | $          | 0.01       |       | $          | 0.14       |       | $ | 0.55 |   |
| Diluted Net Income per Common Share                                |       | $          | 0.01       |       | $          | 0.14       |       | $ | 0.53 |   |

 

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

F-4

----

 

**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITYFor the Years Ended April 30, 2004, 2005 and 2006**
| ** **                                              | ** ** | **Common   Stock** | ** ** | **Additional   Paid-In   Capital** | ** ** | **Retained   Earnings** | ** ** | **Treasury   Stock, at   cost** | ** ** | **Accumulated   Other   Comprehensive   Income (Loss)** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------|------------|
|                                                    |       |                    |       |                                         |       |                         |       |                                           |       |                                                                        |       |       |       |
| Balance, May 1, 2003                                    |       | 5,567                   |       | 18,678,675                                   |       | 10,481,696                   |       | (1,775,865                                     | )          | (896,789                                                                    | )          | 26,493,284 |       |
| Comprehensive  income:                                  |       |                    |       |                                         |       |                         |       |                                           |       |                                                                        |       |       |       |
| Net income                                              |       | —                  |       | —                                       |       | 33,563                       |       | —                                         |       | —                                                                      |       | 33,563     |       |
| Reclassification  of earnings, net of taxes of $515,477 |       | —                  |       | —                                       |       | —                       |       | —                                         |       | 896,789                                                                     |       | 896,789    |       |
| Comprehensive  income                                   |       |                    |       |                                         |       |                         |       |                                           |       |                                                                        |       | 930,352    |       |
| 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                                   |       | 10,515,259                   |       | (1,971,765                                     | )          | —                                                                      |       | 27,303,686 |       |
| Net  income                                             |       | —                  |       | —                                       |       | 683,529                      |       | —                                         |       | —                                                                      |       | 683,529    |       |
| Treasury  stock purchases                               |       | —                  |       | —                                       |       | —                       |       | (2,495,547                                     | )          | —                                                                      |       | (2,495,547 | )          |
| Balance, April 30, 2005                                 |       | $                       | 5,584      |                                         | $          | 18,754,608                   |       | $                                              | 11,198,788 |                                                                        | $          | (4,467,312 | )          | — |   | $ | 25,491,668 |   |
| Net  Income                                             |       | —                  |       | —                                       |       | 2,445,153                    |       | —                                         |       | —                                                                      |       | 2,445,153  |       |
| Exercise  of stock options                              |       | 43                      |       | 183,540                                      |       | —                       |       | —                                         |       | —                                                                      |       | 183,583    |       |
| Balance, April 30, 2006                                 |       | $                       | 5,627      |                                         | $          | 18,938,148                   |       | $                                              | 13,643,941 |                                                                        | $          | (4,467,312 | )          | — |   | $ | 28,120,404 |   |

 

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

F-5

----

 

**FIRSTINVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended April 30, 2004, 2005 and 2006**
| ** **                                                                                    | ** ** | **2004**     | ** ** | **2005**     | ** ** | **2006**     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Cash  Flows From Operating Activities:                                                        |       |         |       |         |       |         |       |
| Net income                                                                                    |       | $            | 33,563     |         | $          | 683,529      |       | $ | 2,445,153 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities — |       |         |       |         |       |         |       |
| Depreciation and amortization expense                                                         |       | 3,822,882    |       | 3,880,973    |       | 5,152,610    |       |
| Provision for credit losses                                                                   |       | 12,428,175   |       | 9,519,607    |       | 7,503,245    |       |
| Excess tax benefits related to the exercise of stock options                                  |       | —       |       | —       |       | 20,854       |       |
| Minority interest                                                                             |       | (11,429      | )          | —       |       | —       |       |
| (Increase) decrease in:                                                                       |       |         |       |         |       |         |       |
| Accrued interest receivable                                                                   |       | 805,371      |       | 336,224      |       | (978,477     | )          |
| Restricted cash                                                                               |       | 265,904      |       | (60,111      | )          | (6,441,379   | )          |
| Deferred financing costs and other assets                                                     |       | (1,778,903   | )          | (217,058     | )          | (1,804,799   | )          |
| Funds held under reinsurance agreement                                                        |       | (188,794     | )          | 7,320        |       | 744,380      |       |
| Current income tax receivable                                                                 |       | 996,019      |       | 2,980        |       | 5,233        |       |
| Interest rate derivative positions                                                            |       | 5,002,096    |       | —       |       | —       |       |
| Increase (decrease) in:                                                                       |       |         |       |         |       |         |       |
| Accounts payable and accrued liabilities                                                      |       | (224         | )          | 786,274      |       | 3,901,727    |       |
| Income taxes                                                                                  |       | —       |       | —       |       | 1,385,563    |       |
| Deferred income taxes payable                                                                 |       | 508,407      |       | 352,807      |       | (144,584     | )          |
| Interest rate derivative positions                                                            |       | (5,248,080   | )          | —       |       | —       |       |
| Net cash provided by operating activities                                                     |       | 16,634,987   |       | 15,292,545   |       | 11,789,526   |       |
| Cash  Flows From Investing Activities:                                                        |       |         |       |         |       |         |       |
| Origination of Receivables Held for Investment                                                |       | (90,379,662  | )          | (158,016,891 | )          | (254,313,070 | )          |
| Payments received from Investment                                                             |       | —       |       | —       |       | 660,213      |       |
| Principal payments from Receivables Held for Investment                                       |       | 88,760,335   |       | 100,915,463  |       | 108,099,985  |       |
| Payments received on assets held for sale                                                     |       | 7,467,053    |       | 6,459,975    |       | 7,211,406    |       |
| Purchase of furniture and equipment                                                           |       | (382,929     | )          | (187,820     | )          | (650,066     | )          |
| Net cash (used in) provided by investing activities                                           |       | 5,464,797    |       | (50,829,273  | )          | (138,991,532 | )          |
| Cash  Flows From Financing Activities:                                                        |       |         |       |         |       |         |       |
| Proceeds from advances on—                                                               |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                                   |       | 123,751,068  |       | 298,087,651  |       | 396,702,887  |       |
| Term notes                                                                                    |       | 139,661,000  |       | —       |       | 364,553,000  |       |
| Working capital facility                                                                      |       | 2,000,000    |       | 2,043,863    |       | 5,954,329    |       |
| Other borrowings                                                                              |       | —       |       | 2,500,000    |       | —       |       |
| Principal payments made on—                                                              |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                                   |       | (222,989,779 | )          | (169,231,306 | )          | (521,185,363 | )          |
| Term notes                                                                                    |       | (62,301,657  | )          | (94,667,679  | )          | (118,018,947 | )          |
| Working capital facility                                                                      |       | (1,953,375   | )          | (305,006     | )          | —       |       |
| Other borrowings                                                                              |       | (746,280     | )          | —       |       | —       |       |
| Proceeds from the issuance of common stock                                                    |       | 75,950       |       | —       |       | 162,729      |       |
| Treasury stock purchased                                                                      |       | (195,900     | )          | (2,495,547   | )          | —       |       |
| Net cash provided by (used in) financing activities                                           |       | (22,698,973  | )          | 35,931,976   |       | 128,168,635  |       |
| Increase  (Decrease) in Cash and Short-Term Investments                                       |       | (599,189     | )          | 395,248      |       | 966,629      |       |
| Cash  and Short-Term Investments at Beginning of Period                                       |       | 2,617,680    |       | 2,018,490    |       | 2,413,738    |       |
| Cash  and Short-Term Investments at End of Period                                             |       | $            | 2,018,491  |         | $          | 2,413,738    |       | $ | 3,380,367 |   |
| Supplemental  Disclosures of Cash Flow Information:                                           |       |         |       |         |       |         |       |
| Cash paid (received) during the period for—                                              |       |         |       |         |       |         |       |
| Interest                                                                                      |       | $            | 7,807,027  |         | $          | 6,561,342    |       | $ | 13,880,062 |   |
| Income taxes                                                                                  |       | (969,690     | )          | 37,109       |       | 33,218       |       |
| Noncash operating Activities:                                                                 |       |         |       |         |       |         |       |
| Reclassification  of deferred taxes to income taxes                                           |       | $            | —     |         | $          | —       |       | $ | 1,153,764 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

F-6

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** **

**FIRST INVESTORSFINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSApril 30, 2004, 2005 and 2006**

**1.  The Company**

*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), FIFS Acquisition FundingCorp. LLC, Farragut Financial Corporation, and First Investors Auto FundingCorporation. First Investors, together with its wholly- and majority-ownedsubsidiaries, is hereinafter referred to as the Company.

FIFS began operations in May 1989 and isprincipally involved in the business of originating and holding for investmentretail installment contracts and promissory notes secured by new and usedautomobiles originated by factory authorized franchised dealers or directlythrough consumers. As of April 30, 2006, approximately 30% and 16% ofReceivables Held for Investment had been originated in Texas and Georgia,respectively. The Company currently operates in 28 states.

FIIC was organized under the captive insurancecompany laws of the state of Vermont for the purpose of reinsuring certaincredit enhancement insurance policies that have been written by unrelated thirdparty insurance companies.

On October 2, 1998, the Company completedthe acquisition of FISC and the operations of FISC are included in theconsolidated results of the Company since the date of acquisition.Headquartered in Atlanta, Georgia, FISC performed servicing and collectionactivities on a portfolio of receivables originated for investment as well ason a portfolio of receivables originated and sold pursuant to two assetsecuritizations. As a result of the acquisition, the Company increased thetotal dollar value on its balance sheet of receivables, acquired an interest incertain trust certificates related to the asset securitizations and acquiredcertain 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, the Company enteredinto a partnership agreement whereby a subsidiary of the Company was thegeneral partner owning 70% of the partnership interests and First UnionInvestors, Inc. served as the limited partner and owned 30% of the partnershipinterests.  On September 19, 2003, FirstInvestors Financial Services, Inc. purchased the limited partnership interestspreviously held by First Union Investors, Inc. The Partnership consists primarily of a portfolio of loans previouslyowned or securitized by FISC and certain other financial assets includingcharged-off accounts owned by FISC.

On December 24, 2002, the Companypurchased 40% of the 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.

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

In total, at April 30, 2006, FISCperforms servicing and collection functions on a managed receivables portfolioof approximately $475 million.

F-7

----

 

**2.  Significant Accounting Policies**

*Basis of Presentation*.  The consolidated financial statements includethe accounts of First Investors and its wholly-owned and majority-ownedsubsidiaries.  All significantintercompany accounts and transactions have been eliminated. Investments inwhich the Company exercises significant influence, but which it does notcontrol (generally a 20% to 50% ownership interest), are accounted for underthe equity method of accounting, except for variable interest entities forwhich the Company is considered the primary beneficiary under FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidationof Variable Interest Entities, an interpretation of ARB No. 51*, asamended in December 2003 by Interpretation 46R. As of April 30, 2006, the Company does not have any entities under whichFIN 46 as amended by Interpretation 46R would apply.

*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 Note 3. Actual results coulddiffer from those estimates.

*Receivables Held for Investment*.  ReceivablesHeld for Investment represents the aggregate outstanding balance of installmentsales contracts and promissory notes originated by the Company through itsautomobile dealer relationships or directly with consumers.  The Company accrues interest income monthlyusing the effective interest method. When a receivable becomes 90 days past due, the income accrual issuspended until the payments become current. When a loan is charged off or thecollateral is repossessed, the remaining income accrual is written off.  The Company defers and capitalizes certainexpenses related to the origination of receivables held for investment, andamortizes these expenses in proportion to their underlying receivable.

*Other Income*.  Other Income consists of income received fromservicing activities, other finance charges and fees, income from investments,reinvestment revenue, income earned from the sale of GAP insurance and extendedservice contracts, and realized and unrealized loss on interest rate derivativepositions.  Servicing revenue is accruedas services are rendered. Other finance charges and fees are recognized whenreceived.  Income from investments andreinvestment revenue are accrued based on the respective interest rate of suchinvestment.  Income from the sale of GAPinsurance and extended service contracts is recognized when sold as the Companyhas no further obligation after the sale. Unrealized loss on interest rate derivatives is recognized whenincurred.

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

TheCompany initiates efforts to make customer contact as early as when thecustomer is one day past due and become more aggressive as the loan becomesfurther past due.  Management reviewspast due loans and considers various factors including payment history, jobstatus and any events that may have occurred that prevent the customer frommaking a payment.  Through theevaluation, if it is determined that the loan is uncollectible, the collateralis typically repossessed.  Generally thisoccurs at 60 to 90 days after the loan becomes past due.   Upon repossession, the uncollectible portionof the loan and 100% of accrued interest is written off.  The fair value of the collateral is recordedin Assets Held for Sale.  Fair value isdetermined by estimating the proceeds from the sale of the collateral, whichprimarily are comprised of auction proceeds on the sale of the automobile lessselling related expenses.  Aftercollection of all proceeds, the Company records an adjustment, positive ornegative, based on the difference between the fair value estimate and theproceeds received.  In the event thecollateral cannot be located or if the customer refuses to pay and is notsubject to bankruptcy court protection, the Company will write off the entirebalance of the loan once it reaches 180 days past due.  If the customer is subject to bankruptcycourt protection, the loan generally remains in bankruptcy status as long aspayments are being received from the trustee. If a payment is missed, the Company seeks to repossess the collateralwith approval of the court.  If thecustomer is dismissed from bankruptcy, the Company resumes collection efforts.

F-8

----

 

TheCompany applies a systematic methodology in order to determine the amount ofthe allowance for credit losses.  Thespecific methodology is a six-month migration analysis whereby the Companycompares the aging status of each loan from six months prior to the agingstatus as of the reporting date.  Thesefactors are then applied to the aging status of each loan at the reporting datein order to calculate the number of loans that are expected to migrate toimpaired status.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  Effective thequarter ended April 30, 2005, the Company elected to increase its allowance forloan losses against loans that were greater than 120 days past due and loans inwhich the collateral had been assigned for repossession but had not yet beenrepossessed as of the reporting date. The Company believes that this increase is warranted in light of thechange in federal bankruptcy laws enacted during the period and the recognitionthat the migration trends of severely delinquent loans and loans subject tobankruptcy are expected to become more protracted.  Based on this, the Company has assigned aspecific allowance against these loans equal to the outstanding balance ofloans in these categories less the estimated recovery amount based on currentdata regarding liquidation of the collateral and collection of any additionalpayments.  The Company utilized its mostrecent recovery rates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

*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 the benefitof the third party insurance company. The reinsurance agreement provides, amongother things, that the funds held can be withdrawn by the third party insurancecompany due to an insolvency of the Company or to reimburse the third partyinsurance company for the Company’s share of losses paid by the third partyinsurance 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 facilities generallyprovide that receivables assigned to each facility would be allowed to amortizeshould the facility not be extended. Deferred financing costs are expensed proportionately if borrowingcapacity 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, *“Accounting for Income Taxes”,*which prescribes thatdeferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesapplied to taxable income in the years in which those temporary differences areexpected to be recovered or settled. Under SFAS No. 109, the effect on deferredtax assets and liabilities of a change in tax rates is recognized in the periodthat includes the enactment date. Significant judgement is required indetermining income tax provisions and in evaluating tax positions.  The Company has established additionalprovisions for income taxes, despite its belief that the Company’s taxpositions are fully supportable, when there remain certain positions that aresubject to challenge and that may not be sustained on

F-9

----

 

reviewby tax authorities.  Upon the closure offuture audits and the expiration of certain statutes of limitations,significant income tax accrual reversals could occur starting the year endingApril 30, 2007.

*Derivatives*.  SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities,*as amended,establishes accounting and reporting standards requiring that every derivativeinstrument (including certain derivative instruments embedded in othercontracts) be recorded in the balance sheet as either an asset or liability atits fair value. The Statement requires that changes in the derivative’s fairvalue be recognized currently in earnings unless specific hedge accountingcriteria are met.   The Company hasdetermined that it does not meet the criteria for hedge accounting treatment,and accordingly changes in the fair valueare recorded as unrealized gains or losses and reflected in the statement of earnings.

*Income Per Share*.  Income per share amounts are calculated basedon net income available to common shareholders divided by the weighted averagenumber 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 4 for components of restricted cash.

*Advertising Costs. *The Company expenses advertising costs asincurred.  As of April 30, 2006, 2005,and 2004, advertising expense was $1,777,873, $1,427,481, and $957,255,respectively.

*Treasury Stock. *In September, 2004,the Board of Directors authorized the Company to repurchase up to $1.5 millionof the Company’s outstanding common stock. This plan was subsequently amended in December, 2004, authorizing therepurchase of an additional $1 million of the Company’s outstanding commonstock, resulting in the total authorization of $2.5 million to repurchase theCompany’s stock.  During the years endedApril 30, 2006 and 2005, the Company engaged in the following transactions:

| Year Ended  April 30, 2005 | ** ** | **Year Ended  April 30, 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------|------------|
| **# of Shares  Repurchased**    | ** ** | **Wtd. Avg.  Price/Share**               | ** ** | **# of Shares  Repurchased** | ** ** | **Wtd. Avg.  Price/Share** | ** ** |
| 588,576                                   |       | $                                             | 4.24       |   | — |   | — |   |
|                                           |            |                                               |            |  |  |  |  |  |

 

Asa result of the 588,576 shares repurchased during the year ended April 30,2005, the Company completed the $2.5 million authorized share repurchase planand, as a result, announced the conclusion of its share repurchase planoriginally adopted in December 2001. Since the inception of the plan, a total of 1,171,976 shares wererepurchased at a weighted average price of $3.81 per share.

*Stock-Based Compensation*.  The Company has an employee stock option planand a non-employee director stock option plan, which are described more fullyin Note 14.  The Company has adopted thedisclosure provisions of SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123*.This pronouncement requires prominent disclosures in both annual and interimfinancial statements regarding the method of accounting for stock-basedemployee compensation and the effect of the method used on reported results.The Company accounts for stock compensation awards under the intrinsic valuemethod of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees,*which requirescompensation cost to be recognized based on the excess, if any, between thequoted market price of the stock at the date of grant and the amount thegrantee must pay to acquire the stock. All options awarded under the Company’splan are granted with an exercise price equal to or greater than the fairmarket value on the date of the grant.

F-10

----

 

Thefollowing table presents the Company’s pro-forma net income and net income pershare had the Company adopted the fair value method of accounting forstock-based compensation under SFAS No. 123, *Accountingfor Stock-Based Compensation*, as amended by SFAS No. 148.
| ** **                                                                                                                                            | ** ** | **Fiscal** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                                                            | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                                                                                                                  | ** ** | ** ** |       |   |   |   |   |
| Net Income, as  reported                                                                                                                              |       | $          | 33,563     |   | $ | 683,529 |   | $ | 2,445,153 |   |
| Deduct: Total  stock option plan compensation expense determined under fair value based  method for awards granted, modified or settled, net of taxes |       | (111,681   | )          | (188,082 | ) | (210,980 | ) |
| Pro Forma Net  Income (Loss)                                                                                                                          |       | $          | (78,118    | ) | $ | 495,447 |   | $ | 2,234,173 |   |
|                                                                                                                                                  |       |       |       |   |   |   |   |
| Basic Net Income  per Common Share, as reported                                                                                                       |       | $          | 0.01       |   | $ | 0.14 |   | $ | 0.55 |   |
| Diluted Net  Income per Common Share, as reported                                                                                                     |       | $          | 0.01       |   | $ | 0.14 |   | $ | 0.53 |   |
| Basic Net Income  (Loss) per Common Share, pro forma                                                                                                  |       | $          | (0.02      | ) | $ | 0.10 |   | $ | 0.50 |   |
| Diluted Net Income  (Loss) per Common Share, pro forma                                                                                                |       | $          | (0.02      | ) | $ | 0.10 |   | $ | 0.48 |   |

 

*Reclassifications*.  Certain reclassifications have been made tothe 2004 and 2005 amounts to conform to the 2006 presentation.

**3.  Receivables Held for Investment**

The receivablesgenerally have terms between 48 and 72 months and are collateralized by theunderlying vehicles.  Net receivablebalances consisted of the following at April 30, 2005 and 2006:

|                                            | ** ** | **2005**   | ** **  | **2006**   | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|
| Receivables                                |       | $          | 245,581,749 |       | $          | 368,878,300 |   |
| Unamortized  premium and deferred fees (1) |       | 6,285,004  |        | 10,852,665 |       |
| Allowance for  credit losses               |       | (2,248,599 | )           | (2,332,342 | )          |
| Net receivables                            |       | $          | 249,618,154 |       | $          | 377,398,623 |   |

----

(1)             Includes premium anddiscounts paid to dealer plus deferred acquisition cost.

At April 30, 2006, the weighted averageremaining term of the receivable portfolio is 46 months and the weightedaverage contractual interest rate is 13.8%. Principal payments expected to be received on the receivable portfolio,assuming no defaults and that payments are received in accordance withcontractual terms are summarized in the following table.  Receivables may pay off prior to contractualdue dates, primarily due to defaults and early payoffs.

| Year ending April 30, | ** ** | ** ** | ** **  |
|--------------------------------------|------------|------------|-------------|
| 2007                                 |       | $          | 82,665,403  |   |
| 2008                                 |       | 78,610,565 |        |
| 2009                                 |       | 75,514,271 |        |
| 2010                                 |       | 69,010,558 |        |
| 2011                                 |       | 48,368,107 |        |
| Thereafter                           |       | 14,709,396 |        |
|                                 |       | $          | 368,878,300 |   |

 

F-11

----

 

Activity in the allowancefor credit losses for the years ended April 30, 2004, 2005, and 2006 was asfollows:
| ** **                     | ** ** | **2004**    | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|--------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| Balance,  beginning of year    |       | $           | 2,397,216  |       | $          | 2,199,386  |       | $ | 2,248,599 |   |
| Provision for credit losses    |       | 12,428,175  |       | 9,519,607  |       | 7,503,245  |       |
| Charge-offs, net of recoveries |       | (12,626,005 | )          | (9,470,394 | )          | (7,419,502 | )          |
| Balance, end of year           |       | $           | 2,199,386  |       | $          | 2,248,599  |       | $ | 2,332,342 |   |

 

**4.  Restricted Cash**

The components ofrestricted cash at April 30, 2005 and 2006 are as follows:

|                                                            | ** ** | **2005**  | ** ** | **2006**   | ** ** |
|------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Collection and  lockbox balances                           |       | $         | 12,346,942 |       | $          | 15,503,360 |   |
| Funds held in  trust for receivable funding                |       | 786,591   |       | (751,570   | )          |
| Warehouse credit  facility and Term Note reserves (Note 7) |       | 5,713,325 |       | 10,536,447 |       |
| Other                                                      |       | 250,000   |       | 250,000    |       |
| Total restricted  cash                                     |       | $         | 19,096,858 |       | $          | 25,538,237 |   |

 

**5.  Deferred Financing Costs and Other Assets**

        The components of deferred financingcosts and other assets at April 30, 2005 and 2006 are as follows:

|                                | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Deferred  financing costs, net |       | $         | 886,602    |      | $          | 2,318,018 |   |
| Investments in  FARC           |       | 1,685,002 |       | 1,024,789 |       |
| Accounts  receivable, trade    |       | 1,140,580 |       | 424,806   |       |
| Other, net                     |       | 354,081   |       | 259,047   |       |
| Loan service fee  receivable   |       | 271,127   |       | 153,661   |       |
| Software, net                  |       | 179,375   |       | 350,215   |       |
| Furniture and  equipment, net  |       | 194,731   |       | 372,504   |       |
| Prepaid expenses               |       | 307,532   |       | 459,234   |       |
| Total                          |       | $         | 5,019,030  |      | $          | 5,362,274 |   |

 

**6.  Accounts Payable and Accrued Liabilities**

The components ofaccounts payable and accrued liabilities as of April 30, 2005 and 2006 are asfollows:

|                                | ** ** | **2005** | ** ** | **2006**  | ** ** |
|--------------------------------|------------|----------|------------|-----------|------------|
| Accounts payable               |       | $        | 228,128    |      | $          | 216,048 |   |
| Accrued expenses               |       | 845,357  |       | 1,034,672 |       |
| Accrued salaries  and benefits |       | 547,667  |       | 1,123,454 |       |
| Interest payable               |       | 486,658  |       | 748,768   |       |
| Fundings payable               |       | 279,504  |       | 3,201,614 |       |
| Other                          |       | 107,946  |       | 72,431    |       |
| Total                          |       | $        | 2,495,260  |      | $          | 6,396,987 |   |

 

**7.  Debt**

TheCompany finances its loan originations through two warehouse credit facilities.The Company’s credit facilities provide for one-year terms and have beenrenewed annually. Management of the Company believes that the credit facilitieswill continue to be renewed or extended or that it would be able to securealternate financing on satisfactory terms; however, there can be no assurancethat it will be able to do so. In January, 2002 the Company

F-12

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issued $159million in asset-backed notes (“Term Notes”) secured by discrete pools ofreceivables. These notes were subsequently called and redeemed in March,2005.  In November, 2003, the Companyissued $140 million in Term Notes secured by a discrete pool of receivables.  In May, 2005, the Company issued $175 millionin Term Notes secured by a discrete pool of receivables.  In January, 2006, the Company issued $189million in Term Notes secured by a discrete pool of receivables.  Substantially all receivables retained by theCompany are pledged as collateral for the credit facilities and the Term Notes.The weighted average interest rate for the Company’s secured borrowingsincluding the effect of program fees and dealer fees was 4.5% and 3.5% for thefiscal years ending April 30, 2006 and 2005, respectively.

*WarehouseFacilities as of April 30, 2006*
| **Facility** | ** ** | **Capacity** | ** **                               | **Outstanding** | ** ** | **Interest Rate**                  | ** **                           | **Fees**                                                                                               | ** **              | **Insurance**           | ** ** | **Borrowing  Rate At  April 30,  2006** | ** ** |
|--------------|------------|--------------|------------------------------------------|-----------------|------------|------------------------------------|--------------------------------------|--------------------------------------------------------------------------------------------------------|-------------------------|-------------------------|------------|-----------------------------------------|------------|
| FIARC        | ** ** | $            |     150,000,000      |            | —     |                               | Commercial paper  rate plus .3% |                                                                                                   | .25% of Unused Facility |                    | None       |                                    | 4.9        | % |
| FIRC         | ** ** | $            |      50,000,000 |            | $          |     47,079,677 |                                 | Option of a)  Base Rate, which is the higher of prime rate or fed funds plus .5% or b)  LIBOR plus .5% |                    | .25% of Unused Facility |       | See below                               |       | 5.5 | % |
|              |            |              |                                          |                 |            |                                    |                                      |                                                                                                        |                         |                         |            |                                         |            |  |  |

 

*WarehouseFacilities – Credit Enhancement as of April 30, 2006*

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

 

FIRC- In order to obtain a lower cost of funding, the Company has agreed tomaintain credit enhancement insurance covering the receivables pledged ascollateral under the FIRC credit facility. The facility lenders are named asadditional insureds under these policies. The coverages are obtained on eachreceivable at the time it is originated by the Company and the applicablepremiums are prepaid for the life of the receivable. Generaly, each receivableis covered by three separate credit insurance policies, consisting of basicdefault insurance under a standard auto loan protection policy (known as “ALPI”insurance) together with certain supplemental coverages relating to physicaldamage and other risks.  The Companycarries these coverages at its sole expense, and neither the vehicle purchasersnor the dealers are charged for the coverages nor are they usually aware oftheir existence. The Company’s ALPI insurance policy is written by NationalUnion Fire Insurance Company of Pittsburgh (“National Union”), which is awholly-owned subsidiary of American International Group.

The premiums thatthe Company paid during fiscal year 2006 for its three credit enhancementinsurance coverages, of which the largest component is basic ALPI insurance,represented approximately 1.9% of the principal amount of the receivablesoriginated during the year. Aggregate premiums paid for ALPI coverage aloneduring the fiscal years ended April 30, 2004, 2005 and 2006 were $3,066,131,$3,669,198, and $3,768,534, respectively, and accounted for 3.5%, 2.3% and 1.4%of the aggregate principal balance of the receivables originated during suchrespective periods.

InApril 1994, the Company organized First Investors Insurance Company (the “InsuranceSubsidiary”) under the captive insurance company laws of the State of Vermont.The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Companyand is a party to a reinsurance agreement whereby the Insurance Subsidiaryreinsures 100% of the risk under the Company’s ALPI insurance policy. At thetime each receivable is insured by National

F-13

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Union, the risk isautomatically reinsured to its full extent and approximately 96% of the premiumpaid by the Company to National Union with respect to such receivable is cededto the Insurance Subsidiary. When a loss covered by the ALPI policy occurs,National Union pays it after the claim is processed, and National Union is thenreimbursed in full by the Insurance Subsidiary. In addition to the monthly premiums and liquidity reserves of the InsuranceSubsidiary, a trust account is maintained by National Union to secure theInsurance Subsidiary’s obligations for losses it has reinsured.

Theresult of the foregoing reinsurance structure is that National Union, as the “fronting”insurer under the captive arrangement, is unconditionally obligated to theCompany’s credit facility lenders for all losses covered by the ALPI policy,and the Company, through its Insurance Subsidiary, is obligated to indemnifyNational Union for all such losses. As of April 30, 2006, the InsuranceSubsidiary had capital and surplus of $2,766,495 and unencumbered cash reservesof $1,442,680 in addition to $3,430,734 in a trust account.

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

FIARC– Credit Enhancement for the FIARC warehouse facility is provided to the commercialpaper investors by a 6% overcollaterization level and a cash reserve accountequal to 1% of the receivables held by FIARC. The Company is not a guarantor of, or otherwise a party to, suchcommercial paper.

*WarehouseFacilities – Agents and Expirations*
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**    | ** ** | **Event if not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 14, 2007 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 14, 2007 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

On December 4, 2003, theFIRC facility was renewed, under similar terms and conditions, at the $50million commitment level until December 2, 2004, and was subsequently extendeduntil February 14, 2007.  On June 15,2004, the FIRC facility was extended to $65 million, and reverted back to $50million on September 13, 2004.  As ofApril 30, 2005 and 2006, there was $43.6 and $47.1 million, respectively,outstanding.

On January 29, 2004,following a short-term extension of the original maturity date, the FIARCfacility was renewed, under similar terms and conditions, to December 2, 2004,and was subsequently extended until February 14, 2007.  In connection with the renewal, the Companyobtained approval from the lender to eliminate the requirement that a suretybond be maintained to provide additional enhancement to the commercial paperinvestors.  As a result, the 0.35% suretybond premium and the 0.25% unused surety bond premium were eliminated.  In exchange, the Company agreed to increasethe program fee paid to the lender from 0.30% to 0.55% and to increase theunused fee paid to the lender from 0.25% to 0.30%.  As of April 30, 2005 and 2006, there was$127.9 and $-0- million, respectively, outstanding.

Managementpresently intends to seek further extensions to these warehouse facilitiesprior to the current expiration dates.  Managementconsiders its relationship with its lenders to be satisfactory and has noreason to believe that the FIRC and FIARC facilities will not be renewed ateach of their respective expiration dates.

F-14

----

 

Thefollowing table contains pertinent information on the Term Notes as of April30, 2006.
| **Term Notes** | ** ** | **Issuance Date** | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **         | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|---------------------|------------|------------------------|------------|----------------------|-------------|------------------------|--------------------|-----------------|------------|--------------------|------------|
| 2003-A              |       | November  11, 2003     |       | $                    | 139,661,000 |                   | April  20, 2011    |            | $          | 37,714,745         |       | 2.58 | % |
| 2005-A Class 2      |       | May  5, 2005           |       | $                    | 106,493,000 |                   | July  16, 2012     |            | $          | 106,161,988        |       | 4.23 | % |
| 2006-A Class 1      |       | January  26, 2006      |       | $                    | 32,000,000  |                   | January  16, 2007  |            | $          | 15,647,831         |       | 4.57 | % |
| 2006-A Class 2      |       | January  26, 2006      |       | $                    | 47,000,000  |                   | March  16, 2009    |            | $          | 47,000,000         |       | 4.87 | % |
| 2006-A Class 3      |       | January  26, 2006      |       | $                    | 74,000,000  |                   | February  15, 2011 |            | $          | 74,000,000         |       | 4.93 | % |
| 2006-A Class 4      |       | January 26, 2006       |       | $                    | 36,060,000  |                   | April 15, 2013     |            | $          | 36,060,000         |       | 5.00 | % |

 

Credit enhancementon the Term Note is as follows:

| Facility | ** ** | **Cash Reserve**                                                                                     | ** ** | **Advance  Rate**                           | ** ** | **Insurance** |
|----------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------|
| 2003-A   |       | 0.5% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 96.5% initial  advance decreasing to 96.1%  |       | Surety Bond   |
| 2005-A   |       | 1.0% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 97.0% initial  advance decreasing to 95.75% |       | Surety Bond   |
| 2006-A   |       | 1.0% of Initial  Pool Balance increasing to 2% of Initial Pool Balance including Pre-Funding  Amount |       | 98.5% initial  advance decreasing to 96.75% |       | Surety Bond   |

 

TermNotes - On November 20, 2003, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2003-A (“2003Auto 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 a $5,065,891 Class B Note that wasretained 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 Note does not bearinterest but requires principal reductions sufficient to reduce the balance ofthe Class B Note to 3.9% 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, 2005 and 2006, theoutstanding principal balances on the 2003-A term notes were $70,050,511 and$37,714,745, respectively.

OnMay 5, 2005, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2005-A (“2005 Auto Trust”) completed the issuance of$69,000,000 of 3.57% Class A-1 asset-backed notes and $106,493,000 of 4.23%Class A-2 asset-backed notes (collectively “2005-A Term Notes”), for a total of

F-15

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$175,493,000 ofasset backed notes. The initial pool of automobile receivables transferred tothe 2005 Auto Trust totaled $150,920,721, which was previously owned by FIRCand FIARC, and secures the 2005-A Term Notes. In addition to the issuance of the Class A-1 and Class A-2 Notes, the2005 Auto Trust also issued a $5,427,619 Class B Note that was retained by theCompany and pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $175,487,827 were used to (i) fund a $29,999,898 pre-funding account tobe used for future loan originations; (ii) repay all outstanding borrowingsunder the FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction fees related tothe 2005-A Term Note issuance, and (v) fund an initial cash reserve account of1% or $1,509,207 of the initial receivables pledged.  The Class A-1 and Class A-2 Term Notes bearinterest at 3.57% and 4.23%, respectively, and requires monthly principalreductions sufficient to reduce the balance of the Class A Term Notes to 95.75%of the outstanding balance of the underlying receivables pool. The finalmaturity of the Class A-1 and Class A-2 Term Notes is December 17, 2007 andJuly 16, 2012, respectively.  The Class BNote does not bear interest but requires principal reductions sufficient toreduce the balance of the Class B Note to 4.25% of the outstanding balance ofthe underlying receivables pool.  A suretybond issued by MBIA Insurance Corporation provides credit enhancement for theClass A Notes.  In the event that certainasset quality covenants are not met, the reserve account target level willincrease to 2% of the then current principal balance of the receivablespool.  As of  April 30, 2006, the outstanding principalbalances on the 2005-A Class A-1 and Class A-2 term notes were $-0- and$106,161,988, respectively.

OnJanuary 26, 2006, the Company, through its indirect, wholly-owned subsidiaryFirst Investors Auto Owner Trust 2006-A (“2006 Auto Trust”) completed theissuance of $32,000,000 of 4.57% Class A-1 asset-backed notes, $47,000,000 of4.87% Class A-2 asset-backed notes, $74,000,000 of 4.93% Class A-3 asset-backednotes, and $36,060,000 of 5.00% Class A-4 asset-backed notes (collectively “2006-ATerm Notes”), for a total of $189,060,000 of asset backed notes. The initialpool of automobile receivables transferred to the 2006 Auto Trust totaled$151,939,112, was previously owned by FIRC and FIARC, and secures the 2006-ATerm Notes.  In addition to the issuanceof the Class A-1, Class A-2, Class A-3, and Class A-4 notes, the 2006 AutoTrust also issued a $2,879,112 Class B Note that was retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $188,445,709 were used to (i) fund a $40,000,000 pre-funding account tobe used for future loan originations; (ii) repay all outstanding borrowingsunder the FIARC commercial paper facility, (iii) reduce the outstandingborrowings under the FIRC credit facility, (iv) pay transaction fees related tothe 2006-A Term Note issuance, and (v) fund an initial cash reserve account of1% or $1,519,391 of the initial receivables pledged.  The 2006-A Term Notes require monthlyprincipal reductions sufficient to reduce the balance of the notes to 96.75% ofthe outstanding balance of the underlying receivables pool. The final maturityof the Class A-1, Class A-2, Class A-3, and Class A-4 Term Notes is January 16,2007, March 16, 2009, February 15, 2011, and April 15, 2013, respectively.  The Class B Note does not bear interest butrequires principal reductions sufficient to reduce the balance of the Class BNote to 3.25% 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 thegreater of 2% of the initial pool balance or 6% of the then current principalbalance of the receivables pool.  As ofApril 30, 2006, the outstanding principal balances on the 2006-A Class A-1,Class A-2, Class A-3, and Class A-4 term notes were $15,647,831, $47,000,000,$74,000,000 and $36,060,000, respectively.

*Working Capital Facility*.  The facility is provided to aspecial-purpose, wholly-owned subsidiary of the Company, First InvestorsResidual Funding LP.  This facilityrevolves monthly in accordance with a borrowing base consisting of theovercollateralization amount and reserve account for each of the Company’sother credit facilities.  The facility issecured solely by the residual cash flow and cash reserve accounts related tothe Company’s warehouse credit facilities and the existing and future term notefacilities.  The outstanding borrowingsunder the facility bear interest at one-month LIBOR plus 2.25%.  In addition, a commitment fee of 1.5% is paidon the total amount of this facility.  OnOctober 26, 2004, the Working Capital Facility was extended until October 10,2005, increasing the commitment amount from $9 million to $13.5 million.  The interest rate remained at LIBOR plus2.25% and the commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  On August 15,2005, the Working Capital Facility was extended until February 15, 2006,increasing the commitment amount to $23.5 million, and was subsequently extendedon February 15, 2006 until February 14, 2007. The interest rate remained at LIBOR plus 2.25% and the commitment feepaid on the total available amount of the facility was maintained at 1.5%.  As of April 30, 2005 and 2006, there was$10,500,000 and $16,454,329, respectively, outstanding under this facility.

 

F-16

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

*RelatedParty Loans. *OnDecember 3, 2001 the Company entered into an agreement with one of itsshareholders who is a member of its Board of Directors under which the Companymay, from time to time, borrow up to $2.5 million.  On December 6, 2004, the original $2.5million shareholder loan was replaced with a $2.5 million loan containingidentical terms and conditions between the Company and a limited partnershipthat is affiliated with a current shareholder and member of the Board ofDirectors  The proceeds of the borrowingshave been utilized to fund certain private and open market purchases of theCompany’s common stock pursuant to a Stock Repurchase Plan authorized by theBoard of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid at anytime unless the Company is in default on one of its other creditfacilities.  There was $2.5 millionoutstanding under these facilities as of April 30, 2005 and 2006.  For the fiscal years ended April 30, 2004,2005, 2006, the Company recorded interest expense under these facilities of$67,676, $17,808 and $250,000, respectively.

*LoanCovenants*.  Thedocumentation governing these credit facilities and Term Notes containsnumerous covenants relating to the Company’s business, the maintenance of creditenhancement insurance covering the receivables (if applicable), the observanceof certain financial covenants, the avoidance of certain levels of delinquencyexperience and other matters. The breach of these covenants, if not curedwithin the time limits specified, could precipitate events of default thatmight result in the acceleration of the FIRC credit facility, the Term Notesand the working capital facility or the termination of the commercial paperfacilities. The Company was not in default with respect to any financial andnon-financial covenants governing these financing arrangements at April 30,2006.

*InterestRate Management*.  TheCompany’s warehouse credit facilities and working capital facilities bearinterest at floating interest rates which are reset on a short-term basis whilethe secured Term Notes bear interest at a fixed rate of interest. The Company’sreceivables bear interest at fixed rates that do not generally vary with achange in market interest rates. Since a primary contributor to the Company’sprofitability is its ability to manage its net interest spread, the Companyseeks to maximize the net interest spread while minimizing exposure to changesin interest rates. In connection with managing the net interest spread, theCompany may periodically enter into interest rate swaps or caps to minimize theeffects of market interest rate fluctuations on the net interest spread. To theextent that the Company has outstanding floating rate borrowings or has electedto convert a portion of its borrowings from fixed rates to floating rates, theCompany will be exposed to fluctuations in short-term interest rates.

During fiscal year2006, as a requirement of the FIARC commercial paper facility, the Companyentered into seven interest rate cap transactions, with a strike rate of6%.  The aggregate initial notionalamount of the caps was $131,710,159 which amortizes over six years.  The Company paid $449,746 in premium topurchase these caps.  The interest rate caps were not designated ashedges, and accordingly, changes in the fair value of the interest rate capsare recorded as realized gains or losses and reflected in net income OnJanuary 26, 2006, the Company terminated all interest rate caps outstanding inexchange for proceeds of $275,000.  Thecaps were terminated following the repayment of all balances outstanding under theFIARC facility prior to the issuance of the 2006-A Term Notes.  As a result, a realized loss of $174,746 wasincurred relative to the aggregate market value of the interest rate caps.

During fiscal year 2005, as a requirement of the FIARC commercial paperfacility, the Company entered into nine interest rate cap transactions, withstrike rates between 5% and 6%.  Theaggregate initial notional amount of the caps was $126,086,843 which amortizedover six years.  The Company paid anaggregate of $1,213,097 in premiums to purchase these caps.  The interest rate caps were not designated ashedges, and accordingly, changes in the fair value of the interest rate capsare recorded as unrealized gains or losses and reflected in net income.  On April 28, 2005, the Company terminated allinterest rate caps outstanding in exchange for proceeds of $840,000.  The caps were terminated following therepayment of all amounts outstanding under the FIARC facility prior to the

F-17

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issuanceof the 2005-A term notes.  As a result, arealized loss of $373,097 was incurred relative to the aggregate market valueof the interest rate caps.

During fiscal year 2004, as a requirement of the FIARCcommercial paper facility, the Company entered into various interest rate captransactions at cap rates ranging from 6.5% to 7.5% with an amortizing notionalbalance that is expected to coincide with the outstanding balance of the FIARCcommercial paper facility. The interest rate caps were not designated as hedgesand, accordingly, changes in the fair value of the interest rate caps wererecorded as 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.

**8.  Income Taxes**

Thetemporary differences which give rise to deferred tax assets (liabilities) areas follows at April 30, 2005 and 2006, respectively:

|                                       | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets related to:      |       |       |       |       |       |
| Allowance for credit losses           |       | $          | 764,524    |       | $          | 792,996 |   |
| Net operating loss carry forward      |       | 517,760    |       | —     |       |
| Fixed assets and other deferred costs |       | 188,731    |       | 235,088    |       |
| Accrued expenses                      |       | 51,010     |       | 123,776    |       |
| AMT credit                            |       | 11,339     |       | —     |       |
|                                  |       | $          | 1,533,364  |       | $          | 1,151,860 |   |
| Deferred tax  liabilities related to: |       |       |       |       |       |
| Receivables Held for Investment, net  |       | (2,378,830 | )          | (1,824,996 | )          |
| Prepaid expenses                      |       | (65,341    | )          | (93,087    | )          |
|                                  |       | (2,444,171 | )          | (1,918,083 | )          |
| Net deferred tax  liabilities         |       | $          | (910,807   | )          | $          | (766,223 | ) |

 

Theprovision (benefit) for income taxes on income before income taxes and minorityinterest for the years ended April 30, 2004, 2005 and 2006, consists ofthe following:

|          | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|
| Current  |       |     |       |     |       |     |       |
| Federal  |       | $        | (75,161    | )        | $          | 18,560   |       | $ | 264,269 |   |
| State    |       | 9,022    |       | 21,528   |       | 26,835   |       |
|     |       | $        | (66,139    | )        | $          | 40,088   |       | $ | 291,104 |   |
| Deferred |       |     |       |     |       |     |       |
| Federal  |       | $        | 85,430     |     | $          | 352,807  |       | $ | 1,009,180 |   |
| State    |       | —   |       | —   |       | —   |       |
|     |       | $        | 85,430     |     | $          | 352,807  |       | $ | 1,009,180 |   |

 

F-18

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The following is a reconciliation betweenthe effective income tax rate and the applicable statutory federal income taxrate for the years ended April 30, 2004, 2005 and 2006.
| ** **                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax -  statutory rate              |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  tax, net of federal benefit |       | 2.0      | %          | 2.0      | %          | 0.4      | %          |
| Minority  Interest                        |       | 10.1     | %          | —   |       | —   |       |
| Non-deductible  expenses                  |       | 0.5      | %          | 0.5      | %          | 0.3      | %          |
| Effective income  tax rate                |       | 46.6     | %          | 36.5     | %          | 34.7     | %          |

 

**9.  Investmentin First Auto Receivables Corporation**

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

The Company accounts for its ownership investment inFARC using the equity method in accordance with APB Opinion 18.  In addition to the equity and debtinvestments, the Company performs loan servicing and collection activities onthe portfolio.  For the years ended April30, 2004, 2005, and 2006, the Company recognized $1,352,234, $894,262, and$532,186 of servicing revenue, $161,750, $108,994, and $87,597 of interestincome and $1,009,322, $668,774, and $413,354 of equity in the income frominvestment in FARC.  As of April 30, 2005and 2006, the equity investment in FARC of $968,327 and $734,014 and juniormezzanine debt of $832,696 and $192,093, respectively are included in DeferredFinancing Costs and Other Assets on the balance sheet.

**10.  New Accounting Pronouncements**

InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments—an amendment of FASB StatementsNo. 133 and 140* (“SFAS 155”). This statement amends SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities* (“SFAS 133”), and SFAS No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities* and resolves issues addressed in SFAS133 Implementation Issue No. D1, “Application of Statement 133 toBeneficial Interest in Securitized Financial Assets”. This Statement:(a) permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation;(b) clarifies which interest-only strips and principal-only strips are notsubject to the requirements of SFAS 133; (c) establishes a requirement toevaluate beneficial interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation;(d) clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives; and, (e) eliminates restrictionson a qualifying special-purpose entity’s ability to hold passive derivativefinancial instruments that pertain to beneficial interests that are or containa derivative financial instrument. The standard also requires presentationwithin the financial statements that identifies those hybrid financialinstruments for which the fair value election has been applied and informationon the income statement impact of the changes in fair value of thoseinstruments. The Company is required to apply SFAS 155 to all financialinstruments acquired, issued or subject to a remeasurement event beginningJanuary 1, 2007 although early adoption is permitted as of the beginningof an entity’s fiscal year. The provisions of SFAS 155 are not expected to havea financial statement impact at adoption; however, the standard could affectthe future income recognition for securitized financial assets because theremay be more embedded derivatives identified with changes in fair valuerecognized in net income.

In May 2005, SFASNo. 154, *Accounting Changes and Error Corrections*,was issued. This statement applies to all voluntary changes in accountingprinciples and requires retrospective application to prior periods’ financialstatements of changes in accounting principles, unless this would beimpracticable. This statement also makes a distinction between “retrospectiveapplication” of an accounting principle and the “restatement” of financialstatements to reflect the correction of an error. This statement is effectivefor accounting changes and corrections of

F-19

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errors made in fiscalyears beginning after December 15, 2005. The Company does not expect theadoption of this interpretation to have a material impact on its financialposition, cash flows and results of operations.

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

 

SFAS No. 123(R) iseffective as of the beginning of the fiscal year that begins after June 15,2005. SFAS 123(R) applies to all awards granted after the required effectivedate and to such awards modified, repurchased, or cancelled after that date.The cumulative effect of initially applying SFAS No. 123(R), if any, isrecognized as of the required effective date. As of the required effectivedate, all public entities that used the fair-value-based method for eitherrecognition or disclosure under SFAS No. 123 will apply SFAS No. 123(R) using amodified version of prospective application. Under that transition method,compensation cost is recognized on or after the required effective date for theportion of outstanding awards for which the requisite service has not yet beenrendered, based on the grant-date fair value of those awards calculated underSFAS No. 123 for either recognition or pro forma disclosures. For periodsbefore the required effective date, those entities may elect to apply amodified version of retrospective application under which financial statementsfor prior periods are adjusted on a basis consistent with the pro formadisclosures required for those periods by SFAS No. 123.  The Company expects compensation expense relatedto SFAS No. 123(R) to be approximately $169,000 for the fiscal year endingApril 30, 2007.

**11.  Credit Risks**

Approximately 30%and 16% of the Company’s Receivables Held for Investment by principal balanceat April 30, 2006, represents receivables originated in Texas and Georgia. 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.  FairValue of Financial Instruments**

The followingtable summarizes 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, 2005** | ** **  | **April 30, 2006** | ** ** |
|---------------------------------|------------|------------------------------|-------------|------------------------------|------------|
| ** **                      | ** ** | **Carrying**                 | ** **  | ** **                   | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Amount**                   | ** **  | **Fair Value**          | ** ** | **Amount** | ** ** | **Fair Value** | ** ** |
| Financial assets  —        |       |                         |        |                         |       |   |   |   |   |
| Receivables Held for Investment |       | $                            | 245,581,749 |                         | $          | 256,710,698 |   | $ | 368,878,300 |   | $ | 377,656,048 |   |
| Financial  liabilities —   |       |                         | ** **  | ** **                   |       |   | ** ** | ** ** | ** ** |
| Term Notes                      |       | $                            | 70,050,511  |                         | $          | 68,856,437 |   | $ | 316,584,564 |   | $ | 314,416,170 |   |

 

The followingmethods and assumptions were used to estimate the fair value of each categoryof financial instruments:

F-20

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*Cash andShort-Term Investments, Other Receivables, Accounts Payable and AccruedLiabilities*.  The carryingamounts approximate fair value because of the short maturity and marketinterest rates of those instruments.

*ReceivablesHeld for Investment*. The fair values were estimated by discounting expected cash flows at arisk-adjusted rate of return deemed to be appropriate for investors in suchreceivables. Expected cash flows take into consideration management’s estimatesof prepayments, defaults and recoveries.

*TermNotes*.  The fair valuewas estimated by discounting cash payments using current rates and comparativematurities. Expected cash payments take into consideration prepayments,defaults and recoveries on the underlying collateral.

*CreditFacilities*.  Thecarrying amount approximates fair value because of the floating interest rateson the credit facilities.

**13.  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 effectivethe first enrollment period after 90 days of employment. The Company pays theadministrative expenses of the 401(k) plan. The Company also matches apercentage of each participant’s voluntary contributions up to a maximumvoluntary contribution of 3 percent of the participant’s compensation. In fiscalyears 2004, 2005, and 2006, the Company made matching contributions to the401(k) plan in the amounts of $40,062, $23,425, and $42,168, respectively.Effective April 28, 1998, the Company established a participant-directedDeferred Compensation Plan for certain executive officers of the Company.  The Deferred Compensation Plan was terminatedduring the fourth quarter of fiscal year 2005 in response to changes in the taxlaw associated with such plans.  Theassets in the plan were distributed to the participants.

**14. Shareholders’ Equity**

*Preferred Stock*.  The Company has authorized 1,000,000 sharesof preferred stock with a $1.00 par value. As of April 30, 2006, no shares have been issued.

*Employee**Stock Option Plan*. In June 1995, theBoard of Directors adopted the Company’s 1995 Employee Stock Option Plan (thePlan). The Plan is administered by the Compensation Committee of the Board ofDirectors and provides that options may be granted to officers and other keyemployees for the purchase of up to 300,000 shares of common stock, subject toadjustment in the event of certain changes in capitalization. On September 10,2002, the number of shares of common stock available for issuance was increasedto 500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. In no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan. As of April 30, 2005 and 2006, a total of 360,500 options had beenissued, with 360,500 and 294,500, respectively, options outstanding under theplan.  This plan expired on June 27,2005.

On September 8, 2005, the shareholdersapproved the Company’s 2005 Employee Stock Option Plan (the 2005 Plan).  The 2005 Plan is administered by theCompensation Committee of the Board of Directors and provides that options maybe granted to officers and other key employees for the purchase of up to200,000 shares of common stock, subject to adjustment in the event of certainchanges in capitalization. Options may be granted either as incentive stockoptions (which are intended to qualify for certain favorable tax treatment) oras non-qualified stock options.  TheCompensation Committee selects the persons to receive options and determinesthe exercise price, the duration, any conditions on exercise and other terms ofthe options. The exercise price may not be less than 100% of the fair marketvalue per share of common stock on the date of grant, and in no event may theduration of an option exceed 10 years and no option may be granted after theexpiration of 10 years from the adoption of the Plan.  As of

F-21

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April30, 2006, 102,500 options were issued and outstanding under the 2005 Plan,leaving 97,500 options remaining and available for issuance.

The exercise priceof the option is payable in cash upon exercise. At the discretion of the Compensation Committee, options may be issuedin tandem with stock appreciation rights entitling the option holder to receivean amount in cash or in shares of common stock, or a combination thereof, equalin value to any increase since the date of grant in the fair market value ofthe common stock covered by the option.

*Non-Employee Director StockOption Plan* - In September 2002, the Non-EmployeeStock Option 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 grants will be both automatic anddiscretionary.  Automatic grants of20,000 shares for each non-employee director, or 100,000 shares total, wereapproved in September 2002.  Subsequentautomatic grants of an option to purchase 20,000 shares shall be made to eachnon-employee director on July 15th each year, beginning July 15, 2003. The planalso gives the Board of Directors discretionary authority to provide foradditional option grants if the Company’s annual financial performance exceedsparameters established by the Board.  Nodiscretionary grants have been awarded. As of April 30, 2005 and 2006, a total of 390,000 and 490,000,respectively, options had been issued under the plan, leaving a remaining110,000 and 10,000, respectively, available for issuance.  In addition to the options granted above,there were an additional 20,000 options granted to a director in 1995, beforethe adoption of the Non-Employee Stock Option Plan.  All options issued under this plan wereissued with an exercise price equal to the fair market value of the underlyingcommon stock on the date of the grant

A summary of thestatus of the Company’s stock option plans for the years ended April 30, 2004,2005 and 2006 is presented below: 

|                                                        | ** ** | ** ** | ** ** | **Weighted** | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                             | ** ** | **Shares** | ** ** | **Average**  | ** ** |
| ** **                                             | ** ** | **Under**  | ** ** | **Exercise** | ** ** |
| ** **                                             | ** ** | **Option** | ** ** | **Price**    | ** ** |
| 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    |       | $            | 4.35       |   |
| Granted                                                |       | 208,500    |       | $            | 4.99       |   |
| Forfeited and Expired                                  |       | (10,500    | )          | $            | 3.69       |   |
| Outstanding at  April 30, 2005                         |       | 770,500    |       | $            | 4.86       |   |
| Granted                                                |       | 202,500    |       | $            | 4.68       |   |
| Forfeited and Expired                                  |       | (63,500    | )          | $            | 6.87       |   |
| Exercised                                              |       | (42,500    | )          | $            | 3.71       |   |
| Outstanding at  April 30, 2006                         |       | 867,000    |       | $            | 4.72       |   |
| Options available for  future grants at April 30, 2006 |       | 107,500    |       |         |       |

 

|                                                         | ** ** | **Fiscal** | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Options  exercisable at end of year                     |       | 245,333    |       | 357,467 |   | 439,500 |   |
| Weighted average  exercise price of options exercisable |       | $          | 6.11       |   | $ | 5.38 |   | $ | 4.79 |   |
| Weighted average fair  value of options granted         |       | $          | 1.36       |   | $ | 1.57 |   | $ | 1.13 |   |

 

F-22

----

 

Followingis a summary of the status of options outstanding at April 30, 2006:

|                   | ** ** | ** **              | ** ** | ** **      | ** ** | ** **      | ** ** | **Weighted**                | ** ** |
|-------------------|------------|-------------------------|------------|-----------------|------------|-----------------|------------|-----------------------------|------------|
| **Range of** | ** ** | **Weighted**            | ** ** | ** **      | ** ** | ** **      | ** ** | **Average**                 | ** ** |
| **Exercise**      | ** ** | **Average**             | ** ** | **Options**     | ** ** | **Options**     | ** ** | **Contractual**             | ** ** |
| **Price**         | ** ** | **Exercise Price** | ** ** | **Outstanding** | ** ** | **Exercisable** | ** ** | **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       |            | 127,500    |            | 108,500    |                        | 6.27       |   |
| $3.98 -$5.25      |       | $                       | 4.63       |            | 626,000    |            | 217,500    |                        | 7.79       |   |
| $6.75 -$7.38      |       | $                       | 7.37       |            | 33,500     |            | 33,500     |                        | 1.27       |   |
| $11.00            |       | $                       | 11.00      |            | 10,000     |            | 10,000     |                        | 0.14       |   |
| ** **        |       |                    |       | 867,000         |       | 439,500         |       |                        |       |

 

----

(1)             The optionwill terminate one year after the Director ceases to be a member of the Boardof Directors, except that in the event of the Director’s death while serving asa Director the option would be exercisable by his heirs or representatives ofhis estate for a period of two years after date of death.

Thefair value of each option is estimated on the date of grant using theBlack-Scholes option pricing model.

Thefollowing weighted-average assumptions were used:

|                                    | ** ** | **Fiscal** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2004**   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Risk free  interest rate           |       | 3.8        | %          | 4.5 | % | 3.9 | % |
| Expected life of  options in years |       | 4.6        |       | 4.8 |   | 4.5 |   |
| Expected stock  price volatility   |       | 30         | %          | 19 | % | 19 | % |
| Expected dividend yield            |       | 0          | %          | 0 | % | 0 | % |

 

The Black-Scholes option valuation modelwas developed for use in estimating the fair value of traded options that haveno vesting restrictions and are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company’s employee stockoptions have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

**15. Commitments and Contingencies**

*Employment Agreement*.   As of April 30, 2006, 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 of April30, 2006, management believes there are no such legal proceedings that willhave a material adverse impact on the Company’s financial position or resultsof 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 onDecember 31, 2015. Rent expense for office space and other operating leases forthe years ended April 30, 2004, 2005 and 2006, was   $764,283, $1,052,765 and $1,135,099,respectively. Required minimum lease payments for the remaining terms of theabove leases are:

F-23

----

 

| Year ending April 30, | ** ** | ** ** | ** ** |   |
|--------------------------------------|------------|------------|------------|--------|
| 2007                                 |       | $          | 999,095    |   |
| 2008                                 |       | 754,552    |       |
| 2009                                 |       | 838,018    |       |
| 2010                                 |       | 836,915    |       |
| 2011                                 |       | 794,269    |       |
| Thereafter                           |       | 2,610,461  |       |
|                                      |            |            |            |        |  |  |

 

**16.  IncomePer Share**

Income per share amounts are based on theweighted average number of shares of common stock and potential dilutive commonshares outstanding during the period. The weighted average number of sharesused to compute basic and diluted earnings per share for the years ended April30, 2004, 2005, and 2006 are as follows:

|                                                                   | ** ** | **For the Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2004**                                                  | ** ** | **2005** | ** ** | **2006** | ** ** |
| Weighted average  shares:                                         |       |                                                      |       |   |   |   |   |
| Weighted average shares outstanding for basic income  per share   |       | 5,008,427                                                 |       | 4,789,784 |   | 4,439,021 |   |
| Effect of dilutive stock options and warrants                     |       | 84,906                                                    |       | 96,619 |   | 219,127 |   |
| Weighted average  shares outstanding for diluted income per share |       | 5,093,333                                                 |       | 4,886,403 |   | 4,658,148 |   |

 

At April 30, 2004, 2005,and 2006, the Company had 621,631, 218,000, and 10,000 employee stock optionsand warrants, respectively, and 70,000, 190,000, and 20,000 director options,respectively, which were not included in the computation of diluted earningsper share because to do so would have been antidilutive for the periodpresented.

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

The table below sets forth the unauditedconsolidated operating results by quarter for the year ended April 30, 2006.
| ** **                           | ** ** | **For the Three Months Ended,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **July 31, 2005**                         | ** ** | **October 31, 2005** | ** ** | **  January 31, 2006  ** | ** ** | **April 30, 2006** | ** ** |
| ** **                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                      |       | $                                                   | 8,498,007  |   | $ | 9,914,714 |   | $ | 10,331,603 |   | $ | 10,555,768 |   |
| Interest Expense                     |       | 2,960,147                                           |       | 3,476,266 |   | 3,937,523 |   | 4,667,807 |   |
| Net Income                           |       | 924,864                                             |       | 764,640 |   | 318,491 |   | 437,159 |   |
| Basic Net Income  per Common Share   |       | $                                                   | 0.21       |   | $ | 0.17 |   | $ | 0.07 |   | $ | 0.10 |   |
| Diluted Net Income per  Common Share |       | $                                                   | 0.21       |   | $ | 0.17 |   | $ | 0.07 |   | $ | 0.09 |   |

 

Thetable below sets forth the unaudited consolidated operating results by quarterfor the year ended April 30, 2005.
| ** **                                     | ** ** | **For the Three Months Ended,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **July 31, 2004**                         | ** ** | **October 31, 2004** | ** ** | **January 31, 2005** | ** ** | **April 30, 2005** | ** ** |
| ** **                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest Income                                |       | $                                                   | 6,952,179  |   | $ | 7,001,225 |   | $ | 7,220,443 |   | $ | 7,097,874 |   |
| Interest Expense                               |       | 1,776,773                                           |       | 1,828,779 |   | 1,964,382 |   | 2,045,822 |   |
| Net Income                                     |       | 86,953                                              |       | 216,070 |   | 278,886 |   | 101,620 |   |
| Basic and Diluted Net  Income per Common Share |       | $                                                   | 0.02       |   | $ | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |

 

F-24

----

 

Thetable below sets forth the unaudited consolidated operating results by quarterfor the year ended 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 | ) |

 

F-25

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