FIRST INVESTORS FINANCIAL SERVICES GROUP INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED APRIL 30, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO ___________

COMMISSION FILE NUMBER 0-26686

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(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
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Common Stock - $.001 par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant as of June 30, 2001, based on the closing
price of the Common Stock on the NASDAQ National Market on said date, was
$13,454,375.

There were 5,566,669 shares of Common Stock of the registrant
outstanding as of June 30, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

There is incorporated by reference in Part III of this Annual Report on
Form 10-K the information contained in the registrant's proxy statement for its
annual meeting of shareholders to be held September 6, 2001, which will be filed
with the Securities and Exchange Commission not later than 120 days after April
30, 2001.

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES

FORM 10-K

APRIL 30, 2001

TABLE OF CONTENTS

PAGE NO.
--------
PART I

Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 16
Item 3. Legal Proceedings............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders........................................... 16

PART II

Item 5. Market for Registrants' Common Equity and Related Shareholder Matters......................... 17

Item 6. Selected Consolidated Financial Data.......................................................... 18

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................. 19

Item 8. Financial Statements and Supplementary Data................................................... 32

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................................ 32

PART III

Item 10. Directors and Executive Officers.............................................................. 33

Item 11. Executive Compensation........................................................................ 33

Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 33

Item 13. Certain Relationships and Related Transactions................................................ 33

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 33

PART I

ITEM 1. BUSINESS

GENERAL

First Investors Financial Services Group, Inc. (the "Company") is a
consumer finance company engaged in both the purchase of receivables originated
by franchised automobile dealers and originating loans directly to consumers in
connection with the sale of new and late-model used vehicles. The Company
specializes in lending to consumers with impaired credit profiles. The Company
does not utilize off-balance sheet securitization to finance its Receivables
Held for Investment. As of April 30, 2001, the Company had Receivables Held for
Investment in the aggregate principal amount of $244,684,343, having an
effective yield of 16.1 percent and a net interest spread to the Company of 8.5
percent (net of cost of funds and other carrying costs).

HISTORY

The Company was organized in 1989 by Tommy A. Moore, Jr. and Walter A.
Stockard to conduct an automobile finance business, with Mr. Moore providing the
operating expertise and Mr. Stockard and members of his family furnishing the
initial financial support. During the first three years of the Company's
existence, its operations consisted primarily of purchasing and pooling
receivables for resale to financial institutions and others. In March 1992, the
Company obtained additional capital from a group of private investors and
decided to expand its operations and reorient its business. Instead of acquiring
receivables for resale, the Company adopted a strategy of purchasing receivables
for retention.

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

INDUSTRY

The automobile finance industry is the second largest consumer finance
market in the United States. Most automobile financing is provided by captive
finance subsidiaries of major automobile manufacturers, banks, thrifts, credit
unions and independent finance companies such as the Company. The overall
industry is generally segmented according to the type of vehicle sold (new vs.
used), the nature of the dealership (franchised vs. independent) and the credit
characteristics of the borrower (prime vs. non-prime). The non-prime market is
comprised of individuals who are relatively high credit risks and who have
limited access to traditional financing sources, generally due to unfavorable
past credit experience, low income or limited financial resources and/or the
absence or limited extent of prior credit history.

ORIGINATING DEALER BASE

GENERAL. The Company primarily purchases receivables from the new and used
car departments of dealers operating under franchises from the major automobile
manufacturers. The Company does not generally do business with "independent"
dealers who operate used car lots with no manufacturer affiliation. No dealer or
group of dealers (who are affiliated with each other through common ownership)
accounted for more than 5 percent of the receivables owned by the Company at
April 30, 2001, and no dealer or group of related dealers originated more than 5
percent of the receivables held by the Company at that date. The volume and
frequency of receivable purchases from particular dealers vary widely with the
size of the dealerships as well as market and competitive factors in the various
dealership locations.

1

LOCATION OF DEALERS. Approximately 19 percent of the dealers with whom the
Company has agreements are located in Texas, where the Company has operated
since 1989. The Company's expansion beyond Texas began in 1992 and today the
Company operates in 26 states.

The following table summarizes, with respect to each state in which the
Company operates, the number of receivables (and percentage of total
receivables), outstanding which were originated by the Company from dealers in
such state during the last two fiscal years:

RECEIVABLES HELD FOR INVESTMENT
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YEAR ENDED YEAR ENDED
APRIL 30, 2000 APRIL 30, 2001
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STATE LOAN COUNT % LOAN COUNT %
--------------------------------- ---------- ------- ---------- -------

Texas............................ 5,684 29.3% 5,444 26.6%
Georgia.......................... 2,998 15.5% 3,512 17.1%
Ohio............................. 3,472 17.9% 3,373 16.5%
Oklahoma......................... 2,195 11.3% 2,512 12.3%
Missouri......................... 960 5.0% 1,029 5.0%
North Carolina................... 455 2.3% 643 3.1%
Michigan......................... 665 3.4% 589 2.9%
Virginia......................... 557 2.9% 515 2.5%
Tennessee........................ 291 1.5% 506 2.5%
Colorado......................... 330 1.7% 503 2.5%
Kansas........................... 385 2.0% 303 1.5%
New Jersey....................... 111 0.6% 254 1.2%
Washington....................... 149 0.8% 220 1.1%
Indiana.......................... 89 0.5% 133 0.6%
Pennsylvania..................... 156 0.8% 131 0.6%
All others(1).................... 877 4.5% 835 4.0%
------ ----- ------ -----
19,374 100.0% 20,502 100.0%
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(1) Includes dealers located in Arizona, California, Connecticut,
Florida, Iowa, Idaho, Illinois, Kentucky, Nebraska, South
Carolina and Utah.

MARKETING REPRESENTATIVES. The Company utilizes a system of regional
marketing representatives to recruit, enroll and to provide new dealers with the
Company's underwriting guidelines and credit policies as well as to maintain
relationships with the Company's existing dealers. The representatives are
full-time employees who reside in the region for which they are responsible.

In addition to soliciting and enrolling new dealers, the regional
representatives assist new dealers in assimilating the Company's system of
credit application submission, review, acceptance and funding, as well as
dealing with routine dealer relations on a daily basis. The role of the regional
representatives is generally limited to marketing the Company's core finance
programs and maintaining relationships with the Company's originating dealer
base. The representatives do not enter into or modify dealer agreements on
behalf of the Company, do not participate in credit evaluation or loan funding
decisions and do not handle funds belonging to the Company or its dealers. Each
representative reports to, and is supervised by, the Company's sales and
marketing manager in Houston.

In 1997, the Company established a telemarketing department to supplement
the efforts of its marketing representatives in the field. The telemarketing
staff (dealer sales representatives) is located in Houston and is primarily
responsible for new loan volume in rural areas or states in which the Company
cannot justify a field marketing representative.

2

It has been the policy of the Company to avoid the establishment of branch
offices because it believes that the expenses and administrative burden of such
offices are generally unjustified. Moreover, in view of the availability of
modern data transmission technology, the Company has concluded that the critical
functions of credit evaluation and loan origination are best performed and
controlled on a centralized basis from its Houston facility. Accordingly, as the
marketing representative system has operated satisfactorily, the Company does
not plan to create branch offices in the future.

FINANCING PROGRAMS

The Company originates loans from two sources: (i) dealer indirect (the
"core program"), and (ii) consumer direct utilizing the Internet and direct
marketing. The core program generates approximately 90 percent of the Company's
current volume and consists of loans purchased directly from dealerships in
states in which the Company operates. Consumer direct originations contribute
approximately 10 percent of originations and involve applications for credit
obtained through either direct marketing efforts or through the Company's
Internet initiative from consumers who are seeking to acquire a vehicle or
refinance an existing automobile loan.

Credit applications generated by each of the above sources are forwarded to
the Company's centralized credit department in Houston with decisions made based
on the Company's standard underwriting guidelines and credit scoring model. The
internal credit decision and acceptance process is essentially the same
regardless of the origination source. Third party originators have no credit
approval authority and are subject to individual contracts that specify the
obligations of the parties. Essentially all of the Company's receivables are
acquired on a non-recourse basis.

In addition to purchasing receivables from dealers under the core program
as they are originated or making loans directly to consumers, the Company has
also acquired seasoned receivables in bulk portfolio acquisitions or from other
third party originators and may continue to do so from time to time.

The Company had active dealership agreements with 1,443 dealers at April
30, 2001. These are non-exclusive agreements terminable at any time by either
party and they require no specific volume levels. The agreements with the core
program dealers contain customary representations and warranties concerning
title to the receivables sold, validity of the liens on the underlying vehicles,
compliance with applicable laws and related matters. Although the dealers are
obligated to repurchase receivables that do not conform to these warranties, the
dealers do not guarantee collectability or obligate themselves to repurchase
receivables solely because of payment default. The receivables are purchased at
par or at prices that may reflect a discount or premium depending on the annual
percentage rates of particular receivables and the Company's assessment of
relative credit risk. The pricing and credit terms upon which the Company agrees
to acquire receivables is governed by the Company's credit policy and a credit
score generated by the Company's proprietary, empirical based scoring model.

CREDIT EVALUATION

GENERAL. In connection with the origination of a receivable for purchase by
the Company, the Company follows systematic procedures designed to eliminate
unacceptable risks. This involves a three-step process whereby (i) the
creditworthiness of the borrower and the terms of the proposed transaction are
evaluated and either approved, declined or modified by the Company's credit
verification department, (ii) the loan documentation and collateralization is
reviewed by the Company's funding department, and (iii) additional collateral
verification procedures and customer interviews are conducted by the Company.
During the course of this process, the Company's credit verification and funding
personnel coordinate closely with the finance and insurance departments of the
dealers tendering receivables or with individuals to whom the Company lends
directly. The Company has developed various financing programs under which it
approves loans that vary in pricing and loan terms depending on the relative
credit risk determined for each loan. Credit or default risk is evaluated by the
Company's loan officers in conjunction with a proprietary, empirical based
credit scoring model developed based on the Company's 12 year database of
non-prime lending results.

3

COLLATERAL VERIFICATION. As a condition to the purchase of each
receivable originated by the Company, the Company performs an individual
audit evaluation consisting of personal telephonic interviews with each
vehicle purchaser to verify the details of the credit application and to
confirm that the material terms of the sale conform to the purchaser's
understanding of the transaction. The Company will purchase a receivable
under its core program only after receipt and review of a satisfactory audit
report.

SERVICING

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

Since its inception in 1989 until July 1999, the Company had a
servicing relationship with General Electric Capital Corporation ("GECC") an
affiliate of General Electric Corporation. The division of GECC which
serviced the Company's receivables operates primarily as a servicer of
automobile installment loans and is one of the largest such servicers in the
United States. The Company's relationship with GECC was governed by a
servicing agreement entered into in October 1992 although the Company had
done business with GECC under previous agreements since 1989. Under the
agreement, GECC was responsible for all aspects of loan servicing and
collections with the exception of the disposition of repossessed vehicles,
which was the responsibility of the Company.

Servicing fees paid by the Company to GECC represented a variable
cost that increased in proportion to the volume of receivables carried.
During its two fiscal years ended April 30, 2000 and 2001, the Company
incurred servicing and related fees in the amount of $434,572 and $0,
respectively. In July 1999, the Company elected to terminate the servicing
agreement with GECC in connection with the transfer of the servicing and
collection activities on the receivables to the Company's internal servicing
and collection platform.

PORTFOLIO CHARACTERISTICS

GENERAL. In selecting receivables for inclusion in its portfolio, the
Company seeks to identify potential borrowers whom it regards as creditworthy
despite credit histories that limit their access to traditional sources of
consumer credit. In addition to personal credit qualifications, the Company
attempts to assure that the characteristics of the automobile sold and the terms
of the sale are likely to result in a consistently performing receivable. These
considerations include amount financed, monthly payments required, duration of
the loan, age of the automobile, mileage on the automobile and other factors.

CUSTOMER PROFILE. The Company's primary goal in credit evaluation is
to make loans to customers having stable personal situations, predictable
incomes and the ability and inclination to perform their obligations in a
timely manner. Many of the Company's customers are persons who have
experienced credit difficulties in the past by reason of illness, divorce,
job loss, reduction in pay or other adversities, but who appear to the
Company to have the capability and commitment to meet their obligations.
Through its credit evaluation process, the Company seeks to distinguish these
persons from those applicants who are chronically poor credit risks. Certain
information concerning the Company's obligors for the past two fiscal years
(based on credit information compiled at the time of the loan origination) is
set forth in the following table:

4

APRIL 30,
------------------
2000 2001
------ ------

Average monthly gross income....................... $4,030 $3,975
Average ratio of consumer debt to gross income..... 33% 34%
Average years in current employment................ 6 6
Average years in current residence................. 5 5
Residence owned.................................... 42% 41%
Residence rented................................... 53% 53%
Other residence arrangements(1).................... 5% 6%

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(1) Includes military personnel and persons residing with relatives.

PORTFOLIO PROFILE. In order to manage the risks associated with the
relatively high yields available in the non- prime market, the Company endeavors
to maintain a receivables portfolio having characteristics that, in its
judgment, reflect an optimal balance between achievable yield and acceptable
risk. The following table sets forth certain information concerning the
composition of the Company's portfolio as of the end of the past two fiscal
years:

APRIL 30,
------------------
2000 2001
------- -------

New Vehicles:
Percentage of portfolio(1)............................... 23% 19%
Number of receivables outstanding........................ 4,052 3,858
Average amount at date of acquisition.................... $17,601 $18,369
Average term (months) at date of acquisition(2).......... 60 61
Average remaining term (months)(2)....................... 45 38
Average monthly payment.................................. $ 471 457
Average annual percentage rate........................... 17.0% 17.1%
Used Vehicles:
Percentage of portfolio(1)............................... 77% 81%
Number of receivables outstanding........................ 15,322 16,644
Average age of vehicle at date of acquisition (years).... 1.9 2.0
Average amount at date of acquisition.................... $14,665 $15,279
Average term (months) at date of acquisition(2).......... 57 58
Average remaining term (months)(2)....................... 46 39
Average monthly payment.................................. $ 413 $ 398
Average annual percentage rate........................... 17.6% 17.8%

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

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

FINANCING ARRANGEMENTS

GENERAL. At the time the Company acquires receivables, they are
financed by transferring them, at an amount equal to the outstanding principal
balance, to a wholly-owned special-purpose financing subsidiary, F.I.R.C., Inc.
("FIRC"). FIRC maintains a $50 million revolving bank facility with Bank of
America and First Union National Bank, (the "FIRC credit facility"). In
addition, a wholly-owned special-purpose financing subsidiary, First Investors
Auto Receivables Corporation ("FIARC") has a $150 million conduit finance
facility with Enterprise Funding Corporation ("Enterprise"), a commercial paper
conduit administered by Bank of America, (the "FIARC commercial paper facility")
which allows the Company to refinance borrowings under the FIRC credit facility
in

5

order to maintain sufficient capacity to acquire new receivables. Together,
these warehouse credit facilities provide $200 million in financing capacity
to fund the purchase and long-term financing of receivables. When necessary,
the Company will transfer receivables from the warehouse credit facilities
and issue additional term notes.

FIRC CREDIT FACILITY. As designated receivables are originated by the
Company and transferred to FIRC, they are immediately pledged to a commercial
bank that serves as the collateral agent for the bank lenders. The FIRC credit
facility has a borrowing base that, subject to certain adjustments, permits FIRC
to draw advances up to the outstanding principal balance of qualified
receivables but not in excess of the present facility limit of $50 million.
Uninsured losses on receivables, or certain other events adversely affecting the
collectability of receivables, can result in their ineligibility for inclusion
in the borrowing base, and in the event that the Company's advances exceed the
borrowing base the Company must prepay the credit line until the imbalance is
corrected.

Under the FIRC credit facility the Company has three interest rate
options: (i) the Bank of America prime rate in effect from time to time, (ii) a
rate equal to .5 percent above the "LIBOR" rate (the average U.S. dollar deposit
rate prevailing from time to time in the London interbank market) for selected
advance terms, or (iii) any other short-term fixed interest rate agreed upon by
the Company and the lenders. The Company is also required to pay periodic
facility fees as well as an annual agency fee, and to maintain certain
collection reserves. The pledge of all of the receivables financed, a cash
reserve account and all of the capital stock of FIRC secure this facility.
Collections of principal and interest on the Company's receivables are remitted
directly to the collateral agent for application to the payment of interest due
on the credit facility and certain other charges, with the balance of
collections then being distributed to the Company.

The current term of the FIRC credit facility expires on November 14,
2001, at which time, should the facility not be renewed, the outstanding
borrowings would be converted to a term loan facility that would mature six
months thereafter and amortize monthly in accordance with the borrowing base
with any remaining balance due at maturity. The Company presently intends to
seek a renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no reason
to believe that this credit facility will not be renewed. If the facility were
not renewed however, or if material changes were made to its terms and
conditions, it could have a material adverse effect on the Company.

FIARC COMMERCIAL PAPER FACILITY. When a sufficient number of
receivables have been accumulated under the FIRC credit facility, they may be
refinanced under the FIARC commercial paper facility through a transfer of a
group of specified receivables from FIRC to FIARC. FIARC's purchase is funded
through borrowings under the commercial paper facility equal to 94 percent of
the aggregate principal balance of the receivables transferred. The remaining 6
percent of funds required to repay borrowings under the FIARC credit facility
are advanced by the Company in the form of an equity contribution to FIARC.
Enterprise funds the advance to FIARC through the issuance, by an affiliate of
Enterprise, of commercial paper (indirectly secured by the receivables) to
institutional or public investors. The Company is not a guarantor of, or
otherwise a party to, such commercial paper. At April 30, 2001, the maximum
borrowings available under the commercial paper facility were $150 million. The
Company's interest cost is based on Enterprise's commercial paper rates for
specific maturities plus .30 percent. In addition, the Company is required to
pay periodic facility fees and other costs related to the issuance of commercial
paper.

As collections are received on the transferred receivables they are
remitted directly to a collection account maintained by the collateral agent for
the FIARC commercial paper facility. From that account, a portion of the
collected funds are distributed to Enterprise in an amount equal to the
principal reduction required to maintain the 94 percent advance rate and to pay
carrying costs and related expenses, with the balance released to the Company.
In addition to the 94 percent advance rate, FIARC must maintain a 1 percent cash
reserve as additional credit support for the facility.

In November 2000, the Company increased its commercial paper facility,
with Enterprise, which is credit enhanced by a surety bond issued by MBIA
Insurance Corporation from $135 million to $150 million. The new facility
expires on November 29, 2001. If the facility were terminated, no new
receivables could be transferred to FIARC from FIRC and the receivables financed
under the commercial paper facility would be allowed to amortize. The Company
presently intends to seek a renewal of the facility from its lenders prior to
maturity. Management

6

considers its relationship with its lenders to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the
facility were not renewed however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.

FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, a wholly-owned
special-purpose financing subsidiary, First Investors Auto Capital Corporation
("FIACC"), entered into a $25 million commercial paper conduit facility with
Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit
administered by First Union National Bank (the "FIACC commercial paper
facility"), to fund the acquisition of additional receivables generated under
certain of the Company's financing programs. FIACC acquires receivables from the
Company and may borrow up to 88 percent of the face amount of receivables, which
are pledged as collateral for the commercial paper borrowings. VFCC funds the
advance to FIACC through the issuance of commercial paper (indirectly secured by
the receivables) to institutional or public investors. The Company is not a
guarantor of, or otherwise a party to, such commercial paper. The Company's
interest cost is based on VFCC's commercial paper rates for specific maturities
plus .30 percent.

At April 30, 2001, borrowings were $10,400,901 under the FIACC
commercial paper facility, and had a weighted average interest rate of 5.56
percent, including the effects of program fees and hedge instruments. There
were no outstanding borrowings at April 30, 2000. The current term of the
FIACC commercial paper facility expires on November 14, 2001. If the facility
were not renewed on or prior to the maturity date, the outstanding balance
under the facility would continue to amortize utilizing cash collections from
the receivables pledged as collateral. The Company presently intends to seek
a renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no
reason to believe that this credit facility will not be renewed. If the
facility were not renewed however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.

On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1 (the "ALAC 97-1 Securitization"). Accordingly,
the Company acquired $8,110,849 in outstanding receivables from the trust and
borrowed $6,408,150 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding balance in a cash reserve
account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456
of the trust certificates. On March 15, 2001, the Company elected to exercise
its right to repurchase the senior notes issued in connection with the ALAC
Automobile Receivables Owner Trust 1998-1 (the "ALAC 98-1 Securitization").
Accordingly, the Company acquired $9,257,612 in outstanding receivables from the
trust and borrowed $7,174,509 under the FIACC facility which, combined with
amounts on deposit in the collection account and the outstanding balance in a
cash reserve account, was utilized to repay $7,997,615 in senior notes and
redeem $1,946,178 of the Trust Certificates. The receivables purchased were used
as collateral to secure the FIACC borrowing with any residual cash flow
generated by the receivables pledged to the partnership. As a result of
utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company
has elected to utilize the FIACC commercial paper facility solely as the
financing source for the repurchases and does not expect to utilize the facility
to finance Receivables Held for Investment. Accordingly, the borrowing capacity
was reduced from $25 million to $11,627,308 effective March 15, 2001.

TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed notes
("Term Notes"). A pool of automobile receivables totaling $174,968,641, which
were previously owned by FIRC, FIARC and FIACC, secures the Term Notes. Proceeds
from the issuance, which totaled $167,967,690 were used to repay all outstanding
borrowings under the FIARC and FIACC commercial paper facilities, to reduce the
outstanding borrowings under the FIRC credit facility, to pay transaction fees
related to the Term Note issuance and to fund a cash reserve account of 2
percent or $3,499,373 which will serve as a portion of the credit enhancement
for the transaction. The Term Notes bear interest at 7.174 percent and require
monthly principal reductions sufficient to reduce the balance of the Term Notes
to 96 percent of the outstanding balance of the underlying receivables pool. The
final maturity of the Term Notes is February 15, 2006. As of April 30, 2000 and
2001, the outstanding principal balances on the Term Notes were $151,104,279 and
$84,925,871, respectively. A surety bond

7

issued by MBIA Insurance Corporation provides credit enhancement for the Term
Note holders. Additional credit support is provided by the cash reserve
account, which equals 2 percent of the original balance of the receivables
pool and a 4 percent over-collateralization requirement. In the event that
certain asset quality covenants are not met, the reserve account target level
will increase to 6 percent of the then current principal balance of the
receivables pool.

ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC ("FIFS
Acquisition"), entered into a $75 million non-recourse bridge financing facility
with VFCC to finance the Company's acquisition of FISC. Contemporaneously with
the Company's purchase of FISC, FISC transferred certain assets to FIFS
Acquisition, consisting primarily of (i) all receivables owned by FISC as of the
acquisition date, (ii) FISC's ownership interest in certain trust certificates
and subordinated spread or cash reserve accounts related to two asset
securitizations previously conducted by FISC, and (iii) certain other financial
assets, including charged-off accounts owned by FISC as of the acquisition date.
These assets, along with a $1 million cash reserve account funded at closing,
serve as the collateral for the bridge facility. The facility bore interest at
VFCC's commercial paper rate plus 2.35 percent and expired August 14, 2000.
Under the terms of the facility, all cash collections from the acquired
receivables or cash distributions to the certificate holder under the
securitizations are applied to pay FISC a servicing fee in the amount of 3
percent on the outstanding balance of all owned or managed receivables and then
to pay interest on the facility. Excess cash flow available after servicing fees
and interest payments are utilized to reduce the outstanding principal balance
on the indebtedness.

On August 8, 2000, the Company entered into an agreement with First
Union to refinance the acquisition facility. Under the agreement, a
partnership was created in which FIFS Acquisition serves as the general
partner and contributed its assets for a 70 percent interest in the
partnership and First Union Investors, Inc., an affiliate of First Union,
serves as the limited partner with a 30 percent 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 B Notes in the amount of
$979,453 to VFCC, the proceeds of which were used to retire the acquisition
debt. The Class A Notes bear interest at VFCC's commercial paper rate plus
0.95 percent per annum and amortize on a monthly basis by an amount necessary
to reduce the Class A Note balance as of the payment date to 75 percent of
the outstanding principal balance of Receivables Acquired for Investment,
excluding Receivables Acquired for Investment that are applicable to FIACC,
as of the previous month end. The Class B Notes bear interest at VFCC's
commercial paper rate plus 5.38 percent per annum and amortize on a monthly
basis by an amount which varied based on excess cash flows received from
Receivables Acquired for Investment after payment of servicing fees, trustee
and back-up servicer fees, Class A Note interest and Class A Note principal,
plus collections received on the Trust Certificates. The outstanding balance
of the Class A Notes was $11,126,050 as of April 30, 2001 and had a weighted
average interest rate of 6.26 percent, including the effects of program fees
and hedge instruments. The Class B Notes were paid in full on September 15,
2000. After the Class B Notes were paid in full, all cash flows received
after payment of Class A Note principal and interest, servicing fees and
other costs, are distributed to the Partnership for subsequent distribution
to the partners based upon the respective partnership interests. The amount
of the partners' cash flow will vary depending on the timing and amount of
residual cash flows. The Company is accounting for First Union's limited
partnership interest in the Partnership as a minority interest.

The Class A Notes mature on July 31, 2001. If the Class A Notes are
not renewed on or prior to the maturity date, the outstanding balance under
the notes would continue to amortize utilizing cash collections from the
receivables pledged as collateral. The Company presently intends to seek a
renewal of the notes from the lender prior to maturity. Management considers
its relationship with the lender to be satisfactory and has no reason to
believe that the notes will not be renewed. If the notes were not renewed
however, or if material changes were made to the terms and conditions, it
could have a material adverse effect on the Company.

WORKING CAPITAL FACILITY. The Company has maintained a $13.5 million
working capital line of credit with Bank of America and First Union National
Bank that was utilized for working capital and general corporate purposes. The
facility was increased from $10 million to $13.5 million in December 1999 and
was scheduled to mature on December 22, 2000. Effective December 22, 2000, the
$13.5 million in outstandings were refinanced through the issuance of a $13.5
million term loan. Under the terms of the facility, provided by Bank of America
and First Union, the term loan would be repaid in quarterly installments of
$675,000 beginning on March 31, 2001. In

8

addition to the scheduled principal payments, the term loan also requires an
additional principal payment of $300,000 on June 30, 2001 under certain
conditions relating to the size of Bank of America's portion of the
outstanding balance. Pursuant to this requirement, the Company paid $300,000
to Bank of America effective June 30, 2001. The remaining unpaid balance of
the term loan is due at maturity on December 22, 2002. Pricing under the
facility is based on the LIBOR rate plus 3 percent. The term loan is secured
by all unencumbered assets of the Company, excluding receivables owned and
financed by wholly-owned, special-purpose subsidiaries of the Company and is
guaranteed by First Investors Financial Services Group, Inc. and all
subsidiaries that are not special-purpose subsidiaries. In consideration for
refinancing the working capital facility, the Company paid each lender an
upfront fee and issued warrants to each lender to purchase, in aggregate,
167,001 shares of the Company's common stock at a strike price of $3.81 per
share. The warrants expire on December 22, 2010. On December 22, 2000, the
warrant value of $175,000 was estimated based on the expected difference
between financing costs with and without the warrants. These costs are
included as deferred financing costs and will be amortized through the
maturity date of the debt. In addition, if certain conditions were met, the
Company agreed to issue additional warrants to Bank of America to acquire up
to a maximum of 47,945 additional shares of stock at a price equal to the
average closing price for the immediately preceding 30 trading days prior to
each grant date which is June 30, 2001 and December 31, 2001. Pursuant to
this requirement, the Company issued 36,986 warrants to Bank of America at a
strike price of $3.56 per share on June 30, 2001. All other terms and
conditions of the warrants were identical to the warrants issued in December
2000. The amount of warrants if any, to be issued on December 31, 2001 will
be determined by the outstanding balance owing to Bank of America under of
the term loan. In no event, however, can the additional warrants issued on
December 31, 2001 exceed 10,959. The fair value of the warrants issued on
June 30, 2001 will be included as deferred financing costs and amortized
through the maturity date of the debt.

On September 20, 1999, the Company entered into an unsecured promissory
note with a director and shareholder of the Company under which the Company
borrowed $2.5 million to fund its working capital requirement. The note was
repaid in full on December 20, 1999 with the proceeds from borrowings under the
increased working capital facility.

LOAN COVENANTS. The documentation governing each of the Company's
financing arrangements contains numerous covenants relating to the Company's
business, the maintenance of credit enhancement insurance covering the
receivables (if applicable), the observance of certain financial covenants,
the avoidance of certain levels of delinquency experience, and other matters.
The breach of these covenants, if not cured within the time limits specified,
could precipitate events of default that might result in the acceleration of
the FIRC credit facility and working capital facility or the termination of
the commercial paper facilities. Through the operation of the collateral
agency arrangements described above, which are in the nature of a "lock-box"
security device covering the collection of principal and interest on almost
all of the Company's receivables, such a default could cause the immediate
termination of the Company's primary sources of liquidity. The Company is not
currently in default with any covenants governing these financing
arrangements at April 30, 2001.

INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities
bear interest at floating interest rates which are reset on a short-term basis
while the secured Term Notes bear interest at a fixed rate of interest. The
Company's receivables bear interest at fixed rates that do not generally vary
with the change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.

The Company was previously a party to a swap agreement with Bank of
America pursuant to which the Company's interest rate was fixed at 5.565 percent
on a notional amount of $120 million. The swap agreement expired on January 12,
2000. In connection with the issuance of the Term Notes, the Company entered
into a swap agreement with Bank of America pursuant to which the Company pays a
floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent
and receives a fixed rate of 7.174 percent from the counterparty. The initial

9

notional amount of the swap was $167,969,000, which amortizes in accordance with
the expected amortization of the Term Notes. Final maturity of the swap is
August 15, 2002.

On September 27, 2000, the Company elected to terminate the floating
swap at no material gain or loss and enter into a new swap under which the
Company would pay a fixed rate of 6.30 percent on a notional amount of $100
million. Under the terms of the swap, the counterparty had the option of
extending the swap for an additional three years to mature on April 15, 2004 at
a fixed rate of 6.42 percent. On April 15, 2001, the counterparty exercised its
extension option.

On June 1, 2001, the Company 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 Company will pay a floating rate based on
one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to
enter into these swap agreements to offset the uneconomical position of the
existing pay fixed swap created by rapidly declining market interest rates.

In connection with the repurchase of the ALAC 97-1 Securitization
and the financing of the repurchase through the FIACC facility on September
15, 2000, the Company entered into an interest rate swap agreement with First
Union under which the Company pays a fixed rate of 6.76 percent as compared
to the one month commercial paper index rate. The initial notional amount of
the swap was $6,408,150, which amortizes monthly in accordance with the
expected amortization of the commercial paper borrowings and matures on
December 15, 2001. On March 15, 2001, in connection with the repurchase of
the ALAC 1998-1 Securitization and the financing of that purchase through the
FIACC subsidiary, the Company and the counterparty modified the existing
interest rate swap increasing the notional amount initially to $11,238,710
and reducing the fixed rate from 6.76 percent to 5.12 percent. The new
notional amount is scheduled to amortize monthly in accordance with the
expected principal amortization of the underlying borrowings. The expiration
date of the swap was changed from December 15, 2001 to September 1, 2002.

On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million (Swap A) pursuant to which
the Company's interest rate is fixed at 4.81 percent; and, the second in the
initial notional amount of $24.9 million (Swap B) pursuant to which the
Company's interest rate is fixed at 5.50 percent. The notional amount
outstanding under each swap agreement amortizes based on an implied amortization
of the hedged indebtedness. Swap A has a final maturity of December 20, 2002
while Swap B matured on February 20, 2000. The Company also purchased two
interest rate caps, which protect the Company, and the lender against any
material increases in interest rates, which may adversely affect any outstanding
indebtedness that is not fully covered by the aggregate notional amount
outstanding under the swaps. The first cap agreement enables the Company to
receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 4.81 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap A and the underlying indebtedness. The
interest rate cap expires December 20, 2002 and the cost of the cap is amortized
in interest expense for the period. The second cap agreement enables the Company
to receive payments from the counterparty in the event that the one-month
commercial paper rate exceeds 6 percent on a notional amount that increases
initially and then amortizes based on the expected difference between the
outstanding notional amount under Swap B and the underlying indebtedness. The
interest rate cap expires February 20, 2002 and the cost of the cap is imbedded
in the fixed rate applicable to Swap B. Pursuant to the refinance of the
acquisition facility on August 8, 2000, the Class B cap was terminated and the
notional amounts of the Class A swap and Class A cap were adjusted downward to
reflect the lower outstanding balance of the Class A Notes. The amendment or
cancellation of these instruments resulted in a gain of $418,609. This
derivative net gain is being amortized over the life of the initial derivative
instrument. In addition, the two remaining hedge instruments were assigned by
FIFS Acquisition to the Partnership.

As of May 1, 2001 the Company had designated three interest rate swaps
and one interest rate cap with an aggregate notional value of $130,165,759 as
cash flow hedges as defined under SFAS No. 133. Accordingly, any

10

changes in the fair value of these instruments resulting from the
mark-to-market process will be recorded as unrealized gains or losses and be
reflected as an increase or reduction in stockholders' equity through other
comprehensive income. In connection with the decision to enter into the $100
million floating rate swaps on June 1, 2001, the Company elected to change
the designation of the $100 million fixed rate swap and not account for the
instrument as a hedge under SFAS No. 133. As a result, the change in fair
value of both swaps will be reflected as a gain or loss in net income for the
appropriate measurement period. Management believes that since these two
positions effectively offset, any net gains or losses will be immaterial to
income.

CREDIT ENHANCEMENT -- FIRC CREDIT FACILITY. In order to obtain a
lower cost of funding, the Company has agreed under the FIRC credit facility
to maintain credit enhancement insurance covering all of its receivables
pledged as collateral under this facility. The facility lenders are named as
additional insureds under these policies. The coverages are obtained on each
receivable at the time it is purchased by the Company 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 coverages relating to
physical damage and other risks. Solely the Company at its expense carries
these coverages and neither the vehicle purchasers nor the dealers are
charged for the coverages and they are usually unaware of their existence.
The Company's ALPI insurance policy is written by National Union Fire
Insurance Company of Pittsburgh ("National Union"), which is a wholly-owned
subsidiary of American International Group. As of April 30, 2001, National
Union had been assigned a rating of A+ + by A.M. Best Company, Inc.

The premiums that the Company paid during its past fiscal year for its
three credit enhancement insurance coverages, which consist primarily of the
basic ALPI insurance, represented approximately 3.9 percent of the principal
amount of the receivables acquired during the year. Aggregate premiums paid for
ALPI coverage alone during the three fiscal years ended April 30, 2001 were
$3,537,416, $5,344,975 and $3,413,186, respectively, and accounted for 3.2
percent, 3.8 percent and 3.0 percent of the aggregate principal balance of the
receivables acquired during such respective periods.

Prior to establishing its relationship with National Union in March
1994, the Company's ALPI policy was provided by another third-party insurer. In
April 1994 the Company organized First Investors Insurance Company (the
"Insurance Affiliate") under the captive insurance company laws of the State of
Vermont. The Insurance Affiliate is an indirect wholly-owned subsidiary of the
Company and is a party to a reinsurance agreement whereby the Insurance
Affiliate reinsures 100 percent of the risk under the Company's ALPI insurance
policy. At the time each receivable is insured by National Union, the risk is
automatically reinsured to its full extent and approximately 96 percent of the
premium paid by the Company to National Union with respect to such receivable is
ceded to the Insurance Affiliate. When a loss covered by the ALPI policy occurs,
National Union pays it after the claim is processed, and National Union is then
reimbursed in full by the Insurance Affiliate. As of April 30, 2001, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $21,963,429 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$6,210,971. In addition to the monthly premiums and liquidity reserves of the
Insurance Affiliate, a trust account is maintained by National Union to secure
the Insurance Affiliates obligations for losses it has reinsured.

The result of the foregoing reinsurance structure is that National
Union, as the "fronting" insurer under the captive arrangement, is
unconditionally obligated to the Company's credit facility lenders for all
losses covered by the ALPI policy, and the Company, through its Insurance
Affiliate, is obligated to indemnify National Union for all such losses. As of
April 30, 2001, the Insurance Affiliate had capital and surplus of $1,633,013
and unencumbered cash reserves of $919,639 in addition to the $2,533,058 trust
account.

The ALPI coverage as well as the Insurance Affiliate's liability under
the Reinsurance Agreement, remains in effect for each receivable that is pledged
as collateral under the warehouse credit facility. Once receivables are
transferred from FIRC to FIARC and financed under the commercial paper facility,
ALPI coverage and the Insurance Affiliate's liability under the Reinsurance
Agreement is cancelled with respect to the transferred receivables. Any unearned
premium associated with the transferred receivables is returned to the Company.
The

11

Company believes the losses its Insurance Affiliate will be required 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 and the capital
and surplus of the Insurance Affiliate.

CREDIT ENHANCEMENT -- FIARC COMMERCIAL PAPER FACILITY. Prior to October
1996, the ALPI Policy, through the structure outlined above, served as credit
enhancement for both the FIRC credit facility and the commercial paper facility.
In October 1996, in connection with the increase in the FIARC commercial paper
facility to $105 million, the Company elected to diversify its credit
enhancement mechanisms, obtaining a surety bond from MBIA Insurance Corporation
to enhance the FIARC commercial paper facility and retaining the ALPI Policy to
enhance the FIRC credit facility. The surety bond provides payment of principal
and interest to Enterprise in the event of payment default by FIARC. MBIA is
paid a surety premium equal to 0.35 percent per annum on the average outstanding
borrowings under the facility. The surety bond was issued for an initial term of
two years and has been extended to November 29, 2001. Termination of the surety
bond would result in default under the FIARC commercial paper facility.

CREDIT ENHANCEMENT -- FIACC COMMERCIAL PAPER FACILITY. Under the
structure of the FIACC commercial paper facility, no third-party credit
insurance or surety bond is required. Credit enhancement is provided in the form
of the 88 percent advance rate against eligible receivables and 2 percent cash
reserve requirement.

CREDIT ENHANCEMENT -- TERM NOTES. A surety bond issued by MBIA
Insurance Corporation enhances the Term Notes issued in January 2000. The surety
bond provides payment of principal and interest to the noteholders in the event
of payment default by the 2000-A Trust. MBIA is paid a surety premium equal to
0.35 percent per annum on the outstanding balance of the Term Notes. The surety
bond was issued for the term of the underlying notes, which mature on February
15, 2006.

DELINQUENCY AND CREDIT LOSS EXPERIENCE

The Company's results of operations, financial condition and liquidity
may be adversely affected by nonperforming receivables. The Company seeks to
manage its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. The allowance for credit losses of
$2,688,777 as of April 30, 2001 and $2,133,994 as of April 30, 2000 as a
percentage of Receivables Held for Investment of $244,684,343 as of April 30,
2001 and $231,696,539 as of April 30, 2000 was 1.1 percent at April 30, 2001 and
.9 percent at April 30, 2000.

With respect to Receivables Acquired for Investment, the Company has
established a nonaccretable loss reserve to cover expected losses over the
remaining life of the receivables. As of April 30, 2001 and 2000, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 8.6 percent and 17.3 percent, respectively. The nonaccretable
portion represents the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows.

The following table sets forth certain information regarding the
Company's delinquency and charge-off experience over its last two fiscal years
(dollars in thousands):

12

AS OF OR FOR THE YEARS ENDED APRIL 30,
-----------------------------------------
2000 2001
------------------- ------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------

Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days........................ 469 $5,308 396 $4,774
60 - 89 days........................ 157 1,778 141 1,688
90 days or more..................... 162 1,799 199 2,409
-------- ------ -------- ------
Total delinquencies..................... 788 $8,885 736 $8,871
======== ====== ======== ======
Total delinquencies as a percentage
of outstanding receivables............ 4.1% 3.8% 3.6% 3.6%
Net charge-offs as a percentage of
average receivables outstanding
during the period..................... 2.8% 3.2%

The total number of delinquent accounts (30 days or more) as a
percentage of the number of outstanding receivables for the Company's
portfolio of Receivables Acquired for Investment and Securitized Receivables
was 6.0 percent and 8.7 percent as of April 30, 2001, and 2000, respectively.

The Company believes that the fundamental factors in minimizing
delinquencies are prudent loan origination procedures, the initial contact with
customers made by Company personnel (described above under "Credit Evaluation")
and attentive servicing of receivables. In addition, based on its experience,
the Company believes that delinquency risk can be reduced to some degree by more
conservative loan structures which limit loan terms and loan-to-value ratios and
by managing the composition of its portfolio to include a relatively large
proportion of receivables arising from the sale of new or late-model used cars.
These vehicles are less likely to experience mechanical problems during the
initial 24 months of the loan (which is the period of highest delinquency risk)
and the purchasers of such vehicles appear to have a relatively higher
commitment to loan performance than the purchasers of older used automobiles.
Therefore, the Company (unlike many of its competitors in the sub-prime market)
concentrates on financing new and late-model used cars to the extent
practicable. In view of the popularity in recent years of new automobile leasing
programs sponsored by manufacturers and franchised dealers, the Company believes
that large numbers of late-model used automobiles will be available for sale
over the near term as these vehicles come "off lease". As of April 30, 2001,
approximately 19 percent of the receivables that had been acquired by the
Company related to new vehicles and approximately 81 percent of the receivables
arose from the sale of used vehicles. Of the Company's Receivables Held for
Investment at that date, approximately 77 percent originated from the sale of
vehicles that were either new or no more than two model years old at the time of
sale.

SECURITIZATION

Many finance companies similar to the Company engage in
"securitization" transactions whereby receivables are pooled and conveyed to
a trust or other special purpose entity, with interests in the entity being
sold to investors. As the pooled receivables amortize, finance charge
collections are passed through to the investors at a specified rate for the
life of the pool and an interest in collections exceeding the specified rate
is retained by the sponsoring finance company. For accounting purposes, the
sponsor often recognizes as revenue the discounted present value of this
excess interest as estimated over the life of the pool. This revenue, or
"gain on sale", is recognized for the period in which the transaction occurs.

The Company does not use off-balance sheet financing structures for
receivables originated by the Company and therefore, recognizes interest income
on the accrual method over the life of the receivables rather than recording

13

gains when those receivables are sold. The Company does not currently intend to
engage in off-balance sheet securitization transactions resulting in gains on
sale of receivables.

In connection with the acquisition of FISC in October 1998, the
Company obtained interests in two securitizations of automobile receivables
(as further described in Note 2 in the Notes to Consolidated Financial
Statements). The outstanding balance of the receivables sold pursuant to
these two securitizations were repurchased by the Company in September 2000
and March 2001, respectively, and are now reflected in Receivables Acquired
for Investment.

EMPLOYEES

The Company had 167 employees as of April 30, 2001, including 49
located at its headquarters in Houston, 113 located at its loan servicing
center in Atlanta and 5 regional marketing representatives. The Company's
employees are covered by group health insurance, but the Company has no
pension, profit-sharing or other material benefit programs. Effective May 1,
1994, the Company adopted a participant-directed 401(k) retirement plan for
its employees. An employee becomes eligible to participate in the plan
immediately upon employment. The Company pays the administrative expenses of
the 401(k) plan. The Company also matches a percentage of each participant's
voluntary contributions up to a maximum voluntary contribution of 3 percent
of the participant's compensation. In fiscal years 2001 and 2000, the Company
made matching contributions to the 401(k) plan of $32,932 and $31,954,
respectively. Prior to fiscal year 2000, no matching contributions were made.
Effective April 28, 1998, the Company established a participant-directed
Deferred Compensation Plan for certain executive officers of the Company.
Under the terms of the Deferred Compensation Plan, the participants may elect
to make contributions to the plan that exceeds amounts allowed under the
Company's 401(k) plan. The Company pays the administrative expenses of the
Deferred Compensation Plan. As of April 30, 2001 and 2000, the amounts
invested under the Deferred Compensation Plan totaled $527,958 and $258,521,
respectively. The Company has no collective bargaining agreements and
considers its employee relations to be satisfactory.

INFORMATION SYSTEMS

The Company utilizes advanced information management systems including
a fully integrated software program designed to expedite each element in the
receivables acquisition process, including the entry and verification of credit
application data, credit analysis and the communication of credit decisions to
originating dealers. The Company also utilizes a number of analytical tools in
managing credit risk including an empirical scoring model, trend and
discriminant analysis and pricing models which are designed to optimize yield
given an expected default rate.

The servicing and collection platform is provided by a third party
application service provider through which the Company accesses a mainframe
system which is designed to provide support for all collections and servicing
activities including billing, collection process management, account activity
history, repossession management, loan accounting information and payment
posting. The Company pays a monthly usage fee to the service provider based on
the number of accounts serviced. The Company also utilizes auto dialer software
that interfaces with the system and serves as an efficiency tool in the
collection process.

Both the front-end and back-end platforms are highly compatible from an
integration standpoint with all loans boarded electronically following funding
from the origination system to the collection system.

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

The Company believes that its data processing and information
management capacity is sufficient to accommodate significantly increased
volumes of receivables without material additional capital expenditures for
this purpose.

14

COMPETITION

The business of direct and indirect lending for the purchase of new
and used automobiles is intensely competitive in the United States. Such
financing is provided by commercial banks, thrifts, credit unions, the large
captive finance companies affiliated with automobile manufacturers, and many
independent finance companies such as the Company. Many of these competitors
and potential competitors have significantly greater financial resources than
the Company and, particularly in the case of the captive finance companies,
enjoy ready access to large numbers of dealers. The Company believes that a
number of factors including historical market orientations, traditional
risk-aversion preferences and in some cases regulatory constraints, have
discouraged many of these entities from entering the non-prime sector of the
market where the Company operates. However, as competition intensifies, these
well-capitalized concerns could enter the market, and the Company could find
itself at a competitive disadvantage.

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

REGULATION

The operations of the Company are subject to regulation, supervision
and licensing under various federal and state laws and regulations. State
consumer protection laws, motor vehicle installment sales acts and usury laws
impose ceilings on permissible finance charges, require licensing of finance
companies as consumer lenders, and prescribe many of the substantive provisions
of the retail installment sales contracts that the Company purchases. Federal
consumer credit statutes and regulations primarily require disclosure of credit
terms in consumer finance transactions, although rules adopted by the Federal
Trade Commission (including the so-called holder-in-due-course rule) also affect
the substantive rights and remedies of finance companies purchasing automobile
installment sales contracts.

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

In addition to specific licensing and consumer regulations applicable
to the Company's business, the Company's ability to enforce and collect its
receivables is limited by several laws of general application including the Fair
Debt Collection Practices Act, Federal bankruptcy laws and the Uniform
Commercial Codes of the various states. These and similar statutes govern the
procedures, and in many instances limit the rights of creditors, in connection
with asserting defaults, repossessing and selling collateral, realizing on the
proceeds thereof, and enforcing deficiencies.

The Company's insurance subsidiary is subject to regulation by the
Department of Banking, Insurance and Securities of the State of Vermont. The
plan of operation of the subsidiary, described above under "Financing
Arrangements" and "Credit Enhancement", was approved by the Department and any
material changes in those operations would likewise require the Department's
approval. The subsidiary is subject to minimum capital and surplus requirements,
restrictions on dividend payments, annual reporting, and periodic examination
requirements.

The Company believes that its operations comply in all material
respects with the requirements of laws and regulations applicable to its
business. These requirements and the interpretations thereof, change from time
to time and are not uniform among the states in which the Company operates. The
Company retains a specialized consumer credit legal counsel that engages and
supervises local legal counsel in each state where the Company does business, to
monitor compliance on an ongoing basis and to respond to changes in applicable
requirements as they occur.

15

ITEM 2. PROPERTIES

The Company's principal physical properties are its data processing and
communications equipment and furniture and fixtures, all of which the Company
believes to be adequate for its intended use.

The Company's offices in suburban Houston consist of approximately
12,369 square feet on the seventh floor of an eight-story office building. This
space is held under a lease requiring average annual rentals of approximately
$177,000 and expiring on February 28, 2003, with an option to renew for five
years at the market rate then prevailing.

The Company's offices in suburban Atlanta consist of approximately
27,467 square feet on the third and fourth floor of a four-story office
building. This space is held under a lease requiring average annual rentals of
approximately $557,000 and expiring on June 30, 2007, with an option to renew
for two consecutive five-year periods at the market rate then prevailing.

The Company owns no real property.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's securities holders
during the fourth quarter of the past fiscal year.

16

PART II

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

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

THREE MONTHS ENDED HIGH LOW
------------------------------------------- ----- -----

April 30, 2001............................. $4.50 $3.39
January 31, 2001........................... 4.44 3.00
October 31, 2000........................... 4.94 3.12
July 31, 2000.............................. 5.25 4.69
April 30, 2000............................. 5.50 4.50
January 31, 2000........................... 6.03 4.75
October 31, 1999........................... 6.44 5.00
July 31, 1999.............................. $6.50 $5.20

As of June 30, 2001, there were approximately 40 shareholders of record
of the Company's common stock. The number of beneficial owners is unknown to the
Company at this time.

The Company has not declared or paid any cash dividends on its common
stock since its inception. The payment of cash dividends in the future will
depend on the Company's earnings; financial condition and capital needs and on
other factors deemed pertinent by the Company's Board of Directors. It is
currently the policy of the Board of Directors to retain earnings to finance the
operation and expansion of the Company's business and the Company has no plans
to pay any cash dividends on the common stock in the foreseeable future.

17

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company for
the five fiscal years ended April 30, 2001, has been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with such statements (dollars in thousands, except share data).

YEARS ENDED APRIL 30,
--------------------------------------------------------
1997 1998 1999(1) 2000 2001
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS:

Interest income...................................... $ 18,151 $ 20,049 $ 31,076 $ 40,276 $ 44,365
Interest expense..................................... 6,706 7,834 12,782 16,510 20,141
-------- -------- -------- -------- --------
Net interest income.............................. 11,445 12,215 18,294 23,766 24,224
Provision for credit losses......................... 2,520 3,901 4,661 6,414 8,351
Loss on Trust Certificates........................... -- -- -- -- 400
-------- -------- -------- -------- --------
Net interest income after provision for
credit losses and loss on Trust Certificates.. 8,925 8,314 13,633 17,352 15,473
-------- -------- -------- -------- --------
Servicing............................................ -- -- 1,200 1,293 457
Late fees and other.................................. 693 617 1,594 2,728 2,563
-------- -------- -------- -------- --------
Total other income............................... 693 617 2,794 4,021 3,020
-------- -------- -------- -------- --------
Servicing fees....................................... 1,536 1,838 2,350 435 --
Salaries and benefits................................ 2,351 2,639 6,030 9,413 9,389
Other interest expense............................... -- 111 540 1,153 1,311
Other................................................ 2,356 2,415 4,354 5,705 6,897
-------- -------- -------- -------- --------
Total operating expenses......................... 6,243 7,003 13,274 16,706 17,597
-------- -------- -------- -------- --------
Income before provision for income taxes and
Minority Interest................................ 3,375 1,928 3,153 4,667 896
Provision for income taxes........................... 1,232 704 1,151 1,703 327
Minority Interest.................................... -- -- -- -- 517
-------- -------- -------- -------- --------
Net Income........................................... $ 2,143 $ 1,224 $ 2,002 $ 2,964 $ 52
======== ======== ======== ======== ========
Basic and Diluted net income per
Common Share.................................... $ 0.39 $ 0.22 $ 0.36 $ 0.53 $ 0.01
======== ======== ======== ======== ========

AS OF APRIL 30,
--------------------------------------------------------
1997 1998 1999(1) 2000 2001
-------- -------- -------- -------- --------

BALANCE SHEET DATA:
Receivables Held for Investment, net................. $118,299 $139,599 $183,319 $235,955 $248,186
Receivables Acquired for Investment, net............. -- -- 41,024 21,888 26,121
Investment in Trust Certificates..................... -- -- 10,755 5,849 --
Other assets......................................... 21,444 21,654 37,711 39,567 38,562
-------- -------- -------- -------- --------
Total assets..................................... $139,743 $161,253 $272,809 $303,259 $312,869
======== ======== ======== ======== ========

Debt:
Term Notes....................................... $ -- $ -- $ -- $151,104 $ 84,926
Acquisition term facility........................ -- -- 55,737 26,212 11,126
Warehouse credit facilities...................... 112,894 130,813 176,549 77,545 168,250
Working capital facility......................... -- 2,500 7,235 13,300 12,825
Other liabilities.................................... 2,913 2,780 6,126 4,972 3,803
Minority Interest.................................... -- -- -- -- 1,587
Shareholders' equity................................. 23,936 25,160 27,162 30,126 30,352
-------- -------- -------- -------- --------
Total liabilities and shareholders' equity..... $139,743 $161,253 $272,809 $303,259 $312,869
======== ======== ======== ======== ========

- -----------------

(1) On October 2, 1998, the Company completed the acquisition of FISC. FISC was
engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables for
investment as well as on a portfolio of receivables acquired and sold pursuant
to two asset securitizations. The transaction was treated as a purchase for
accounting purposes and results of operations are included in the Company's
consolidated financial statements beginning on October 2, 1998.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

GENERAL

Net income for the year ended April 30, 2001, was $51,646 or $0.01 per
common share. Net income for the year ended April 30, 2000, was $2,963,535 or
$0.53 per common share. The results for fiscal 2001 include the effects of $1.6
million in pre-tax, non-cash charges in the fourth quarter. See Results of
Operations.

OVERVIEW

The Company is a consumer finance company engaged in both the purchase
of receivables originated by franchised automobile dealers and originating loans
directly to consumers in connection with the sale of new and late-model used
vehicles. The Company specializes in lending to consumers with impaired credit
profiles. At April 30, 2001, the Company had a network of 1,443 franchised
dealers in 26 states from which it regularly purchases receivables at the time
of origination. The Company also originates loans directly through consumers
utilizing the Internet and direct marketing. While the Company intends to
continue to geographically diversify its receivables portfolio, approximately 27
percent of Receivables Held for Investment at April 30, 2001 represent
receivables acquired from dealers or originated to consumers located in Texas.

The primary source of the Company's revenues is interest income from
receivables retained as investments, while its primary cost has been interest
expense arising from the financing of the Company's investment in such
receivables. The profitability of the Company during this period has been
determined by the growth of the receivables portfolio and effective management
of net interest income and fixed operating expenses. In addition, on October 2,
1998, the Company completed the acquisition of First Investors Financial
Servicing Corporation ("FISC") formally known as Auto Lenders Acceptance
Corporation, from Fortis, Inc. Headquartered in Atlanta, Georgia, FISC was
engaged in essentially the same business as the Company and additionally
performs servicing and collection activities on a portfolio of receivables
acquired for investment as well as on a portfolio of receivables acquired and
sold pursuant to two asset securitizations. As a result of the acquisition, the
Company increased the total dollar value on its balance sheet of receivables,
acquired an interest in certain trust certificates and interest strips related
to the asset securitizations and acquired certain servicing rights along with
furniture, fixtures, equipment and technology to perform the servicing and
collection functions for the portfolio of receivables under management. FISC
performs servicing and collection functions on a $270 million portfolio of loans
originated in 31 states.

19

The following table summarizes the Company's growth in receivables and
net interest income for the last two fiscal years (dollars in thousands):

AS OF OR FOR THE
YEARS ENDED APRIL 30,
---------------------------
2000 2001
---------- ----------

Receivables Held for Investment:
Number................................... 19,374 20,502
Principal balance........................ $231,697 $244,684
Average principal balance of
Receivables outstanding during
the twelve-month period.............. $208,160 $247,434
Average principal balance of
Receivables outstanding during
the three-month period............... $224,286 $248,987
Receivables Acquired for Investment:
Number................................... 3,375 4,721
Principal balance........................ $ 28,097 $ 25,397
Securitized Receivables(1):
Number................................... 4,281 --
Principal balance........................ $ 29,337 --
Total Managed Receivables Portfolio:
Number................................... 27,030 25,223
Principal Balance........................ $289,131 $270,081

- ----------------------

(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company retains
the servicing rights to those receivables. Both securitizations were
liquidated during the year ended April 30, 2001 and the receivables were
repurchased. These receivables are included in Receivables Acquired for
Investment.

YEARS ENDED APRIL 30,
---------------------
2000 2001
--------- ---------

Interest income(1):
Receivables Held for Investment..................... $33,333 $39,915
Receivables Acquired for Investment, Investment
in Trust Certificates and Minority Interest (2).. 6,943 4,450
--------- ---------
40,276 44,365
Interest expense:
Receivables Held for Investment(3).................. 13,573 19,068
Receivables Acquired for Investment and Investment
in Trust Certificates ........................... 2,937 1,073
--------- ---------
16,510 20,141
--------- ---------
Net interest income ............................. $23,766 $24,224
========= =========

- ----------------------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the year ended April 30, 2001 reflect $1,215 in interest
income related to minority interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.

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

20

YEARS ENDED
APRIL 30,
---------------
2000 2001
------ -----

Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1).............. 16.0% 16.1%
Average cost of debt(2)................ 6.7 7.6
------ -----
Net interest spread(3)................. 9.3% 8.5%
====== =====
Net interest margin(4)................. 9.5% 8.4%
====== =====

- --------------------------

(1) Represents interest income as a percentage of average Receivables Held
for Investment outstanding.
(2) Represents interest expense as a percentage of average debt
outstanding.
(3) Represents yield on Receivables Held for Investment less average cost
of debt.
(4) Represents net interest income as a percentage of average Receivables
Held for Investment outstanding.

The Company intends to increase its acquisition of receivables by
expanding its dealer base in existing states served, by expanding its dealer
base into new states and by generating additional loan volume by increasing
direct to consumer lending. To the extent that the Company's receivables
acquisitions exceed the extinguishment of receivables through principal
payments, payoffs or defaults, its receivables portfolio and interest income
will continue to increase. The following table summarizes the activity in the
Company's receivables portfolio (dollars in thousands):

YEARS ENDED
APRIL 30,
--------------------
2000 2001
--------- ---------

Receivables Held for Investment:
Principal balance, beginning of period......... $179,808 $231,697
Originations................................... 141,306 115,042
Principal payments and payoffs................. (77,602) (90,143)
Defaults prior to liquidations and recoveries.. (11,815) (11,912)
-------- --------
Principal balance, end of period............... $231,697 $244,684
======== ========

Receivables may be paid earlier than their contractual term,
primarily due to prepayments and liquidation of collateral after defaults. See
"Delinquency and Credit Loss Experience".

ANALYSIS OF NET INTEREST INCOME

Net interest income is the difference between interest earned from
the receivables portfolio and interest expense incurred on the credit
facilities used to acquire the receivables. Net interest income was $24.2
million in 2001, an increase of 2 percent and 30 percent, when compared to
amounts reported in 2000 and 1999, respectively. The increase resulted
primarily from the growth of the receivables held for investment offset by
lower contributions to interest income from the receivables acquired for
investment and trust certificates due to the liquidating nature of these
assets.

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

21

YEARS ENDED APRIL 30,
---------------------------------------------------------------
1999 TO 2000 2000 TO 2001
---------------------------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN
------------------ -------------------
AVERAGE AVERAGE
PRINCIPAL AVERAGE TOTAL NET PRINCIPAL AVERAGE TOTAL NET
AMOUNT RATE INCREASE AMOUNT RATE INCREASE
--------- ------- --------- --------- ------- ---------

Receivables Held for Investment:
Interest income.......................... $ 8,531 $ (345) $ 8,186 $ 6,289 $ 293 $ 6,582
Interest expense......................... 3,278 488 3,766 3,174 2,321 5,495
--------- ------- --------- --------- ------- ---------
Net interest income...................... $ 5,253 $ (833) $ 4,420 $ 3,115 $(2,028) $ 1,087
========= ======= ========= ========= ======= =========

RESULTS OF OPERATIONS

FISCAL YEAR ENDED APRIL 30, 2001, COMPARED TO FISCAL YEAR ENDED APRIL
30, 2000 (DOLLARS IN THOUSANDS)

INTEREST INCOME. Interest income for 2001 increased by $4,089, or 10
percent over 2000, primarily as a result of an increase in the average
principal balance of Receivables Held for Investment of 19 percent from 2000
to 2001 offset by the decrease in interest income on Receivables Acquired for
Investment and Investment in Trust Certificates of 36 percent. The decrease in
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates is attributable to a 52 percent decline in the average principal
balances of the Receivables Acquired for Investment and Investment in Trust
Certificates for 2001 as compared to 2000.

INTEREST EXPENSE. Interest expense for 2001 increased by $3,631, or 22
percent, over 2000. An increase in the weighted average borrowings outstanding
under credit and term facilities of 23 percent resulted in $3,174 of this
difference. These facilities are used to fund Receivables Held for Investment.
The weighted average cost of debt to fund Receivables Held for Investment
increased to 7.6 percent for the year ended April 30, 2001 compared to 6.7
percent for the year ended April 30, 2000 accounting for $2,321 of the
difference. Contributing to this increase is the write off of $230 of deferred
financing costs related to a reduction in the FIACC borrowing capacity.
Conversely, the interest expense on the Receivables Acquired for Investment
decreased $1,864 primarily resulting from a decrease in the weighted average
borrowings outstanding of 49 percent.

NET INTEREST INCOME. Net interest income increased by $458 in 2001, an
increase of 2 percent over 2000. Increases in net interest income from the
Receivables Held for Investment were offset by decreases in the Receivables
Acquired for Investment and Investment in Trust Certificates.

PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2001
increased by $1,937, or 30 percent, over 2000, as a result in the growth of
Receivables Held for Investment and the increase in the allowance for credit
losses to 1.1 percent of outstanding receivables in 2001 compared to .9
percent of outstanding receivables for 2000. The increase of $430 was made in
light of the recent slowdown in economic growth and softness in the employment
rate. Net charge-offs increased from $5,810 in fiscal 2000 to $7,796 in fiscal
2001, due to the increase in Receivables Held for Investment and a higher
charge-off rate due to a slight increase in the repossession rate and lower
repossession recoveries.

LOSS ON TRUST CERTIFICATES. During the fourth quarter of fiscal 2001 a
loss of $400,000 was recorded on the ALAC Automobile Receivables Trust 1998-1.
The writedown is attributable to weakening economic conditions and the impact
of these factors on the value of the certificates. The loss to the Company,
net of the minority interest, is $280,000.

SERVICING INCOME. Servicing income represents amounts received on loan
receivables previously sold by FISC in connection with two asset
securitization transactions. Under these transactions, FISC, as servicer, is
entitled to receive a fee of 3 percent on the outstanding principal balance of
the securitized receivables plus reimbursement for

22

certain costs and expenses incurred as a result of its collection activities.
Servicing income decreased 65 percent for fiscal 2001 as compared to fiscal
2000. This decrease results from the declining principal balance of the
securitized receivables as well as liquidation of the securitizations. One
securitization was called September 15, 2000 and the other was called March
15, 2001, when the underlying receivables were repurchased. Subsequent to the
call date, no further servicing income is earned.

LATE FEES AND OTHER INCOME. Late fees and other income primarily
represents late fees collected from customers on past due accounts,
collections on certain FISC assets which had previously been charged off by
the Company, and interest income earned on short-term marketable securities
and money market instruments. Late fees and other income decreased to $2,563
in 2001 from $2,728 in 2000 mainly attributable to lower late fees as a result
of the call of the two securitizations. Under the servicing agreement, fees
collected were paid to the Company as additional servicing compensation. After
the call, fees collected are recorded as part of accretable yield in the
Receivables Acquired for Investment.

SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the
Company to General Electric Credit Corporation with which the Company had a
servicing relationship on its Receivables Held for Investment. Effective July
6, 1999, the Company began servicing its portfolio in-house and terminated the
General Electric arrangement. Thus, beginning in July 1999, the Company
incurred no third party servicing expenses.

SALARIES AND BENEFIT EXPENSES. Salaries and benefits decreased from
$9,413 in 2000 to $9,389 in 2001. The decrease is a result of decreasing staff
levels in light of the decline in the Company's managed receivables portfolio.
The majority of the decrease occurred in the fourth quarter 2001.

OTHER INTEREST EXPENSE. Other interest expense increased $157, or 14
percent, for the year ended April 30, 2001 over the year ended April 30, 2000.
The increase is principally related to an increase in the average borrowings
outstanding under the working capital facility of 23 percent.

OTHER EXPENSES. Other expenses increased $1,192 or 21 percent in fiscal
2001. The increase is largely due to $696 in non-recurring charges primarily
related to the write-off of certain unamortized software costs, professional
fees that were incurred during the period, and other non-cash costs. Expenses
for fiscal 2001 were also reflective of a full year of servicing costs related
to Receivables Held for Investment, which were converted from a third-party
servicer in July 1999.

INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During
2001, income before provision for income taxes and minority interest decreased
by $3,771, or 81 percent from 2000 as a result of the factors discussed above.

FISCAL YEAR ENDED APRIL 30, 2000, COMPARED TO FISCAL YEAR ENDED APRIL 30, 1999
(DOLLARS IN THOUSANDS)

INTEREST INCOME. Interest income for 2000 increased by $9,200, or 30
percent over 1999, primarily as a result of an increase in the average
principal balance of Receivables Held for Investment of 34 percent from 1999
to 2000 and the increase in interest income on Receivables Acquired for
Investment and Investment in Trust Certificates of 17 percent. The increase in
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates is attributable to a full twelve-month period for fiscal 2000 as
compared to a seven-month period for fiscal 1999 from the FISC acquisition in
October 1998. This is offset by a 41 percent decline in the average principal
balances of the Receivables Acquired for Investment and Investment in Trust
Certificates for 2000 as compared to 1999.

INTEREST EXPENSE. Interest expense for 2000 increased by $3,728, or 29
percent, over 1999. An increase in the weighted average borrowings outstanding
under credit and term facilities of 33 percent resulted in $3,766 of this
difference. The remaining difference is primarily due to a 33 percent decrease
in the average outstanding borrowings for the FISC acquisition facility. This
decrease is offset by a full twelve-month period for the acquisition facility
in fiscal 2000 compared to seven months for fiscal 1999. Lastly, the weighted
average cost of debt to fund

23

Receivables Held for Investment increased to 6.7 percent for the year ended
April 30, 2000 compared to 6.5 percent for the year ended April 30, 1999.

NET INTEREST INCOME. Net interest income increased by $5,472 in 2000,
an increase of 30 percent over 1999. The increase resulted primarily from the
growth in Receivables Held for Investment and the contributions to interest
income from the Receivables Acquired for Investment and Investment in Trust
Certificates.

PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2000
increased by $1,753, or 38 percent, over 1999, as a result in the growth of
Receivables Held for Investment and the maintenance of an allowance for credit
losses of .9 percent of outstanding receivables. Net charge-offs increased
from $4,330 in fiscal 1999 to $5,810 in fiscal 2000, also as a result of the
increase in Receivables Held for Investment.

SERVICING INCOME. Servicing income represents amounts received on loan
receivables previously sold by FISC in connection with two asset
securitization transactions. Under these transactions, FISC, as servicer, is
entitled to receive a fee of 3 percent on the outstanding principal balance of
the securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Servicing income increased
8 percent for fiscal 2000 as compared to fiscal 1999. This increase is a
result of a full twelve months of activity for 2000 compared to seven months
from the acquisition date of October 1998 to April 1999 for fiscal 1999. This
increase is offset by a 46 percent decline in the average outstanding
principal balance of the securitized loans during 2000 as compared to 1999.

LATE FEES AND OTHER INCOME. Late fees and other income primarily
represents late fees collected from customers on past due accounts,
collections on certain FISC assets which had previously been charged off by
the Company, and interest income earned on short-term marketable securities
and money market instruments. Late fees and other income increased to $2,728
in 2000 from $1,594 in 1999 mainly attributable to the growth in Receivables
Held for Investment and an increased emphasis on collection of late fees since
the Company began servicing its own loans in July 1999.

SERVICING FEE EXPENSES. Servicing fees consist of fees paid by the
Company to General Electric Credit Corporation with which the Company had a
servicing relationship on its Receivables Held for Investment. Effective July
6, 1999, the Company began servicing its portfolio in-house and terminated the
General Electric arrangement. Thus, beginning in July 1999, the Company
incurred no third party servicing expenses.

SALARIES AND BENEFIT EXPENSES. Salaries and benefits increased from
$6,030 in 1999 to $9,413 in 2000, an increase of $3,383 or 56 percent. The
increase is a result of increasing staff levels to support an increase in the
Company's managed receivables portfolio, an expansion of its geographic
territory and an increase in staffing levels as a result of the acquisition of
FISC and the resulting assumption of loan servicing activities. Contributing
to the increase is the inclusion of a full twelve-month period for FISC in
fiscal 2000 as compared to only seven months for fiscal 1999. As of April 30,
2000, the Company had 177 employees compared to 148 as of April 30, 1999.

OTHER INTEREST EXPENSE. Other interest expense increased $613, or 114
percent, for the year ended April 30, 2000 over the year ended April 30, 1999.
The increase is related to an increase in the average borrowings outstanding
under the working capital facility of 130 percent and an increase in the
average borrowing rate.

OTHER EXPENSES. Other expenses increased 31 percent in fiscal 2000. The
increase is primarily due to including a full twelve-month period for FISC in
fiscal 2000 compared to only seven months in 1999.

INCOME BEFORE PROVISION FOR INCOME TAXES. During 2000, income before
provision for income taxes increased by $1,514, or 48 percent from 1999 as a
result of the positive factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH FLOWS. The Company's business requires
significant cash flow to support its operating activities. The principal cash
requirements include (i) amounts necessary to acquire receivables from

24

dealers and fund required reserve accounts, (ii) amounts necessary to fund
premiums for credit enhancement insurance or other credit enhancement required
by the Company's financing programs, and (iii) amounts necessary to fund costs
to retain receivables, primarily interest expense and servicing fees. The
Company also requires a significant amount of cash flow for working capital to
fund fixed operating expenses, primarily salaries and benefits.

The Company's most significant cash flow requirement is the acquisition
of receivables. The Company paid $115.0 million for receivables acquired to be
held for investment for 2001 compared to $141.3 million in 2000.

The Company funds the purchase price of receivables through a
combination of two warehouse facilities. The FIRC credit facility generally
permits the Company to borrow up to the outstanding principal balance of
qualified receivables, but not to exceed $50 million. Receivables that have
accumulated in the FIRC credit facility may be transferred to the FIARC
commercial paper facility at the option of the Company. The FIARC commercial
paper facility provides an additional financing source up to $150 million.
Additionally, the Company has transferred receivables from the warehouse
credit facilities and issued Term Notes. Substantially all of the Company's
receivables are pledged to collateralize these credit facilities and Term
Notes.

The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolios. The Company
received such payments in the amount of $130.1 million in 2001 and $110.0
million in 2000. Such cash flow funds repayment of amounts borrowed under the
FIRC credit and commercial paper facilities and other holding costs, primarily
interest expense and servicing and custodial fees. During fiscal years 2001
and 2000, the Company required net cash flow, respectively, of $24.9 million
and $63.7 million (cash required to acquire receivables held for investment
net of principal payments on receivables) to fund the growth of its
receivables portfolio. The Company has relied on borrowed funds to provide the
source of cash flow to fund such growth.

CAPITALIZATION. The Company has financed its acquisition of such
receivables primarily through these types of credit facilities since 1992. The
Company's equity was not a significant factor in its capitalization until the
completion of the Company's initial public offering of common stock in October
1995, resulting in net proceeds of $18.5 million. However, the Company expects
to continue to rely primarily on its credit facilities and the issuance of
secured term notes to acquire and retain receivables. The Company believes its
existing credit facilities have adequate capacity to fund the increase of the
receivables portfolio expected in the foreseeable future. While the Company
has no reason to believe that these facilities will not continue to be
available, their termination could have a material adverse effect on the
Company's operations if substitute financing on comparable terms was not
obtained.

FIRC CREDIT FACILITY. The primary source of acquisition financing for
Receivables Held for Investment has been through a syndicated warehouse credit
facility agented by Bank of America. The FIRC credit facility currently
provides for maximum borrowings, subject to certain adjustments, up to the
outstanding principal balance of qualified receivables, but not to exceed the
facility limit of $50 million as of April 30, 2001 and $65 million as of April
30, 2000. Borrowings under the FIRC credit facility bear interest pursuant to
certain indexed variable rate options at the election of the Company or any
other short-term fixed interest rate agreed upon by the Company and the
lenders. The Company bases its selection of the interest rate option primarily
on its expectations of market interest rate fluctuations, the timing and the
amount of the required funding and the period of time it anticipates requiring
the funding prior to transfer to the FIARC commercial paper facility. The FIRC
credit facility provides for a term of one year, matures November 14, 2001 at
which time, should the facility not be renewed, the outstanding borrowings
would be converted to a term loan facility that would mature six months
thereafter and amortize monthly in accordance with the borrowing base with any
remaining balance due at maturity. Borrowings under the FIRC credit facility
were $59,540,000 and $36,040,000 at April 30, 2000 and 2001, respectively. The
Company presently intends to seek a renewal of the facility from its lenders
prior to maturity. Management considers its relationship with its lenders to
be satisfactory and has no reason to believe that this credit facility will
not be renewed. If the facility were not renewed however, or if material
changes were made to its terms and conditions, it could have a material
adverse effect on the Company.

25

FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a $150 million commercial paper conduit
facility with Enterprise Funding Corporation ("Enterprise"), a commercial
paper conduit managed by Bank of America. Receivables that have accumulated in
the FIRC credit facility may be transferred to the FIARC commercial paper
facility by transferring a specific group of receivables to a discrete
special-purpose financing subsidiary and pledging those receivables as
collateral. Receivables are generally transferred from the FIRC credit
facility to the FIARC commercial paper facility to refinance them on a longer
term basis at interest rates based on commercial paper rates and to provide
additional borrowing capacity under the FIRC credit facility. Borrowings under
this commercial paper facility bear interest at the commercial paper rate plus
.30 percent. The current term of the FIARC commercial paper facility expires
on November 29, 2001. If the FIARC commercial paper facility were terminated,
no new receivables could be transferred from the FIRC credit facility to
Enterprise; however, the then outstanding receivables would continue to be
financed until fully amortized. At April 30, 2000 and 2001, the Company had
borrowings of $18,004,889 and $121,808,808, respectively, outstanding under
the commercial paper facility. The Company presently intends to seek a renewal
of the facility from its lenders prior to maturity. Management considers its
relationship with its lenders to be satisfactory and has no reason to believe
that this credit facility will not be renewed. If the facility were not
renewed however, or if material changes were made to its terms and conditions,
it could have a material adverse effect on the Company.

FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into
a $25 million commercial paper conduit facility with VFCC, a