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, 2002

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 July 1, 2002, based on the closing price
of the Common Stock on the NASDAQ National Market on said date, was $14,060,516.
There were 5,396,669 shares of Common Stock of the registrant outstanding
as of July 1, 2002.

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 10, 2002, which will be
filed with the Securities and Exchange Commission not later than 120 days after
April 30, 2002.

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES

FORM 10-K
APRIL 30, 2002

TABLE OF CONTENTS

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, 2002, the Company had Receivables Held for
Investment in the aggregate principal amount of $212,926,747, having an
effective yield of 15.4 percent and a net interest spread to the Company of 9.6
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, 2002, 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.

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LOCATION OF DEALERS. Approximately 22 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 27 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:

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(1) Includes dealers located in Arizona, Connecticut, Iowa, Idaho,
Maryland, Nebraska, Nevada, Oregon, 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

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primarily responsible for new loan volume in rural areas or states in which the
Company cannot justify a field marketing representative.

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 direct marketing. The core
program generates approximately 93 percent of the Company's current origination
volume and consists of loans purchased directly from dealerships in states in
which the Company operates. Consumer direct originations contribute
approximately 7 percent of originations and involve applications for credit
obtained through direct marketing efforts 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 1,452 dealers at April
30, 2002. 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 collectibility 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 13 year database of
non-prime lending results.

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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.

From 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. 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. No servicing fees
were incurred during the two fiscal years ended April 30, 2001 and 2002.

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:

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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:

- ----------
(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 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 Variable Funding Capital
Corporation ("VFCC"), a commercial paper conduit administered by First Union
Securities, (the "FIARC commercial paper facility") which allows the Company to
refinance borrowings under the FIRC credit facility in order to maintain
sufficient capacity to acquire new receivables. Together, these warehouse credit
facilities provide $200 million in

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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 lender. 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
collectibility 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 First Union 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 December 5, 2002,
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. VFCC
funds the advance to FIARC through the issuance, by an affiliate of VFCC, 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, 2002, the maximum borrowings available under
the commercial paper facility were $150 million. The Company's interest cost is
based on VFCC'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 VFCC 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.

The FIARC commercial paper facility expired on January 12, 2002. In
conjunction with the renewal of the facility to January 13, 2003 the facility
commitment was assigned from Enterprise Funding Corporation, a commercial paper
conduit administered by Bank of America, to VFCC. No other material changes were
made to the facility in conjunction with the assignment to VFCC.

If the facility had not been extended beyond the maturity date, receivables
pledged as collateral would be allowed to amortize; however, no new receivables
would be allowed to transfer from the FIRC credit facility. The

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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, 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 .55 percent.

At April 30, 2002, borrowings were $2,603,433 under the FIACC commercial
paper facility, and had a weighted average interest rate of 5.79 percent,
including the effects of program fees and hedge instruments. At April 30, 2001,
borrowings were $10,400,901, and had a weighted average interest rate of 5.56
percent, including the effects of program fees and hedge instruments. The
current term of the FIACC commercial paper facility expires on March 11, 2003.
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. As FIACC borrowings support a
liquidating portfolio, no excess borrowing capacity exists as of April 30, 2002.

TERM NOTES. On January 29, 2002, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002-A Auto
Trust") completed the issuance of $159,036,000 of 3.46% percent Class A
asset-backed notes ("2002-A Term Notes"). The initial pool of automobile
receivables transferred to the 2002-A Auto Trust totaled $135,643,109, which
were previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In
addition to the issuance of the 2002-A Class A Notes, the 2002-A Auto Trust also
issued $4,819,000 in Class B Notes which were retained by the Company and
pledged to secure the Working Capital Facility as further described below.
Proceeds from the issuance, which totaled $159,033,471 were used to (i) fund a
$25,000,000 pre-funding account to be used for future loan originations; (ii)
repay all outstanding borrowings under the FIARC commercial paper facility,
(iii) reduce the outstanding borrowings under the FIRC credit facility, (iv) pay
transaction

7

fees related to the 2002-A Term Note issuance, and (v) fund a cash reserve
account of 2 percent or $2,712,862 of the initial receivables pledged which will
serve as a portion of the credit enhancement for the transaction. The
$25,000,000 pre-fund amount has been completely utilized to fund originations
and no cash balances remain as of April 30, 2002. The 2002-A Class A Term Notes
bear interest at 3.46 percent and require monthly principal reductions
sufficient to reduce the balance of the 2002-A Class A Term Notes to 97 percent
of the outstanding balance of the underlying receivables pool. The final
maturity of the 2002-A Term Notes is December 15, 2008. The Class B Notes do not
bear interest but require principal reductions sufficient to reduce the balance
of the Class B Notes to 3 percent of the outstanding balance of the underlying
receivables pool. A surety bond issued by MBIA Insurance Corporation provides
credit enhancement for the 2002-A Class A Notes. Additional credit support is
provided by the cash reserve account, which equals 2 percent of the original
balance of the receivables pool plus 2 percent of the original balance of
receivables transferred under the pre-funding provision. Further enhancement is
provided through an initial 1 percent overcollateralization which is required to
be increased to 3 percent through excess monthly principal and interest
collections. 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.

On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A ("2000-A Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed notes
("2000-A Term Notes"). A pool of automobile receivables totaling $174,968,641,
which were previously owned by FIRC, FIARC and FIACC, secures the 2000-A 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 2000-A 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 2000-A Term Notes bear interest
at 7.174 percent and require monthly principal reductions sufficient to reduce
the balance of the 2000-A Term Notes to 96 percent of the outstanding balance of
the underlying receivables pool. The final maturity of the 2000-A Term Notes is
February 15, 2006. As of April 30, 2001 and 2002, the outstanding principal
balances on the 2000-A Term Notes were $84,925,871 and $40,162,801,
respectively. A surety bond issued by MBIA Insurance Corporation provides credit
enhancement for the 2000-A 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,

8

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 $3,670,765 as of April 30, 2002 and had a weighted average
interest rate of 5.76 percent, including the effects of program fees and hedge
instruments. At April 30, 2001, the outstanding balance of the Class A Notes was
$11,126,050 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. Beginning in November 2001, the
partnership used excess cash flow to retire additional Class A Note principal
thus no further partnership distributions will be paid until the Class A Notes
are retired. The Company is accounting for First Union's limited partnership
interest in the Partnership as a minority interest.

The Class A Notes mature on March 11, 2003. 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 addition to the scheduled principal
payments, the term loan also requires additional principal payments of $300,000
in June and December 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, 2001. Pricing
under the facility is based on the LIBOR rate plus 3 percent. The term loan was
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 were included as
deferred financing costs and were to 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 was to be determined by the outstanding balance
owing to Bank of America under of the term loan. In no event, however, could the
additional warrants issued on December 31, 2001 exceed 10,959. The fair value of
the warrants issued on June 30, 2001 of $38,757 is included as deferred
financing costs and amortized through the maturity date of the debt. At April
30, 2001, there was $12,825,000 outstanding under this facility.

On December 6, 2001, the Company entered into an agreement with First Union
National Bank to refinance the $11,175,000 outstanding balance of the working
capital term loan and increase the size of the facility to $13.5 million. The
renewal facility was provided to a special-purpose, wholly-owned subsidiary of
the Company, First Investors Residual Funding LP. Upon the issuance of the
2002-A Term Notes on January 29, 2002, a portion of this

9

facility was converted to a $4.5 million term loan tranche which amortizes
monthly as principal payments are collected under the 2002-A Term Note facility.
The monthly principal amortization must be sufficient to reduce the amounts
outstanding under the term loan tranche of this facility to no greater than 3
percent of the outstanding receivables securing the 2002-A Term Note
transaction. The term loan tranche of this working capital facility will be
evidenced by the Class B Notes issued in conjunction with the 2002-A Auto Trust
financing. This principal repayment requirement replaces the current $675,000
per quarter and the additional $600,000 per annum required under the previous
facility. The remaining $9 million of the $13.5 million working capital facility
revolves monthly in accordance with a borrowing base consisting of the
overcollateralization amount and reserve accounts for each of the Company's
other credit facilities. The new facility is secured solely by the residual cash
flow and cash reserve accounts related to the Company's warehouse credit
facilities, the acquisition facility and the existing and future term note
facilities. This compares to the previous requirement that all assets of the
Company, excluding receivables owned and financed by special purpose
subsidiaries, secure the indebtedness. Pricing under the facility was not
changed. The maturity of the facility was extended to December 5, 2002. In the
event that the facility is not renewed at maturity, residual cash flows from the
various receivables financing transactions will be applied to amortize the debt
over the remaining life of the underlying receivables. Further, as a result of
the refinancing, the Company is not obligated to issue additional warrants
covering 10,959 shares of the Company's common stock to Bank of America on
December 31, 2001. At April 30, 2002, there was $11,798,520 outstanding under
this facility. In conjunction with the refinancing, the Company repaid the
working capital term loan and entered into the new working capital facility.
Consequently, $554,896 of deferred financing costs and warrants were written
off.

The Company intends to seek a renewal of the working capital facility from
its lender prior to maturity. Should the facility not be renewed, the
outstanding balance of the receivables would be amortized in accordance with the
borrowing base. 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.

SHAREHOLDER LOANS - On December 3, 2001 the Company entered into an
agreement with one of its existing shareholders and a member of its Board of
Directors under which the Company may, from time to time, borrow up to $2.5
million. The proceeds of the borrowings will be utilized to fund certain private
and open market purchases of the Company's common stock pursuant to a Stock
Repurchase Plan authorized by the Board of Directors and for general corporate
purposes. Borrowings under the facility bear interest at a fixed rate of 10
percent per annum. The facility is unsecured and expressly subordinated to the
Company's senior credit facilities. The facility matures on December 3, 2008 but
may be repaid at any time unless the Company is in default on one of its other
credit facilities. As of April 30, 2002, $525,000 was outstanding under this
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 was not in default with
respect to any covenants governing these financing arrangements at April 30,
2002.

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 changes
in market 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.

10

In connection with the issuance of the 2000-A 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 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 was 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 uneconomic position of the
existing fixed swap created by rapidly declining market interest rates.

In connection with the repurchase of the ALAC 97-1 Securitization and the
financing of that repurchase through the FIACC subsidiary on September 15, 2000,
FIACC entered into an interest rate swap agreement with First Union under which
FIACC 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 is $6,408,150, which
amortizes monthly in accordance with the expected amortization of the FIACC
borrowings. The final maturity of the swap was 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 (Class A Cap) 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 (Class B
Cap) 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 December 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 Swap A 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.

11

As of May 1, 2001 the Company had designated the 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 changes in the
fair value of these instruments resulting from the mark-to-market process are
recorded as unrealized gains or losses and reflected as an increase or reduction
in shareholders' equity through other comprehensive income (loss). 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 is reflected in net earnings for
the period subsequent to May 31, 2001. In conjunction with this designation and
the adoption of SFAS 133 and SFAS 138, the Company recorded a transition
adjustment in the aggregate amount of $(2,501,595), net of a tax benefit of
$1,437,925, as a reduction to shareholders' equity and recorded a corresponding
liability to reflect the fair market value of the derivatives as of May 1, 2001.
The equity adjustment is classified as other comprehensive income (loss) and the
derivative liability is classified in the interest rate derivative positions
liability. Over a period ending April 2004, the maturity date of the final swap,
the Company will reclassify into earnings substantially all of the transition
adjustment originally recorded.

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 at its expense, the Company 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, 2002, 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, 2002 were
$5,344,975, $3,413,186 and $2,382,031, respectively, and accounted for 3.8
percent, 3.0 percent and 3.1 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, 2002, gross
premiums had been ceded to the Insurance Affiliate by National Union in the
amount of $24,345,460 and, since its formation, the Insurance Affiliate
reimbursed National Union for aggregate reinsurance claims in the amount of
$6,976,127. 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, 2002, the
Insurance Affiliate had capital and surplus of $1,814,379 and unencumbered cash
reserves of $1,082,138 in addition to the $2,656,433 trust account.

12

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
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. Enhancement for the
FIARC commercial paper facility is provided by a surety bond issued by MBIA
Insurance Corporation. The surety bond provides payment of principal and
interest to VFCC 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 is issued for a term to coincide with the
facility. 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
overcollateralization and a 2 percent cash reserve requirement.

CREDIT ENHANCEMENT -- TERM NOTES. A surety bond issued by MBIA Insurance
Corporation enhances the 2000-A Term Notes issued in January 2000 and the 2002-A
Term Notes issued in January 2002. The surety bond provides payment of principal
and interest to the noteholders in the event of payment default by the 2000-A
Trust and the 2002-A Trust. MBIA is paid a surety premium equal to 0.35 percent
per annum on the outstanding balance of the 2000-A and 2002-A Term Notes. The
surety bond was issued for the term of the underlying notes, which mature on
February 15, 2006 and December 15, 2008, for the 2000-A Term Notes and 2002-A
Term Notes, respectively.

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
$2,338,625 as of April 30, 2002 and $2,688,777 as of April 30, 2001 as a
percentage of Receivables Held for Investment of $212,926,747 as of April 30,
2002 and $244,684,343 as of April 30, 2001 was 1.1 percent.

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, 2002 and April 30, 2001, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 14.6% and 8.6%, respectively. The nonaccretable portion
represents the excess of the loan's scheduled contractual principal and interest
payments over its expected cash flows. The increase as of April 30, 2002 is
related to an additional reserve provided by the third quarter write down of
$1.3 million related to increasing the cumulative loss rate in the cash flow
projections. This write down occurred due to higher severity and frequency of
losses realized to date and to reserve for higher expected potential losses. The
Company also reclassifies accretable yield and nonaccretable difference as
assumptions are updated. For the year ended April 30, 2002, the increase in
accretable yield is primarily due to increasing the expected term of the
remaining cash flow in order to allow for collections on charged off
receivables. By extending the cash flow projection model life, accretable yield
must be increased to provide for future income.

The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 90 days past due.
Generally, repossession procedures are initiated 90 to 120 days after the
payment default.

13

The Company retains the credit risk associated with the receivables
acquired. The Company purchases credit enhancement insurance from third party
insurers which covers the risk of loss upon default and certain other risks.
Until March 1994, such insurance absorbed substantially all credit losses. In
April 1994, the Company established a captive insurance subsidiary to reinsure
certain risks under the credit enhancement insurance coverage for all
receivables acquired in March 1994 and thereafter. In addition, receivables
financed under the Auto Trust, FIARC and FIACC commercial paper facilities do
not carry default insurance. Provisions for credit losses of $8,940,601 and
$8,351,234 have been recorded for the twelve months ended April 30, 2002 and
April 30, 2001, respectively.

The Company calculates the allowance for credit losses in accordance with
SFAS 5, "Accounting for Contingencies". SFAS 114, "Accounting for Creditors for
Impairment of a Loan" does not apply to the Company since the Receivables Held
for Investment are comprised of a large group of smaller balance homogenous
loans.

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

For Receivables Acquired for Investment, nonaccretable difference
represents contractual principal and interest payments the Company will be
unable to collect. The Company analyzes the composition of these liquidating
portfolios in order to estimate a future loss rate. Criteria evaluated include
delinquencies, historical charge offs, recovery rates, portfolio seasoning and
economic conditions. A cash flow model that considers term, interest rate, loss
rate, prepayment rate and recovery rate is consistently applied to project
expected cash flows. The difference between expected cash flows and total
contractual principal and interest payments is the nonaccretable difference.
During the third quarter of the year ended April 30, 2002, the Company increased
the cumulative loss rates on the warehouse and FIACC portfolios by 1.44% and
..42%, respectively. The total increase to nonaccretable difference of $1,288,885
relates to the recessionary environment and the impact it has on customers'
ability to maintain comparable paying employment. Additionally, the effective
decrease in prices of new automobiles through incentive programs offered by
captives contributed to decreasing prices and demands for used vehicles. This
results in lower recovery rates realized through repossessions. The collateral
comprising the Receivables Acquired for Investment is at higher risk as it is
primarily older model used cars with higher mileage. The increase in accretable
yield results from increasing the expected term of the remaining cash flow in
order to allow for collections on charged off receivables. By extending the cash
flow projection model life, accretable yield must be increased to provide for
future income.

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):

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 11.3 percent
and 6.0 percent as of April 30, 2002, and 2001, 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, 2002,
approximately 20 percent of the receivables that had been acquired by the
Company related to new vehicles and approximately 80 percent of the receivables
arose from the sale of used vehicles.

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
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 150 employees as of April 30, 2002, including 39 located at
its headquarters in Houston, 105 located at its loan servicing center in Atlanta
and 6 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

15

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 2002 and 2001, the Company recorded
matching contributions to the 401(k) plan of $30,265 and $32,932, 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, 2002 and 2001, the amounts invested under the Deferred Compensation
Plan totaled $256,876 and $527,958, 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.

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

16

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.

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 $209,000
and expiring on February 28, 2005, 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
$566,000 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.

17

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.

18

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.

As of July 1, 2002, 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.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of the Company for the
five fiscal years ended April 30, 2002, 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).

- ----------

(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.

20

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

GENERAL

Net loss for the year ended April 30, 2002, was $(309,012) or $(0.06) per
common share. Net income for the year ended April 30, 2001, was $51,646 or $0.01
per common share. The results for fiscal year 2002 were negatively impacted by a
third quarter $1,260,000 loss, or $882,000 net of minority interest, on the
Receivables Acquired for Investment due to an increase in projected loss rates.
Additionally, during the third quarter, the Company amortized deferred financing
costs and warrants of $602,162 related to restructuring of debt facilities. 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, 2002, the Company had a network of 1,452 franchised
dealers in 27 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 26
percent of Receivables Held for Investment at April 30, 2002 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 $221 million portfolio of loans
originated in 31 states.

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

- ----------

- ----------
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the year ended April 30, 2002 and April 30, 2001 reflect
$709 and $1,215, respectively, in interest income related to minority
interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.

22

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):

- ----------

(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):

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 $23.8 million in 2002,
a decrease of 2 percent when compared to amounts reported in 2001 and flat
compared to amounts reported in 2000.

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):

23

RESULTS OF OPERATIONS

FISCAL YEAR ENDED APRIL 30, 2002, COMPARED TO FISCAL YEAR ENDED APRIL 30,
2001 (DOLLARS IN THOUSANDS)

INTEREST INCOME. Interest income for 2002 decreased $6,818, or 15 percent,
over 2001, primarily as a result of a decrease in the average principal balance
of Receivables Held for Investment of 8 percent from 2001 to 2002 and a decrease
in the effective yield from 16.1% for 2001 to 15.4% in 2002. Additionally the
interest income on Receivables Acquired for Investment and Investment in Trust
Certificates decreased by 39 percent. The decrease in interest income on
Receivables Acquired for Investment and Investment in Trust Certificates is
attributable to a 60 percent decline in the average principal balances of the
Receivables Acquired for Investment and Investment in Trust Certificates for
2002 as compared to 2001.

INTEREST EXPENSE. Interest expense for 2002 decreased by $6,431, or 32
percent, over 2001. A decrease in the weighted average borrowings outstanding
under credit and term facilities of 9 percent resulted in $1,802 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
decreased to 5.8 percent for the year ended April 30, 2002 compared to 7.6
percent for the year ended April 30, 2001 accounting for $4,117 of the
difference. Included in the decrease is the 2001 write off of $230 of deferred
financing costs related to a reduction in the FIACC borrowing capacity. Lastly,
the interest expense on the Receivables Acquired for Investment decreased $512
primarily resulting from a decrease in the weighted average borrowings
outstanding of 42 percent.

NET INTEREST INCOME. Net interest income decreased by $387 in 2002, a
decrease of 2 percent over 2001. Decreases in interest income from the
Receivables Held for Investment and Receivables Acquired for Investment and
Investment in Trust Certificates were offset by savings in interest expense on
the Receivables Acquired for Investment and Investment in Trust Certificates.

PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2002
increased by $589, or 7 percent, over 2001. The provision is affected by a) the
amount of net charge offs, b) changes in the portfolio size, and c) changes in
the target percentage of overall allowance to outstanding receivables. Net
charge offs increased from $7,796 in fiscal 2001 to $9,291 in fiscal 2002 due to
an increase in the frequency of repossessions and lower recovery rates from the
sales of repossessed vehicles. The higher frequency is directly related to the
weakened economic conditions and the resulting inability of certain customers to
maintain comparable employment. Lower recovery rates on repossessions are due to
an increase in supply of used vehicles and increased incentives for new vehicles
which decreased the demand and price for used vehicles. Offsetting the increase
in the charge offs was the provision impact of a declining portfolio. Based
primarily on historical loss experience of various aging categories, the Company
provides a reserve equal to 1.1% of the outstanding principal balance of
Receivables Held for Investment. Since the average portfolio size has decreased
during fiscal 2002, a lower provision expense was incurred. Lastly, in fiscal
2001, the provision expense increased from .9% to 1.1% of outstanding principal
balance of Receivables Held for Investment or $430. The increase was made in
light of the slowdown in economic growth and softness in the

24

employment rate. This increased the provision expense in 2001 and also
contributed an offsetting effect to the higher charge offs when comparing total
2002 expense to 2001.

LOSS ON RECEIVABLES ACQUIRED FOR INVESTMENT AND TRUST CERTIFICATES. The
loss in fiscal year 2002 increased to $1,260 from $400 for fiscal 2001. During
the third quarter of fiscal 2002 a loss of $1,260 was recorded on the
Receivables Acquired for Investment and Investment in Trust Certificates. These
assets are comprised of loans previously originated by Auto Lenders Acceptance
Corporation and include a portfolio of warehouse loans and a portfolio of loans
that were previously securitized. The securitized loans were subsequently
redeemed and funded through the FIACC credit facility. The 2002 loss is due to a
..42%, or $334, and 1.44%, or $954, increase in the cumulative loss rate for the
FIACC and warehouse portfolios, respectively. The increase in the cumulative
loss rates was necessary due to the higher loss frequency and severity in these
portfolios. These loans are secured by older vehicles which typically experience
a larger drop in value in a weak auction market. The fiscal 2001 writedown of
$400 was recorded on the ALAC Automobile Receivables Trust 1998-1 and was due to
an increase in the cumulative loss rate of .81%. The increase in the loss rate
was necessary due to estimated future losses exceeding losses that were
previously projected due to softened economic conditions and lower recovery
rates on the collateral. The loss to the Company, net of minority interest, is
$882 and $280 for fiscal 2002 and 2001, respectively.

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. 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.