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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File Number 0-26686

First Investors Financial Services Group, Inc.
(Exact Name of Registrant as Specified in its Charter)

        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 ý    No o.

        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.    o

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

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

        There were 5,026,269 shares of Common Stock of the registrant outstanding as of October 31, 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 on September 10, 2003, which is to be filed with the Securities and Exchange Commission not later than 120 days after April 30, 2003.

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES


FORM 10-K
APRIL 30, 2003

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

General

        First Investors Financial Services Group, Inc., organized in 1989, 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 or refinance of new and late-model used vehicles. The Company specializes in lending to consumers with impaired credit profiles. Additionally, the Company has purchased receivables in bulk portfolio acquisitions or from other third party originators. The Company does not utilize off-balance sheet securitization to finance its Receivables Held for Investment. As of April 30, 2003, the Company had Receivables Held for Investment in the aggregate principal amount of $226,362,218, having an effective yield of 15.0 percent and a net interest spread to the Company of 10.4 percent (net of cost of funds and other carrying costs).

        During the fiscal year ended April 30, 2003, the Company started performing servicing and collection activities for third parties through First Investors Servicing Corporation ("FISC"), a wholly owned subsidiary located in Atlanta, Georgia. The total managed portfolio serviced by FISC was $659 million as of April 30, 2003.

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.

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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, 2003, 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.

        Location of Dealers.    Approximately 23 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 28 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 or purchased through bulk portfolio acquisitions during the last two fiscal years:

(1)

Includes dealers located in Connecticut, Delaware, Iowa, Idaho, Massachusetts, Maryland, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, South Carolina, South Dakota, Utah, Vermont, and Wisconsin.

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

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

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

        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 81 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 19 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 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 1,620 dealers at April 30, 2003. 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

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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 15 year database of non-prime lending results.

        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. In addition to servicing its owned portfolio, in December 2002, the Company began servicing and collection activities for third parties in exchange for servicing fees. The Company completed two transactions during the fiscal year ended April 30, 2003, both of which related to portfolio acquisitions from collateral previously originated by Union Acceptance Corporation. Under the first transaction, the Company invested $475,061 for a 40% ownership interest and $712,591 in junior mezzanine debt of First Auto Receivables Corporation ("FARC"). FARC purchased a $197.5 million automobile loan portfolio. In addition to the equity and debt investments, the Company collects a fee for servicing the portfolio. The second transaction is a $276 million auto loan portfolio

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purchased by a third party and serviced by the Company. The Company will continue to seek opportunities to increase servicing income through investments in bulk portfolio acquisitions.

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:

(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

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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.    The Company financing strategy is to utilize credit and commercial paper facilities with financial institutions to fund originations. When sufficient volume is originated, the Company will complete an on balance sheet securitization and issue term notes, thereby freeing up capacity in the warehouse and credit facilities. Additionally, the Company has a working capital term loan that was utilized for working capital and general corporate purposes. Lastly, the Company has an agreement with one of its shareholders who is a member of its Board of Directors to borrow up to $2.5 million. Proceeds of the borrowings are to be used to fund private and open market purchases of the Company's common stock pursuant to a Stock Repurchase Plan and for general corporate purposes. The following chart summarizes the borrowing status at April 30, 2003:

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

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Risk Areas

        Warehouse Credit Facilities.    The Company's credit and commercial paper facilities with financial institutions, collectively referred to as warehouse credit facilities, are renewed periodically. On December 5, 2002, the maturity date of the FIRC facility was extended to December 4, 2003. Under the terms of the renewal, the facility was to revert back to $50 million on June 30, 2003 based on the anticipated issuance of additional asset-backed notes which would decrease the borrowings below the reduced facility limit. On June 30, 2003, the FIRC credit facility commitment of $75 million was extended to October 31, 2003 at which time it will convert to $50 million. There were no other material changes to the terms and conditions of the facility. Under the renewal mechanics of the facility, should the lenders elect not to renew the facility beyond October 31, 2003, the facility would convert to a term loan facility which would mature six months thereafter and amortize monthly in accordance with the borrowing base with any remaining balance due at maturity. The FIARC commercial paper facility expired on January 12, 2003 and was renewed until December 4, 2003. No other material changes were made. If the facility is not 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 credit facility. The Company presently intends to seek a renewal of the facility from its lenders prior to maturity. Management considers its relationship with its lenders to be satisfactory and has no reason to believe that this credit facility will not be renewed. If the facility is not renewed, however, or if material changes are made to its terms and conditions, it could have a material adverse effect on the Company.

        Term Notes.    The Company relies on its ability to pool and sell receivables in the asset-backed market in order to generate cash used to pay down the warehouse facilities. Adverse terms or unfavorable occurences in the auto asset-backed market could make securitizations more expensive or could impair the ability to complete securitizations which would have an adverse effect on the Company's liquidity and financial position.

        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, 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, 2003.

        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. Please see Market Risk under Item 7 for quantification.

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        The following is a summary of the financial instruments owned as of April 30, 2003:

(a)

This interest rate represents the cap rate. In the event interest rates rise above the cap rate, the Company will receive the rate difference multiplied by the outstanding notional balance.

        Since the Company has offsetting positions on the interest rate swap transactions, the exposure is limited to the notional balance multiplied by 1.395% for the remaining term of the swaps. The pay fixed interest rate swap transaction was entered into as protection for interest rate movements in conjunction with floating rates on the warehouse credit facilities. Partially due to anticipation of the issuance of fixed rate Term Notes, the Company entered into the offsetting receive fixed swap.

        The interest rate caps were purchased as a requirement of the FIARC commercial paper facility and expiration dates range from April 2006 to May 2009. The interest rate caps were purchased at a cost of $522,204 and have amortizing notional balances in accordance with expected paydowns on the corresponding FIARC debt.

        As of May 1, 2001 the Company designated its interest rate swaps and an 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 were 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 swap 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 the 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.

        The interest rate caps are not designated as hedges and, accordingly, changes in the fair value are recorded as unrealized gains or losses and reflected in net earnings. Hedge accounting was not adopted for the interest rate cap positions due to mark-to-market movements being deemed ineffective since they relate to time value and would be required to flow through net earnings thus eliminating any benefits of hedge accounting.

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        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, 2003 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, of which the largest component is 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 fiscal years ended April 30, 2001, 2002 and 2003 were $3,413,186, $2,382,031 and $4,141,328, respectively, and accounted for 3.0 percent, 3.1 percent and 3.8 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 Subsidiary") under the captive insurance company laws of the State of Vermont. The Insurance Subsidiary is an indirect wholly-owned subsidiary of the Company and is a party to a reinsurance agreement whereby the Insurance Subsidiary 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 Subsidiary. 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 Subsidiary. As of April 30, 2003, gross premiums had been ceded to the Insurance Subsidiary since its inception by National Union in the amount of $28,486,788 and the Insurance Subsidiary reimbursed National Union for aggregate reinsurance claims in the amount of $8,089,381. In addition to the monthly premiums and liquidity reserves of the Insurance Subsidiary, a trust account is maintained by National Union to secure the Insurance Subsidiary's 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 Subsidiary, is obligated to indemnify National Union for all such losses. As of April 30, 2003, the Insurance Subsidiary had capital and surplus of $1,753,375 and unencumbered cash reserves of $1,521,507 in addition to the $2,725,785 trust account.

        The ALPI coverage as well as the Insurance Subsidiary'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 Subsidiary'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 Subsidiary will be required to indemnify will be less than the premiums ceded to it. However,

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there can be no assurance that losses will not exceed the premiums ceded and the capital and surplus of the Insurance Subsidiary.

        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 Variable Funding Capital Corporation ("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—Term Notes.    A surety bond issued by MBIA Insurance Corporation enhances 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 2002-A Trust. MBIA is paid a surety premium equal to 0.35 percent per annum on the outstanding balance of the 2002-A Term Notes. The surety bond was issued for the term of the underlying notes, which mature on December 15, 2008. Termination of the surety bond would result in default under the governing documents.

        Economy.    Periods of weakened economic condition and slow or negative growth will tend to have an unfavorable effect on delinquencies, defaults and losses, particularly with non prime borrowers. Recent periods have also been negatively impacted by declining prices of used vehicles which increases losses to the Company upon repossession. These decreasing prices are primarily due to heavy incentives being offered on new vehicles which has decreased the demand in the used market. Losses have adverse effects on the Company's liquidity and operating results.

        Servicer Default.    The Company performs servicing and collection activities for its owned portfolio as well as two pools of loans owned or partially owned by third parties. Each of the servicing agreements identifies areas of servicer default which are generally defined as the inability to protect the assets under agreement or failing trigger tests of the portfolios. Triggers are related to negative default and loss performance as compared to trigger levels. An event of servicer default would have adverse effects on liquidity and profitability and could result in having the portfolios transferred to another servicer.

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. The outstanding balance of the receivables sold pursuant

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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 166 employees as of April 30, 2003, including 49 located at its headquarters in Houston, 113 located at its loan servicing center in Atlanta and 4 regional marketing representatives. The Company's employees are covered by group health insurance, but the Company has no pension, profit-sharing or other material benefit programs. Effective May 1, 1994, the Company adopted a participant-directed 401(k) retirement plan for its employees. An employee becomes eligible to participate in the plan immediately upon employment. The Company pays the administrative expenses of the 401(k) plan. The Company also matches a percentage of each participant's voluntary contributions up to a maximum voluntary contribution of 3 percent of the participant's compensation. In fiscal years 2003 and 2002, the Company recorded matching contributions to the 401(k) plan of $32,548 and $30,265, respectively. 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, 2003 and 2002, the amounts invested under the Deferred Compensation Plan totaled $236,378 and $256,876, 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.

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Competition

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

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

Regulation

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

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

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

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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 $220,000 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 floors of a four-story office building. This space is held under a lease requiring average annual rentals of approximately $571,000 and expiring on June 30, 2007, with an option to renew for two consecutive five-year periods at the market rate then prevailing.

        The Company owns no real property.

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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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, 2003, there were approximately 30 shareholders of record of the Company's common stock. The Company believes the number of beneficial owners to be approximately 232.

        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.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data of the Company for the four fiscal years ended April 30, 2003, 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). The selected consolidated financial data for the year ending April 30, 1999 and the balance sheet data as of April 30, 2000 has been derived from the unaudited financial statements of the Company. As reflected in the Company's Form 10-K/A filed November 29, 2002, the Company restated the Consolidated Financial Statements as of April 30, 2002 and 2001, and for the three years ended April 30, 2002 to correct for certain prior period misstatements that were discovered by the Company as it was performing additional control procedures adopted during the first quarter 2003 period at the request of its new accounting firm, Grant Thornton LLP. The restatement related to overstated balances that should have been identified by the Company upon conversion from a third party servicer. The restatement impacted certain restricted cash, deferred expenses, receivables held for investment, and tax balances as reported, but it did not affect the Company's free liquidity position or debt position. The balance of retained earnings as of April 30, 1999 has been restated from amounts previously reported to reflect a retroactive charge of $1,248,918, after tax. Restricted cash, deferred expenses, receivables held for investment, and tax balances have been adjusted for the restatement for all

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applicable years. Because of the restatement and due to the predecessor auditing firm no longer being in business, an updated opinion could not be obtained for 1999.