**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 
| **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                           |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | ** ** |                                                                                                                                                                                                                                                                                                                           |
|       | ** ** | **For the fiscal year ended April 30,  2005**                                                                                                                                                                                                                                                                             |
|       | ** ** |                                                                                                                                                                                                                                                                                                                           |
| **OR**     |
|       | ** ** |                                                                                                                                                                                                                                                                                                                           |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                           |
|       |       | **For the transition period from                        to                            ** |

 

**Commission File Number 0-26686**

 

**First Investors FinancialServices Group, Inc.**

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).

Yes o  No ý

 

Theaggregate market value of the voting stock of the registrant held bynon-affiliates of the registrant as of June 30, 2005 based on the closingprice of the Common Stock on the Over The Counter Bulletin Board Market on saiddate was $12,512,468.

 

Therewere 4,411,693 shares of Common Stock of the registrant outstanding as of June 30,2005.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of theregistrant’s definitive proxy statement for its annual meeting of shareholdersto be held on September 8, 2005, which is to be filed with the Securities andExchange Commission not later than 120 days after April 30, 2005, areincorporated by reference into part III hereof.

 

 

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

**AND SUBSIDIARIES**

 

**FORM 10-K**

**APRIL 30, 2005**

 

**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**

 

FirstInvestors Financial Services Group, Inc., together with its wholly-ownedsubsidiaries, (“Company”) is a consumer finance company engaged in originatingand holding for investment retail installment sales contracts and promissorynotes receivable secured by new and used automobiles and light trucks arisingfrom the sale of the vehicle by factory authorized franchised dealers orrefinanced by the vehicle owner (consumer). The Company specializes in lendingto consumers with impaired credit profiles. Additionally, the Company haspurchased receivables in portfolio acquisitions or from other third partyoriginators. The Company does not utilize off-balance sheet securitization tofinance its Receivables Held for Investment. As of April 30, 2005, theCompany had Receivables Held for Investment in the aggregate principal amountof approximately $245 million having an effective yield of 12.8% and a netinterest spread to the Company of 9.4% (net of cost of funds and other carryingcosts).

 

Duringthe fiscal year ended April 30, 2003, the Company began performing servicingand collection 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 $439 million as of April 30, 2005.

 

**History**

 

TheCompany was organized in 1989 by Tommy A. Moore, Jr. and Walter A.Stockard to conduct an automobile finance business, with Mr. Mooreproviding the operating expertise and Mr. Stockard and members of hisfamily furnishing the initial financial support. During the first three yearsof the Company’s existence, its operations consisted primarily of purchasingand pooling receivables for resale to financial institutions and others. In March 1992,the Company obtained additional capital from a group of private investors andexpanded its operations and reoriented its business towards originatingreceivables for retention.  In October 1995,the Company completed the initial public offering of common stock whichresulted in net proceeds of $18.5 million.

 

OnOctober 2, 1998, the Company completed the acquisition of First InvestorsServicing Corporation (“FISC”), formerly known as Auto Lenders AcceptanceCorporation, from Fortis, Inc. Headquartered in Atlanta, Georgia.  FISC engaged in essentially the same businessas the Company and additionally performed servicing and collection activitieson a portfolio of receivables originated for investment as well as on aportfolio 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.

 

**Industry**

 

Theautomobile finance industry is the second largest consumer finance market inthe United States. Most automobile financing is provided by captive financesubsidiaries of major automobile manufacturers, banks, thrifts, credit unionsand independent finance companies such as the Company. The overall industry isgenerally segmented according to the type of vehicle sold (new vs. used), thenature of the dealership (franchised vs. independent) and the creditcharacteristics of the borrower (prime vs. non-prime). The non-prime market iscomprised of individuals who are relatively high credit risks and who have limitedaccess to traditional financing sources, generally due to unfavorable pastcredit experience, low income or limited financial resources and/or the absenceor limited extent of prior credit history.

 

1

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**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 major automobile manufacturers. The Company does not generally dobusiness with “independent” dealers who operate used car lots with nomanufacturer affiliation. No dealer or group of dealers (who are affiliatedwith each other through common ownership) accounted for more than 5% of thereceivables owned by the Company at April 30, 2005, and no dealer or groupof related dealers originated more than 5% of the receivables held by theCompany at that date. The volume and frequency of receivable originations fromparticular dealers vary widely with the size of the dealerships as well asmarket and competitive factors in the various dealership locations.

 

*Location of Dealers*.  Approximately 35% of the dealers with whomthe Company has agreements are located in Texas, where the Company has operatedsince 1989, 23% in Ohio and 17% in Tennessee. The Company’s expansion beyond Texas began in 1992 and today the Companyoperates in 28 states.

 

Thefollowing table summarizes, with respect to each state in which the Companyoperates, the number of receivables (and percentage of total receivables)outstanding which were originated by the Company from refinancing existingloans originally financed from an outside third party, dealers in such statesor purchased through bulk portfolio acquisitions:

 
| ** **     | ** ** | **Receivables Held for Investment** | ** ** |
|----------------|------------|-------------------------------------|------------|
| ** **     | ** ** | **As of   30-Apr-04**               | ** ** | **As of   30-Apr-05** | ** ** |
| **State**      | ** ** | **Loan Count**                      | ** ** | **%** | ** ** | **Loan Count** | ** ** | **%** | ** ** |
| Texas          |       | 4,565                               |       | 28.0 | % | 5,018 |   | 28.5 | % |
| Georgia        |       | 3,050                               |       | 18.7 | % | 3,149 |   | 17.9 | % |
| Ohio           |       | 2,119                               |       | 13.0 | % | 1,918 |   | 10.9 | % |
| California     |       | 406                                 |       | 2.5 | % | 857 |   | 4.9 | % |
| Florida        |       | 447                                 |       | 2.7 | % | 751 |   | 4.2 | % |
| Illinois       |       | 440                                 |       | 2.7 | % | 710 |   | 4.0 | % |
| Tennessee      |       | 672                                 |       | 4.1 | % | 607 |   | 3.4 | % |
| Missouri       |       | 581                                 |       | 3.6 | % | 589 |   | 3.3 | % |
| Oklahoma       |       | 1,090                               |       | 6.7 | % | 580 |   | 3.3 | % |
| North Carolina |       | 588                                 |       | 3.6 | % | 533 |   | 3.0 | % |
| Indiana        |       | 194                                 |       | 1.2 | % | 435 |   | 2.5 | % |
| Arizona        |       | 198                                 |       | 1.2 | % | 298 |   | 1.7 | % |
| Colorado       |       | 313                                 |       | 1.9 | % | 249 |   | 1.4 | % |
| Virginia       |       | 270                                 |       | 1.7 | % | 177 |   | 1.0 | % |
| Michigan       |       | 301                                 |       | 1.9 | % | 157 |   | 0.9 | % |
| All others (1) |       | 1,077                               |       | 6.5 | % | 1,604 |   | 9.1 | % |
|           |       | 16,311                              |       | 100.0 | % | 17,632 |   | 100.0 | % |

 

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(1)          Includesdealers located in Alabama, Connecticut, Delaware, Iowa, Idaho, Kansas,Kentucky, Massachusetts, Maryland, Minnesota, Nebraska, Nevada, New Hampshire,New Jersey, New Mexico, New York, Oregon, Pennsylvania, South Carolina, SouthDakota, Utah, Vermont, Washington and Wisconsin.

 

2

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*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.

 

Inaddition to soliciting and enrolling new dealers, the regional representativesassist new dealers in assimilating the Company’s system of credit applicationsubmission, review, acceptance and funding, as well as dealing with routinedealer relations on a daily basis. The role of the regional representatives isgenerally limited to marketing the Company’s core finance programs andmaintaining relationships with the Company’s originating dealer base. Therepresentatives do not enter into or modify dealer agreements on behalf of theCompany, do not participate in credit evaluation or loan funding decisions anddo not handle funds belonging to the Company or its dealers. Eachrepresentative reports to, and is supervised by, the Company’s sales andmarketing manager in Houston.

 

Ithas been the policy of the Company to avoid the establishment of branch officesbecause it believes that the expenses and administrative burden of such officesare generally unjustified. Moreover, in view of the availability of modern datatransmission technology, the Company has concluded that the critical functionsof credit evaluation and loan origination are best performed and controlled ona centralized basis from its Houston facility. Accordingly, as the marketingrepresentative system has operated satisfactorily, the Company does not currentlyexpect to create branch offices.

 

**Financing Programs**

 

TheCompany originates loans from two sources: (i) dealer indirect and (ii) consumerdirect. The dealer indirect program generates approximately 36% of the Company’scurrent origination volume and consists of loans originated directly fromdealerships in states in which the Company operates.  Consumer direct originations contributeapproximately 64% of originations and involve applications for credit obtainedthrough direct marketing efforts from consumers who are primarily seeking toacquire a vehicle or refinance an existing automobile loan.

 

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

 

Inaddition to originating receivables from dealers under the core program ormaking loans directly to consumers, the Company has acquired seasonedreceivables in portfolio acquisitions or from other third party originators andmay continue to do so from time to time.

 

TheCompany had active dealership agreements with 1,477 dealers at April 30,2005. These are non-exclusive agreements terminable at any time by either partyand they require no specific volume levels. The agreements with the dealerscontain customary representations and warranties concerning title to thereceivables sold, validity of the liens on the underlying vehicles, compliancewith applicable laws and related matters. Although the dealers are obligated topurchase receivables that do not conform to these warranties, the dealers donot guarantee collectibility or obligate themselves to purchase receivablessolely because of payment default. The receivables are originated at par or atprices that may reflect a discount or premium depending on the annualpercentage rates of particular receivables and the Company’s assessment ofrelative credit risk. The pricing and credit terms upon which the Companyagrees to originate receivables is governed by the Company’s credit policy anda credit score generated by the Company’s proprietary, empirical scoring model.

 

3

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**Credit Evaluation**

 

*General*.  In connection with the origination of areceivable by the Company, the Company follows systematic procedures designedto eliminate unacceptable risks. This involves a three-step process in which (i) thecreditworthiness of the borrower and the terms of the proposed transaction areevaluated and either approved, declined or modified by the Company’s creditverification department, (ii) the loan documentation and collateralizationis reviewed by the Company’s funding department, and (iii) additionalcollateral verification procedures and customer interviews are conducted by theCompany. During the course of this process, the Company’s credit verificationand funding personnel coordinate closely with the finance and insurancedepartments of the dealers or with individuals to whom the Company lendsdirectly. The Company has developed financing programs under which it approvesloans that vary in pricing and loan terms depending on the relative credit riskdetermined for each loan. Credit or default risk is evaluated by the Company’sloan officers in conjunction with a proprietary, empirical credit scoring modeldeveloped from the Company’s 17 year database of non-prime lending results.

 

*CollateralVerification*. As a condition to the origination of each receivable by the Company, theCompany performs an individual audit evaluation to verify the details of thecredit application, and to confirm that the material terms of the sale conformto the purchaser’s understanding of the transaction.  In the majority of circumstances for dealerindirect loans, we conduct a personal telephonic interview with eachprospective obligor.  For direct toconsumer loans, we verify all information during our normal underwritingprocedures.  The Company will originate areceivable only after receipt and review of a satisfactory audit report.

 

**Servicing**

 

TheCompany believes that competent, attentive and efficient loan servicing is asimportant as sound credit evaluation for purposes of assuring the integrity ofa receivable.

 

Inaddition to servicing its owned portfolio, in December 2002, the Companybegan servicing and collection activities for third parties in exchange forservicing fees.   The Company completedtwo transactions during the fiscal year ended April 30, 2003, both ofwhich related to portfolio acquisitions from collateral previously originatedby Union Acceptance Corporation.  Underthe first transaction, the Company invested $475,061 for 40% of the common stockand $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.

 

*CustomerProfile*.  The Company’sprimary goal in credit evaluation is to make loans to customers having stablepersonal situations, predictable incomes and the ability and inclination toperform their obligations in a timely manner. Many of the Company’s customersare persons who have experienced credit difficulties in the past by reason ofillness, divorce, job loss, reduction in pay or other adversities, but whoappear to the Company to have the capability and commitment to meet theirobligations. Through its credit evaluation process, the Company seeks todistinguish these persons from those applicants who are chronically poor creditrisks.

 

4

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Certaininformation concerning the Company’s obligors for the past two fiscal years(based on credit information compiled at the time of loan origination) is setforth in the following table:

 
| ** **                                      | ** ** | **April 30,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2004**           | ** ** | **2005** | ** ** |
| Average monthly  gross income                   |       | $                  | 4,300      |   | $ | 4,468 |   |
| Average ratio of  consumer debt to gross income |       | 36                 | %          | 37 | % |
| Average years in  current employment            |       | 7                  |       | 7 |   |
| Average years in  current residence             |       | 6                  |       | 6 |   |
| Residence owned                                 |       | 52                 | %          | 52 | % |
| Residence rented                                |       | 40                 | %          | 40 | % |
| Other residence  arrangements (1)               |       | 8                  | %          | 8 | % |
|                                                 |            |                    |            |  |  |  |  |

 

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(1)          Includesmilitary personnel and persons residing with relatives.

 

*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,** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|
| ** **                                             | ** ** | **2004**            | ** ** | **2005** | ** ** |
| New Vehicles:                                          |       |                |       |   |   |
| Percentage of  portfolio (1)                           |       | 24                  | %          | 20 | % |
| Number of  receivables outstanding                     |       | 3,942               |       | 3,570 |   |
| Average amount  at date of origination                 |       | $                   | 22,025     |   | $ | 22,708 |   |
| Average term  (months) at date of origination (2)      |       | 68                  |       | 68 |   |
| Average  remaining term (months) (2)                   |       | 44                  |       | 44 |   |
| Average monthly  payment                               |       | $                   | 495        |   | $ | 490 |   |
| Average annual  percentage rate                        |       | 15.5                | %          | 14.5 | % |
| Used Vehicles:                                         |       |                |       |   |   |
| Percentage of  portfolio (1)                           |       | 76                  | %          | 80 | % |
| Number of  receivables outstanding                     |       | 12,369              |       | 14,062 |   |
| Average age of  vehicle at date of origination (years) |       | 2                   |       | 2 |   |
| Average amount  at date of origination                 |       | $                   | 16,940     |   | $ | 18,392 |   |
| Average term  (months) at date of origination (2)      |       | 60                  |       | 61 |   |
| Average  remaining term (months) (2)                   |       | 34                  |       | 53 |   |
| Average monthly  payment                               |       | $                   | 420        |   | $ | 423 |   |
| Average annual  percentage rate                        |       | 16.3                | %          | 13.8 | % |

 

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(1)          Calculatedon the basis of number of receivables outstanding as of the date indicated.

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

 

**Financing Arrangements**

 

*General.*  The Company’s financing strategy is toutilize credit and commercial paper facilities with financial institutions tofund originations.  When sufficientvolume is originated, the Company will complete an on balance sheet securitizationand issue term notes, thereby freeing up capacity in the warehouse and creditfacilities.  Additionally, the Companyhas a working capital term loan that is utilized for working capital andgeneral corporate purposes.  Lastly, theCompany has an agreement with a limited partnership that is affiliated with acurrent shareholder and member of the board of directors, to borrow up to $2.5million.  Proceeds of the borrowings areto be used to fund private and open market purchases of the Company’s commonstock pursuant to a Stock Repurchase

 

5

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Planand for general corporate purposes. The following chart summarizes theborrowing status at April 30, 2005 under these facilities:

 
| **Facility  Type**               | ** ** | **Outstanding  Balance** | ** **  | **Available  Credit** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|--------------------------|-------------|-----------------------|------------|------------|------------|
| FIARC Commercial  Paper Facility |       | $                        | 127,928,518 |                  | $          | 22,071,482 |       | $ | 150,000,000 |   |
| FIRC Credit  Facility            |       | 43,633,636               |        | 6,366,364             |       | 50,000,000 |       |
| Term Notes                       |       | 70,050,511               |        | —                |       | 70,050,511 |       |
| Working Capital  Term Loan       |       | 10,500,000               |        | 3,000,000             |       | 13,500,000 |       |
| Shareholder                      |       | 2,500,000                |        | —                |       | 2,500,000  |       |
| Total                            |       | $                        | 254,612,665 |                  | $          | 31,437,846 |       | $ | 286,050,511 |   |

 

Pleasesee Note 7 to the consolidated financial statements for further informationregarding interest rates, expiration dates and other terms of the variousfacilities.

 

**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 2, 2004, thematurity date of the FIRC facility was extended to February 15, 2006.  No other material changes were made.  The FIARC commercial paper facility expiredon December 2, 2004 and was renewed until February 15, 2006.  No other material changes were made.   If the facility is not extended beyond thematurity date, receivables pledged as collateral would be allowed to amortize;however, no new receivables would be allowed to be funded under the creditfacility.  The Company intends to seek arenewal of the facilities from its lenders prior to maturity.  Management considers its relationship withits lenders to be satisfactory and has no reason to believe that these creditfacilities will not be renewed.  If thesefacilities are not renewed, however, or if material changes are made to itsterms and conditions, it could have a material 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 tocomplete securitizations which would have an adverse effect on the Company’sliquidity and financial position.

 

*LoanCovenants*.  The documentationgoverning each of the Company’s financing arrangements contains numerouscovenants 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 and workingcapital facility or the termination of the commercial paper facilities. Throughthe operation of the collateral agency arrangements, which are in the nature ofa “lock-box” security device covering the collection of principal and intereston almost all of the Company’s receivables, such a default could cause theimmediate termination of the Company’s primary sources of liquidity. TheCompany was not in default with respect to any covenants governing thesefinancing arrangements at April 30, 2005.

 

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

 

*CreditEnhancement — FIRC Credit Facility*. In order to obtain a lower cost of funding, the Company has agreed underthe FIRC credit facility to maintain credit enhancement insurance covering allof its receivables pledged as collateral under this facility. The facilitylenders are named as additional insureds under these policies.

 

6

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Thecoverage is obtained on each receivable at the time it is originated by theCompany and the applicable premiums are prepaid for the life of the receivable.Each receivable is covered by three separate credit insurance policies,consisting of basic default insurance under a standard auto loan protection policy(known as “ALPI” insurance) together with certain supplemental coveragesrelating to physical damage and other risks. Solely at its expense, the Companycarries these coverages and neither the vehicle purchasers nor the dealers arecharged for the coverages and they are usually unaware of their existence. TheCompany’s ALPI insurance policy is written by National Union Fire InsuranceCompany of Pittsburgh (“National Union”), which is a wholly-owned subsidiary ofAmerican International Group.

 

Thepremiums that the Company paid during its past fiscal year for its three creditenhancement insurance coverages, of which the largest component is the basicALPI insurance, represented approximately 2.6% of the principal amount of thereceivables originated during the year. Aggregate premiums paid for ALPIcoverage alone during the fiscal years ended April 30, 2003, 2004 and 2005were $4,141,328, $3,066,131, and $3,669,198, respectively, and accounted for 3.8%,3.5% and 2.3% of the aggregate principal balance of the receivables originatedduring 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, 2005,gross premiums had been ceded to the Insurance Subsidiary since its inceptionby National Union in the amount of $35,132,279 and the Insurance Subsidiaryreimbursed National Union for aggregate reinsurance claims in the amount of $9,384,091.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, 2005, the InsuranceSubsidiary had capital and surplus of $2,464,149 and unencumbered cash reservesof $1,110,550 in addition to the $3,317,904 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.

 

*Credit Enhancement — FIARC Commercial PaperFacility.*  Enhancement for theFIARC commercial paper facility is provided by a surety bond issued by MBIAInsurance Corporation. The surety bond provides payment of principal andinterest to Variable Funding Capital Corporation (“VFCC”) in the event ofpayment default by FIARC. MBIA is paid a surety premium equal to 0.35% perannum on the average outstanding borrowings under the facility. The surety bondis issued for a term to coincide with the facility. Termination of the suretybond would result in default under the FIARC commercial paper facility.

 

*Credit Enhancement — Term Note*.  A surety bond issued by MBIA InsuranceCorporation enhances the 2003-A Term Notes issued on November 20, 2003.The surety bond provides payment of principal and interest to the note holdersin the event of payment default by the 2003-A Trust. MBIA is paid a suretypremium equal to 0.35% per annum on the outstanding balance of the 2003-A TermNotes. The surety bond was issued for the term of the underlying notes, whichmature on April 20, 2011. Termination of the surety bond would result indefault under the governing documents.

 

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*Economy. *Periods ofweakened economic condition and slow or negative growth will tend to have anunfavorable effect on delinquencies, defaults and losses, particularly with non-primeborrowers.  Recent periods have been positivelyimpacted by increasing wholesale prices of used vehicles which decreases lossesto the Company upon repossession.  Losseshave adverse effects on the Company’s liquidity and operating results.

 

*Servicer Default. *The Company performs servicing and collection activities forits owned portfolio as well as two pools of loans owned or partially owned bythird parties.  Each of the servicingagreements identifies areas of servicer default which are generally defined asthe inability to protect the assets under agreement or failing trigger tests ofthe portfolios.  Triggers are related tonegative default and loss performance as compared to specified levels.  An event of servicer default would haveadverse effects on liquidity and profitability and could result in having theportfolios transferred to another servicer.

 

**Securitization**

 

Manyfinance companies similar to the Company engage in “securitization”transactions whereby receivables are pooled and conveyed to a trust or otherspecial purpose entity, with interests in the entity being sold to investors.As the pooled receivables amortize, finance charge collections are passedthrough to the investors at a specified rate for the life of the pool and aninterest in collections exceeding the specified rate is retained by thesponsoring finance company. For accounting purposes, the sponsor oftenrecognizes as revenue the discounted present value of this excess interest asestimated over the life of the pool. This revenue, or “gain on sale”, isrecognized for the period in which the transaction occurs.

 

TheCompany does not use off-balance sheet financing structures for receivablesoriginated by the Company and therefore, recognizes interest income on theaccrual method over the life of the receivables rather than recording gainswhen those receivables are sold. The Company does not currently intend toengage in off-balance sheet securitization transactions resulting in gains onsale of receivables.

 

**Employees**

 

TheCompany has 148 employees as of April 30, 2005, including 57 located atits headquarters in Houston, 87 located at its loan servicing center in Atlantaand 4****regional marketing representatives.The Company’s employees are covered by group health insurance.  Effective May 1, 1994, the Companyadopted a participant-directed 401(k) retirement plan for its employees. Anemployee becomes eligible to participate in the plan immediately uponemployment. The Company pays the administrative expenses of the 401(k) plan.The Company also matches a percentage of each participant’s voluntarycontributions up to a maximum voluntary contribution of 3% of the participant’scompensation. In fiscal years 2005 and 2004, the Company recorded matching contributionsto the 401(k) plan of $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 recipients.

 

**Information Systems**

 

TheCompany utilizes advanced information management systems including a fullyintegrated software program designed to expedite each element in thereceivables underwriting process, including the entry and verification ofcredit application data, credit analysis and the communication of creditdecisions to originating dealers. The Company also utilizes a number ofanalytical tools in managing credit risk including an empirical scoring model,trend and discriminant analysis, and pricing models which are designed tooptimize yield given an expected default rate.

 

Theservicing and collection platform is provided by an application serviceprovider through which the Company accesses a mainframe system which isdesigned to provide support for all collections and servicing activitiesincluding billing, collection process management, account activity history,repossession management, loan accounting information and payment posting.  The Company pays a monthly usage fee to theservice provider based on the number of accounts serviced.  The Company also utilizes auto dialersoftware that interfaces with the system and serves as an efficiency tool inthe collection process.

 

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Boththe front-end and back-end platforms are highly compatible from an integrationstandpoint with all loans boarded electronically following funding from theorigination system to the collection system.

 

Inaddition to its two primary operating systems, the Company also utilizesthird-party software in its accounting, human resources, and data managementfunctions, all of which are products well known in the marketplace.

 

TheCompany believes that its data processing and information management capacityis sufficient to accommodate significantly increased volumes of receivableswithout material additional capital expenditures for this purpose.

 

**Competition**

 

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

 

Thenon-prime market in which the Company operates also consists of a number ofboth large and mid-sized independent finance companies doing business on alocal, regional or national basis, including some which are affiliated withcaptive finance companies or large insurance groups. Reliable data regardingthe number of such companies and their market shares is unavailable; however,the market is highly fragmented and intensely competitive.

 

**Regulation**

 

Theoperations of the Company are subject to regulation, supervision and licensingunder various federal and state laws and regulations. State consumer protectionlaws, motor vehicle installment sales acts and usury laws impose ceilings onpermissible finance charges, require licensing of finance companies as consumerlenders, and prescribe many of the substantive provisions of the retailinstallment sales contracts that the Company originates. Federal consumercredit statutes and regulations primarily require disclosure of credit terms inconsumer finance transactions, although rules adopted by the Federal TradeCommission (including the so-called holder-in-due-course rule) also affect thesubstantive rights and remedies of finance companies originating automobileinstallment sales contracts.

 

TheCompany’s business requires it to hold consumer lending licenses issued byindividual states, under which the Company is subject to periodic examinations.State consumer credit regulatory authorities generally enjoy broad discretionin the revocation and renewal of such licenses and the loss of one or more ofthese in states in which the Company conducts material business could adverselyaffect the Company’s operations.

 

Inaddition to specific licensing and consumer regulations applicable to theCompany’s business, the Company’s ability to enforce and collect itsreceivables is limited by several laws of general application, including theFair Debt Collection Practices Act, Federal bankruptcy laws and the Uniform CommercialCodes of the various states. These and similar statutes govern the procedures,and in many instances limit the rights of creditors, in connection withasserting defaults, repossessing and selling collateral, realizing the proceedsthereof, and enforcing deficiencies.

 

TheCompany’s insurance subsidiary is subject to regulation by the Department ofBanking, Insurance and Securities of the State of Vermont. The plan ofoperation of the subsidiary, described above under “Financing Arrangements” and“Credit Enhancement”, was approved by the Department and any material changesin those operations would likewise require the Department’s approval. Thesubsidiary is subject to minimum capital and surplus requirements, restrictionson dividend payments, annual reporting, and periodic examination requirements.

 

9

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TheCompany believes that its operations comply in all material respects with therequirements of laws and regulations applicable to its business. Theserequirements and the interpretations thereof, change from time to time and arenot uniform among the states in which the Company operates. The Company retainsa specialized consumer credit legal counsel that engages and supervises locallegal counsel in each state where the Company does business, to monitorcompliance on an ongoing basis and to respond to changes in applicablerequirements as they occur.

 

**ITEM 2.  *PROPERTIES***

 

TheCompany’s principal physical properties are its data processing and communicationsequipment and furniture and fixtures, all of which the Company believes to beadequate for their intended use.

 

TheCompany’s offices in suburban Houston consist of approximately 17,304 squarefeet on the seventh floor of an eight-story office building. This space is heldunder a lease requiring average annual rentals of approximately $311,384 andexpiring on February 28, 2011, with an option to renew for five years atthe market rate then prevailing.

 

TheCompany’s offices in suburban Atlanta consist of approximately 27,467 squarefeet on the third and fourth floors of a four-story office building. This spaceis held under a lease requiring average annual rentals of approximately$557,227 and expiring on June 30, 2007, with an option to renew for twoconsecutive five-year periods at the market rate then prevailing.  The Company owns no real property.

 

**ITEM 3.  *LEGAL PROCEEDINGS***

 

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***

 

Nomatters were submitted to a vote of the Company’s securities holders during thefourth quarter of the past fiscal year.

 

**PART II**

 

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

 

TheCompany’s common stock has been traded on the NASDAQ National Market System,under the symbol “FIFS” from the completion of the Company’s initial publicoffering on October 4, 1995 through December 1, 2004.  On December 2, 2004, the Company’scommon stock started trading on the over-the-counter bulletin board market.High and low closing prices of the common stock are set forth below for theperiods indicated.

 

| **Three  Months Ended** | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|
| 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 |   |
| April 30,  2003    |       | $        | 4.25       |    | $          | 3.27 |   |
| January 31,  2003  |       | $        | 3.75       |    | $          | 2.36 |   |
| October 31,  2002  |       | $        | 3.44       |    | $          | 2.60 |   |
| July 31,  2002     |       | $        | 3.90       |    | $          | 3.25 |   |

 

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Asof May 31, 2005, there were approximately 220 shareholders of record ofthe Company’s common stock.  The Companybelieves that the number of beneficial owners is significantly greater than thenumber of shareholders of record.

 

TheCompany has not declared or paid any cash dividends on its common stock sinceits inception. The payment of cash dividends in the future will depend on theCompany’s earnings, financial condition and capital needs and on other factorsdeemed pertinent by the Company’s Board of Directors. It is currently thepolicy of the Board of Directors to retain earnings to finance the operationand expansion of the Company’s business. The Company has no plans to pay cash dividends on the common stock inthe foreseeable future.

 

Duringthe twelve months ended April 30, 2005 and 2004, the Company repurchased 588,576and 43,000 shares of common stock, respectively.  The monthly detail of such repurchasesappears below.

 

| **Three  Months Ended** | ** ** | **# of Shares  Repurchased** | ** ** | **Wtd. Avg.  Price/Share** | ** ** |
|-------------------------|------------|------------------------------|------------|----------------------------|------------|
| July 31,  2003     |       | 21,000                       |       | $                          | 4.03       |   |
| October 31,  2003  |       | —                       |       | —                     |       |
| January 31,  2004  |       | 5,000                        |       | $                          | 4.20       |   |
| April 30,  2004    |       | 17,000                       |       | $                          | 5.31       |   |
| July 31,  2004     |       | —                       |       | —                     |       |
| October 31,  2004  |       | 900                          |       | $                          | 4.35       |   |
| January 31,  2005  |       | 587,676                      |       | $                          | 4.24       |   |
| April 30,  2005    |       | —                       |       | —                     |       |

 

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

 

Thefollowing selected consolidated financial data of the Company for each of thefive fiscal years ended April 30, 2005, has been derived from the auditedconsolidated financial statements of the Company and should be read inconjunction with such statements (dollars in thousands, except sharedata).  As reflected in the Company’s Form 10-K/Afiled November 29, 2002, the Company restated its consolidated financialstatements as of April 30, 2002 and 2001, and for the three years ended April 30,2002 to correct for certain prior period misstatements that were discovered bythe Company as it was performing additional control procedures adopted duringthe first quarter 2003 period at the request of its new accounting firm, GrantThornton LLP.  The restatement related tooverstated balances that should have been identified by the Company uponconversion from a third party servicer. The restatement impacted certain restricted cash, deferred expenses,receivables held for investment, and tax balances as reported, but it did notaffect the Company’s free liquidity position or debt position. The balance ofretained earnings as of April 30, 1999 has been restated from amountspreviously reported to reflect a retroactive charge of $1,248,918, after tax.Restricted cash, deferred expenses, receivables held for investment, and taxbalances have been adjusted for the restatement for all applicable years.

 

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| ** **                                                                                                                     | ** ** | **Year Ended April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2001**                      | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Statement  of Operations:**                                                                                                  |       |                          |       |   |   |   |   |   |   |   |   |
| Interest income                                                                                                                |       | $                             |       | 44,365 |   | $ |   | 37,547 |   | $ |   | 32,940 |   | $ |   | 30,498 |   | $ |   | 28,272 |   |
| Interest expense                                                                                                               |       | 20,141                        |       | 13,710 |   | 10,166 |   | 8,438 |   | 7,616 |   |
| Net interest income                                                                                                            |       | 24,224                        |       | 23,837 |   | 22,774 |   | 22,060 |   | 20,656 |   |
| Provision for  credit losses                                                                                                   |       | 8,351                         |       | 8,941 |   | 10,338 |   | 12,428 |   | 9,520 |   |
| Loss on  Receivables Acquired for Investment and Trust Certificates                                                            |       | 400                           |       | 1,260 |   | — |   | — |   | — |   |
| Net interest  income after provision for credit losses and loss on Receivables Acquired for  Investment and Trust Certificates |       | 15,473                        |       | 13,636 |   | 12,436 |   | 9,632 |   | 11,136 |   |
| Servicing  revenue                                                                                                             |       | 457                           |       | — |   | 1,080 |   | 4,889 |   | 3,398 |   |
| Late fees and  other                                                                                                           |       | 1,090                         |       | 1,176 |   | 1,220 |   | 1,912 |   | 3,834 |   |
| Income from  investment                                                                                                        |       | —                        |       | — |   | 418 |   | 1,009 |   | 669 |   |
| Other interest  income                                                                                                         |       | 1,544                         |       | 682 |   | 283. |   | 460 |   | 427 |   |
| Realized and  unrealized loss on interest rate derivative positions                                                            |       | —                        |       | (121 | ) | (329 | ) | (34 | ) | (373 | ) |
| Total other  income                                                                                                            |       | 3,091                         |       | 1,737 |   | 2,672 |   | 8,236 |   | 7,955 |   |
| Salaries and  benefits                                                                                                         |       | 9,208                         |       | 7,902 |   | 7,785 |   | 8,538 |   | 8,917 |   |
| Operating  expenses                                                                                                            |       | 2,447                         |       | 2,613 |   | 2,488 |   | 5,098 |   | 4,801 |   |
| General and  administrative                                                                                                    |       | 4,702                         |       | 4,238 |   | 3,554 |   | 3,723 |   | 3,732 |   |
| Other interest  expense                                                                                                        |       | 1,311                         |       | 785 |   | 643 |   | 468 |   | 565 |   |
| Total operating  expenses                                                                                                      |       | 17,668                        |       | 15,538 |   | 14,470 |   | 17,827 |   | 18,015 |   |
| Income (Loss)  before provision (benefit) for income taxes and  minority interest                                         |       | 896                           |       | (165 | ) | 638 |   | 41 |   | 1,076 |   |
| Provision  (Benefit) for income taxes                                                                                          |       | 29                            |       | (178 | ) | 191 |   | 19 |   | 392 |   |
| Minority  interest                                                                                                             |       | 815                           |       | 322 |   | 114 |   | (11 | ) | — |   |
| Net income  (Loss)                                                                                                             |       | $                             |       | 52 |   | $ |   | (309 | ) | $ |   | 333 |   | $ |   | 33 |   | $ |   | 684 |   |
| Basic and  diluted net income (loss) per common share                                                                          |       | $                             |       | 0.01 |   | $ |   | (0.06 | ) | $ |   | 0.07 |   | $ |   | 0.01 |   | $ |   | 0.14 |   |

 
| ** **                                       | ** ** | **As of April 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | **2001**                 | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Balance  Sheet Data:**                         |       |                     |       |   |   |   |   |   |   |   |   |
| Receivables Held  for Investment, net            |       | $                        | 247,770    |   | $ | 215,243 |   | $ | 228,989 |   | $ | 209,777 |   | $ | 248,977 |   |
| Receivables  Acquired for Investment, net        |       | 26,121                   |       | 9,020 |   | 2,704 |   | 1,190 |   | 641 |   |
| Interest rate  derivative positions              |       | —                   |       | 3,119 |   | 4,105 |   | — |   | — |   |
| Other assets                                     |       | 38,269                   |       | 38,531 |   | 37,198 |   | 34,789 |   | 33,892 |   |
| Total assets                                     |       | $                        | 312,160    |   | $ | 265,913 |   | $ | 272,996 |   | $ | 245,756 |   | $ | 283,510 |   |
| Debt:                                            |       |                     |       |   |   |   |   |   |   |   |   |
| Term notes                                       |       | $                        | 84,926     |   | $ | 183,260 |   | $ | 87,359 |   | $ | 164,718 |   | $ | 70,051 |   |
| Acquisition term  facility                       |       | 11,126                   |       | 3,671 |   | — |   | — |   | — |   |
| Warehouse credit  facilities                     |       | 168,250                  |       | 31,213 |   | 141,945 |   | 42,706 |   | 171,562 |   |
| Working capital  facility                        |       | 12,825                   |       | 11,798 |   | 8,715 |   | 8,761 |   | 10,500 |   |
| Other borrowings                                 |       | —                   |       | 525 |   | 746 |   | — |   | 2,500 |   |
| Interest rate  derivative positions              |       | —                   |       | 5,886 |   | 5,248 |   | — |   | — |   |
| Other  liabilities                               |       | 4,343                    |       | 2,042 |   | 1,758 |   | 2,267 |   | 3,405 |   |
| Minority  interest                               |       | 1,587                    |       | 932 |   | 732 |   | — |   | — |   |
| Shareholders’  equity                       |       | 29,103                   |       | 26,586 |   | 26,493 |   | 27,304 |   | 25,492 |   |
| Total  liabilities and shareholders’ equity |       | $                        | 312,160    |   | $ | 265,913 |   | $ | 272,996 |   | $ | 245,756 |   | $ | 283,510 |   |

 

*Reclassifications*.  Certain reclassifications have been made tothe 2001, 2002, 2003 and 2004 amounts to conform to the 2005 presentation.

 

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**ITEM7.****              *****MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND******RESULTS OFOPERATIONS***

 

**Critical Accounting Policies**

 

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

 

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

 

*Receivables Held for Investment*.  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.

 

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

 

*AdvertisingCosts. *The Companyaccounts for advertising costs under FAS 91 and are expensed as incurred.

 

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

 

The Company initiates efforts to make customer contactas early as when the customer is one day past due and become more aggressive asthe loan becomes further past due. Management reviews past due loans and considers various factorsincluding payment history, job status and any events that may have occurredthat prevent the customer from making a payment.  Through the evaluation, if it is determinedthat the loan is uncollectible, the collateral is typically repossessed.  Generally this occurs at 90 to 120 days afterthe loan becomes past due.   Uponrepossession, the uncollectible portion of the loan and 100% of accruedinterest is written off.  The fair valueof the collateral is recorded as an Assets Held for Sale.  Fair value is determined by estimating theproceeds from the sale of the collateral, which primarily are comprised ofauction proceeds on the sale of the automobile less selling relatedexpenses.  After collection of allproceeds, the Company records an adjustment, positive or negative, based on thedifference between the 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 the trustee.  If a payment is missed, the Company seeks torepossess the collateral with approval of the court.  If the customer is dismissed from bankruptcy,the Company resumes collection efforts.

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanfrom six months prior to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to

 

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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.  During thefourth quarter, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcy areexpected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations.  Ultimatelosses may vary from current estimates. These estimates are reviewedperiodically and as adjustments, either positive or negative, become necessary,are reported in earnings in the period they become known.

 

*Stock-Based Compensation*.  The Company has an employee stock option planand a non employee director stock option plan. 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 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, 2005, was $683,529 or $0.14 per commonshare.  Net income for the year ended April 30,2004, was $33,563 or $0.01 per common share. In fiscal year 2005, the Companyexperienced lower credit losses and collection expenses in fiscal year 2005 inaddition to higher fee revenue and a lower cost of funds.  These were partially offset by lower servicingrevenue and a slightly lower net interest margin due to lower effective yieldsin fiscal 2005.  Net income for the yearended April 30, 2003 was $332,618 or $0.07 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 determined by the growthof the receivables portfolio, inclusion of two new servicing transactions, andeffective management of net interest income and fixed operating expenses. Infiscal 2005, First Investors Servicing Corporation (“FISC”) performed servicingand collection functions on an average portfolio balance of $458.8 million ofloans.

 

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The Company’s managed receivables are (dollars inthousands):

 
| ** **                                                                                | ** ** | **As of or for the  Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                        | ** ** | **2005** | ** ** |
| Receivables Held for Investment:                                                          |       |                                            |       |   |   |
| Number                                                                                    |       | 16,311                                          |       | 17,472 |   |
| Principal balance                                                                         |       | $                                               | 207,489    |   | $ | 244,941 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                               | 220,255    |   | $ | 219,530 |   |
| Average principal balance of receivables outstanding  during the three-month period  |       | $                                               | 210,401    |   | $ | 235,073 |   |
| Receivables Acquired for Investment:                                                      |       |                                            |       |   |   |
| Number                                                                                    |       | 730                                             |       | 654 |   |
| Principal balance                                                                         |       | $                                               | 1,190      |   | $ | 641 |   |
| Other Servicing:                                                                          |       |                                            |       |   |   |
| Number                                                                                    |       | 18,508                                          |       | 14,166 |   |
| Principal balance                                                                         |       | $                                               | 279,002    |   | $ | 193,763 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                               | 355,436    |   | $ | 238,421 |   |
| Total Managed Receivables Portfolio:                                                      |       |                                            |       |   |   |
| Number                                                                                    |       | 35,549                                          |       | 32,292 |   |
| Principal balance                                                                         |       | $                                               | 487,681    |   | $ | 439,345 |   |
| Average principal balance of receivables outstanding  during the twelve-month period |       | $                                               | 572,883    |   | $ | 458,818 |   |

 

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,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **2004**                       | ** ** | **2005** | ** ** |
| Receivables Held  for Investment:                       |       |                           |       |   |   |
| Effective yield  on Receivables Held for Investment (1) |       | 13.9                           | %          | 12.9 | % |
| Average cost of  debt (2)                               |       | 3.7                            | %          | 3.5 | % |
| Net interest  spread (3)                                |       | 10.2                           | %          | 9.4 | % |
| Net interest  margin (4)                                |       | 10.0                           | %          | 9.4 | % |

 

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

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

(3)          Representsyield on Receivables 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 principal payments,payoffs or defaults, its receivables portfolio and interest income willincrease. The following table summarizes the activity in the Company’sreceivables portfolio (dollars in thousands):

 

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| ** **                                     | ** ** | **Year Ended**     | ** ** |
|------------------------------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **April 30,** | ** ** |
| ** **                                     | ** ** | **2004**           | ** ** | **2005** | ** ** |
| Receivables Held  for Investment:              |       |               |       |   |   |
| Principal  balance, beginning of period        |       | $                  | 226,362    |   | $ | 207,489 |   |
| Originations                                   |       | 88,062             |       | 158,017 |   |
| Principal  payments and payoffs                |       | (87,638            | )          | (100,366 | ) |
| Defaults prior  to liquidations and recoveries |       | (19,297            | )          | (20,199 | ) |
| Principal  balance, end of period              |       | $                  | 207,489    |   | $ | 244,941 |   |

 

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 $20.7 million in 2005, adecrease of 6.4% when compared to amounts reported in 2004 and a decrease of 9.3%when compared to amounts reported in 2003.

 

Theamount of net interest income is the result of the relationship between the averageprincipal amount of receivables held and average rate earned thereon and theaverage principal amount of debt incurred to finance such receivables and theaverage rates paid thereon. Changes in the principal amount and rate componentsassociated with the receivables and debt can be segregated to analyze theperiodic changes in net interest income. The following table analyzes thechanges attributable to the principal amount and rate components of netinterest income (dollars in thousands):

 
| ** **                        | ** ** | **Year Ended April 30,**              | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2003 to 2004**                           | ** ** | **2004 to 2005** | ** ** |
| ** **                        | ** ** | **Increase  (Decrease)  Due to Change in** | ** ** | ** ** | ** ** | **Increase  (Decrease)  Due to Change in** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Average   Principal   Amount**           | ** ** | **Average   Rate** | ** ** | **Total Net  Increase   (Decrease)** | ** ** | **Average  Principal  Amount** | ** ** | **Average   Rate** | ** ** | **Total Net  Increase   (Decrease)** | ** ** |
| Receivables Held  for Investment: |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                   |       | $                                          | 463        |   | $ | (2,445 | ) | $ | (1,982 | ) | $ | (100 | ) | $ | (2,127 | ) | $ | (2,227 | ) |
| Interest expense                  |       | 404                                        |       | (2,103 | ) | (1,699 | ) | (355 | ) | (467 | ) | (822 | ) |
| Net interest  income              |       | $                                          | 59         |   | $ | (342 | ) | $ | (283 | ) | $ | 255 |   | $ | (1,660 | ) | $ | (1,405 | ) |

 

**Results of Operations**

 

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

 

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

 

*Executive Summary. *Netincome for the year ended April 30, 2005 was $684 compared to $34 for yearended April 30, 2004.  Basic anddiluted earnings per common share were $0.14 and $0.01 for the years ended April 30,2005, and April 30, 2004, respectively.

 

The increase innet income for the year ended April 30, 2005 compared to April 30,2004 is due primarily to declines in interest expense and provision expenseduring the 2005 period and an increase in late fees and other

 

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income.  The decline in interest expense was due to adecrease in the average cost of debt from 3.7% in 2004 to 3.5% during 2005 as aresult of the expiration of certain interest rate swaps in April 2004which was offset by increasing short term interest rates in 2005.  Provision expense decreased 23% during theyear as a result of lower repossessions and charge-offs and improving recoveryrates.  This improvement in overallcredit quality is due to (i) improvements in general economic conditionsincluding a lower unemployment rate, (ii) an increase in the percentage ofloans originated under the Direct Program which exhibit much lower defaultrates than the Indirect Program and (iii) higher recovery rates on thesale of repossessed collateral due to improvements in the used car market. Latefee and other collection income increased 102% as a result of (i) anincrease in income received related to GAP insurance and extended servicecontracts sold to consumers in connection with the Company’s direct lendingactivities, (ii) increased collections and payments allocated to latefees and other income as a result of changes made to the methodology underwhich the Company allocated cash received to interest, uncollected fees andprincipal, (iii) an increase in loans originated for a third party and (iv) directadvertising fees associated with marketing services provided to dealershipswhich were not performed during 2004.

 

These factors were partially offset by a 7% decrease in (i) interestincome, (ii) a 30% decrease in servicing income, (iii) a 34% decreasein income from investment and (iv) a $339 increase in realized lossesassociated with the Company’s interest rate derivative positions. The declinein interest income is the result of a decrease in effective yields from 13.9%in 2004 to 12.9% in 2005, predominantly due to an increase in the percentage ofloans originated under the direct program which typically carry a lower interestrate.  The decline in servicing revenueand income from investment is due to a decrease in the portfolio of receivablesserviced for third parties and a decrease in the portfolio of receivablesserviced on behalf of FARC.  Losses oninterest rate derivative positions increased due to an increased in thenotional amount of interest rate derivative contracts, overall market ratevolatility and the termination of certain interest rate caps in connection withthe issuance of the 2005-A Notes on May 5, 2005.

 

*Interest Income*.Total interest income for the year ended April 30, 2005 decreased to$28,272 compared 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 Receivables Heldfor Investment, the weighted average interest rate on receivables originated bythe Company, the mix of direct and indirect lending activities and the level ofearly prepayments and charge-offs. Interest income on Receivables Held for Investment decreased****7% for the year ended April 30, 2005 compared to theyear ended April 30, 2004.  This isa reduction of 97 basis points, or a 7% decrease, in the yield on ReceivablesHeld for Investment for the year ended April 30, 2005 compared the yearended April 30, 2004.  The reductionin 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 $7,616compared to $8,438 for the year ended April 30, 2004. Interest expense onReceivables Held for Investment decreased 10% for the year ended April 30,2005.  The reduction in interest expenseis primarily due to the expiration of certain interest rate swaps in April 2004which 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 April 30,2005, 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, 2005decreased to $9,520 as compared to $12,428 for the year ended April 30,2004. The decrease in provision for credit losses is primarily due to (i) improvingeconomic trends, (ii) a change in portfolio mix to loans originateddirectly with 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-offsfor the year ended April 30, 2005 is primarily due to (i) a decreasein loss frequency and loss severity from repossessions and (ii) anincrease in recoveries from defaulted 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 Companyentered into an agreement to provide loan servicing and collection activitieson behalf of FARC.  FARC, which is 40%owned by the Company, purchased a portfolio of approximately $200 million ofinstallment loan receivables.  On March 19,2003, the Company entered into an agreement to provide loan servicing andcollection activities on $276 million of installment loan receivables forunrelated third parties.  Servicingrevenue decreased to $3,399****for the yearended April 30, 2005 compared to $4,889 for year ended April 30,2004.  The decrease in servicing revenuefor the year ended April 30, 2005 is due to the liquidation of servicedreceivables during 2005.  Revenue derivedfrom servicing activities will increase or decrease in direct proportion to theaverage outstanding balance of serviced receivables.

 

*Late Fees and Other Income*. Late fees and other income increased to $3,834 for the year ended April 30,2005, compared to $1,912 for the year ended April 30, 2004.  The increase is attributable to (i) anincrease in income received related to GAP insurance and extended service contractssold to consumers in connection with the Company’s direct lendingactivities, (ii) increased collections and payments allocated to latefees and other income as a result of changes made to the methodology underwhich the Company allocated cash received to interest, uncollected fees andprincipal, (iii) an increase in loans originated for a third party and (iv) directadvertising fees associated with marketing services provided to dealershipswhich were not performed during 2004.  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.

 

Late fees and other income 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.

 

*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 isimpacted by the outstanding balance of investments held, general marketinterest rates and the profitability of FARC. The Company anticipates that contributions from the FARC investment willcontinue to decline as the portfolio of receivables owned by FARC amortizes.

 

*Other Interest Income.* Otherinterest income decreased to $427 for the year ended April 30, 2005,compared to $460 for the year ended April 30, 2004.  Other interest income is impacted by andcomprised of the outstanding balance of the junior mezzanine debt owned byFARC, interest earned on overnight 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 ended April 30,2005 and $34 for the year ended April 30, 2004 are principally due to thetermination of 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-Aterm notes on May 5, 2005.

 

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to $8,917 for the year ended April 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 in temporary labor tosupport increased origination volume.  Thisis partially offset by a decrease in salaries and benefits due to theconsolidation and restructuring of certain management positions and a declinein loans collections and customer service personnel as a result of the declinein total managed receivables.  The overallnumber of employees of the Company is primarily correlated to (i) thetotal number of receivables managed, since the majority

 

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ofthe Company’s employees are involved in loan collection activities and (ii) originationgrowth rates which require additional marketing and credit underwritingpersonnel.

 

*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 the fiscalyear 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 wasprimarily due to (i) a 23% increase in the average outstanding borrowingson the Company’s working capital line and (ii) an increase in the averageinterest rate of 6.8% for the year ended April 30, 2005, compared to 2004.

 

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

 

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

 

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 forInvestment decreased****7% for theyear ended April 30, 2004 compared to the year ended April 30,2003.  This is a reduction of 111 basispoints, or a 7% decrease, in the yield on Receivables Held for Investment forthe year ended April 30, 2004 compared the year ended April 30,2003.  The reduction in yield for theyear ended April 30, 2004 is due to (i) an increase in interestwritten-off for impaired loans (ii) a lower weighted average interest rateon the performing portfolio which reflects the Company’s increased focus onreceivables originated directly to consumers which typically carry lowerinterest rates and (iii) the overall competitive environment forreceivables originated through dealerships. The decline in effective yields was partially offset by a 1% increase inthe average portfolio outstanding for the period ended April 30, 2004compared to the period ended April 30, 2003.

 

Interest income on Receivables Acquired for Investment for the year endedApril 30, 2004 decreased to $(9) compared to $451 for the year ended April 30,2003.  The decrease is due to theliquidation of performing assets.

 

*Interest Expense*.Interest expense for the year ended April 30, 2004 decreased to $8,438compared to $10,166 for the year ended April 30, 2003. Interest expense onReceivables Held for Investment decreased 17% for the year ended April 30,2004.  The reduction in interest expenseis primarily due to a general decline in overall market interest rates as aresult the current economic environment and market rate reductions adopted bythe Federal Reserve System which were offset by the Company’s decision to lockin interest rates on $140 million of debt in November 2003 through theissuance of Term Notes to minimize the risk of future interest rateincreases.  Longer term fixed rate TermNotes typically carry higher interest rates than shorter term floating ratedebt.  Interest rates decreased 92 basispoints, or 20%, on the outstanding borrowings for the year ended April 30,2004 compared to the year ended April 30, 2003.  This was offset by a 7% higher average debtoutstanding for the year ended April 30, 2004 compared to the year ended April 30,2003 as a result of a slightly higher average portfolio of Receivables Held forInvestment and the impact of issuing Term Notes which includes a $30 millionprefunding component.

 

*Provision for Credit Losses*. The provision for credit losses for the year ended April 30, 2004increased to $12,428 as compared to $10,338 for the year ended April 30,2003. The increase in provision for credit losses is primarily due to the Company’sassessment of weakened economic conditions and the ability of customers tomaintain comparable employment. Additionally, recovery rates on repossessions have suffered due todecreasing

 

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prices and increased incentives for new vehicles whichdecreases the demand and price for used vehicles and negatively impactsrecovery rates and loss severity.

 

Net charge-offs for the year ended April 30, 2004increased to $12,626 compared to $10,279 for the year ended April 30,2003.  The increase in net charge-offsfor the year ended April 30, 2004 is primarily due to a 13% increase inlosses from repossessions and a 300% increase in other losses which includelosses related to customer bankruptcies and loans that were significantlydelinquent and no longer supported by collateral.

 

The level of provision for credit losses is a key driverof overall financial performance and is positively impacted by improvement ingeneral economic conditions, improvements in wholesale used car prices andlower net losses resulting from stricter underwriting controls adopted by theCompany during 2000 and 2001.  Anyadditional economic deterioration or further decline in wholesale used car priceswill negatively impact provision expense as will increases in the outstandingbalance of Receivables Held for Investment.

 

*Servicing Revenue*.  On December 24, 2002, the Companyentered into an agreement to provide loan servicing and collection activitieson behalf of FARC.  FARC, which is 40%owned by the Company, purchased a portfolio of approximately $200 million ofinstallment loan receivables.  On March 19,2003, the Company entered into an agreement to provide loan servicing andcollection activities on $276 million of installment loan receivables forunrelated third parties.  Servicingrevenue increased to $4,889****for the yearended April 30, 2004 compared to $1,080 for the year ended April 30,2003.  The increase in servicing revenuefor the year ended April 30, 2004 is due to the 2004 period containing afull year of servicing revenue compared to a partial year in 2003. Revenuederived from servicing activities will increase or decrease in directproportion to the average outstanding balance of serviced receivables.

 

*Late Fees and Other Income*. Late fees and other income increased to $1,912 for the year ended April 30,2004, compared to $1,220 for the year ended April 30, 2003.  The increase is attributable to a 132%increase in fees related to providing electronic payment services to ourcustomers.  Additionally, fiscal year2004 reflects fee income received related to GAP Insurance and extended servicecontracts sold to consumers in connection with the Company’s direct lendingactivities that were not present in fiscal year 2003.

 

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

 

*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 increased to $1,009 for the year ended April 30, 2004 comparedto $418 for the year ended April 30, 2003. The increase in income frominvestment for fiscal year 2004 is due to the 2004 period containing income forthe entire fiscal year.  Fiscal year 2003contains only a partial year’s income. Income from investments is impacted by the outstanding balance ofinvestments held, general market interest rates and the profitability ofFARC.  The Company anticipates thatcontributions from the FARC investment will continue to decline as theportfolio of receivables owned by FARC amortizes.

 

*Other Interest Income.* Otherinterest income increased to $460 for the year ended April 30, 2004,compared to $283 for the year ended April 30, 2003.  The primary reasons for the increase arerelated to interest earned on the junior mezzanine debt owed by FARC and thefact that fiscal year 2004 reflects income for the full year compared to onlyfour months in fiscal year 2003.  Otherinterest income is impacted by the outstanding balance of the junior mezzaninedebt 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.  A net realized loss of $(34) for the yearended April 30, 2004 is principally due to the termination of thesepositions.

 

*Salaries and Benefit Expenses*. Salaries and benefit expense increased to $8,538 for the year ended April 30,2004, compared to $7,786 for the year ended April 30, 2003.  The increase is primarily due to higherbenefits costs and higher staffing levels required to accommodate the increasein the managed portfolio from the addition of the FARC assets, the March 19,2003 loan servicing agreement and an increase in direct lending activities. Theoverall

 

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numberof employees of the Company is primarily correlated to (i) the totalnumber of receivables managed, since the majority of the Company’s employeesare involved in loan collection activities and, (ii) origination growthrates which require additional marketing and credit underwriting personnel.

 

*Operating Expenses.* Operating expenses increased to $5,098 for the year ended April 30,2004, compared to $2,488 for the year ended April 30, 2003.  The increase in operating expenses for thefiscal year 2004 period is due to the increased servicing costs associated withan additional $476 million in loans from the December 24, 2002, FARC andthe March 19, 2003, loan servicing agreements.  Operating expenses for the year ended April 30,2003 contain four months of servicing expense for the December 24, 2002,FARC portfolio and no expenses associated with the March 19, 2003 loanservicing agreement.  Additionally, theCompany’s decision to grow the direct lending business in fiscal year 2004increased expenses, particularly printing, credit bureau and postage costs,associated with the Company’s direct lending initiative. Overall operatingexpenses are generally correlated to the total number of receivables managed bythe Company.

 

*General and Administrative.* General and administrative expenses increased to $3,723 for the yearended April 30, 2004, compared to $3,554 for the year ended April 30,2003.  The year ended April 2004experienced slightly higher equipment rental, bank service charges, commissionsand liability insurance premiums when compared to the year ended April 30,2003.  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 decreased to $468 for the year ended April 30,2004, compared to $643 for the year ended April 30, 2003. The decrease wasprimarily due to a 25% reduction in the average outstanding borrowings on theCompany’s working capital line for the year ended April 30, 2004, comparedto 2003.  Additionally, the shareholderloan, as further described under Liquidity and Capital Resources, in fiscalyear 2004 had a 48% lower average outstanding balance compared to fiscal year2003.  As of April 30, 2004 theshareholder loan was fully paid.

 

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

 

The Company’s mostsignificant cash flow requirement is for the origination of receivables. TheCompany originated $158 million of Receivables Held for Investment for 2005compared to $90 million in 2004.

 

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’sreceivables are pledged to collateralize these credit facilities and termnotes.  The Company is obligated to meetcertain financial covenants. Noncompliance may significantly 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 $129****millionin 2005 and $119 million in 2004.  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 fiscalyear 2005, the Company required net cash of $29.0 million as the receivablesoriginated exceeded portfolio collections. During the fiscal year 2004, the Company required net cash of $2.4million as the receivables originated exceeded portfolio collections.  The Company relies on borrowed funds toprovide cash flow in periods of growth. As of April 30,

 

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2005, the Company had $28million of available capacity in the FIRC and FIARC credit facilities to fundfuture growth.

 

In addition to the cash flowgenerated from the principal and interest collections on its receivables portfolio,the Company collects servicing fees.  Servicing fees range from 1.4% to 2.5% of theoutstanding principal balance of the loans in the portfolio.  Cash flow and servicing fees are receivedafter month end, but relate to the prior month activity.  Thus upon filing of the monthly servicingstatements, a portion of the restricted cash is converted to cash available tofund operations.  At April 30, 2005and 2004 the Company’s unencumbered cash was $2,413,738 and $2,018,490respectively.  Cash and servicing feescollected after year-end, but related to the prior year’s activity totaled $271,127and $555,922 as of April 30, 2005 and 2004, respectively.  The decrease in cash and servicing feescollected after year-end is primarily due to the decrease in the amount ofthird party loans serviced as of April 30, 2005.  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) |       | $                          | 171,562,154 |   | $ | 157,395,402 |   | $ | 12,412,586 |   | $ | 1,754,166 |   | $ | — |   |
| Term note  obligation (2)                  |       | 70,050,511                 |        | 30,218,030 |   | 23,529,733 |   | 16,302,748 |   | — |   |
| Working capital  facility obligation (2)   |       | 10,500,000                 |        | 4,164,899 |   | 5,550,671 |   | 784,430 |   | — |   |
| Related party  note obligation             |       | 2,500,000                  |        | — |   | — |   | 2,500,000 |   | — |   |
| Operating lease  obligations               |       | 3,524,623                  |        | 1,136,080 |   | 1,471,854 |   | 651,414 |   | 265,275 |   |
| Total                                      |       | $                          | 258,137,288 |   | $ | 192,914,411 |   | $ | 42,964,844 |   | $ | 21,992,758 |   | $ | 265,275 |   |

 

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(1)     Thepayments due by period was effected by the 2005-A Term Notes issued on May 5,2005, in which $148,081,723 of the Warehouse credit facility obligations weresecuritized.  Remaining contractualobligations may vary as principal payments are determined by cash received onthe underlying asset, and may differ from the expected scheduled payments.

 

(2)     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’s operationsif substitute financing on comparable terms was not obtained.

 

*FinancingArrangements.* The Company finances its loan originationthrough two warehouse credit facilities. The Company’s credit facilitiesprovide for one-year terms and have been renewed annually. Management of theCompany believes that the credit facilities will continue to be renewed orextended or that it would be able to secure alternate financing on satisfactoryterms; however, there can be no assurance that it will be able to do so. InJanuary, 2002 the Company issued $159 million in asset-backed notes (“TermNotes”) secured by discrete pools of receivables. These notes were subsequentlycalled and redeemed in March, 2005.  InNovember, 2003, the Company issued $140 million in Term Notes secured by adiscrete pool of receivables. Substantially all receivables retained by the Company are pledged ascollateral for the credit facilities and the Term Notes. The weighted averageinterest rate for the Company’s secured borrowings including the effect ofprogram fees, and dealer fees, and other comprehensive income (loss)amortization was 3.5% and 3.7% for the fiscal years ending April 30, 2005and 2004, respectively.

 

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*Warehouse Facilities as of April 30, 2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                               | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  April 30,  2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 127,928,518       |       | Commercial paper  rate plus .3%                                                                        |       | .25% of Unused Facility |       | .35                                          | %          | 2.96 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 43,633,636        |       | Option of a)  Base Rate, which is the higher of prime rate or fed funds plus .5% or b)  LIBOR plus .5% |       | .25% of Unused Facility |       | See below                                    |       | 3.56 | % |

 

*Warehouse Facilities – Credit Enhancement as of April 30,2005*

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

 

FIRC- In order to obtain a lower cost 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 coverage is obtained on eachreceivable at the time it is purchased 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 thatthe Company paid during fiscal year 2005 for its three credit enhancementinsurance coverages, of which the largest component is basic ALPI insurance,represented approximately 2.6% of the principal amount of the receivablesoriginated during the year. Aggregate premiums paid for ALPI coverage aloneduring the fiscal years ended April 30, 2004 and 2005 were $3,066,131 and$3,669,198, respectively, and accounted for 3.5% and 2.3% of the aggregateprincipal balance of the receivables originated during such respective periods.

 

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

 

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

 

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all such losses. As of April 30,2005, the Insurance Subsidiary had capital and surplus of $2,464,149 andunencumbered cash reserves of $1,110,550 in addition to the $3,317,904 trustaccount.

 

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

 

FIARC– Credit Enhancement for the FIARC warehouse facility is provided to thecommercial paper investors by a cash reserve account equal to 1% of the receivablesheld by FIARC and, additionally, a surety bond issued by MBIA. The Company isnot a guarantor of, or otherwise a party to, such commercial paper.

 

*Warehouse Facilities – Agents and Expirations*

 
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**         | ** ** | **Event if not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15, 2006 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 15, 2006 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

OnDecember 4, 2003, the FIRC facility was renewed, under similar terms andconditions, at the $50 million commitment level until December 2, 2004,and was subsequently extended until February 15, 2006.  On June 15, 2004, the FIRC facility wasextended to $65 million, and reverted back to $50 million on September 13,2004.  As of April 30, 2004 and2005, there was $42.7 and $43.6 million, respectively, outstanding.

 

OnJanuary 29, 2004, following a short-term extension of the originalmaturity date, the FIARC facility was renewed, under similar terms andconditions, to December 2, 2004, and was subsequently extended until February 15,2006.  As of April 30, 2004 and2005, there was $0 and $127.9 million, respectively, outstanding.

 

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

 

The following table contains pertinent information on the Term Note asof April 30, 2005.

 
| **Term  Notes** | ** ** | **Issuance Date**      | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **          | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------|-------------|-------------------|---------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November 11, 2003 |       | $                    | 139,661,000 |              | April 20, 2011 |            | $          | 70,050,511         |       | 2.58 | % |
|                 |            |                        |            |                      |             |                   |                     |                 |            |                    |            |  |  |

 

Credit enhancement on the Term Note is as follows:

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

 

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Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% Class A asset-backed notes(“2002-A Term Notes”). The initial pool of automobile receivables transferredto the 2002 Auto Trust totaled $135,643,109, which was previously owned by FIRCand FIARC, secure the 2002-A Term Notes. In addition to the issuance of the Class A Notes, the 2002 AutoTrust also issued $4,819,000 in Class B Notes that were retained by theCompany and pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $159,033,471 were used to (i) fund a $25,000,000 pre-fundingaccount 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) paytransaction fees related to the 2002-A Term Note issuance, and (v) fund acash reserve account of 2% or $2,712,862 of the initial receivables pledgedwhich will serve as a portion of the credit enhancement for the transaction.The Class A Term Notes bear interest at 3.46% and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 97% of the outstanding balance of the underlying receivables pool. Thefinal maturity of the 2002-A Term Notes is December 15, 2008.    The Class B Notes do not bear interestbut require principal reductions sufficient to reduce the balance of the Class BNotes to 3% of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 6% ofthe then current principal balance of the receivables pool.  On February 28, 2005, the Companynotified the note holders of the 2002-A securitization of its intent toexercise its prepayment call provision. This call provision was completed effective March 15, 2005, andtherefore there was no outstanding balance as of April 30, 2005.  As of April 30, 2004, the outstandingprincipal balance on the 2002-A Term Notes was $44,335,659.

 

On November 20,2003, the Company, through its indirect, wholly-owned subsidiary FirstInvestors Auto Owner Trust 2003-A (“2003 Auto Trust”) completed the issuance of$139,661,000 of 2.58% Class A asset-backed notes (“2003-A Term Notes”).The initial pool of automobile receivables transferred to the 2003 Auto Trusttotaled $114,726,891, which was previously owned by FIRC and FIARC, secure the2003-A Term Notes.  In addition to theissuance of the Class A Notes, the 2003 Auto Trust also issued $5,065,891in Class B Notes that were retained by the Company and pledged to securethe 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 beused 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 feesrelated 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 at2.58% and requires monthly principal reductions sufficient to reduce thebalance of the Class A Term Notes to 96.1% of the outstanding balance ofthe underlying receivables pool. The final maturity of the 2003-A Term Notes isApril 20, 2011.  The Class BNotes do not bear interest but require principal reductions sufficient toreduce the balance of the Class B Notes to 3.9% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30,2004 and 2005, the outstanding principal balances on the 2003-A term notes were$120,382,531 and $70,050,511, respectively.

 

On May 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 of4.23% Class A-2 asset-backed notes (collectively “2005-A Term Notes”), fora total of $175,493,000 of asset backed notes. The initial pool of automobilereceivables transferred to the 2005 Auto Trust totaled $150,920,721, which waspreviously owned by FIRC and FIARC, and secures the 2005-A Term Notes.  In addition to the issuance of the Class A-1and Class A-2 Notes, the 2005 Auto Trust also issued $5,427,619 in Class BNotes that were retained by the Company and pledged to secure the WorkingCapital Facility as further described below. Proceeds from the issuance, which totaled $175,487,827 were used to (i) funda $29,999,898 pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1% or $1,509,207 of the initial receivablespledged.  The Class A-1 and Class A-2Term Notes bear interest at 3.57% and 4.23%, respectively, and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1 and Class A-2 Term

 

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Notes is December 17,2007 and July 16, 2012, respectively. The Class B Notes do not bear interest but require principalreductions sufficient to reduce the balance of the Class B Notes to 4.25%of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.

 

*AcquisitionFacility*.  On August 8,2000, the Company entered into an agreement with Wachovia Securities.  Under the agreement, a partnership was createdin which FIFS Acquisition served as the general partner and contributed itsassets for a 70% interest in the partnership and First Union Investors, Inc.,an affiliate of Wachovia Securities, served as the limited partner with a 30%interest in the partnership (the “Partnership”). Pursuant to the refinancing,the Partnership issued Class A Notes in the amount of $19,204,362 and Class BNotes in the amount of $979,453 to VFCC, an affiliate of Wachovia Securities,the proceeds of which were used to retire the acquisition debt. The Class ANotes bear interest at VFCC’s commercial paper rate plus 0.95% per annum andamortize on a monthly basis by an amount necessary to reduce the Class ANote balance as of the payment date to 75% of the outstanding principal balanceof Receivables Acquired for Investment, excluding Receivables Acquired forInvestment that are applicable to FIACC, as of the previous month end. The Class BNotes bear interest at VFCC’s commercial paper rate plus 5.38% per annum andamortize on a monthly basis by an amount which varied based on excess cashflows received from Receivables Acquired for Investment after payment ofservicing fees, trustee and back-up servicer fees, Class A Note interestand Class A Note principal, plus collections received on the TrustCertificates. The Class B Notes were paid in full on September 15,2000.  After the Class B Notes werepaid in full, all cash flows received after payment of Class A Noteprincipal and interest, servicing fees and other costs, are distributed to thePartnership for subsequent distribution to the partners based upon therespective partnership interests. Beginning in November 2001, the partnership used excess cash flowto retire additional Class A Note principal, thus no further partnershipdistributions were paid until the Class A Notes were retired.  On February 20, 2003, the Class ANotes were fully paid.  On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc. andaccordingly receives all excess cash flows.

 

*WorkingCapital Facility*.  On December 6,2001, the Company entered into an agreement with Wachovia Securities torefinance the $11,175,000 outstanding balance of the working capital term loanpreviously provided by Bank of America and Wachovia and increase the size ofthe facility to $13.5 million.  Therenewal facility was provided to a special-purpose, wholly-owned subsidiary ofthe Company, First Investors Residual Funding LP.   The facility originally consisted of a $9million revolving tranche and a $4.5 million term loan tranche which amortizesmonthly.  The term loan tranche of thisworking capital facility was evidenced by the Class B Notes issued inconjunction with the 2002 Auto Trust financing. The remaining $9 million of the$13.5 million working capital facility revolves monthly in accordance with aborrowing base consisting of the overcollateralization amount and reserveaccounts for each of the Company’s other credit facilities.  The facility is secured solely by theresidual cash flow and cash reserve accounts related to the Company’s warehousecredit facilities, the acquisition facility and the existing and future termnote facilities.  During 2002, thefacility was modified to increase the interest rate from LIBOR plus a 1.5%program fee to LIBOR plus a 2.25% program fee. The commitment fee paid on the total available amount of the facilitywas maintained at 1.5%.  In addition, themonthly principal amortization under the term loan tranche was increased to thegreater of $250,000 or the principal distributions made under the Class BNotes issued under the 2002 Auto Trust financing.  On December 4, 2003, the Working CapitalFacility was extended to December 2, 2004. Under the terms of the extension, the monthly amortization requirementwas replaced with the requirement that outstandings under the facility couldnot exceed the lesser of a borrowing base or the $9 million facilitylimit.  On October 26, 2004, theWorking Capital Facility was extended until October 10, 2005, increasingthe commitment amount to $13.5 million. 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, 2004 and 2005, there was$8,761,143 and $10,500,000, respectively, outstanding under this facility.

 

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

 

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*RelatedParty Loans. *On December 3,2001 the Company entered into an agreement with one of its shareholders who isa member of its Board of Directors under which the Company may, from time totime, borrow up to $2.5 million.  On December 6,2004, the original $2.5 million shareholder loan was replaced with a $2.5million loan containing identical terms and conditions between the Company anda limited partnership that is affiliated with a current shareholder and memberof the Board of Directors  The proceedsof the borrowings have been utilized to fund certain private and open marketpurchases of the Company’s common stock pursuant to a Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid atany time unless the Company is in default on one of its other creditfacilities.  There was $0 and $2.5million outstanding under these facilities as of April 30, 2004 and 2005,respectively.  For the fiscal years endedApril 30, 2004 and April 30, 2005, the Company recorded interestexpense under these facilities of $67,676 and $17,808.

 

*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 financialcovenants governing these financing arrangements at April 30, 2005.

 

*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.

 

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

 

On June 1, 2001, the Company entered into interest rate swaps withan aggregate notional amount of $100 million and a maturity date of April 15,2004.  Under the terms of these swaps,the Company will pay a floating rate based on one month LIBOR and receive afixed rate of 5.025%.  Management electedto enter into these swap agreements to offset the uneconomical position of theexisting pay fixed swap created by rapidly declining market interestrates.  In connection with the decisionto enter into the $100 million floating rate swap, the Company elected to changethe designation of the $100 million fixed rate swap from a cash flow hedge andnot account for the instrument as a hedge under SFAS No. 133.   As a result, the change in fair value of theswaps is reflected in net income for periods subsequent to May 31, 2001.

 

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 arerecorded as unrealized gains or losses and reflected in net income.  On December 2, 2003, the Companyterminated all interest rate caps outstanding in exchange for proceeds of$356,000.  The caps were terminatedfollowing the repayment of all outstandings under the FIARC facility followingthe issuance of the 2003-A term notes. As a result, a realized loss of $14,000 was incurred relative to theaggregate market value of the interest rate caps.

 

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 amounts of the caps was $126,086,843 which amortizedover six years.  The Company paid anaggregate of $1,213,097 in

 

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premiumsto purchase these caps.  The interestrate caps were not designated as hedges, and accordingly, changes in the fairvalue of the interest rate caps are recorded as unrealized gains or losses andreflected in net income.  On April 28,2005, the Company terminated all interest rate caps outstanding in exchange forproceeds of $840,000.  The caps wereterminated following the repayment of all outstandings under the FIARC facilityprior to the issuance of the 2005-A term notes. As a result, a realized loss of $373,097 was incurred relative to theaggregate market value of the interest rate caps.

 

**Delinquencyand Credit Loss Experience**

 

TheCompany’s results of operations, financial condition and liquidity may beadversely affected by nonperforming receivables. The Company seeks to manageits risk of credit loss through (i) prudent credit evaluations, (ii) riskmanagement activities, (iii) effective collection procedures, and (iv) bymaximizing recoveries on defaulted loans. The allowance for credit losses of $2,248,599as of April 30, 2005 and $2,199,386 as of April 30, 2004 as apercentage of Receivables Held for Investment of $244,940,526 as of April 30,2005 and $207,489,339 as of April 30, 2004 was .9% and 1.1%, 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 90 to 120 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 $9,519,607 and $12,428,175 have been recorded for the years ended 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, *Accountingfor 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 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 Companycompares the aging status of each loan from six months prior to the aging loanstatus 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 to impairedstatus.  The estimated number ofimpairments is then multiplied by the estimated loss per loan, which is basedon historical information.  During thefourth quarter, the Company elected to increase its allowance for loan lossesagainst loans that were greater than 120 days past due and loans in which thecollateral had been assigned for repossession but had not yet been repossessedas of the reporting date.  The Companybelieves that this increase is warranted in light of the change in federalbankruptcy laws enacted during the period and the recognition that themigration trends of severely delinquent loans and loans subject to bankruptcyare expected to become more protracted. Based on this, the Company has assigned a specific allowance againstthese loans equal to the outstanding balance of loans in these categories lessthe estimated recovery amount based on current data regarding liquidation ofthe collateral and collection of any additional payments.  The Company utilized its most recent recoveryrates in order to assess fair value of these loans.  For loans that are not classified into thesecategories, the historical migration pattern is utilized in order to establishthe estimated impairment.  Despite theincrease in allowance associated with the higher delinquency loans and bankruptaccounts, the total allowance for loan losses decreased during the period as apercentage of Receivables Held for Investment due to improving overalldelinquency trends and lower repossession and loss rates.  The allowance for credit losses is based onestimates and qualitative evaluations. Ultimate losses may vary from current estimates. These estimates arereviewed periodically and as adjustments, either positive or negative, becomenecessary, are reported in earnings in the period they become known.

 

28

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The followingtable sets forth certain information regarding the Company’s delinquency andcharge-off experience over its last two fiscal years (dollars in thousands):

 
| ** **                                                                            | ** ** | **As of or for the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                       | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | **Number  of Loans**                           | ** ** | **Amount** | ** ** | **Number  of Loans** | ** ** | **Amount** | ** ** |
| Receivables Held  for Investment:                                                     |       |                                           |       |   |   |   |   |   |   |
| Delinquent  amount outstanding (1):                                                   |       |                                           |       |   |   |   |   |   |   |
| 30 - 59 days                                                                          |       | 186                                            |       | $ | 1,691 |   | 164 |   | $ | 1,414 |   |
| 60 - 89 days                                                                          |       | 78                                             |       | 650 |   | 40 |   | 404 |   |
| 90 days or more                                                                       |       | 291                                            |       | 2,757 |   | 71 |   | 496 |   |
| Total  delinquencies                                                                  |       | 555                                            |       | $ | 5,098 |   | 275 |   | $ | 2,314 |   |
| Total  delinquencies as a percentage of outstanding receivables                       |       | 3.4                                            | %          | 2.5 | % | 1.6 | % | 0.9 | % |
| Net charge-offs  as a percentage of average receivables outstanding during the period |       |                                           |       | 5.7 | % |   |   | 4.3 | % |

 

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(1)           Delinquent amounts outstanding do not include loans in bankruptcy statussince collection activity is limited and highly regulated for bankruptaccounts.

 

Thelower annualized charge-off rate results from a lower number of repossessionscoupled with higher recovery rates on the repossessed collateral.

 

Asof April 30, 2005, there were 483 accounts totaling $4,627,082 that werein bankruptcy status and were more than 30 days past due.  As of April 30, 2004, there were 522 accountstotaling $4,942,694 that were in bankruptcy status and were more than 30 dayspast due.  As of April 30, 2005 and2004, 90% and 87%, respectively, of the bankruptcy delinquencies filed forprotection under Chapter 13.

 

**New Accounting Pronouncements**

 

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

 

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

 

SFAS No. 123(R) is effective as of the beginningof the fiscal year that begins after June 15, 2005. SFAS 123(R) applies toall awards granted after the required effective date and to such awardsmodified, repurchased, or cancelled after that date. The cumulative effect ofinitially applying SFAS No. 123(R), if any, is recognized as of therequired effective date. As of the required effective date, all public entitiesthat used the fair-value-based method for either recognition or disclosureunder SFAS No. 123 will apply SFAS No. 123(R) using a modifiedversion of

 

29

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prospective application.Under that transition method, compensation cost is recognized on or after therequired effective date for the portion of outstanding awards for which therequisite service has not yet been rendered, based on the grant-date fair valueof those awards calculated under SFAS No. 123 for either recognition orpro forma disclosures. For periods before the required effective date, thoseentities may elect to apply a modified version of retrospective applicationunder which financial statements for prior periods are adjusted on a basisconsistent with the pro forma disclosures required for those periods by SFAS No. 123.The Company has not yet completed its evaluation of the impact that SFAS No. 123(R)will have on its financial position and results of operations.

 

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

 

Themarket risk discussion and the estimated amounts generated from the analysisthat follows are forward-looking statements of market risk assuming certainadverse market conditions occur. Actual results in the future may differmaterially due to changes in the Company’s product and debt mix, developmentsin the financial markets, and further utilization by the company ofrisk-mitigating strategies such as hedging.

 

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

 

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

 

Asof April 30, 2005, the Company had $182.1 million of floating rate secureddebt outstanding.  For every 1% increasein LIBOR annual after-tax earnings would decrease by approximately $1,192,507assuming the Company maintains a level amount of floating rate debt andassuming an immediate increase in rates. As of April 30, 2004, the Company had $51.5 million of floatingrate secured debt outstanding.  For every1% increase in commercial paper rates or LIBOR, annual after-tax earnings woulddecrease by approximately $271,145 assuming the Company maintains a levelamount of floating rate debt and assuming an immediate increase in rates.

 

**Forward Looking Information**

 

Statementsand financial discussion and analysis included in this report that are nothistorical are considered to be forward-looking in nature. Forward-lookingstatements involve a number of risks and uncertainties that may cause actualresults to differ materially from anticipated results. Specific factors thatcould cause such differences include unexpected fluctuations in market interestrates, changes in economic conditions, changes in the competition for loans, orthe inability to renew or obtain financing. Further information concerningrisks and uncertainties is included throughout Item 1.

 

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

 

30

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**ITEM8.****    *****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA***

 

TheConsolidated Financial Statements of the Company included in this Form 10-Kare listed under Item 14(a). The Company is not required to file anysupplementary financial data under this item.

 

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

 

None.

 

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

 

In accordance with Exchange Act Rules 13a-15 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 30,2005 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.

 

There has been no change in the Company’s internalcontrols over financial reporting that occurred during the quarter ended April 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting, other thanincreased controls surrounding the Company’s reporting for income taxes.  Historically, the Company has utilized thirdparties to prepare federal and state tax returns, and to provide accountingentries to record differences between the current and deferred tax accounts onthe Company’s balance sheet.  In aneffort to provide adequate assurances that federal and state tax returnscontinue to be filed in a timely and accurate manner, and specifically toensure that entries made to record current and deferred tax assets andliabilities are fully documented, the Company has instituted additionalreconciliation and testing procedures which will enhance internal controls andprovide additional information to management on the nature of these assets andliabilities.  The Company has alsoelected to engage a national accounting firm to provide advisory and complianceservices with respect to the Company’s federal and state tax obligations.

 

**Part III**

 

**ITEM10.****  *****DIRECTORS AND EXECUTIVEOFFICERS***

 

Informationresponsive to this item appears under the caption “Election of Directors” inthe Company’s Proxy Statement for the 2005 Annual Meeting of Shareholdersexpected to be held on September 8, 2005, which is to be filed with theSecurities and Exchange Commission, and is incorporated herein by reference.

 

Information related to the nomination of directorsappears under the caption “Corporate Governance” in the Company’s ProxyStatement for the 2005 Annual Meeting of Shareholders expected to be held on September 8,2005, which is to be filed with the Securities and Exchange Commission, and isincorporated herein by reference.

 

Information related to the Company’s Code of BusinessConduct and Ethics, adopted April 28, 2004, appears under the caption “CorporateGovernance” in the Company’s Proxy Statement for the 2005 Annual Meeting ofShareholders expected to be held on September 8, 2005, which is to befiled with the Securities and Exchange Commission, and is incorporated hereinby reference.  The Code of BusinessConduct and Ethics has also been filed under Item 15 as an exhibit to this Form 10-K.

 

31

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The Audit Committee of the Board of Directors hasdesignated one or more persons as financial experts.  Information related to the financial expertdesignation and the Audit Committee appears under the caption “OtherInformation Concerning the Board of Directors” in the Company’s Proxy Statementfor the 2005 Annual Meeting of Shareholders expected to be held on September 8,2005, which is to be filed with the Securities and Exchange Commission, and isincorporated herein by reference.

 

**ITEM 11.  *EXECUTIVE COMPENSATION***

 

Informationresponsive to this item appears under the caption “Executive Compensation” inthe Company’s Proxy Statement for the 2005 Annual Meeting of Shareholdersexpected to be held on September 8, 2005, which is to be filed with theSecurities and Exchange Commission, and is incorporated herein by reference.

 

**ITEM 12.  *SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT***

 

Informationresponsive to this item appears under the caption “Security Ownership ofManagement and Certain Beneficial Owners” in the Company’s Proxy Statement forthe 2005 Annual Meeting of Shareholders expected to be held on September 8,2005, which is to be filed with the Securities and Exchange Commission, and isincorporated herein by reference.

 

**ITEM 13.  *CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS***

 

Informationresponsive to this item appears under the caption “Related Party Transactions”in the Company’s Proxy Statement for the 2005 Annual Meeting of Shareholdersexpected to be held on September 8, 2005, which is to be filed with theSecurities and Exchange Commission, and is incorporated herein by reference.

 

**ITEM 14.  *PRINCIPAL ACCOUNTANT FEESAND SERVICES***

 

Informationrelated to this item appears under the caption “Proposal 2: Ratification ofappointment of Independent Auditors” in the Company’s proxy statement for the2005 annual meeting of shareholders expected to be held on September 8,2005, which is to be filed with the Securities and Exchange Commission, and isincorporated herein by reference.

 

32

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**Part IV**

 

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

 

(a)   *(1)(2) Financial Statementsand Financial Statement Schedules*

 

SeeIndex to Consolidated Financial Statements on Page F-1.

 

*(3) Exhibits*

 

 
| 2.1(j)   |   | — |   | Stock Purchase  Agreement, dated as of September 9, 1998, between First Investors  Financial Services Group, Inc. and Fortis, Inc. to purchase Auto  Lenders Acceptance Corporation, a wholly-owned subsidiary of Fortis, Inc.                                                                                                                                                                                                                                                                                                                               |
|----------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(a)   |   | — |   | Articles of  Incorporation, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2(a)   |   | — |   | Bylaws, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1(a)   |   | — |   | Excerpts from the  Articles of Incorporation, as amended (included in Exhibit 3.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3(a)   |   | — |   | Specimen Stock  Certificate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5(a)  |   | — |   | Credit Agreement dated  as of October 16, 1992 among F.I.R.C., Inc. (“FIRC”) and  NationsBank of Texas, N.A., individually and as agent for the banks party  thereto, as amended by First Amendment to Credit Agreement and Loan Documents  dated as of November 5, 1993, Second Amendment to Credit Agreement and  Loan Documents dated as of March 3, 1994, Third Amendment to Credit  Agreement and Loan Documents dated as of March 17, 1995 and Fourth  Amendment to Credit Agreement and Loan Documents dated as of July 7,  1995. |
| 10.6(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.9(a)  |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.10(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.11(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.12(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.13(a) |   | — |   | Facultative  Reinsurance Agreement between National Fire Insurance Company of Pittsburgh  and First Investors Insurance Company, as reinsurer, dated as of May 26,  1995.                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14(a) |   | — |   | Blanket Collateral  Protection Insurance Policy dated October 5, 1992 issued by Agricultural  Excess & Surplus Insurance Company to FIRC as insured.                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17(a) |   | — |   | Lease Agreement  between A.I.G. Realty, Inc. and First Investors dated as of June 1,  1992, as amended by Amendment One dated October 29, 1993 and Amendment  Two dated October 26, 1994.                                                                                                                                                                                                                                                                                                                                                                    |
| 10.18(a) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.21(a) |   | — |   | 1995 Employee Stock  Option Plan of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.22(a) |   | — |   | Form of Stock  Option Agreement between the Registrant and Robert L. Clarke dated  August 25, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.23(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.25(b) |   | — |   | Amendment Three dated  October 10, 1995 to the Lease Agreement between A.I.G. Realty, Inc.  and the Registrant, filed as Exhibit 10.17.                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.26(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.27(b) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.28(c) |   | — |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.29(d) |   | — |   | Security Agreement  dated as of October 22, 1996 among First Investors Auto Receivables  Corporation, Enterprise Funding Corporation, Texas Commerce Bank National  Association, MBIA Insurance Corporation, NationsBank N.A., and First  Investors Financial Services, Inc.                                                                                                                                                                                                                                                                                           |
| 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.                                                                                                                                                                                                                                                                                             |
| 14.1      |   | — |   | Code  of Business Conduct and Ethics adopted April 28, 2004                                                                                                                                                                                                                                                                                                                                                                                |
| 21.1(j)   |   | — |   | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1      |   | — |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1      |   | — |   | Certification  of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                      |
| 31.2      |   | — |   | Certification  of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                      |
| 32.1      |   | — |   | Certification  of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                      |
| 32.2      |   | — |   | Certification  of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                      |

 

36

----

 
| (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.                                           |

 

(b) *Reports on Form 8-K*

 

Form 8-K filed March 10,2005 reporting third quarter financial results.

 

37

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-Kto be signed on its behalf by the undersigned thereunto duly authorized.

 
| ** ** | **First Investors Financial Services  Group, Inc.** |
|------------|----------------------------------------------------------|
|       | (Registrant)                                             |
|       |                                                     |
| Date:      | 7/29/05                                                  |   | By:  /s/ Tommy A. Moore, Jr. |
| ** ** | **Tommy A. Moore, Jr.**                             |
| ** ** | **President and Chief Executive Officer**                |
| ** ** | **(Principal Executive Officer)**                        |
|            |                                                          |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of First InvestorsFinancial Services Group, Inc. and in the capacities and on the dateindicated.

 
| **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:                             | 7/29/05    |                                             |   |   |
|                                   |            |                                                  |  |  |

 

38

----

 

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

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent  Registered Public Accounting Firm                                                     |   |
|--------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                         |   |
| Consolidated Balance Sheets  as of April 30, 2004 and 2005                                              |   |
|                                                                                                         |   |
| Consolidated  Statements of Operations for the Years Ended April 30, 2003, 2004 and  2005               |   |
|                                                                                                         |   |
| Consolidated  Statement of Shareholders’ Equity for the Years Ended April 30, 2003,  2004 and 2005 |   |
|                                                                                                         |   |
| Consolidated  Statements of Cash Flows for the Years Ended April 30, 2003, 2004 and  2005               |   |
|                                                                                                         |   |
| Notes to  Consolidated Financial Statements                                                                  |   |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED**

**PUBLIC ACCOUNTING FIRM**

 

Board of Directors andShareholders of First Investors Financial Services Group, Inc.

 

We have audited theaccompanying consolidated balance sheets of First Investors Financial ServicesGroup, Inc. (a Texas corporation) and subsidiaries as of April 30, 2005and 2004, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended April 30,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required 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 auditprovides a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of First Investors FinancialServices Group, Inc. and subsidiaries as of April 30, 2005 and 2004,and the results of their operations and their cash flows for each of the threeyears in the period ended April 30, 2005, in conformity with accountingprinciples generally accepted in the United States of America.

 

 
| /s/ GRANT THORNTON LLP |   |
|------------------------|--------|
|                   |
|                   |
| Houston, Texas         |
| July 15, 2005     |

 

F-2

----

 

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

**CONSOLIDATED BALANCE SHEETS****— APRIL 30, 2004 and 2005**

 
| ** **                                                                                                                                                                                         | ** ** | **2004**    | ** **  | **2005**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **ASSETS**                                                                                                                                                                                         |       |        |        |        |       |
| Receivables Held  for Investment, net                                                                                                                                                              |       | $           | 209,777,347 |        | $          | 248,976,931 |   |
| Receivables  Acquired for Investment, net                                                                                                                                                          |       | 1,190,230   |        | 641,223     |       |
| Cash and  Short-Term Investments                                                                                                                                                                   |       | 2,018,490   |        | 2,413,738   |       |
| Restricted Cash                                                                                                                                                                                    |       | 19,036,747  |        | 19,096,858  |       |
| Accrued Interest  Receivable                                                                                                                                                                       |       | 2,576,023   |        | 2,239,798   |       |
| Assets Held for  Sale                                                                                                                                                                              |       | 851,426     |        | 942,774     |       |
| Other Assets:                                                                                                                                                                                      | ** ** | ** **  | ** **  | ** **  | ** ** |
| Funds held under  reinsurance agreement                                                                                                                                                            |       | 4,182,134   |        | 4,174,814   |       |
| Deferred  financing costs and other assets, net of accumulated amortization and  depreciation of $5,759,477 and $2,684,543                                                                         |       | 6,115,203   |        | 5,019,030   |       |
| Current income  taxes receivable                                                                                                                                                                   |       | 8,212       |        | 5,233       |       |
| Total assets                                                                                                                                                                                       |       | $           | 245,755,812 |        | $          | 283,510,399 |   |
| ** **                                                                                                                                                                                         | ** ** | ** **  | ** **  | ** **  | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                      | ** ** | ** **  | ** **  | ** **  | ** ** |
| Debt:                                                                                                                                                                                              | ** ** | ** **  | ** **  | ** **  | ** ** |
| Warehouse credit  facilities                                                                                                                                                                       |       | $           | 42,705,809  |        | $          | 171,562,153 |   |
| Term notes                                                                                                                                                                                         |       | 164,718,190 |        | 70,050,511  |       |
| Working capital  facility                                                                                                                                                                          |       | 8,761,143   |        | 10,500,000  |       |
| Related party  note                                                                                                                                                                                | ** ** | **—**  |        | 2,500,000   |       |
| Other  Liabilities:                                                                                                                                                                                | ** ** | ** **  | ** **  | ** **  | ** ** |
| Accounts payable  and accrued liabilities                                                                                                                                                          |       | 1,708,984   |        | 2,495,260   |       |
| Deferred income  taxes payable                                                                                                                                                                     |       | 558,000     |        | 910,807     |       |
| Total  liabilities                                                                                                                                                                                 |       | 218,452,126 |        | 258,018,731 |       |
| ** **                                                                                                                                                                                         | ** ** | ** **  | ** **  | ** **  | ** ** |
| Commitments and  Contingencies                                                                                                                                                                     | ** ** | **—**  | ** **  | **—**  | ** ** |
| Shareholders’  Equity:                                                                                                                                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| Common stock,  $0.001 par value, 10,000,000 shares authorized, 5,583,669 issued; 5,000,269  outstanding at April 30, 2004 and 5,583,669 issued; 4,411,693  outstanding at April 30, 2005 |       | 5,584       |        | 5,584       |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 18,754,608  |        | 18,754,608  |       |
| Retained  earnings                                                                                                                                                                                 |       | 10,515,259  |        | 11,198,788  |       |
| Less, treasury  stock, at cost, 583,400 and 1,171,976 shares                                                                                                                                       |       | (1,971,765  | )           | (4,467,312  | )          |
| Total  shareholders’ equity                                                                                                                                                                   |       | 27,303,686  |        | 25,491,668  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                   |       | $           | 245,755,812 |        | $          | 283,510,399 |   |

 

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

 

F-3

----

 

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**For the Years Ended April 30, 2003, 2004 and2005**

 
| ** **                                                           | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                 |       |       |       |       |       |       |       |
| Interest Income                                                      |       | $          | 32,939,897 |       | $          | 30,498,270 |       | $ | 28,271,721 |   |
| Interest Expense                                                     |       | 10,165,739 |       | 8,437,766  |       | 7,615,756  |       |
| Net interest income                                                  |       | 22,774,158 |       | 22,060,504 |       | 20,655,965 |       |
| Provision for Credit Losses                                          |       | 10,337,718 |       | 12,428,175 |       | 9,519,607  |       |
| Net Interest Income After Provision for Credit Losses                |       | 12,436,440 |       | 9,632,329  |       | 11,136,358 |       |
| Other Income (Expense):                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Servicing revenue                                                    |       | 1,080,433  |       | 4,888,899  |       | 3,398,623  |       |
| Late fees and other                                                  |       | 1,219,991  |       | 1,911,570  |       | 3,834,340  |       |
| Income from investment                                               |       | 418,099    |       | 1,009,322  |       | 668,774    |       |
| Other interest income                                                |       | 282,708    |       | 460,243    |       | 426,630    |       |
| Realized and unrealized loss on interest rate derivative positions   |       | (329,059   | )          | (33,737    | )          | (373,097   | )          |
| Total other income                                                   |       | 2,672,172  |       | 8,236,297  |       | 7,955,270  |       |
| Costs and Expenses:                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Salaries and benefits                                                |       | 7,785,835  |       | 8,538,033  |       | 8,916,984  |       |
| Operating expense                                                    |       | 2,487,885  |       | 5,098,173  |       | 4,801,002  |       |
| General and administrative                                           |       | 3,553,975  |       | 3,722,842  |       | 3,731,936  |       |
| Other interest expense                                               |       | 643,296    |       | 468,153    |       | 565,282    |       |
| Total operating expenses                                             |       | 14,470,991 |       | 17,827,201 |       | 18,015,204 |       |
|                                                                 |       |       |       |       |       |       |       |
| Income Before Provision for Income Taxes and  Minority Interest |       | 637,621    |       | 41,425     |       | 1,076,424  |       |
| Provision (Benefit) for Income Taxes:                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current                                                              |       | (373,030   | )          | (66,139    | )          | 40,088     |       |
| Deferred                                                             |       | 564,220    |       | 85,430     |       | 352,807    |       |
| Total provision (benefit) for income taxes                           |       | 191,190    |       | 19,291     |       | 392,895    |       |
| Minority Interest                                                    |       | 113,813    |       | (11,429    | )          | —     |       |
|                                                                 |       |       |       |       |       |       |       |
| Net Income                                                           |       | $          | 332,618    |       | $          | 33,563     |       | $ | 683,529 |   |
| ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic and Diluted Net Income per Common Share                        |       | $          | 0.07       |       | $          | 0.01       |       | $ | 0.14 |   |

 

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

 

F-4

----

 

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

**CONSOLIDATEDSTATEMENT OF SHAREHOLDERS’ EQUITY**

**For the Years Ended April 30, 2003, 2004 and2005**

 
| ** **                                                     | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Stock, at  cost** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Balance, April 30, 2002                                   |       | 5,567             |       | 18,678,675                       |       | 10,149,078             |       | (515,000                      | )          | (1,731,886                                           | )          | 26,586,434 |       |
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Comprehensive income:                                          |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Net income                                                     |       | —            |       | —                           |       | 332,618                |       | —                        |       | —                                               |       | 332,618    |       |
| Unrealized gains  on derivatives, net of tax benefit of $4,201 |       | —            |       | —                           |       | —                 |       | —                        |       | 7,300                                                |       | 7,300      |       |
| Reclassification  of earnings, net of taxes of  $475,820  |       | —            |       | —                           |       | —                 |       | —                        |       | 827,797                                              |       | 827,797    |       |
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Comprehensive  income                                          |       |              |       |                             |       |                   |       |                          |       |                                                 |       | 1,167,715  |       |
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Treasury stock  purchases                                      |       | —            |       | —                           |       | —                 |       | (1,260,865                    | )          | —                                               |       | (1,260,865 | )          |
|                                                           |       |              |       |                             |       |                   |       |                          |       |                                                 |       |       |       |
| Balance,  April 30, 2003                                  |       | 5,567             |       | 18,678,675                       |       | 10,481,696             |       | (1,775,865                    | )          | (896,789                                             | )          | 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 |   |
|                                                                |            |                   |            |                                  |            |                        |            |                               |            |                                                      |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of this consolidated financialstatement.

 

F-5

----

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For the Years Ended April 30, 2003, 2004 and2005**

 
| ** **                                                                               | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**     | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Cash Flows From Operating Activities:                                                    |       |         |       |         |       |         |       |
| Net income                                                                               |       | $            | 332,618    |         | $          | 33,563       |       | $ | 683,529 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities — |       |         |       |         |       |         |       |
| Depreciation and amortization expense                                                    |       | 3,919,567    |       | 3,822,882    |       | 3,880,973    |       |
| Provision for credit losses                                                              |       | 10,337,718   |       | 12,428,175   |       | 9,519,607    |       |
| Minority interest                                                                        |       | 113,813      |       | (11,429      | )          | —       |       |
| (Increase) decrease in:                                                                  |       |         |       |         |       |         |       |
| Accrued interest receivable                                                              |       | (71,478      | )          | 805,371      |       | 336,224      |       |
| Restricted cash                                                                          |       | 4,106,495    |       | 265,904      |       | (60,111      | )          |
| Deferred financing costs and other assets                                                |       | (601,449     | )          | (1,778,903   | )          | (217,058     | )          |
| Funds held under reinsurance agreement                                                   |       | (558,433     | )          | (188,794     | )          | 7,320        |       |
| Deferred income taxes receivable                                                         |       | 529,646      |       | —       |       | —       |       |
| Current income tax receivable                                                            |       | 399,241      |       | 996,019      |       | 2,980        |       |
| Interest rate derivative positions                                                       |       | (151,010     | )          | 5,002,096    |       | —       |       |
| Increase (decrease) in:                                                                  |       |         |       |         |       |         |       |
| Accounts payable and accrued liabilities                                                 |       | (332,772     | )          | (224         | )          | 786,274      |       |
| Deferred income taxes payable                                                            |       | 49,593       |       | 508,407      |       | 352,807      |       |
| Interest rate derivative positions                                                       |       | (637,860     | )          | (5,248,080   | )          | —       |       |
| Net cash provided by operating activities                                                |       | 17,435,689   |       | 16,634,987   |       | 15,292,545   |       |
| Cash Flows From Investing Activities:                                                    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Origination of Receivables Held for Investment                                           |       | (114,245,233 | )          | (90,050,875  | )          | (158,016,891 | )          |
| Origination of Receivables Acquired for Investment                                       |       | —       |       | (328,787     | )          | —       |       |
| Purchase of investments                                                                  |       | (1,884,450   | )          | —       |       | —       |       |
| Principal payments from Receivables Held for Investment                                  |       | 81,009,858   |       | 87,638,125   |       | 100,366,456  |       |
| Principal payments from Receivables Acquired for Investment                              |       | 6,002,312    |       | 1,122,210    |       | 549,007      |       |
| Payments received on assets held for sale                                                |       | 6,898,267    |       | 7,467,053    |       | 6,459,975    |       |
| Purchase of furniture and equipment                                                      |       | (220,289     | )          | (382,929     | )          | (187,820     | )          |
| Net cash (used in) provided by investing activities                                      |       | (22,439,535  | )          | 5,464,797    |       | (50,829,273  | )          |
| Cash Flows From Financing Activities:                                                    |       |         |       |         |       |         |       |
| Proceeds from advances on—                                                          |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | 219,023,400  |       | 123,751,068  |       | 298,087,651  |       |
| Term notes                                                                               |       | —       |       | 139,661,000  |       | —       |       |
| Working capital facility                                                                 |       | —       |       | 2,000,000    |       | 2,043,863    |       |
| Other borrowings                                                                         |       | 1,221,280    |       | —       |       | 2,500,000    |       |
| Principal payments made on—                                                         |       |         |       |         |       |         |       |
| Warehouse credit facilities                                                              |       | (108,292,312 | )          | (222,989,779 | )          | (169,231,306 | )          |
| Term notes                                                                               |       | (95,900,937  | )          | (62,301,657  | )          | (94,667,679  | )          |
| Acquisition term facility                                                                |       | (3,670,765   | )          | —       |       | —       |       |
| Working capital facility                                                                 |       | (3,084,002   | )          | (1,953,375   | )          | (305,006     | )          |
| Other borrowings                                                                         |       | (1,000,000   | )          | (746,280     | )          | —       |       |
| Proceeds from the issuance of common stock                                               |       | —       |       | 75,950       |       | —       |       |
| Treasury stock purchased                                                                 |       | (1,260,865   | )          | (195,900     | )          | (2,495,547   | )          |
| Net cash provided by (used in) financing activities                                      |       | 7,035,799    |       | (22,698,973  | )          | 35,931,976   |       |
| Increase (Decrease) in Cash and Short-Term Investments                                   |       | 2,031,953    |       | (599,189     | )          | 395,248      |       |
| Cash and Short-Term Investments at Beginning of Period                                   |       | 585,727      |       | 2,617,680    |       | 2,018,490    |       |
| Cash and Short-Term Investments at End of Period                                         |       | $            | 2,617,680  |         | $          | 2,018,491    |       | $ | 2,413,738 |   |
| Supplemental Disclosures of Cash Flow Information:                                       |       |         |       |         |       |         |       |
| Cash paid (received) during the period for—                                         |       |         |       |         |       |         |       |
| Interest                                                                                 |       | $            | 9,485,192  |         | $          | 7,807,027    |       | $ | 6,561,342 |   |
| Income taxes                                                                             |       | (307,267     | )          | (969,690     | )          | 37,109       |       |

 

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

 

F-6

----

 

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**April 30, 2003, 2004 and 2005**

 

**1.  The Company**

 

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

 

FIFSbegan operations in May 1989 and is principally involved in the businessof originating and holding for investment retail installment contracts andpromissory notes secured by new and used automobiles originated by factoryauthorized franchised dealers or directly through consumers. As of April 30,2005, approximately 28%, 18% and 11% of Receivables Held for Investment hadbeen originated in Texas, Georgia and Ohio, respectively. The Company currentlyoperates in 28 states.

 

FIICwas organized under the captive insurance company laws of the state of Vermontfor the purpose of reinsuring certain credit enhancement insurance policiesthat have been written by unrelated third party insurance companies.

 

OnOctober 2, 1998, the Company completed the acquisition of FISC and theoperations of FISC are included in the consolidated results of the Companysince the date of acquisition. Headquartered in Atlanta, Georgia, FISC wasengaged in essentially the same business as the Company and additionallyperforms servicing and collection activities on a portfolio of receivablesoriginated for investment as well as on a portfolio of receivables originatedand sold pursuant to two asset securitizations.

 

OnAugust 8, 2000, the Company entered into a partnership agreement whereby asubsidiary of the Company was the general partner owning 70% of the partnershipinterests and First Union Investors, Inc. served as the limited partnerand owned 3% of the partnership interests. On September 19, 2003, First Investors Financial Services, Inc.purchased the limited partnership interests previously held by First UnionInvestors, Inc.  The Partnershipconsists primarily of a portfolio of loans previously owned or securitized byFISC and certain other financial assets including charged-off accounts owned byFISC.

 

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

 

OnMarch 19, 2003, FISC entered into a servicing agreement with an unrelatedthird party to service an approximately $300 million portfolio of installmentloan receivables purchased from a subsidiary of Union Acceptance Corporation.

 

Intotal, at April 30, 2005, FISC performs servicing and collection functionson a managed receivables portfolio of approximately $439 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, *Consolidation of Variable Interest Entities, an interpretation of ARB No. 51*,as amended in December 2003 by Interpretation 46R.  As of April 30, 2005, the Company doesnot have any entities under which FIN 46 as amended by Interpretation 46R wouldapply.

 

*Useof Estimates*. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. The most significant estimates usedby the Company relate to the allowance for credit losses.  See Notes 3 and 4. 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.

 

*Receivables Acquired for Investment*.  In connection with loans thatwere acquired in a portfolio purchase by the Partnership, the Company estimatesthe amount and timing of undiscounted expected future principal and interestcash flows. For certain purchased loans, the amount paid for a loan reflectsthe Company’s determination that it is probable the Company will be unable tocollect all amounts due according to the loan’s contractual terms. Accordingly,at acquisition, the Company recognizes the excess of the loan’s scheduledcontractual principal and contractual interest payments over its expected cashflows as an amount that should not be accreted. The remaining amount,representing the excess of the loan’s expected cash flows over the amount paid,is accreted into interest income over the remaining life of the loan.  As a result of the amortization of theoutstanding principal balance of the receivables portfolio, the majority of theremaining cash flows projected constitute default collections fromobligors.  Given thenature of the remaining cash flows of individual loans, the Company determinedthat the timing of collections on Receivables Acquired for Investment was muchmore unpredictable than contractual cash flows from non-defaulted receivables.  Therefore, under the guidance provided byPractice Bulletin 6*, Amortization ofDiscounts on Certain Acquired Loans*, Receivables Acquired forInvestment are accounted for under the cost-recovery method beginning September 30,2003.  Under the cost recovery method,cash proceeds from collections are applied to first reduce the Company’s basisin the assets.  Cash collected in excessof this cost basis is recognized as income when received.

 

*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 whenincurred.

 

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

 

F-8

----

 

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

 

The Company applies a systematic methodology in orderto determine the amount of the allowance for credit losses.  The specific methodology is a six-monthmigration analysis whereby the Company compares the aging status of each loanfrom six months prior to the aging loan status as of the reporting date.  These factors are then applied to the agingstatus of each loan at the reporting date in order to calculate the number ofloans that are expected to migrate to impaired status.  The estimated number of impairments is thenmultiplied by the estimated loss per loan, which is based on historicalinformation.  During the fourth quarter,the Company elected to increase its allowance for loan losses against loansthat were greater than 120 days past due and loans in which the collateral hadbeen assigned for repossession but had not yet been repossessed as of thereporting date.  The Company believesthat this increase is warranted in light of the change in federal bankruptcylaws enacted during the period and the recognition that the migration trends ofseverely delinquent loans and loans subject to bankruptcy are expected tobecome more protracted.  Based on this,the Company has assigned a specific allowance against these loans equal to theoutstanding balance of loans in these categories less the estimated recoveryamount based on current data regarding liquidation of the collateral andcollection of any additional payments. The Company utilized its most recent recovery rates in order to assessfair value of these loans.  For loansthat are not classified into these categories, the historical migration patternis utilized in order to establish the estimated impairment.  Despite the increase in allowance associatedwith the higher delinquency loans and bankrupt accounts, the total allowancefor loan losses decreased during the period as a percentage of Receivables Heldfor Investment due to improving overall delinquency trends and lowerrepossession and loss rates.  Theallowance for credit losses is based on estimates and qualitativeevaluations.  Ultimate losses may varyfrom current estimates. These estimates are reviewed periodically and asadjustments, either positive or negative, become necessary, are reported inearnings in the period they become known.

 

*FundsHeld Under Reinsurance Agreement*. The Company provides financial assurance for the third party insurancecompany it reinsures by maintaining premiums ceded to it in a restricted trustaccount for the benefit of the third party insurance company. The reinsuranceagreement provides, among other things, that the funds held can be withdrawn bythe third party insurance company due to an insolvency of the Company or toreimburse the third party insurance company for the Company’s share of lossespaid by the third party insurance company pursuant to the reinsuranceagreement.

 

*AssetsHeld for Sale*. The Company commences repossession procedures against the underlyingcollateral when the Company determines that collection efforts are likely to beunsuccessful. Upon repossession, the receivable is written down to theestimated fair value of the collateral, less the cost of disposition and plusthe expected recoveries from third-party insurers, through a charge to theallowance for credit losses.  Fair valueis determined by estimating the proceeds of the collateral, which primarily arecomprised 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.

 

F-9

----

 

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

 

*OtherOperating Expenses*. Other operating expenses include primarily depreciation expense,professional fees, service bureau fees, telephone, repossession related expenses,mail cost associated with the direct business and rent.

 

*IncomeTaxes*.  The Company followsSFAS No. 109, which prescribes that deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred tax assets and liabilitiesare measured using enacted tax rates applied to taxable income in the years inwhich those temporary differences are expected to be recovered or settled.Under SFAS No. 109, the effect on deferred tax assets and liabilities of achange in tax rates is recognized in the period that includes the enactmentdate.

 

*Derivatives*. SFASNo. 133, *Accounting for Derivative Instruments andHedging Activities,*as amended, establishes accounting and reportingstandards requiring that every derivative instrument (including certainderivative instruments embedded in other contracts) be recorded in the balancesheet as either an asset or liability at its fair value. The Statement requiresthat changes in the derivative’s fair value be recognized currently in earningsunless specific hedge accounting criteria are met.   The Company has determined that it does notmeet the criteria for hedge accounting treatment, and accordingly changes in the fair value are recorded asunrealized gains or losses and reflected in the statement of operations.

 

*EarningsPer Share*.  Earnings per shareamounts are calculated based on net income available to common shareholdersdivided by the weighted average number of shares of common stock outstanding.

 

*Furnitureand Equipment*. Furniture and equipment are carried at cost, less accumulateddepreciation. Depreciable assets are amortized using the straight-line methodover the estimated useful lives (two to five years) of the respective assets.

 

*Cashand Short-Term Investments*. The Company considers all investments with a maturity of three months orless when purchased to be short-term investments and treated as cashequivalents. See Note 5 for components of restricted cash.

 

*AdvertisingCosts. *The Companyexpenses advertising costs as incurred. As of April 30, 2005 and 2004, advertising expense was $1,427,481and $957,255, respectively.

 

*Treasury Stock. *In September, 2004, the Board of Directors authorizedthe Company to repurchase up to $1.5 million of the Company’s outstandingcommon stock.  This plan was subsequentlyamended in December, 2004, authorizing the repurchase of an additional $1million of the Company’s outstanding common stock, resulting in the totalauthorization of $2.5 million to repurchase the Company’s stock.  During the years ended April 30, 2005and 2004, the Company engaged in the following transactions:

 

| **Year ended  April 30, 2004** | ** ** | **Year Ended  April 30, 2005** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|
| **# of Shares  Repurchased**        | ** ** | **Wtd. Avg.  Price/Share**          | ** ** | **# of Shares  Repurchased** | ** ** | **Wtd. Avg.  Price/Share** | ** ** |
| 43,000                              |       | $                                   | 4.56       |   | 588,576 |   | $ | 4.24 |   |
|                                     |            |                                     |            |  |  |  |  |  |  |

 

As a result of the 588,576 shares repurchased during theyear ended April 30, 2005, the Company completed the $2.5 millionauthorized share repurchase plan and, as a result, announced the conclusion ofits share repurchase plan originally adopted in December 2001.  Since the inception of the plan, a total of1,171,976 shares were repurchased at a weighted average price of $3.81 pershare.

 

F-10

----

 

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

 

The following table presents the Company’s net incomeper share 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** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                                                            | ** ** | **2003**   | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                                                                                                  |       |       |       |   |   |   |   |
| Net Income, as  reported                                                                                                                              |       | $          | 332,618    |   | $ | 33,563 |   | $ | 683,529 |   |
| Deduct: Total  stock option plan compensation expense determined under fair value based  method for awards granted, modified or settled, net of taxes |       | (76,115    | )          | (111,681 | ) | (188,082 | ) |
| Pro Forma Net  Income (Loss)                                                                                                                          |       | $          | 256,503    |   | $ | (78,118 | ) | $ | 495,447 |   |
|                                                                                                                                                  |       |       |       |   |   |   |   |
| Basic and  Diluted Net Income per Common Share, as reported                                                                                           |       | $          | 0.07       |   | $ | 0.01 |   | $ | 0.14 |   |
| Basic and  Diluted Net Income (Loss) per Common Share, pro forma                                                                                      |       | $          | 0.05       |   | $ | (0.02 | ) | $ | 0.10 |   |

 

*Reclassifications*.  Certain reclassifications have been made to the2003 and 2004 amounts to conform to the 2005 presentation.

 

**3.  Receivables Held for Investment**

 

Thereceivables generally have terms between 48 and 72 months and arecollateralized by the underlying vehicles. Net receivable balances consisted of the following at April 30, 2004and 2005:

 
| ** **                                 | ** ** | **2004**   | ** **  | **2005**   | ** ** |
|--------------------------------------------|------------|------------|-------------|------------|------------|
| Receivables                                |       | $          | 207,489,339 |       | $          | 244,940,526 |   |
| Unamortized  premium and deferred fees (1) |       | 4,487,394  |        | 6,285,004  |       |
| Allowance for  credit losses               |       | (2,199,386 | )           | (2,248,599 | )          |
| Net receivables                            |       | $          | 209,777,347 |       | $          | 248,976,931 |   |

 

----

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

 

AtApril 30, 2005, the weighted average remaining term of the receivableportfolio is 50 months and the weighted average contractual interest rate is 13.9%.  Principal payments expected to be received onthe receivable portfolio, assuming no defaults and that payments are receivedin accordance with contractual terms are summarized in the following table.  Receivables may pay off prior to contractualdue dates, primarily due to defaults and early payoffs.

 

F-11

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| Year ending  April 30, |   |       |        |
|-----------------------------|--------|------------|-------------|
| 2006                        |   | $          | 59,460,413  |   |
| 2007                        |   | 68,295,721 |        |
| 2008                        |   | 78,443,879 |        |
| 2009                        |   | 38,740,513 |        |
|                        |   | $          | 244,940,526 |   |

 

Activityin the allowance for credit losses for the years ended April 30, 2004 and2005 was as follows:

 
| ** **                      | ** ** | **2004**    | ** ** | **2005**   | ** ** |
|---------------------------------|------------|-------------|------------|------------|------------|
| Balance,  beginning of year     |       | $           | 2,397,216  |       | $          | 2,199,386 |   |
| Provision for  credit losses    |       | 12,428,175  |       | 9,519,607  |       |
| Charge-offs, net  of recoveries |       | (12,626,005 | )          | (9,470,394 | )          |
| Balance, end of  year           |       | $           | 2,199,386  |       | $          | 2,248,599 |   |

 

**4.  Receivables Acquired for Investment**

 

Receivables Acquired for Investment comprise loanspreviously originated by Auto Lenders Acceptance Corporation and other thirdparties.  Loans originated by AutoLenders Acceptance Corporation include a portfolio of warehouse loans and aportfolio of loans that were previously securitized.  The securitized loans were subsequentlyredeemed and funded through the FIACC credit facility.  Receivables Acquired for Investmentpreviously originated by Auto Lenders Acceptance Corporation were purchased ata discount relating to credit quality. As a result of the amortization of the outstanding principal balance ofthe receivables portfolio, the majority of the remaining cash flows projectedconstitute default collections from obligors. Given the nature of the remaining cash flows of individual loans, theCompany determined that the timing of collections on Receivables Acquired forInvestment was much more unpredictable than contractual cash flows fromnon-defaulted receivables, therefore under the guidance provided by PracticeBulletin 6*, Amortization of Discounts on Certain AcquiredLoans*, Receivables Acquired for Investment have been accounted forunder the cost-recovery method since September 30, 2003.  Under this method, cash proceeds fromcollections are applied to first reduce the Company’s basis in the assets.  Cash collected in excess of this cost basisis recognized as income when received. Receivables Acquired for Investmentpreviously originated by Auto Lenders Acceptance Corporation were $979,496 and$607,894 as of April 30, 2004 and April 30, 2005, respectively.

 

On September 30, 2003 the Company purchased $9.4million of defaulted auto loan receivables from an unrelated third party.  These loans are included in ReceivablesAcquired for Investment on the balance sheet in the amount of $210,735 and$33,329 as of April 30, 2004 and April 30, 2005, respectively, andare accounted for using the cost-recovery method.  The Company may, from time to time, considersimilar acquisitions in the future.

 

**5.  Restricted Cash**

 

Thecomponents of restricted cash at April 30, 2004 and 2005 are as follows:

 
| ** **                                                 | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Collection and  lockbox balances                           |       | $         | 11,128,176 |      | $          | 12,346,942 |   |
| Funds held in  trust for receivable funding                |       | (790,564  | )          | 786,591   |       |
| Warehouse credit  facility and Term Note reserves (Note 7) |       | 8,449,135 |       | 5,713,325 |       |
| Other                                                      |       | 250,000   |       | 250,000   |       |
| Total restricted  cash                                     |       | $         | 19,036,747 |      | $          | 19,096,858 |   |

 

F-12

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

 

Thecomponents of deferred financing costs and other assets at April 30, 2004and 2005 are as follows:

 
| ** **                     | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Deferred  financing costs, net |       | $         | 1,713,833  |      | $          | 886,602 |   |
| Investments in  FARC           |       | 1,685,002 |       | 1,685,002 |       |
| Accounts  receivable, trade    |       | 269,091   |       | 1,140,580 |       |
| Other, net                     |       | 534,143   |       | 354,081   |       |
| Loan service fee  receivable   |       | 484,146   |       | 271,127   |       |
| Software, net                  |       | 383,753   |       | 179,375   |       |
| Furniture and  equipment, net  |       | 353,381   |       | 194,731   |       |
| Deferred  compensation plan    |       | 267,111   |       | —    |       |
| Prepaid expenses               |       | 424,743   |       | 307,532   |       |
| Total                          |       | $         | 6,115,203  |      | $          | 5,019,030 |   |

 

**7.  Debt**

 

The Company finances its loan origination through twowarehouse credit facilities. The Company’s credit facilities provide forone-year terms and have been renewed annually. Management of the Companybelieves that the credit facilities will continue to be renewed or extended orthat it would be able to secure alternate financing on satisfactory terms;however, there can be no assurance that it will be able to do so. In January,2002 the Company issued $159 million in asset-backed notes (“Term Notes”)secured by discrete pools of receivables. These notes were subsequently calledand redeemed in March, 2005.  InNovember, 2003, the Company issued $140 million in Term Notes secured by adiscrete pool of receivables. Substantially all receivables retained by the Company are pledged ascollateral for the credit facilities and the Term Notes. The weighted averageinterest rate for the Company’s secured borrowings including the effect ofprogram fees, and dealer fees, and other comprehensive income (loss)amortization was 3.5% and 3.7% for the fiscal years ending April 30, 2005and 2004, respectively.

 

*Warehouse Facilities as of April 30, 2005*

 
| **Facility** | ** ** | **Capacity** | ** **  | **Outstanding** | ** ** | **Interest Rate** | ** ** | **Fees**                                                                                              | ** ** | **Insurance**           | ** ** | **Borrowing  Rate At  April 30,  2005** | ** ** |
|--------------|------------|--------------|-------------|-----------------|------------|-------------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|
| FIARC        | ** ** | $            | 150,000,000 |            | $          | 127,928,518       |       | Commercial paper rate  plus .3%                                                                       |       | .25% of Unused Facility |       | .35                                          | %          | 2.96 | % |
| FIRC         | ** ** | $            | 50,000,000  |            | $          | 43,633,636        |       | Option of a) Base Rate,  which is the higher of prime rate or fed funds plus .5% or b) LIBOR plus .5% |       | .25% of Unused Facility |       | See below                                    |       | 3.56 | % |

 

*Warehouse Facilities – Credit Enhancement as of April 30,2005*

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

 

F-13

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

 

The premiums that the Company paid during fiscal year2005 for its three credit enhancement insurance coverages, of which the largestcomponent is basic ALPI insurance, represented approximately 2.6% of theprincipal amount of the receivables originated during the year. Aggregatepremiums paid for ALPI coverage alone during the fiscal years ended April 30,2004 and 2005 were $3,066,131 and $3,669,198, respectively, and accounted for3.5% and 2.3% of the aggregate principal balance of the receivables originatedduring such respective periods.

 

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

 

The result of the foregoing reinsurance structure isthat National Union, as the “fronting” insurer under the captive arrangement,is unconditionally obligated to the Company’s credit facility lenders for alllosses covered by the ALPI policy, and the Company, through its InsuranceSubsidiary, is obligated to indemnify National Union for all such losses. As ofApril 30, 2005, the Insurance Subsidiary had capital and surplus of$2,464,149 and unencumbered cash reserves of $1,110,550 in addition to the$3,317,904 trust account.

 

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

 

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

 

F-14

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*Warehouse Facilities – Agents and Expirations*

 
| **Facility** | ** ** | **Agent** | ** ** | **Expiration**         | ** ** | **Event if not Renewed**                                                                                                                                                                |
|--------------|------------|-----------|------------|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FIARC        |       | Wachovia  |       | February 15, 2006 |       | Receivables pledged would be allowed to amortize;  however, no new receivables would be allowed to transfer from the FIRC  facility.                                                    |
| FIRC         |       | Wachovia  |       | February 15, 2006 |       | The loan would convert to a term loan which would  mature six months thereafter and amortize monthly in accordance with the  borrowing base with the remaining balance due at maturity. |

 

On December 4, 2003,the FIRC facility was renewed, under similar terms and conditions, at the $50million commitment level until December 2, 2004, and was subsequentlyextended until February 15, 2006. On June 15, 2004, the FIRC facility was extended to $65 million,and reverted back to $50 million on September 13, 2004.  As of April 30, 2004 and 2005, there was$42.7 and $43.6 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 15, 2006.  As of April 30, 2004 and 2005, there was$0 and $127.9 million, respectively, outstanding.

 

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

 

The following table contains pertinent information on the Term Note asof April 30, 2005.

 
| **Term  Notes** | ** ** | **Issuance Date**      | ** ** | **Issuance  Amount** | ** **  | **Maturity Date** | ** **          | **Outstanding** | ** ** | **Interest  Rate** | ** ** |
|-----------------|------------|------------------------|------------|----------------------|-------------|-------------------|---------------------|-----------------|------------|--------------------|------------|
| 2003-A          |       | November 11, 2003 |       | $                    | 139,661,000 |              | April 20, 2011 |            | $          | 70,050,511         |       | 2.58 | % |
|                 |            |                        |            |                      |             |                   |                     |                 |            |                    |            |  |  |

 

Credit enhancement on the Term Note is as follows:

 

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

 

Term Notes- On January 29, 2002, the Company, through its indirect, wholly-ownedsubsidiary First Investors Auto Owner Trust 2002-A (“2002 Auto Trust”)completed the issuance of $159,036,000 of 3.46% Class A asset-backed notes(“2002-A Term Notes”). The initial pool of automobile receivables transferredto the 2002 Auto Trust totaled $135,643,109, which was previously owned by FIRCand FIARC, secure the 2002-A Term Notes. In addition to the issuance of the Class A Notes, the 2002 Auto Trustalso issued $4,819,000 in Class B Notes that were retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $159,033,471 were used to (i) fund a $25,000,000 pre-fundingaccount 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) paytransaction fees related to the 2002-A Term Note issuance, and (v) fund acash reserve account of 2% or $2,712,862 of the initial receivables pledgedwhich will serve as a portion of the credit enhancement for the transaction.The Class A Term Notes bear interest at

 

F-15

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3.46% and requiresmonthly principal reductions sufficient to reduce the balance of the Class ATerm Notes to 97% of the outstanding balance of the underlying receivablespool. The final maturity of the 2002-A Term Notes is December 15,2008.    The Class B Notes do notbear interest but require principal reductions sufficient to reduce the balanceof the Class B Notes to 3% of the outstanding balance of the underlyingreceivables pool.  A surety bond issuedby MBIA Insurance Corporation provides credit enhancement for the Class ANotes.  In the event that certain assetquality covenants are not met, the reserve account target level will increaseto 6% of the then current principal balance of the receivables pool.  On February 28, 2005, the Companynotified the note holders of the2002-A securitization of its intent to exercise its prepayment callprovision.  This call provision wascompleted effective March 15, 2005, and therefore there was no outstandingbalance as of April 30, 2005.  As ofApril 30, 2004, the outstanding principal balance on the 2002-A Term Noteswas $44,335,659.

 

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 $5,065,891 in Class B Notes thatwere retained by the Company and pledged to secure the Working Capital Facilityas further described below.  Proceedsfrom the issuance, which totaled $139,656,629 were used to (i) fund a$30,000,000 pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2003-A term note issuance, and (v) fund aninitial cash reserve account of 0.5% or $573,635 of the initial receivablespledged.  The Class A Term Notesbear interest at 2.58% and requires monthly principal reductions sufficient toreduce the balance of the Class A Term Notes to 96.1% of the outstandingbalance of the underlying receivables pool. The final maturity of the 2003-ATerm Notes is April 20, 2011.  The Class BNotes do not bear interest but require principal reductions sufficient toreduce the balance of the Class B Notes to 3.9% of the outstanding balanceof the underlying receivables pool.  Asurety bond issued by MBIA Insurance Corporation provides credit enhancementfor the Class A Notes.  In the eventthat certain asset quality covenants are not met, the reserve account targetlevel will increase to 6% of the then current principal balance of thereceivables pool.  As of April 30,2004 and 2005, the outstanding principal balances on the2003-A term notes were $120,382,531 and $70,050,511, respectively.

 

On May 5, 2005, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2005-A (“2005Auto Trust”) completed the issuance of $69,000,000 of 3.57% Class A-1asset-backed notes and $106,493,000 of 4.23% Class A-2 asset-backed notes(collectively “2005-A Term Notes”), for a total of $175,493,000 of asset backednotes. The initial pool of automobile receivables transferred to the 2005 AutoTrust totaled $150,920,721, which was previously owned by FIRC and FIARC, andsecures the 2005-A Term Notes.  Inaddition to the issuance of the Class A-1 and Class A-2 Notes, the2005 Auto Trust also issued $5,427,619 in Class B Notes that were retainedby the Company and pledged to secure the Working Capital Facility as furtherdescribed below.  Proceeds from theissuance, which totaled $175,487,827 were used to (i) fund a $29,999,898pre-funding account to be used for future loan originations; (ii) repayall outstanding borrowings under the FIARC commercial paper facility, (iii) reducethe outstanding borrowings under the FIRC credit facility, (iv) paytransaction fees related to the 2005-A Term Note issuance, and (v) fund aninitial cash reserve account of 1% or $1,509,207 of the initial receivablespledged.  The Class A-1 and Class A-2Term Notes bear interest at 3.57% and 4.23%, respectively, and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1 and Class A-2 Term Notes is December 17,2007 and July 16, 2012, respectively. The Class B Notes do not bear interest but require principalreductions sufficient to reduce the balance of the Class B Notes to 4.25%of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset quality covenantsare not met, the reserve account target level will increase to 2% of the thencurrent principal balance of the receivables pool.

 

*Acquisition Facility*.  On August 8, 2000, the Company enteredinto an agreement with Wachovia Securities. Under the agreement, a partnership was created in which FIFS Acquisitionserved as the general partner and contributed its assets for a 70% interest inthe partnership and First Union Investors, Inc., an affiliate of WachoviaSecurities, served as the limited partner with a 30% interest in thepartnership (the “Partnership”). Pursuant to the

 

F-16

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refinancing, thePartnership issued Class A Notes in the amount of $19,204,362 and Class BNotes in the amount of $979,453 to VFCC, an affiliate of Wachovia Securities,the proceeds of which were used to retire the acquisition debt. The Class ANotes bear interest at VFCC’s commercial paper rate plus 0.95% per annum andamortize on a monthly basis by an amount necessary to reduce the Class ANote balance as of the payment date to 75% of the outstanding principal balanceof Receivables Acquired for Investment, excluding Receivables Acquired forInvestment that are applicable to FIACC, as of the previous month end. The Class BNotes bear interest at VFCC’s commercial paper rate plus 5.38% per annum andamortize on a monthly basis by an amount which varied based on excess cashflows received from Receivables Acquired for Investment after payment ofservicing fees, trustee and back-up servicer fees, Class A Note interestand Class A Note principal, plus collections received on the TrustCertificates. The Class B Notes were paid in full on September 15,2000.  After the Class B Notes werepaid in full, all cash flows received after payment of Class A Noteprincipal and interest, servicing fees and other costs, are distributed to thePartnership for subsequent distribution to the partners based upon therespective partnership interests. Beginning in November 2001, the partnership used excess cash flowto retire additional Class A Note principal, thus no further partnershipdistributions were paid until the Class A Notes were retired.  On February 20, 2003, the Class ANotes were fully paid.  On September 19,2003, First Investors Financial Services, Inc. purchased the limitedpartnership interests previously held by First Union Investors, Inc. andaccordingly receives all excess cash flows.

 

*Working Capital Facility*.  On December 6, 2001, the Company enteredinto an agreement with Wachovia Securities to refinance the $11,175,000outstanding balance of the working capital term loan previously provided byBank of America and Wachovia and increase the size of the facility to $13.5million.  The renewal facility wasprovided to a special-purpose, wholly-owned subsidiary of the Company, FirstInvestors Residual Funding LP.   Thefacility originally consisted of a $9 million revolving tranche and a $4.5million term loan tranche which amortizes monthly.  The term loan tranche of this working capitalfacility was evidenced by the Class B Notes issued in conjunction with the2002 Auto Trust financing. The remaining $9 million of the $13.5 millionworking capital facility revolves monthly in accordance with a borrowing baseconsisting of the overcollateralization amount and reserve account for each ofthe Company’s other credit facilities. The facility is secured solely by the residual cash flow and cashreserve accounts related to the Company’s warehouse credit facilities, theacquisition facility and the existing and future term note facilities.  During 2002, the facility was modified toincrease the interest rate from LIBOR plus a 1.5% program fee to LIBOR plus a2.25% program fee.  The commitment feepaid on the total available amount of the facility was maintained at 1.5%.  In addition, the monthly principalamortization under the term loan tranche was increased to the greater of$250,000 or the principal distributions made under the Class B Notesissued under the 2002 Auto Trust financing. On December 4, 2003, the Working Capital Facility was extended to December 2,2004.  Under the terms of the extension,the monthly amortization requirement was replaced with the requirement thatoutstandings under the facility could not exceed the lesser of a borrowing baseor the $9 million facility limit.  On October 26,2004, the Working Capital Facility was extended until October 10, 2005,increasing the commitment amount 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%.  As of April 30,2004 and 2005, there was $8,761,143 and $10,500,000, respectively, outstandingunder this facility.

 

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

 

*Related Party Loans. *On December 3, 2001the Company entered into an agreement with one of its shareholders who is amember of its Board of Directors under which the Company may, from time totime, borrow up to $2.5 million.  On December 6,2004, the original $2.5 million shareholder loan was replaced with a $2.5million loan containing identical terms and conditions between the Company anda limited partnership that is affiliated with a current shareholder and memberof the Board of Directors  The proceedsof the borrowings have been utilized to fund certain private and open marketpurchases of the Company’s common stock pursuant to a Stock Repurchase Planauthorized by the Board of Directors and for general corporate purposes.  Borrowings under the facility bear interestat a fixed rate of 10% per annum.  Thefacility is unsecured and expressly subordinated to the

 

F-17

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Company’s senior creditfacilities. The facility matures on December 3, 2008 but may be repaid atany time unless the Company is in default on one of its other creditfacilities.  There was $0 and $2.5million outstanding under these facilities as of April 30, 2004 and 2005,respectively.  For the fiscal years endedApril 30, 2004 and April 30, 2005, the Company recorded interestexpense under these facilities of $67,676 and $17,808.

 

*Loan Covenants*.  The documentation governing these creditfacilities and Term Notes contains numerous covenants relating to the Company’sbusiness, the maintenance of credit enhancement insurance covering thereceivables (if applicable), the observance of certain financial covenants, theavoidance of certain levels of delinquency experience and other matters. Thebreach of these covenants, if not cured within the time limits specified, couldprecipitate events of default that might result in the acceleration of the FIRCcredit facility, the Term Notes and the working capital facility or thetermination of the commercial paper facilities. The Company was not in defaultwith respect to any financial covenants governing these financing arrangementsat April 30, 2005.

 

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

 

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

 

On June 1, 2001, theCompany entered into interest rate swaps with an aggregate notional amount of$100 million and a maturity date of April 15, 2004.  Under the terms of these swaps, the Companywill pay a floating rate based on one month LIBOR and receive a fixed rate of5.025%.  Management elected to enter intothese swap agreements to offset the uneconomical position of the existing payfixed swap created by rapidly declining market interest rates.  In connection with the decision to enter intothe $100 million floating rate swap, the Company elected to change thedesignation of the $100 million fixed rate swap from a cash flow hedge and notaccount for the instrument as a hedge under SFAS No. 133.   As a result, the change in fair value of theswaps is reflected in net income for periods subsequent to May 31, 2001.

 

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 arerecorded as unrealized gains or losses and reflected in net income.  On December 2, 2003, the Companyterminated all interest rate caps outstanding in exchange for proceeds of$356,000.  The caps were terminatedfollowing the repayment of all outstandings under the FIARC facility followingthe issuance of the 2003-A term notes. As a result, a realized loss of $14,000 was incurred relative to theaggregate market value of the interest rate caps.

 

During fiscal year 2005, as arequirement of the FIARC commercial paper facility, the Company entered intonine interest rate cap transactions, with strike rates between 5% and 6%.  The aggregate initial notional amount of thecaps was $126,086,843 which amortized over six years.  The Company paid an aggregate of $1,213,097in premiums to purchase these caps.  Theinterest rate caps were not designated as hedges, and accordingly, changes inthe fair value of the interest rate caps are recorded as unrealized gains orlosses and reflected in net income.  On April 28,2005, the Company terminated all interest rate caps outstanding in exchange forproceeds of $840,000.  The caps wereterminated following the repayment of all outstandings under the FIARC facilityprior to the issuance of the 2005-A term notes. As a result, a realized loss of $373,097 was incurred relative to theaggregate market value of the interest rate caps.

 

F-18

----

 

**8.  Income Taxes**

 

Thetemporary differences which give rise to deferred tax assets (liabilities) areas follows at April 30, 2004 and 2005, respectively:

 
| ** **                                | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax  assets related to:          |       |       |       |       |       |
| Allowance for  credit losses              |       | $          | 802,776    |       | $          | 764,524 |   |
| Net operating  loss carry forward         |       | 550,714    |       | 381,089    |       |
| Fixed assets and  other deferred costs    |       | 84,284     |       | 111,462    |       |
| Accrued expenses                          |       | 90,385     |       | 116,273    |       |
| AMT credit                                |       | —     |       | 11,098     |       |
|                                      |       | 1,528,159  |       | 1,384,446  |       |
| Deferred tax  liabilities related to:     |       |       |       |       |       |
| Receivables Held  for Investment, net     |       | (1,086,682 | )          | (1,255,207 | )          |
| Receivables  Acquired for Investment, net |       | (999,477   | )          | (991,303   | )          |
| Prepaid expenses                          |       | —     |       | (48,743    | )          |
|                                      |       | (2,086,159 | )          | (2,295,253 | )          |
| Net deferred tax  assets (liabilities)    |       | $          | (558,000   | )          | $          | (910,807 | ) |

 

Thefollowing table shows the expiration of the Company’s net operating loss carryforwards:

 

| **Year  of expiration** | ** ** | **Amount** | ** ** | **Tax effect** | ** ** |
|-------------------------|------------|------------|------------|----------------|------------|
| 2016                    |       | $          | 71,731     |           | $          | 24,388 |   |
| 2017                    |       | 1,049,120  |       | 356,701        |       |
| Totals                  |       | $          | 1,120,851  |           | $          | 381,089 |   |

 

Theprovision (benefit) for income taxes on income before income taxes and minorityinterest for the years ended April 30, 2003, 2004 and 2005, consists ofthe following:

 
| ** **      | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| Current —  |       |     |       |     |       |     |       |
| Federal         |       | $        | (381,137   | )        | $          | (75,161  | )          | $ | 18,560 |   |
| State           |       | 8,107    |       | 9,022    |       | 21,528   |       |
|            |       | $        | (373,030   | )        | $          | (66,139  | )          | $ | 40,088 |   |
| Deferred — |       |     |       |     |       |     |       |
| Federal         |       | $        | 564,220    |     | $          | 85,430   |       | $ | 352,807 |   |
| State           |       | —   |       | —   |       | —   |       |
|            |       | $        | 564,220    |     | $          | 85,430   |       | $ | 352,807 |   |

 

Thefollowing is a reconciliation between the effective income tax rate and theapplicable statutory federal income tax rate for the years ended April 30,2003, 2004 and 2005.

 

F-19

----

 
| ** **                                | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax —  statutory rate         |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  tax, net of federal benefit |       | 2.0      | %          | 2.0      | %          | 2.0      | %          |
| Minority  Interest                        |       | (6.5     | )%         | 10.1     | %          | —   |       |
| Non-deductible  expenses                  |       | .5       | %          | .5       | %          | .5       | %          |
| Effective income  tax rate                |       | 30.0     | %          | 46.6     | %          | 36.5     | %          |

 

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

 

On December 24, 2002, theCompany invested $475,061 for a 40% ownership in common stock in First Auto ReceivablesCorporation (“FARC”) and $712,591 for junior mezzanine debt of FARC.  FARC purchased a $197.5 million automobileloan portfolio from UAFC-2 Corporation, a subsidiary of Union AcceptanceCorporation, with proceeds from $186 million in senior bridge debt, $8.9million of senior mezzanine debt, $1.8 million of junior mezzanine debt and$1.2 million of equity.   The bridge debtinterest rate is LIBOR plus 1%, the senior mezzanine interest rate is 22.5% andthe junior mezzanine interest 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 year ended April 30,2004 and 2005, the Company recognized $1,352,234 and $894,262 of servicingrevenue, $161,750 and $108,994 of interest income and $1,009,322 and $668,774of equity in the income from investment in FARC.  As of April 30, 2004 and 2005, theequity investment in FARC of $968,327 and junior mezzanine debt of $716,675 areincluded in Deferred Financing Costs and Other Assets on the balance sheet.

 

**10.  NewAccounting Pronouncements**

 

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

 

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

 

SFAS No. 123(R) is effective as of the beginningof the fiscal year that begins after June 15, 2005. SFAS 123(R) applies toall awards granted after the required effective date and to such awardsmodified, repurchased, or cancelled after that date. The cumulative effect ofinitially applying SFAS No. 123(R), if any, is recognized as of therequired effective date. As of the required effective date, all public entitiesthat used the fair-value-based method for either recognition or disclosureunder SFAS No. 123 will apply SFAS No. 123(R) using a modifiedversion of the 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

 

F-20

----

 

retrospective applicationunder which financial statements for prior periods are adjusted on a basisconsistent with the pro forma disclosures required for those periods by SFAS No. 123.The Company has not yet completed its evaluation of the impact that SFAS No. 123(R)will have on its financial position and results of operations.

 

**11.  Credit Risks**

 

Approximately 28%,18%, and 11% of the Company’s Receivables Held for Investment by principalbalance at April 30, 2005, represents receivables originated from dealerslocated in Texas, Georgia, and Ohio. The economy of Texas is primarilydependent on petroleum and natural gas production and sales of related suppliesand services, petrochemical operations, light and medium manufacturingoperations, computer and computer service businesses, agribusiness and tourism.Job losses in any or all of these primary economic segments of the Texaseconomy may result in a significant increase in delinquencies or defaults inthe Company’s receivable portfolio. While vehicles secure the receivables, itis not expected that the value of the vehicles if repossessed and sold by theCompany would be sufficient to recover the principal outstanding under anydefaulted loans.

 

**12.  Fair Value of Financial Instruments**

 

Thefollowing table summarizes the carrying amounts and estimated fair values ofthe Company’s financial instruments for those financial instruments whosecarrying amounts differ from their estimated fair values. SFAS No. 107, *Disclosures About Fair Value of Financial Instruments,*defines the fair value of a financial instrument as the amount at which theinstrument could be exchanged in a current transaction between willing parties.The carrying amounts shown in the table are included in the balance sheet underthe indicated captions.

 
| ** **                           | ** ** | **April 30, 2004** | ** **  | **April 30, 2005** | ** ** |
|--------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                           | ** ** | **Carrying  Amount**    | ** **  | **Fair Value**          | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Financial assets  —             |       |                    |        |                    |       |   |   |   |   |
| Receivables Held  for Investment     |       | $                       | 207,489,339 |                    | $          | 210,292,409 |   | $ | 244,940,526 |   | $ | 256,710,698 |   |
| Receivables  Acquired for Investment |       | 1,190,230               |        | —                  |       | 641,223 |   | — |   |
| Financial  liabilities —        | ** ** | ** **              | ** **  | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term Notes                           |       | $                       | 164,718,190 |                    | $          | 167,597,201 |   | $ | 70,050,511 |   | $ | 68,856,437 |   |

 

Thefollowing methods and assumptions were used to estimate the fair value of eachcategory of financial instruments:

 

*Cashand Short-Term Investments, Other Receivables, Accounts Payable and AccruedLiabilities*. The carrying amounts approximate fair value because of the shortmaturity and market interest 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.

 

*ReceivablesAcquired for Investment*.  Itwas not practicable to estimate the fair value as the Company cannot predictthe timing of the remaining cash flows.

 

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

 

*CreditFacilities*. The carrying amount approximates fair value because of the floatinginterest rates on the credit facilities.

 

F-21

----

 

**13.  Defined Contribution Plan**

 

EffectiveMay 1, 1994, the Company adopted a participant-directed 401(k) retirementplan for its employees. An employee becomes eligible to participate in the planimmediately upon employment. The Company pays the administrative expenses ofthe 401(k) plan. The Company also matches a percentage of each participant’svoluntary contributions up to a maximum voluntary contribution of 3 percent ofthe participant’s compensation. In fiscal year 2004 and 2005, the Company madematching contributions to the 401(k) plan in the amounts of $40,062 and $23,425,respectively. Effective April 28, 1998, the Company established aparticipant-directed Deferred Compensation Plan for certain executive officersof the Company.  The DeferredCompensation Plan was terminated during the fourth quarter of the fiscal year2005 in response to changes in the tax law associated with such plans.  The assets in the plan were distributed tothe recipients.

 

**14.  Shareholders’ Equity**

 

*PreferredStock*.  The Company hasauthorized 1,000,000 shares of preferred stock with a $1.00 par value.  As of January 31, 2005, no shares havebeen issued.

 

*Employee**Stock Option Plan*. In June 1995, the Board of Directorsadopted the Company’s 1995 Employee Stock Option Plan (the Plan). The Plan isadministered by the Compensation Committee of the Board of Directors andprovides that options may be granted to officers and other key employees forthe purchase of up to 300,000 shares of common stock, subject to adjustment inthe event of certain changes in capitalization. On September 10, 2002, thenumber of shares of common stock available for issuance was increased to500,000. Options may be granted either as incentive stock options (which areintended to qualify for certain favorable tax treatment) or as non-qualifiedstock options.  The CompensationCommittee selects the persons to receive options and determines the exerciseprice, the duration, any conditions on exercise and other terms of the options.In the case of options intended to be incentive stock options, the exerciseprice may not be less than 100% of the fair market value per share of commonstock on the date of grant. With respect to non-qualified stock options, theexercise price may be fixed as low as 50% of the fair market value per share atthe time of grant. In no event may the duration of an option exceed 10 yearsand no option may be granted after the expiration of 10 years from the adoptionof the Plan. As of April 30, 2004 and 2005, a total of 282,500 and 360,500,respectively, options had been issued and remained outstanding leaving aremaining 217,500 and 139,500, respectively, available under the plan.  All stock options issued to date under thePlan have been issued as incentive stock options with an exercise price equalto the fair market value of the underlying common stock on the date of thegrant.

 

Theexercise price of the option is payable in cash upon exercise.  At the discretion of the CompensationCommittee, options may be issued in tandem with stock appreciation rightsentitling the option holder to receive an amount in cash or in shares of commonstock, or a combination thereof, equal in value to any increase since the dateof grant in the fair market value of the common stock covered by the option.

 

*Non-EmployeeDirector Stock Option Plan* - In September 2002, theNon-Employee Stock Option Plan was established to further align the interestsof the Company’s directors with the interests of the shareholders, as well asattracting and retaining qualified directors.  The Board of Directors administers the plan and the options will not bequalified as incentive stock options.  Atotal of 500,000 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. Subsequent automatic grants of an option to purchase 20,000 shares shallbe made to each non-employee director on July 15th each year,beginning July 15, 2003. The plan also gives the Board of Directorsdiscretionary authority to provide for additional option grants if the Company’sannual financial performance exceeds parameters established by the Board.  No discretionary grants have beenawarded.  As of April 30, 2004 and2005, a total of 270,000 and 390,000, respectively, options had been issuedunder the plan, leaving a remaining 230,000 and 110,000, respectively,available for issuance.  In addition tothe options granted above, there were an additional 20,000 options granted to adirector in 1995, before the adoption of the Non-Employee Stock OptionPlan.  All options issued under this planwere issued with an exercise price equal to the fair market value of the of theunderlying common stock on the date of the grant

 

F-22

----

 

Asummary of the status of the Company’s stock option plans for the years ended April 30,2003, 2004 and 2005 is presented below:

 
| ** **                                                         | ** ** | **Shares   Under   Option** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| Outstanding at  April 30, 2002                                |       | 330,500                     |       | $                                         | 6.16       |   |
| Granted                                                            |       | 172,500                     |       | $                                         | 2.95       |   |
| Outstanding at  April 30, 2003                                |       | 503,000                     |       | $                                         | 5.06       |   |
| Granted                                                            |       | 177,500                     |       | $                                         | 4.65       |   |
| Forfeited and  Expired                                             |       | (91,000                     | )          | $                                         | 4.62       |   |
| Exercised                                                          |       | (17,000                     | )          | $                                         | 4.47       |   |
| Outstanding at  April 30, 2004                                |       | 572,500                     |       | $                                         | 4.35       |   |
| Granted                                                            |       | 208,500                     |       | $                                         | 4.99       |   |
| Forfeited and  Expired                                             |       | (10,500                     | )          | $                                         | 3.69       |   |
| Outstanding at  April 30, 2005                                |       | 770,500                     |       | $                                         | 4.86       |   |
| Options  available for future grants  at  April 30, 2005 |       | 249,500                     |       |                                      |       |

 
| ** **                                              | ** ** | **Fiscal** | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2003**   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Options  exercisable at end of year                     |       | 232,800    |       | 245,333 |   | 357,467 |   |
| Weighted average  exercise price of options exercisable |       | $          | 6.86       |   | $ | 6.11 |   | $ | 5.38 |   |
| Weighted average  fair value of options granted         |       | $          | 1.06       |   | $ | 1.36 |   | $ | 1.57 |   |

 

Followingis a summary of the status of options outstanding at April 30, 2005:

 
| **Range  of  Exercise  Price** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Options  Outstanding** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Contractual  Life in Years** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|
| $4.75                          |       | $                                     | 4.75       |                     | 50,000     |                     | 50,000     |                                              |       | (1) |
| $11.00                         |       | $                                     | 11.00      |                     | 20,000     |                     | 20,000     |                                              |       | (1) |
| $2.95                          |       | $                                     | 2.95       |                     | 152,500    |                     | 87,665     |                                              | 7.26       |   |
| $3.98 -$5.25                   |       | $                                     | 4.61       |                     | 479,500    |                     | 131,302    |                                              | 8.09       |   |
| $6.75 -$7.38                   |       | $                                     | 7.37       |                     | 33,500     |                     | 33,500     |                                              | 2.27       |   |
| $11.00                         |       | $                                     | 11.00      |                     | 35,000     |                     | 35,000     |                                              | 0.40       |   |
|                           |       |                                  |       | 770,500                  |       | 357,467                  | ** ** | ** **                                        | ** ** |

 

----

(1) The option will terminate one year after the Director ceases to be a member ofthe Board of Directors, except that in the event of the Director’s death whileserving as a Director the option would be exercisable by his heirs or representativesof his estate for a period of two years after date of death.

 

F-23

----

 

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

 

The followingweighted-average assumptions were used:

 
| ** **                         | ** ** | **Fiscal** | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2003**   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Risk free  interest rate           |       | 4.0        | %          | 3.8 | % | 4.5 | % |
| Expected life of  options in years |       | 4.8        |       | 4.6 |   | 4.8 |   |
| Expected stock  price volatility   |       | 34         | %          | 30 | % | 19 | % |
| Expected  dividend yield           |       | 0          | %          | 0 | % | 0 | % |

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models do not necessarily provide a reliable singlemeasure of the fair value of its employee stock options.

 

**15.  Commitments and Contingencies**

 

*EmploymentAgreement*.   As of April 30,2005, the Company was not a party 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 April 30,2005, management believes there are no such legal proceedings that will have amaterial adverse impact on the Company’s financial position or results ofoperations.

 

*Leases*.  The Company is a party to a lease agreementfor office space in Houston that expires on February 28, 2011. The Companyis party to a lease agreement for office space in Atlanta which expires on June 30,2007. Rent expense for office space and other operating leases for the yearsended April 30, 2003, 2004 and 2005, was  $813,504, $764,283 and $1,052,765, respectively. Required minimum leasepayments for the remaining terms of the above leases are:

 

| Year ending  April 30, |   |      |      |
|-----------------------------|--------|-----------|-----------|
| 2006                        |   | $         | 1,136,080 |   |
| 2007                        |   | 1,042,668 |      |
| 2008                        |   | 429,186   |      |
| 2009                        |   | 333,084   |      |
| 2010                        |   | 318,330   |      |
| Thereafter                  |   | 265,275   |      |
|                             |        |           |           |  |

 

F-24

----

 

**16.  Earnings Per Share**

 

Earningsper share amounts are based on the weighted average number of shares of commonstock and potential dilutive common shares outstanding during the period. Theweighted average number of shares used to compute basic and diluted earningsper share for the years ended April 30, 2002, 2003 and 2004 are asfollows:

 
| ** **                                                          | ** ** | **For the Year Ended April 30,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| Weighted average  shares:                                           |       |                                  |       |   |   |   |   |
| Weighted average  shares outstanding for basic earnings per share   |       | 5,104,438                             |       | 5,008,427 |   | 4,789,784 |   |
| Effect of  dilutive stock options and warrants                      |       | 7,339                                 |       | 84,906 |   | 96,619 |   |
| Weighted average  shares outstanding for diluted earnings per share |       | 5,111,777                             |       | 5,093,333 |   | 4,886,403 |   |

 

AtApril 30, 2005, the Company had 218,000 employee stock options andwarrants and 190,000 director options which were not included in thecomputation of diluted earnings per share because to do so would have beenantidilutive for the period presented.

 

**17.  Other Events**

 

On November 16, 2004, theCompany received a letter from NASDAQ, indicating that the NASDAQ is reviewingthe Company’s eligibility for listing on the NASDAQ National Market as aconsequence of failure to meet the minimum 400 round lot shareholderrequirement of Marketplace Rule 4450(a)(4).  In the letter, NASDAQ stated that the Companyhad until December 1, 2004, to provide an acceptable plan to regaincompliance, or the staff will initiate delisting of the Company’s common stock.  As a result of this action, and afterconsidering the costs and benefits associated with the continued listing on theNASDAQ National Market, the Company has elected to delist from the NASDAQNational Market, electing instead to list its shares on the over-the-counterbulletin board.  The Company hasmaintained its registration under the Securities and Exchange Act of 1934 andcontinues to file Forms 10-Q, 10-K, and 8-K with the Securities and ExchangeCommission and mail an annual report to stockholders following each fiscal yearend.

 

**18.  Subsequent Events**

 

On May 5, 2005, the Company, through itsindirect, wholly-owned subsidiary First Investors Auto Owner Trust 2005-A (“2005Auto Trust”) completed the issuance of $69,000,000 of 3.57% Class A-1 asset-backednotes and $106,493,000 of 4.23% Class A-2 asset-backed notes (collectively“2005-A Term Notes”), for a total of $175,493,000 of asset backed notes. Theinitial pool of automobile receivables transferred to the 2005 Auto Trusttotaled $150,920,721, which was previously owned by FIRC and FIARC, secure the2005-A Term Notes.  In addition to theissuance of the Class A-1 and Class A-2 Notes, the 2005 Auto Trustalso issued $5,427,619 in Class B Notes that were retained by the Companyand pledged to secure the Working Capital Facility as further describedbelow.  Proceeds from the issuance, whichtotaled $175,487,827 were used to (i) fund a $29,999,898 pre-fundingaccount 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) paytransaction fees related to the 2053-A Term Note issuance, and (v) fund aninitial cash reserve account of 1% or $1,509,207 of the initial receivablespledged.  The Class A-1 and Class A-2Term Notes bear interest at 3.57% and 4.23%, respectively, and requires monthlyprincipal reductions sufficient to reduce the balance of the Class A TermNotes to 95.75% of the outstanding balance of the underlying receivables pool.The final maturity of the Class A-1 and Class A-2 Term Notes is December 17,2007 and July 16, 2012, respectively. The Class B Notes do not bear interest but require principalreductions sufficient to reduce the balance of the Class B Notes to 4.25%of the outstanding balance of the underlying receivables pool.  A surety bond issued by MBIA InsuranceCorporation provides credit enhancement for the Class A Notes.  In the event that certain asset qualitycovenants are not met, the reserve account target level will increase to 2% ofthe then current principal balance of the receivables pool.

 

F-25

----

 

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

 

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 (Loss) per Common Share |       | $                               | 0.02       |   | $ | 0.04 |   | $ | 0.06 |   | $ | 0.02 |   |

 

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 | ) |

 

Thetable below sets forth the unaudited consolidated operating results by quarterfor the year ended April 30, 2003.

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

 

F-26

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