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):

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.

19

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.

21

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.

LATE FEES AND OTHER INCOME. Late fees and other income primarily represents
late fees collected from customers on past due accounts, collections on certain
FISC assets which had previously been charged off by the Company, and interest
income earned on short-term marketable securities and money market instruments.
Late fees and other income decreased to $1,810 in 2002 from $2,563 in 2001 or a
29% decrease. The decrease is primarily due to lower reinvestment rates earned
on restricted cash balances. In addition to the declining reinvestment rates,
the reinvestment income was also negatively impacted by the smaller portfolio.

UNREALIZED LOSS ON INTEREST RATE DERIVATIVE POSITIONS. In conjunction with
the adoption of SFAS 133, the Company is required to report the fair value of
interest rate derivative positions. Unrealized losses are primarily related to
mark to market movements in the $100 million 6.42% pay fixed swap versus
movements in the $100 million 5.025% receive floating swap. These two
derivatives will not directly offset over the remaining term due to interest
rate fluctuations between periods.

SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs decreased to
$8,041 in 2002 from $9,389 in 2001. The decrease is primarily due to reduced
headcount needs related to lower originations and a lower managed portfolio.

OTHER INTEREST EXPENSE. Other interest expense decreased $526, or 40
percent, for the year ended April 30, 2002 over the year ended April 30, 2001.
The decrease is principally related to a decrease in the average borrowings
outstanding under the working capital facility of 9 percent and a 34 percent
reduction in the interest rate.

OTHER EXPENSES. Other expenses decreased $232 or 3% percent in fiscal 2002
primarily due to decreases in telephone expense and lease expense of $388 and
$180, respectively, offset by increases in depreciation and amortization of $160
and third party service bureau fees of $159. Telephone expense decreased from
2001 to 2002 due to lower long distance rates and a smaller portfolio. Lease
expense decreased primarily due to the completion of an operating lease in 2002.
Amortization increased due to amortization of deferred financing costs and stock
warrants related to the term loan working capital facility restructured with
Bank of America on December 22, 2001. Amortization of these fees and warrants
were $686 higher in 2002 compared to 2001. Included in this increase is $555 of
amortization related to the termination of the term loan working capital
facility with Bank of America on December 6, 2001. A new term loan facility with
First Union National Bank was entered into on December 6, 2001 in order to
refinance the outstanding borrowings and increase the size of the facility.
Depreciation decreased by

25

$526 in 2002 compared to 2001 related to a write off of capitalized software in
2001 and the completion of a capital lease amortization in mid 2002. In December
2000 in order to increase the stability of operations, the Company migrated to a
third party service bureau which became the primary system for collecting and
servicing the managed loan portfolio. After conversion and testing, the Company
abandoned the use of internal software and expensed $274 of unamortized amounts.
Additionally, in November 2001, the Company completed the amortization of a
capital lease used to acquire assets in conjunction with the purchase of FISC.
Consequently, expenses for 2002 were $250 less than 2001 as related to the
capital lease. Third party service bureau fees increased as the Company began
using the third party provider in December 2000, thus only five months of
expenses were incurred in 2001 compared to a full year for 2002.

INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During
2002, income before provision for income taxes and minority interest decreased
by $1,061, or 118 percent from 2001 as a result of the factors discussed above.

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

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

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

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

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

LOSS ON TRUST CERTIFICATES. During the fourth quarter of fiscal 2001 a loss
of $400 was recorded on the ALAC Automobile Receivables Trust 1998-1 related 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. Losses were negatively impacted by higher frequency and
severity than originally anticipated due to softened economic conditions and
lower recovery rates on the collateral. The loss to the Company, net of the
minority interest, is $280.

SERVICING INCOME. Servicing income represents amounts received on loan
receivables previously sold by FISC in connection with two asset securitization
transactions. Under these transactions, FISC, as servicer, is entitled to
receive a fee of 3 percent on the outstanding principal balance of the
securitized receivables plus reimbursement for certain costs and expenses
incurred as a result of its collection activities. Servicing income decreased 65
percent for fiscal 2001 as compared to fiscal 2000. This decrease results from
the declining principal balance of the securitized

26

receivables as well as liquidation of the securitizations. One securitization
was called September 15, 2000 and the other was called March 15, 2001, when the
underlying receivables were repurchased. Subsequent to the call date, no further
servicing income is earned.

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

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

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

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

OTHER EXPENSES. Other expenses increased $1,192 or 21 percent in fiscal
2001. The increase is largely due to $696 in non-recurring charges primarily
related to the write-off of certain unamortized software costs, professional
fees that were incurred during the period, and other non-cash costs. In December
2000 and in order to increase the stability of operations, the Company migrated
to a third party service bureau which became the primary system for collecting
and servicing the managed loan portfolio. After conversion and testing, the
Company abandoned the use of internal software and expensed $274 of unamortized
software costs. The Company also expensed $120 of capitalized bank fees related
to a search for possible equity or debt investors. The project did not yield
acceptable pricing for the Company and the project was abandoned and expensed.
Also included in the non-recurring charges was $227 of repossession related
expenses. Prior to December 2000, repossession related expenses were written off
upon sale of the collateral. Beginning in December 2000 and in conjunction with
converting to the third party service bureau, the new policy is to expense
repossession related expenses upon repossession of the collateral. Expenses for
fiscal 2001 were also reflective of a full year of servicing costs related to
Receivables Held for Investment, which were converted from a third-party
servicer in July 1999.

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

LIQUIDITY AND CAPITAL RESOURCES

SOURCES AND USES OF CASH FLOWS. The Company's business requires significant
cash flow to support its operating activities. The principal cash requirements
include (i) amounts necessary to acquire receivables from dealers and fund
required reserve accounts, (ii) amounts necessary to fund premiums for credit
enhancement insurance or other credit enhancement required by the Company's
financing programs, and (iii) amounts necessary to fund costs to retain
receivables, primarily interest expense. The Company also requires a significant
amount of cash flow for working capital to fund fixed operating expenses,
primarily salaries and benefits.

The Company's most significant cash flow requirement is the acquisition of
receivables. The Company paid $78 million for receivables acquired to be held
for investment for 2002 compared to $115 million in 2001.

27

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

The Company's most significant source of cash flow is the principal and
interest payments received from the receivables portfolios. The Company received
such payments in the amount of $126.2 million in 2002 and $122.3 million in
2001. Such cash flow funds repayment of amounts borrowed under the FIRC credit
and commercial paper facilities and other holding costs, primarily interest
expense and servicing and custodial fees. During the fiscal year 2002, the
Company's collections on Receivables Held for Investment exceeded cash required
to purchase Receivables Held for Investment by $12.9 million. During the fiscal
year 2001, the Company required net cash of $32.7 million as the receivable
purchases exceeded the portfolio collections. The Company has relied on borrowed
funds to provide the source of cash flow in periods of growth. As of April 30,
2002, the Company has $170.4 million of available capacity in the warehouse
credit facilities to fund future growth.

In addition to the excess cash flow generated from the principal and
interest collections on the receivables portfolio, the Company collects
servicing fees funded from each of the credit facilities. Servicing fees range
from 2% to 2.5% of the outstanding principal balance of the loans. Excess cash
flows and servicing fees are received after month end but relate to the prior
month activity. Thus upon filing of the monthly servicing statements, a portion
of the restricted cash is converted to cash available to fund operations. At
April 30, 2002 and 2001, the Company's unencumbered cash was $585,727 and
$1,011,249, respectively. Excess cash and servicing fees collected after month
end but related to the prior month activity totaled $1,845,664 and $1,943,605 as
of April 30, 2002 and 2001, respectively. The decrease in available cash is
primarily due to the declining portfolio's effect on excess cash and servicing
fees. Management believes the unencumbered cash and cash inflows are adequate to
fund cash requirements for operations.

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

FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been provided through a syndicated warehouse credit facility
agented by First Union National Bank. The borrowing base is defined as the sum
of the principal balance of the receivables pledged and the amount on deposit
with the Company to fund receivables to be acquired. The Company is required to
maintain a reserve account equal to the greater of one percent of the principal
amount of receivables financed or $250,000. Borrowings under the FIRC credit
facility bear interest at a rate selected by the Company at the time of the
advance of either the base rate, defined as the higher of the prime rate or the
federal funds rate plus .5 percent, the LIBOR rate plus .5 percent, or a rate
agreed to by the Company and the banks. The facility also provides for the
payment of a fee of .25 percent per annum based on the total committed amount.

On November 14, 2001, the facility was renewed to December 7, 2001. On
December 7, 2001, the Company entered into an agreement with First Union
National Bank to extend the maturity date of the facility until December 5,
2002. In conjunction with this renewal, First Union assumed the role of agent
and increased its commitment to $50 million from $20 million. The total
commitment remains at $50 million and 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 December 5,
2002, the facility would convert to a term loan facility which

28

would mature six months thereafter and amortize monthly in accordance with the
borrowing base with any remaining balance due at maturity.

Borrowings under the FIRC credit facility were $36,040,000 and $28,610,000
at April 30, 2001 and April 30, 2002, respectively. The Company presently
intends to seek a renewal of the facility from its lenders prior to maturity.
Management considers its relationship with its lenders to be satisfactory and
has no reason to believe that this credit facility will not be renewed. If the
facility were not renewed, however, or if material changes were made to its
terms and conditions, it could have a material adverse effect on the Company.

FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility provided by
Variable Funding Capital Corporation (VFCC), a commercial paper conduit
administered by First Union National Bank (the "FIARC commercial paper
facility"). Receivables are transferred periodically from the FIRC credit
facility to FIARC commercial paper facility through the assignment of an
undivided interest in a specified group of receivables. VFCC issues commercial
paper (indirectly secured by the receivables), the proceeds of which are used to
repay the FIRC credit facility.

The financing is provided to a special-purpose, wholly-owned subsidiary of
the Company, FIARC. Credit enhancement for the $150 million facility is provided
to the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. The Company is not a guarantor of, or otherwise a party to, such
commercial paper. Borrowings under the commercial paper facility bear interest
at the commercial paper rate plus a borrowing spread equal to .30 percent per
annum. Additionally, the agreement provides for additional fees based on the
unused amount of the facility and dealer fees associated with the issuance of
the commercial paper. A surety bond premium equal to .35 percent per annum is
assessed based on the outstanding borrowings under the facility. A one percent
cash reserve must be maintained as additional credit support for the facility.
At April 30, 2001, the Company had borrowings of $121,808,808 outstanding under
the commercial paper facility. The Company had no outstanding borrowings under
the FIARC facility as of April 30, 2002.

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

FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with VFCC, a commercial paper
conduit administered by First Union National Bank, 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 0.55
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 under the FIACC commercial paper facility, and had a
weighted average interest rate of 5.56 percent, including the effects of program
fees and hedge instruments. 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

29

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. 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. 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 securitization, the
Company has elected to utilize the FIACC commercial paper facility solely as the
financing source for this repurchase 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 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
balance on the 2000-A Term Notes was $84,925,871 and

30

$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.

The following table summarizes borrowings under the warehouse credit
facility, the FIARC and FIACC commercial paper facilities and the 2000-A and
2002-A Term Notes (dollars in thousands):

- ----------

(1) Based on interest rates, facility fees, surety bond fees and hedge
instruments applied to borrowings outstanding at period-end.
(2) Based on month-end balances.
(3) Includes borrowings under the FIACC commercial paper facility for the
period from May 1, 2000 until September 15, 2000. See FIACC Commercial
Paper Facility.

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, an affiliate of First Union National Bank, 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 receivables or cash distributions to the certificate holder
under the securitizations are first applied to pay FISC a servicing fee in the
amount of 3% 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. In addition, one-third of the servicing fee paid to
FISC is also utilized to reduce principal outstanding 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 Held for Investment that are
applicable to FIACC, as of

31

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. 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. During fiscal 2002, $972,428 was
distributed to the limited partner compared to $3,084,494 for fiscal 2001. 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 required 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. The remaining unpaid balance of
the term loan was due at maturity on December 22, 2002. Pricing under the
facility was 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 owed
to Bank of America under 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 facility was converted
to a $4.5 million term loan tranche which amortizes monthly as principal
payments are

32

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 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 presently 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.

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 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.

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.

33

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.

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

34

2004, the maturity date of the final swap, the Company will reclassify into
earnings substantially all of the transition adjustment originally recorded.

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. An 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 the 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 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 potential losses based on the higher
loss curve expected.

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.

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 2000-A Auto Trust, 2002-A 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

35

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.

MARKET RISK

The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the company of risk-mitigating
strategies such as hedging.

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

36

The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.

As of April 30, 2002, the Company had $38 million of floating rate secured
debt outstanding considering the effect of swap and cap agreements. For every 1
percent increase in commercial paper rates or LIBOR, annual after-tax earnings
would decrease by approximately $244,000, assuming the Company maintains a level
amount of floating rate debt and assuming an immediate increase in rates. As of
April 30, 2001, the Company had $62 million of floating rate secured debt
outstanding considering the effect of swap and cap agreements. For every 1
percent increase in commercial paper rates or LIBOR, annual after-tax earnings
would decrease by approximately $394,000, assuming the Company maintains a level
amount of floating rate debt and assuming an immediate increase in rates.

FORWARD LOOKING INFORMATION

Statements and financial discussion and analysis included in this report
that are not historical are considered to be forward-looking in nature.
Forward-looking statements involve a number of risks and uncertainties that may
cause actual results to differ materially from anticipated results. Specific
factors that could cause such differences include unexpected fluctuations in
market interest rates, changes in economic conditions, or changes in the
competition for loans. Although the Company believes that the expectations
reflected in the forward-looking statements presented herein are reasonable, it
can give no assurance that such expectations will prove to be correct.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company included in this Form
10-K are listed under Item 14(a). The Company is not required to file any
supplementary financial data under this item.

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

None.

37

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Information responsive to this item appears under the caption "Election of
Directors" in the Company's Proxy Statement for the 2002 Annual Meeting of
Shareholders expected to be held September 10, 2002, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information responsive to this item appears under the caption "Summary
Compensation Table" in the Company's Proxy Statement for the 2002 Annual Meeting
of Shareholders expected to be held September 10, 2002, which is to be filed
with the Securities and Exchange Commission, and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information responsive to this item appears under the caption "Security
Ownership of Management and Certain Beneficial Owners" in the Company's Proxy
Statement for the 2002 Annual Meeting of Shareholders expected to be held
September 10, 2002, which is to be filed with the Securities and Exchange
Commission, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information responsive to this item appears under the caption "Certain
Transactions" in the Company's Proxy Statement for the 2002 Annual Meeting of
Shareholders expected to be held September 10, 2002, which is to be filed with
the Securities and Exchange Commission, and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

See Index to Consolidated Financial Statements on Page F-1.

(3) EXHIBITS

2.1(j) -- Stock Purchase Agreement, dated as of September 9, 1998,
between First Investors Financial Services Group, Inc. and
Fortis, Inc. to purchase Auto Lenders Acceptance
Corporation, a wholly-owned subsidiary of Fortis, Inc.
3.1(a) -- Articles of Incorporation, as amended
3.2(a) -- Bylaws, as amended
4.1(a) -- Excerpts from the Articles of Incorporation, as amended
(included in Exhibit 3.1).
4.3(a) -- Specimen Stock Certificate
10.5(a) -- Credit Agreement dated as of October 16, 1992 among
F.I.R.C., Inc. ("FIRC") and NationsBank of Texas, N.A.,
individually and as agent for the banks party thereto, as
amended by First Amendment to Credit Agreement and Loan
Documents dated as of November 5, 1993, Second Amendment to
Credit Agreement and Loan Documents dated as of March 3,
1994, Third Amendment to Credit Agreement and Loan Documents
dated as of March 17, 1995 and Fourth Amendment to Credit
Agreement and Loan Documents dated as of July 7, 1995.
10.6(a) -- Collateral Security Agreement dated as of October 16,
1992 between FIRC and Texas Commerce Bank National
Association as collateral agent for the ratable benefit of
NationsBank of Texas, N.A., as agent, and the banks party to
the Credit Agreement filed as Exhibit 10.5.

10.7(a) -- Escrow Agreement dated as of October 16, 1992 among FIRC,
NationsBank of Texas, N.A. as agent

38

for the banks party to the Credit Agreement filed as Exhibit
10.5, and Texas Commerce Bank National Association as Escrow
Agent.
10.8(a) -- Transfer and Administration Agreement dated as of March
3, 1994 among FIRC, Enterprise Funding Corporation, Texas
Commerce Bank National Association and NationsBank N.A.
(Carolinas) (formerly NationsBank of North Carolina, N.A.),
as amended by Amendment Number 1 dated August 1, 1994,
Amendment Number 2 dated February 28, 1995 and Amendment No.
3 dated March 21, 1995.
10.9(a) -- Servicing Agreement dated as of October 16, 1992 between
FIRC and General Electric Capital Corporation, as amended by
First Amendment to Servicing Agreement dated as of November
4, 1993, Second Amendment to Servicing Agreement dated as of
March 1, 1994 and Third Amendment to Servicing Agreement
dated as of June 1, 1995.
10.10(a) -- Purchase Agreement between FIRC and First Investors
Financial Services, Inc. ("First Investors") dated October
16, 1992, as amended by First Amendment to Purchase
Agreement dated as of November 5, 1993 and Second Amendment
to Purchase Agreement dated as of March 3, 1994.
10.11(a) -- Auto Loan Protection Insurance Policy dated October 13,
1992 issued by Agricultural Excess & Surplus Insurance
Company to FIRC as insured.
10.12(a) -- Auto Loan Protection Insurance Policy dated April 8, 1994
issued by National Union Fire Insurance Company of
Pittsburgh to FIRC as insured.
10.13(a) -- Facultative Reinsurance Agreement between National Fire
Insurance Company of Pittsburgh and First Investors
Insurance Company, as reinsurer, dated as of May 26, 1995.
10.14(a) -- Blanket Collateral Protection Insurance Policy dated
October 5, 1992 issued by Agricultural Excess & Surplus
Insurance Company to FIRC as insured.
10.15(a) -- ISDA Master Agreement dated August 12, 1994 between FIRC
and NationsBank of Texas, N.A. together with Confirmation of
U.S. Dollar Rate Swap Transaction dated June 14, 1995 and
Confirmation for U.S. Dollar Rate Swap Transaction dated May
16, 1995.
10.16(a) -- Employment Agreement dated as of March 20, 1992 between
the Registrant and Tommy A. Moore, Jr., as amended by First
Amendment dated as of March 15, 1995 and Second Amendment
dated as of July 1, 1995.
10.17(a) -- Lease Agreement between A.I.G. Realty, Inc. and First
Investors dated as of June 1, 1992, as amended by Amendment
One dated October 29, 1993 and Amendment Two dated October
26, 1994.
10.18(a) -- Redemption Agreement dated as of June 8, 1995 among the
Registrant and all holders of its class of 1993 Preferred
Stock.
10.21(a) -- 1995 Employee Stock Option Plan of the Registrant.
10.22(a) -- Form of Stock Option Agreement between the Registrant and
Robert L. Clarke dated August 25, 1995.
10.23(b) -- Amendment No. 4 dated November 20, 1995 to the Transfer
and Administration Agreement dated as of March 3, 1994 filed
as Exhibit 10.8.
10.24(b) -- Employment Agreement dated as of May 1, 1996 between the
Registrant and Bennie H. Duck.
10.25(b) -- Amendment Three dated October 10, 1995 to the Lease
Agreement between A.I.G. Realty, Inc. and the Registrant,
filed as Exhibit 10.17.
10.26(b) -- Confirmation for U.S. Dollar Rate Swap Transaction dated
November 16, 1995.
10.27(b) -- Commitment Letter dated June 24, 1996 between Enterprise
Funding Corporation and FIRC, Inc.
10.28(c) -- Confirmation for U.S. Dollar Rate Swap Transaction dated
August 7, 1996.
10.29(d) -- Security Agreement dated as of October 22, 1996 among
First Investors Auto Receivables Corporation, Enterprise
Funding Corporation, Texas Commerce Bank National
Association, MBIA Insurance Corporation, NationsBank N.A.,
and First Investors Financial Services, Inc.
10.30(d) -- Note Purchase Agreement dated as of October 22, 1996
between First Investors Auto Receivables Corporation and
Enterprise Funding Corporation.
10.31(d) -- Purchase Agreement dated as of October 22, 1996 between
First Investors Financial Services, Inc. and First Investors
Auto Receivables Corporation.
10.32(d) -- Insurance Agreement dated as of October 1, 1996 among
First Investors Auto Receivables Corporation, MBIA Insurance
Corporation, First Investors Financial Services, Inc., Texas
Commerce Bank National Association, and NationsBank N.A.

10.33(d) -- Servicing Agreement dated as of October 22, 1996 between
First Investors Auto Receivables

39

Corporation and General Electric Capital Corporation.
10.34(d) -- Amended and Restated Credit Agreement dated as of October
30, 1996 among F.I.R.C., Inc. and NationsBank of Texas,
N.A., individually and as Agent for the financial
institutions party thereto.
10.35(d) -- Amended and Restated Collateral Security Agreement dated
as of October 30, 1996 between F.I.R.C., Inc. and Texas
Commerce Bank National Association as collateral agent for
the ratable benefit of NationsBank of Texas, N.A.
individually and as agent for the financial institutions
party to the Amended and Restated Credit Agreement filed as
Exhibit 10.34.
10.36(d) -- Amended and Restated Purchase Agreement dated as of
October 30, 1996 between First Investors Financial Services,
Inc. and F.I.R.C., Inc.
10.37(d) -- Amended and Restated Servicing Agreement between
F.I.R.C., Inc. and General Electric Capital Corporation.
10.38(e) -- Third Amendment dated January 20, 1997 to the Employment
Agreement dated as of March 20, 1992 between the Registrant
and Tommy A. Moore, Jr.
10.39(f) -- First Amendment to the Amended and Restated Credit
Agreement dated January 31, 1997 by and among F.I.R.C., Inc.
and NationsBank of Texas, N.A., individually and as agent
for the banks party thereto.
10.40(f) -- Second Amendment to the Amended and Restated Credit
Agreement dated May 15, 1997 by and among F.I.R.C., Inc. and
NationsBank of Texas, N.A., individually and as agent for
the banks party thereto.
10.41(f) -- Employment Agreement dated July 16, 1997 between First
Investors Financial Services, Inc. and Tommy A. Moore, Jr.
10.42(f) -- Credit Agreement dated as of July 18, 1997 between First
Investors Financial Services, Inc. and NationsBank of Texas,
N.A., individually and as agent for the banks party thereto.
10.43(f) -- Pledge and Security Agreement dated as of July 18, 1997
by and among First Investors (Vermont) Holdings, Inc. and
NationsBank of Texas, N.A., as agent for the banks party
thereto.
10.44(f) -- Pledge Agreement dated as of July 18, 1997 by and among
First Investors Financial Services, Inc. and NationsBank of
Texas, N.A., as agent for the banks party thereto.
10.45(g) -- Security Agreement dated as of January 1, 1998 among
First Investors Auto Capital Corporation, First Union
Capital Markets Corp., and First Investors Financial
Services, Inc.
10.46(g) -- Note Purchase Agreement dated as of January 1, 1998
between First Investors Auto Capital Corporation, First
Union Capital Markets Corp., the Investors, First Union
National Bank, and Variable Funding Capital Corporation.
10.47(g) -- Purchase Agreement dated as of January 1, 1998 between
First Investors Financial Services, Inc. and First Investors
Auto Capital Corporation.
10.48(g) -- Servicing Agreement dated as of January 1, 1998 between
First Investors Auto Capital Corporation and General
Electric Capital Corporation.
10.49(h) -- Employment Agreement dated as of May 1, 1998 between the
Registrant and Bennie H. Duck.
10.50(h) -- Employment Agreement dated as of May 1, 1998 between the
Registrant and Joseph A. Pisano.
10.51(i) -- Loan and Security Agreement dated as of October 2, 1998
between Variable Funding Capital Corporation, Auto Lenders
Acceptance Corporation, ALAC Receivables Corp. and FIFS
Acquisition Funding Company, L.L.C.
10.52(i) -- Custodial Agreement dated as of October 2, 1998 among
Variable Funding Capital Corporation, Norwest Bank
Minnesota, NA, and Auto Lenders Acceptance Corporation.
10.53(i) -- Contract Purchase Agreement dated as of October 2, 1998
by and between Auto Lenders Acceptance Corporation and FIFS
Acquisition Funding Company, L.L.C.
10.54(i) -- NIM Collateral Purchase Agreement dated as of October 2,
1998 by and between Auto Lenders Acceptance Corporation,
ALAC Receivables Corporation and FIFS Acquisition Funding
Company, L.L.C.
10.55(k) -- Third Amendment to the Amended and Restated Credit
Agreement dated January 25, 1999 by and among F.I.R.C., Inc.
and NationsBank of Texas, N.A., individually and as agent
for the banks party thereto.
10.56(k) -- Second Amendment to the Credit Agreement dated January
25, 1999 between First Investors Financial Services, Inc.
and NationsBank of Texas, N.A., individually and as agent
for the banks party thereto.
10.57(l) -- Amendment Number 2 to Security Agreement dated March 31,
1999 among First Investors Auto

40

Receivables Corporation, Enterprise Funding Corporation,
Chase Bank of Texas, National Association, Norwest Bank
Minnesota, National Association, MBIA Insurance Corporation,
NationsBank N.A., and First Investors Financial Services,
Inc.
10.58(l) -- Amendment Number 1 to Note Purchase Agreement dated as of
March 31, 1999 among First Investors Auto Receivables
Corporation and Enterprise Funding Corporation.
10.59(l) -- Amendment Number 1 to Insurance Agreement dated March 31,
1999 among First Investors Auto Receivables Corporation,
MBIA Insurance Corporation, First Investors Financial
Services, Inc., Auto Lenders Acceptance Corporation, Norwest
Bank Minnesota, National Association and NationsBank, N.A.
10.60(l) -- Servicing Agreement dated March 31, 1999 among First
Investors Auto Receivables Corporation, Norwest Bank
Minnesota, National Association and Auto Lenders Acceptance
Corporation.
10.61(l) -- Guaranty dated March 31, 1999 by First Investors
Financial Services, Inc., First Investors Auto Receivables
Corporation, Auto Lenders Acceptance Corporation and Norwest
Bank Minnesota, National Association.
10.62(m) -- Sale and Allocation Agreement dated January 1, 2000 among
First Investors Financial Services, Inc., First Investors
Servicing Corporation, First Investors Auto Investment
Corp., Norwest Bank Minnesota, National Association and
First Investors Auto Owner Trust 2000-A.
10.63(m) -- Indenture dated as of January 1, 2000 $167,969,000 7.174%
Asset-Backed Notes among First Investors Auto Owner Trust
2000-A, First Investors Financial Services, Inc. and Norwest
Bank Minnesota, National Association.
10.64(m) -- Amended and Restated Trust Agreement dated as of January
24, 2000 among First Investors Auto Investment Corp. and
Bankers Trust (Delaware).
10.65(m) -- Servicing Agreement dated as of January 1, 2000 by and
among First Investors Auto Owner Trust 2000-A, Norwest Bank
Minnesota, National Association, First Investors Auto
Investment Corp. and First Investors Servicing Corporation.
10.66(m) -- Insurance Agreement dated as of January 1, 2000 among
MBIA Insurance Corporation, First Investors Servicing
Corporation, First Investors Financial Services, Inc., First
Investors Auto Investment Corp., First Investors Auto Owner
Trust 2000-A, Bankers Trust (Delaware) and Norwest Bank
Minnesota, National Association.
10.67(m) -- Indemnification Agreement dated as of January 12, 2000
among MBIA Insurance Corporation, First Investors Financial
Services, Inc. and Banc of America Securities LLC.
10.68(n) -- Administrative Services Agreement dated as of August 8,
2000 between Project Brave Limited Partnership and First
Union Securities, Inc.
10.69(n) -- Project Brave Limited Partnership Agreement of Limited
Partnership dated as of July 1, 2000.
10.70(n) -- Amended and Restated NIM Collateral Purchase Agreement dated
as of August 8, 2000.
10.71(n) -- Amended and Restated Contract Purchase Agreement dated as of
August 8, 2000.
10.72(n) -- First Amendment to Amended and Restated NIM
Collateral Purchase Agreement dated as of September 15,
2000.
10.73(n) -- First Amendment to Servicing Agreement dated as of
September 13, 2000.
10.74(n) -- First Amendment to Transfer and Servicing Agreement
dated as of September 15, 2000.
10.75(n) -- Project Brave Limited Partnership Asset-Backed Notes
Indenture dated as of August 8, 2000.
10.76(n) -- Note Purchase Agreement between Project Brave Limited
Partnership as Issuer, First Union Securities, Inc., as Deal
Agent, the Note Investors named herein, First Union National
Bank as Liquidity Agent and Variable Funding Capital
Corporation, as an Initial Note Investor, dated as of
August 8, 2000.
10.77(n) -- Supplemental Indenture No. 1 (Project Brave Limited
Partnership) dated as of September 15, 2000.
10.78(n) -- Third Amendment to Security Agreement dated as of
September 13, 2000.
10.79(n) -- Transfer and Servicing Agreement among Project Brave
Limited Partnership, Issuer, FIFS Acquisition Funding
Company, L.L.C., as Transferor, First Investors Servicing
Corporation as Servicer and a Transferor Party, ALAC
Receivables Corp., as a Transferor Party, First Union
Securities, Inc., as Deal Agent and Collateral Agent and
Wells Fargo Bank Minnesota, National Association as Backup
Servicer, Collateral Custodian and Indenture Trustee dated
as of August 8, 2000.
10.80(o) -- Second Amended and Restated Credit Agreement dated as
of November 15, 2000 Among F.I.R.C., Inc. as Borrower and
the Financial Institutions Now or Hereafter Parties Hereto
as Banks and Bank of

41

America, N. A. as Agent.
10.81(o) -- Third Amended and Restated Collateral Security Agreement
dated as of November 15, 2000.
10.82(o) -- Fourth Amendment to Amended and Restated Purchase Agreement
dated as of November 15, 2000.
10.83(o) -- First Amendment to Servicing Agreement dated as of
November 15, 2000.
10.84(o) -- Credit Agreement among First Investors Financial Services,
Inc., as Borrower, Bank of America, N. A., as the
Administrative Agent, Banc of America Securities LLC, as
sole lead arranger and sole book manager and the lenders
named herein dated as of December 22, 2000.
10.85(o) -- Pledge and Security Agreement (Borrower) dated as of
December 22, 2000.
10.86(o) -- Pledge and Security Agreement (Subsidiaries) dated as of
December 22, 2000.
10.87(o) -- Pledge and Security Agreement (First Investors (Vermont)
Holdings, Inc.) dated as of December 22, 2000.
10.88(o) -- Pledge and Security Agreement (First Investors Financial
Services Group, Inc.) dated as of December 22, 2000.
10.89(o) -- Guaranty (Subsidiary) dated as of December 22, 2000.
10.90(o) -- Guaranty (First Investors (Vermont) Holdings, Inc.) dated as
of December 22, 2000.
10.91(o) -- Guaranty (First Investors Financial Services Group, Inc.)
dated as of December 22, 2000.
10.92(o) -- Amendment No. 2 To Insurance Agreement for First Investors
Auto Receivables Corporation Revolving Automobile
Receivables Financing Facility dated as of November 29,
2000.
10.93(o) -- Amendment Number 3 To Security Agreement dated as of
November 29, 2000.
10.94(o) -- Warrant No. 1 to Purchase 111,334 Shares of Common Stock,
$.01 par value.
10.95(o) -- Warrant No. 2 to Purchase 55,667 Shares of Common Stock,
$.01 par value.
10.96(o) -- Amendment Number 3 To Purchase Agreement dated as of
November 29, 2000.
10.97(o) -- Amendment Number 1 To Servicing Agreement dated as of
November 29, 2000.
10.98(p) -- First Omnibus Amendment to the Transaction Documents dated
December 6, 2001 between F.I.R.C., Inc., First Investors
Financial Services, Inc., First Investors Servicing
Corporation, Bank of America, N.A., First Union Securities,
Inc. and Wells Fargo Bank Minnesota, National Association
10.99(p) -- Security Agreement dated December 6, 2001 between First
Investors Residual Funding L.P. and First Union Securities,
Inc.
10.100(p) -- Sale and Servicing Agreement dated December 6, 2001 between
First Investors Residual Funding L.P., First Investors
Financial Services, Inc. and First Union Securities, Inc.
10.101(p) -- Note Purchase Agreement dated December 6, 2001 between
First Investors Residual Funding L.P, First Union
Securities, Inc., First Union National Bank and Variable
Funding Capital Corporation
10.102(p) -- Asset Purchase Agreement dated December 6, 2001 between
First Investors Residual Funding L.P., FIFS Acquisition
Funding Company LLC, First Investors Auto Investment Corp.
and First Investors Auto Receivables Corporation
10.103(p) -- Indenture dated January 1, 2002 between First Investors Auto
Owner Trust 2002-A, First Investors Financial Services, Inc.
and Wells Fargo Bank Minnesota, National Association
10.104(p) -- Sale and Allocation Agreement dated January 1, 2002
between First Investors Auto Owner Trust 2002-A, First
Investors Financial Services, Inc., First Investors
Servicing Corporation, First Investors Auto Funding
Corporation and Wells Fargo Bank Minnesota, National
Association
10.105(p) -- Amended and Restated Trust Agreement dated January 1, 2002
between First Investors Auto Funding Corporation and Bankers
Trust (Delaware)
10.106(p) -- First Omnibus Amendment to Transaction Documents dated
January 14, 2002 between First Investors Auto Receivables
Corporation, First Investors Financial Services, Inc., First
Investors Servicing Corporation, Enterprise Funding
Corporation, Bank of America, N.A., Variable Funding Capital
Corporation, First Union Securities, Inc., MBIA Insurance
Corporation, and Wells Fargo Bank Minnesota, National
Association
10.107(p) -- Amendment No.3 to Note Purchase Agreement dated January 14,
2002 between First Investors Auto Receivables Corporation
and Variable Funding Capital Corporation
10.108(p) -- Amendment No.4 to Security Agreement dated January 14, 2002
between First Investors Auto Receivables Corporation, First
Investors Financial Services, Inc., First Investors
Servicing Corporation, Variable Funding Capital Corporation,
First Union Securities, Inc., MBIA Insurance Corporation and
Wells Fargo Bank Minnesota, National Association
21.1(j) -- Subsidiaries of the Registrant.

42

- ----------

(a) - Exhibit previously filed with the Company's Registration
Statement on Form S-1,
- Registration No. 33-94336 and incorporated herein by
reference.
(b) - Exhibit previously filed on 1996 Form 10-K and incorporated
herein by reference.
-
(c) - Exhibit previously filed on July 31, 1996 First Quarter Form
10-Q and incorporated herein by reference.
(d) - Exhibit previously filed on October 31, 1996 Second Quarter
Form 10-Q and incorporated herein by reference.
(e) - Exhibit previously filed on January 31, 1997 Third Quarter
Form 10-Q and incorporated herein by reference.
(f) - Exhibit previously filed on July 31, 1997 First Quarter Form
10-Q and incorporated herein by reference.
(g) - Exhibit previously filed on January 31, 1998 Third Quarter
Form 10-Q and incorporated herein by reference.
(h) - Exhibit previously filed on 1998 Form 10-K and incorporated
herein by reference.
-
(i) - Exhibit previously filed on October 31, 1998 Second Quarter
Form 10-Q and incorporated herein by reference.
(j) - Exhibit previously filed on October 2, 1998 Form 8-K and
incorporated herein by reference.
-
(k) - Exhibit previously filed on January 31, 1999 Third Quarter
Form 10-Q and incorporated herein by reference.
(l) - Exhibit previously filed on 1999 Form 10-K and incorporated
herein by reference.
-
(m) - Exhibit previously filed on March 21, 2000 Third Quarter
Form 10-Q/A and incorporated herein by reference.
(n) - Exhibit previously filed on October 31, 2000 Second Quarter
Form 10-Q and incorporated herein by reference.
(o) - Exhibit previously filed on January 31, 2001 Third Quarter
Form 10-Q and incorporated herein by reference.
(p) - Exhibit previously filed on January 31, 2002 Third Quarter
Form 10-Q and incorporated herein by reference.

(b) REPORTS ON FORM 8-K

None.

43

SIGNATURES

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

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Registrant)

Date: July 24, 2002 By: /s/ Tommy A. Moore, Jr.
-----------------------------------------------
TOMMY A. MOORE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of First
Investors Financial Services Group, Inc. and in the capacities and on the date
indicated.

SIGNATURE TITLE
- -------------------------------------- ---------------------------------------

/s/ Tommy A. Moore, Jr. President and Chief Executive Officer,
- -------------------------------------- Director
TOMMY A. MOORE, JR. (Principal Executive Officer)

/s/ Bennie H. Duck Vice President and Chief Financial
- -------------------------------------- Officer
BENNIE H. DUCK (Principal Financial and Accounting
Officer)

/s/ John H. Buck Director
- --------------------------------------
John H. Buck

/s/ Robert L. Clarke Director
- --------------------------------------
ROBERT L. CLARKE

/s/ Seymour M. Jacobs Director
- --------------------------------------
SEYMOUR M. JACOBS

/s/ Roberto Marchesini Director
- --------------------------------------
ROBERTO MARCHESINI

/s/ Walter A. Stockard Director
- --------------------------------------
WALTER A. STOCKARD

/s/ Walter A. Stockard, Jr. Director
- --------------------------------------
WALTER A. STOCKARD, JR.

Date: July 24, 2002

44

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:

We have audited the accompanying consolidated balance sheet of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 2002, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

/s/ GRANT THORNTON LLP
- ----------------------
Houston, Texas
July 9, 2002

F-2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of First Investors Financial Services
Group, Inc.:

We have audited the accompanying consolidated balance sheets of First Investors
Financial Services Group, Inc. (a Texas corporation) and subsidiaries as of
April 30, 2000 and 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended April 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Investors
Financial Services Group, Inc. and subsidiaries as of April 30, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2001, in conformity with accounting
principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
July 9, 2001

NOTE: THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN REPORT AND
THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN.

F-3

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2001 AND 2002

The accompanying notes are an integral part of these consolidated
financial statements.

F-4

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 2000, 2001 AND 2002

The accompanying notes are an integral part of these consolidated
financial statements.

F-5

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 2000, 2001 AND 2002

F-6

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 2000, 2001 AND 2002

The accompanying notes are an integral part of these consolidated
financial statements.

F-7

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000, 2001 AND 2002

1. THE COMPANY

ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors or the Company) was established to serve as a holding company for
First Investors Financial Services, Inc. (FIFS) and FIFS's wholly-owned
subsidiaries, First Investors Insurance Company (FIIC), First Investors Auto
Receivables Corporation (FIARC), F.I.R.C., Inc. (FIRC), First Investors Auto
Capital Corporation (FIACC), First Investors Servicing Corporation (FISC)
formerly known as, Auto Lenders Acceptance Corporation (ALAC), First Investors
Auto Investment Corporation, FIFS Acquisition Funding Corp. LLC., and First
Investors Auto Funding Corporation. First Investors, together with its wholly-
and majority-owned subsidiaries, is hereinafter referred to as the Company.

FIFS began operations in May 1989 and is principally involved in the
business of acquiring and holding for investment retail installment contracts
and promissory notes secured by new and used automobiles (receivables)
originated by factory authorized franchised dealers or directly through
consumers. As of April 30, 2002, approximately 26 percent of receivables held
for investment had been originated in Texas. The Company currently operates in
27 states.

FIIC was organized under the captive insurance company laws of the state of
Vermont for the purpose of reinsuring certain credit enhancement insurance
policies that have been written by unrelated third party insurance companies.

On October 2, 1998, the Company completed the acquisition of FISC and the
operations of FISC are included in the consolidated results of the Company since
the date of acquisition. 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. The Company performs servicing and collection
functions on loans originated from 31 states on a Managed Receivables Portfolio
of $221 million.

On August 8, 2000, the Company entered into a partnership agreement whereby
a subsidiary of the Company is the general partner owning 70 percent of the
partnership assets and First Union Investors, Inc. serves as the limited partner
and owns 30 percent of the partnership assets (the "Partnership"). The
Partnership consists primarily of a portfolio of loans previously owned or
securitized by FISC and certain other financial assets including charged-off
accounts owned by FISC.

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its wholly- and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant

F-8

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimates used by the Company relate to the allowance for credit losses and
nonaccretable difference. See Notes 3 and 4. Actual results could differ from
those estimates.

RECEIVABLES HELD FOR INVESTMENT. The Company acquires automobile loans from
dealers and originates loans directly to consumers. Fees and expenses of
originating the loan are capitalized and amortized in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases". The basis in the receivables includes the costs to acquire the
receivables from the dealer, plus or minus any fees paid or received related to
the purchase of the receivables.

Receivables are generally acquired from dealers at a premium or discount
from the principal amounts financed by the borrower. The Company and the dealers
negotiate this premium or discount, and such premium or discount is included in
the carrying amount of the receivable. Also included in the carrying amount of
receivables is the insurance premium paid to third-party insurers, net of any
premiums ceded to FIIC for reinsurance. The Company amortizes the difference
between the principal balance of the receivables and its carrying amount over
the expected remaining life of the receivables using the interest method.

RECEIVABLES ACQUIRED FOR INVESTMENT. In connection with loans that were
acquired in a portfolio purchase, the Company estimates the amount and timing of
undiscounted expected future principal and interest cash flows. For certain
purchased loans, the amount paid for a loan reflects the Company's determination
that it is probable the Company will be unable to collect all amounts due
according to the loan's contractual terms. Accordingly, at acquisition, the
Company recognizes the excess of the loan's scheduled contractual principal and
contractual interest payments over its expected cash flows as an amount that
should not be accreted. The remaining amount, representing the excess of the
loan's expected cash flows over the amount paid, is accreted into interest
income over the remaining life of the loan. The fiscal year 2000 contractual
payments receivable was net of an estimate of future cash flows that were to be
sold to the limited partner. For April 30, 2001 and 2002, and in conjunction
with formation of the Partnership, the contractual payments receivable does not
net estimated future cash flows payable to others and instead such amounts are
included as minority interest. See Note 7 - Acquisition Facility.

Over the life of the loan, the Company continues to estimate expected cash
flows on a pool by pool basis. The Company evaluates whether the present value
of any decrease in the loan's actual or expected cash flows should be recorded
as a loss provision for the loan. For any material increases in estimated cash
flows, the Company adjusts the amount of accretable yield by reclassification
from nonaccretable difference. The Company then adjusts the amount of periodic
accretion over the loan's remaining life. See Note 4.

INVESTMENT IN TRUST CERTIFICATES. Through the acquisition of FISC, the
Company obtained interests in two securitizations of automobile receivables.
Automobile receivables were transferred to a trust (ALAC Automobile Receivables
Trust), which issued notes and certificates representing undivided ownership
interests in the trusts. The Company owned trust certificates and interest-only
residuals from each of these trusts which were classified as Investment in Trust
Certificates as of April 30, 2000. Additionally, the Company owned spread
accounts held by the trustee for the benefit of the trust's noteholders. Such
amounts were classified as Restricted Cash as of April 30, 2000. 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. 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 Trust 1998-1. 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 $1,946,177
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. A loss of $400,000 was recorded on the
Investment in Trust Certificates during year ended April 30, 2001, attributable
to the impact of the weakened economic conditions. The net loss to the Company,
after minority interest effects, was

F-9

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$280,000. Effective with the call dates of the securitizations, these assets
were included in Receivables Acquired for Investment.

INCOME RECOGNITION. The Company accrues interest income monthly based upon
contractual terms using the effective interest method. Interest income also
includes additional amounts received upon early payoffs of certain receivables
attributable to the difference between the principal balance of the receivables
calculated using the Rule of 78's method and the principal balance of the
receivables calculated using the effective interest method. When a receivable
becomes 90 days past due, income accrual is suspended until the payments become
current. When a loan is charged off or the collateral is repossessed, the
remaining income accrual is written off. Other income includes late charge fees
and is recognized as collected.

ALLOWANCE FOR CREDIT LOSSES. For receivables financed under the FIRC credit
facility, the Company purchases credit enhancement insurance from third-party
insurers which covers the risk of loss upon default and certain other risks. The
Company established a captive insurance subsidiary to reinsure the credit
enhancement insurance coverage. The credit enhancement insurance coverage for
all receivables acquired in March 1994 and thereafter has been reinsured by
FIIC. Beginning in October 1996, all receivables recorded by the Company were
covered by credit enhancement insurance while pledged as collateral for the FIRC
credit facility. Once receivables are transferred to the FIARC commercial paper
facility, credit enhancement insurance is cancelled. In addition, no default
insurance is purchased for core receivables originated and financed under the
FIACC commercial paper facility. Accordingly, the Company is exposed to credit
losses for all receivables either reinsured by FIIC or uninsured and provides an
allowance for such losses.

Efforts to make customer contact begin when the customer is three days past
due and become more aggressive as the loan becomes further past due. Management
reviews past due loans and considers various factors including payment history,
job status and any events that may have occurred that prevent the customer from
making a payment. Through the evaluation, if it is determined that the loan is
uncollectible, the collateral is repossessed. Generally this occurs at 90 to 120
days past due. Upon repossession, an impairment is recorded to write off
Receivables Held for Investment and record the fair value as Assets Held for
Sale. Fair value is determined by estimating the proceeds of the collateral
which primarily are comprised of auction proceeds on the sale of the automobile
less selling related expenses. After collection of all proceeds, the Company
realizes an adjustment, positive or negative, based on the difference between
the fair value estimate and the true proceeds received. In the event the
collateral is unable to be located, the Company will write off the entire
balance after exhausting all collection efforts.

For Receivables Acquired for Investment, identical collection procedures
are followed. However instead of transferring the estimated fair value to Assets
Held for Sale, the estimated loss is charged against nonaccretable difference.

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.

F-10

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SERVICING AGREEMENT. From its inception until July 1999, the Company was a
party to a servicing agreement with General Electric Capital Corporation (GECC)
under which GECC performed certain loan servicing and collection activities with
respect to the Company's portfolio of Receivables Held for Investment. Servicing
fees were paid monthly to GECC based on the number of receivables being serviced
during the period plus certain reimbursable expenses including legal and third
party recovery costs. Due from servicer primarily represents unremitted
principal and interest payments and proceeds from the sale of repossessed
collateral. 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.

FUNDS HELD UNDER REINSURANCE AGREEMENT. The Company provides financial
assurance for the third party insurance company it reinsures by maintaining
premiums ceded to it in a restricted trust account for the benefit of the third
party insurance company. The reinsurance agreement provides, among other things,
that the funds held can be withdrawn by the third party insurance company due to
an insolvency of the Company or to reimburse the third party insurance company
for the Company's share of losses paid by the third party insurance company
pursuant to the reinsurance agreement.

ASSETS HELD FOR SALE. The Company commences repossession procedures against
the underlying collateral when the Company determines that collection efforts
are likely to be unsuccessful. Upon repossession, the receivable is written down
to the estimated fair value of the collateral, less the cost of disposition and
plus the expected recoveries from third-party insurers, through a charge to the
allowance for credit losses. Additionally, the repossessed collateral is
reclassified to assets held for sale.

DEFERRED FINANCING COSTS. The Company defers financing costs and amortizes
the costs related to the respective warehouse credit facilities and Term Notes
over the estimated average life of the receivables financed under those
respective facilities as the provisions of such facility generally provide that
receivables assigned to such facility would be allowed to amortize should the
facilities not be extended. Deferred financing costs are expensed
proportionately if borrowing capacity is reduced.

SERVICING INCOME. Servicing income is recognized 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 securitized
receivables plus reimbursement for certain costs and expenses incurred as a
result of its collection activities. Under the terms of the securitizations, the
servicer may be removed upon breach of its obligations under the servicing
agreements, the deterioration of the underlying receivables portfolios in
violation of certain performance triggers or the deteriorating financial
condition of the servicer.

OTHER OPERATING EXPENSES. Other operating expenses include primarily
depreciation expense, professional fees, service bureau fees, telephone,
repossession related expenses, and rent.

INCOME TAXES. The Company follows SFAS No. 109, which prescribes that
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date.

INTEREST RATE SWAP AND CAP AGREEMENTS. The Company enters into interest
rate swap and cap agreements to maximize net interest income while managing the
exposure of floating interest rates under the terms of its credit facilities or
Term Notes (see Note 7). The Company endeavors to maintain the effectiveness of
the interest rate swap or cap agreements by selecting products with dollar
denominated notional principal amounts, interest rate indices and interest reset
periods similar to its credit facilities. The differentials paid or received on
interest rate agreements are accrued and recognized currently as adjustments to
interest expense. Premiums paid or received on these agreements, if any, are
amortized to interest expense over the term of the related agreement. Gains and
losses on early terminations of interest rate swap and cap agreements are
included in the carrying amount of the related debt and amortized as yield
adjustments over the estimated remaining term of the swap (see Derivatives).

F-11

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EMPLOYEE STOCK OPTIONS. The Company accounts for its stock-based
compensation under Accounting Principles Board (APB) Opinion No. 25 "Accounting
for Stock Issued to Employees". Under this accounting method, no compensation
expense is recognized in the consolidated statements of operations if no
intrinsic value of the option exists at the date of grant. The Company has made
annual pro forma disclosures of net income and earnings per share as if the
stock based compensation awards were based on the fair value of the awards at
the date of grant. See Note 13.

DERIVATIVES. In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133."

Effective May 1, 2001, the Company adopted SFAS No. 133 concurrently with
SFAS No. 138. Accordingly, the Company designated its three interest rate swaps
and one interest rate cap having an aggregate notional amount as of May 1, 2001
of $130,165,759 as cash flow hedges as defined under SFAS 133. 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 ($3,763,908) as a
reduction to shareholders' equity and recorded a corresponding liability to
reflect the fair market value of the derivatives and deferred gain resulted from
previously terminated interest rate swap and cap agreements as of May 1, 2001.
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
133. The Company has also established guidelines for measuring the effectiveness
of its hedging positions periodically in accordance with the enacted policy. For
the period beginning May 1, 2001, changes in the fair value of the Company's
open hedging positions resulting from the mark-to-market process will be
recorded as unrealized gains or losses and be reflected as an increase or
reduction in stockholders' equity through other comprehensive income. In
addition, to the extent that all or a portion of the Company's hedging positions
are deemed to be ineffective in accordance with the Company's measurement
policy, the amount of any ineffectiveness will be recorded through net income.
The change in fair value of any derivative not designated as a hedge will also
recorded as a gain or loss through income. The Company expects to report
material fluctuations in other comprehensive income and shareholders' equity in
periods of interest rate volatility.

INTERNAL USE SOFTWARE COSTS. The Company capitalizes external direct costs
of materials and services consumed in developing internal-use computer software
and payroll costs for employees who devote time to developing internal-use
computer software.

EARNINGS PER SHARE. Earnings per share amounts are calculated based on net
income available to common shareholders divided by the weighted average number
of shares of common stock outstanding (see Note 13 and Note 15).

FURNITURE AND EQUIPMENT. Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciable assets are amortized using the
straight-line method over the estimated useful lives (two to five years) of the
respective assets.

CASH AND SHORT-TERM INVESTMENTS. The Company considers all investments with
a maturity of three months or less when purchased to be short-term investments
and treated as cash equivalents. See Note 5 for components of restricted cash.

F-12

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TREASURY STOCK. On December 14, 2001, the Board of Directors authorized the
Company to repurchase up to 5% of the Company's outstanding common stock. During
the year ended April 30, 2002, 170,000 shares were repurchased under this
authorization at an average price of $3.03. No shares were repurchased in prior
periods.

RECLASSIFICATIONS. Certain reclassifications have been made to the 2000 and
2001 amounts to conform to the 2002 presentation.

3. RECEIVABLES HELD FOR INVESTMENT

The receivables generally have terms of 60 months and are collateralized by
the underlying vehicles. Net receivable balances consisted of the following at
April 30, 2001 and 2002:

At April 30, 2002, the weighted average remaining term of the receivable
portfolio is 37 months and the weighted average contractual interest rate is
17.6 percent. Principal payments expected to be received on the receivable
portfolio, assuming no defaults and that payments are received in accordance
with contractual terms are summarized in the following table. Receivables may
pay off prior to contractual due dates, primarily due to defaults and early
payoffs.

Year ending April 30-
2003..................... $ 56,948,258
2004..................... 67,820,528
2005..................... 80,768,475
2006..................... 7,389,486
--------------
$ 212,926,747
==============

Activity in the allowance for credit losses for the years ended April 30,
2001 and 2002 was as follows:

4. RECEIVABLES ACQUIRED FOR INVESTMENT

F-13

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Loans purchased at a discount relating to credit quality were included in
the balance sheet amounts of Receivables Acquired for Investment as follows as
of April 30, 2001 and 2002:

The carrying amount of Receivables Acquired for Investment is net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
estimated that it would be unable to collect.

Additions to accretable yield and nonaccretable difference for the year
ended April 30, 2001 relate to the repurchase of ALAC Automobile Receivables
Owner Trust 1997-1 and ALAC Automobile Receivables Trust 1998-1. See Note 7 --
FIACC Commercial Paper Facility. For the year ended April 30, 2001, additions to
nonaccretable difference also include a loss on the Trust Certificates of
$400,000. The write down was attributable to a .81% increase in the cumulative
loss rate as it became apparent that the frequency and severity of losses were
continuing to be higher than originally anticipated due to softened economic
conditions and lower recovery rates on the collateral.

Additions to nonaccretable difference for the year ended April 30, 2002
were due to a $1,260,000 loss recorded on the Receivables Acquired for
Investment. Receivables Acquired for Investment 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 loss reduced the book value by increasing the
nonaccretable difference. The loss relates to a 1.44% increase in the cumulative
loss rate for the warehouse portfolio and a .42% increase in the FIACC
portfolio. The increase in the cumulative loss rates 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.

F-14

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period. The change in accretable
yield includes reclassifications from nonaccretable difference for cash flows
expected to be collected in excess of previous estimates. Accretable yield also
increased for the year ended April 30, 2001 due to the creation of the
Partnership on August 8, 2000 to share income from Receivables Acquired for
Investment with a limited partner. Partnership income accrues through accretable
yield and the limited partner's portion is accounted for as a minority interest.
Prior to August 8, 2000, contractual payments receivable was net of an estimate
of future cash flows that were to be sold to a limited partner. See Note 7 --
Acquisition Facility. For the year ending April 30, 2002, the increase in
accretable yield through reclassifications 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.

Principal payments expected to be received on the receivable portfolio,
assuming no defaults and that payments are received in accordance with
contractual terms are summarized in the following table. Receivables may pay off
prior to contractual due dates, primarily due to defaults and early payoffs.

Year ending April 30 --
2003.............................. $ 9,253,816
2004.............................. 1,840,408
2005.............................. 817,808
------------
$ 11,912,032
============

5. RESTRICTED CASH

The components of restricted cash at April 30, 2001 and 2002 are as
follows:

6. DEFERRED FINANCING COSTS AND OTHER ASSETS

The components of deferred financing costs and other assets at April 30,
2001 and 2002 are as follows:

For the year ended April 30, 2002 and in conjunction with the refinancing
of the working capital facility, the Company expensed approximately $555,000 of
deferred financing costs and warrants related to the old facility. For the year
ended April 30, 2001 and related to the reduction of borrowing availability
under the FIACC commercial paper facility, approximately $230,000 of unamortized
deferred financing costs was expensed. Additionally in 2001, approximately
$696,000 of unamortized software costs, professional fees and other non-cash
costs that had no further useful life was expensed.

F-15

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT

The Company finances the acquisition of its receivables portfolio through
two warehouse credit facilities. The Company's credit facilities provide for
one-year terms and have been renewed annually. Management of the Company
believes that the credit facilities will continue to be renewed or extended or
that it would be able to secure alternate financing on satisfactory terms;
however, there can be no assurance that it will be able to do so. In January
2000 and January 2002, the Company issued $168 million and $159 million,
respectively, in asset-backed notes ("Term Notes") secured by discrete pools of
receivables. Proceeds from the two note issuances were used to repay outstanding
borrowings under the various revolving credit facilities. Substantially all
receivables retained by the Company are pledged as collateral for the credit
facilities and the Term Notes. The weighted average interest rate for the
Company's secured borrowings including the effect of program fees, dealer fees,
and other comprehensive income (loss) amortization was 5.8% and 7.6% for the
fiscal years ending April 30, 2002 and 2001, respectively.

FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been provided through a warehouse credit facility agented by
First Union National Bank. The borrowing base is defined as the sum of the
principal balance of the receivables pledged and the amount on deposit with the
Company to fund receivables to be acquired. The Company is required to maintain
a reserve account equal to the greater of one percent of the principal amount of
receivables financed or $250,000. Borrowings under the FIRC credit facility bear
interest at a rate selected by the Company at the time of the advance of either
the base rate, defined as the higher of the prime rate or the federal funds rate
plus .5 percent, the LIBOR rate plus .5 percent, or a rate agreed to by the
Company and the banks. The facility also provides for the payment of a fee of
..25 percent per annum based on the total committed amount.

On November 14, 2001, the facility was renewed to December 7, 2001. On
December 7, 2001, the Company entered into an agreement with First Union
National Bank to extend the maturity date of the facility until December 5,
2002. In conjunction with this renewal, First Union assumed the role of agent
and increased its commitment to $50 million from $20 million. The total
commitment remains at $50 million and 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 December 5,
2002, 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.

Borrowings under the FIRC credit facility were $36,040,000 and $28,610,000
at April 30, 2001 and 2002, respectively, and had weighted average interest
rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.91 percent and 3.86 percent as of such dates.

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. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility provided by
Variable Funding Capital Corporation (VFCC), a commercial paper conduit
administered by First Union National Bank (the "FIARC commercial paper
facility"). Receivables are transferred periodically from the FIRC credit
facility to FIARC commercial paper facility through the assignment of an
undivided interest in a specified group of receivables. VFCC issues commercial
paper (indirectly secured by the receivables), the proceeds of which are used to
repay the FIRC credit facility.

The financing is provided to a special-purpose, wholly-owned subsidiary of
the Company, FIARC. Credit enhancement for the $150 million facility is provided
to the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. The Company is not a guarantor of, or otherwise a party to, such
commercial paper. Borrowings under the commercial paper facility bear interest
at the commercial paper rate plus a borrowing spread equal to .30 percent per
annum. Additionally, the agreement provides for additional fees based on the
unused amount

F-16

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the facility and dealer fees associated with the issuance of the commercial
paper. A surety bond premium equal to .35 percent per annum is assessed based on
the outstanding borrowings under the facility. A one percent cash reserve must
be maintained as additional credit support for the facility. At April 30, 2001,
the Company had borrowings of $121,808,808 outstanding under the commercial
paper facility with a weighted average interest rate, including the effect of
program fees, dealer fees, and hedge instruments, as applicable, of 6.60
percent. The Company had no outstanding borrowings under the FIARC facility as
of April 30, 2002.

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

FIACC COMMERCIAL PAPER FACILITY. On January 1, 1998, FIACC entered into a
$25 million commercial paper conduit facility with 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 acquired receivables from the Company and may borrow up to 88%
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 under the FIACC commercial paper facility, and had a weighted
average interest rate of 5.56 percent, including the effects of program fees and
hedge instruments. 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.

F-17

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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
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. As of April 30, 2002, the
outstanding principal balance of the 2002-A Term Notes was $143,096,984. 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, an affiliate of First Union National Bank, 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 on August 14, 2000. Under the terms of the facility, all
cash collections from the receivables or cash distributions to the certificate
holder under the securitizations are first 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

F-18

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

principal balance on the indebtedness. In addition, one-third of the servicing
fee paid to FISC is also utilized to reduce principal outstanding on the
indebtedness.

On August 8, 2000, the Company entered into an agreement with First Union
to refinance the acquisition facility. Under the agreement, a partnership was
created in which FIFS Acquisition serves as the general partner and contributed
its assets for a 70 percent interest in the partnership and First Union
Investors, Inc., an affiliate of First Union, serves as the limited partner with
a 30 percent interest in the partnership (the "Partnership"). Pursuant to the
refinancing, the Partnership issued Class A Notes in the amount of $19,204,362
and Class B Notes in the amount of $979,453 to VFCC, the proceeds of which were
used to retire the acquisition debt. The Class A Notes bear interest at VFCC's
commercial paper rate plus 0.95 percent per annum and amortize on a monthly
basis by an amount necessary to reduce the Class A Note balance as of the
payment date to 75 percent of the outstanding principal balance of Receivables
Acquired for Investment, excluding Receivables Acquired for Investment that are
applicable to FIACC, as of the previous month end. The Class B Notes bear
interest at VFCC's commercial paper rate plus 5.38 percent per annum and
amortize on a monthly basis by an amount which varied based on excess cash flows
received from Receivables Acquired for Investment after payment of servicing
fees, trustee and back-up servicer fees, Class A Note interest and Class A Note
principal, plus collections received on the Trust Certificates. The outstanding
balance of the Class A Notes was $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. 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. During fiscal 2002, $972,428
was distributed to the limited partner compared to $3,084,494 for fiscal 2001.
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 required 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. The remaining unpaid balance of
the term loan was due at maturity on December 22, 2002. Pricing under the
facility was 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

F-19

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 owed to Bank of America under
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 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 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 presently 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 these credit facilities and
Term Notes 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, the Term Notes and the working capital facility or the termination of
the commercial paper facilities. The Company was not in default with respect to
any covenants governing these financing arrangements at April 30, 2002.

F-20

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-21

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-22

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

The temporary differences which give rise to deferred tax assets are as
follows at April 30, 2001 and 2002, respectively:

The provision (benefit) for income taxes on income before income taxes and
minority interest for the years ended April 30, 2000, 2001 and 2002, consists of
the following:

The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate for the years ended April 30,
2000, 2001 and 2002.

F-23

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. CREDIT RISKS

Approximately 26 percent of the Company's Receivables Held for Investment
by principal balance at April 30, 2002 represent receivables acquired from
dealers located in Texas. The economy of Texas is primarily dependent on
petroleum and natural gas production and sales of related supplies and services,
petrochemical operations, light and medium manufacturing operations, computer
and computer service businesses, agribusiness and tourism. Job losses in any or
all of these primary economic segments of the Texas economy may result in a
significant increase in delinquencies or defaults in the Company's receivable
portfolio. While vehicles secure the receivables, it is not expected that the
value of the vehicles if repossessed and sold by the Company would be sufficient
to recover the principal outstanding under any defaulted loans.

The Company is also exposed to credit loss in the event that the
counterparties to the swap agreements described in Note 7 do not perform their
obligations. The terms of the Company's interest rate agreements provide for
settlement on a monthly basis and accordingly, any credit loss due to
non-performance of the counterparty would be limited to the amount due from the
counterparty for the month non-performance occurred. The Company would be
exposed to adverse interest rate fluctuations following any such
non-performance. While management believes that it could enter into interest
rate swap agreements with other counterparties to effectively manage such rate
exposure, there is no assurance that it would be able to enter interest rate
agreements on comparable terms as those of its present agreements.

10. MARKET RISKS

The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix, developments in
the financial markets, and further utilization by the Company of risk-mitigating
strategies such as hedging.

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

The Company relies almost exclusively on revolving credit facilities to
fund its origination of receivables. Periodically, the Company will transfer
receivables from a revolving to a term credit facility. Currently, all of the
Company's credit facilities in combination with various swaps bear interest at
floating rates tied to either a commercial paper index or LIBOR.

As of April 30, 2002, the Company had $38 million of floating rate secured
debt outstanding net of swap and cap agreements. For every 1 percent increase in
commercial paper rates or LIBOR, annual after-tax earnings would decrease by
approximately $244,000 assuming the Company maintains a level amount of floating
rate debt and assuming an immediate increase in rates. As of April 30, 2001, the
Company had $62 million of floating rate secured debt outstanding net of swap
and cap agreements. For every 1 percent increase in commercial paper rates or
LIBOR, annual after-tax earnings would decrease by approximately $394,000
assuming the Company maintains a level amount of floating rate debt and assuming
an immediate increase in rates.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

F-24

FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The following methods and assumptions were used to estimate the fair value
of each category of financial instruments:

CASH AND SHORT-TERM INVESTMENTS, OTHER RECEIVABLES, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES. The carrying amounts approximate fair value because of the
short maturity and market interest rates of those instruments.

RECEIVABLES HELD FOR INVESTMENT. The fair values were estimated by
discounting expected cash flows at a risk-adjusted rate of return deemed to be
appropriate for investors in such receivables. Expected cash flows take into
consideration management's estimates of prepayments, defaults and recoveries.

RECEIVABLES ACQUIRED FOR INVESTMENT. The carrying value approximates fair
value. The fair values were estimated by discounting expected cash flows at a
risk-adjusted rate of return deemed to be appropriate for investors in such
receivables. Expected cash flows take into consideration management's estimates
of prepayments, defaults and recoveries.

TERM NOTES. The fair value was estimated by discounting cash payments using
current rates and comparative maturities. Expected cash payments take into
consideration prepayments, defaults and recoveries on the underlying collateral.

CREDIT FACILITIES. The carrying amount approximates fair value because of
the floating interest rates on the credit facilities.

SWAP AGREEMENTS. The fair value was estimated based on the payment the
Company would have to make to or receive from the swap counterparty to terminate
the swap agreements.

CAP AGREEMENTS. The fair value was estimated based on the payment the
Company would receive from the cap counterparty to terminate the cap agreements.

12. DEFINED CONTRIBUTION PLAN

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 year 2002 and 2001, the
Company made matching contributions to the 401(k) plan in the amounts 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.

13. SHAREHOLDERS' EQUITY

PREFERRED STOCK. In June 1995, the shareholders approved a new series of
preferred stock (New Preferred Stock) with a $1.00 par value, and authorized
1,000,000 shares. As of April 30, 2002, no shares have been issued.

STOCK OPTION PLAN. In June 1995, the Board of Directors adopted the
Company's 1995 Employee Stock Option Plan (the Plan). The Plan is administered
by the Compensation Committee of the Board of Directors and provides that
options may be granted to officers and other key employees for the purchase of
up to 300,000 shares of Common Stock, subject to adjustment in the event of
certain changes in capitalization. Options may be granted either as incentive
stock options (which are intended to qualify for certain favorable tax
treatment) or as non-qualified stock options.

The Compensation Committee selects the persons to receive options and
determines the exercise price, the duration, any conditions on exercise and
other terms of the options. In the case of options intended to be incentive
stock options, the exercise price may not be less than 100 percent of the fair
market value per share of Common Stock on the date of grant. With respect to
non-qualified stock options, the exercise price may be fixed as low as 50
percent of the fair market value per share at the time of grant. In no event may
the duration of an option exceed 10 years and no option may be granted after the
expiration of 10 years from the adoption of the Plan.

The exercise price of the option is payable in full upon exercise and
payment may be in cash, by delivery of shares of Common Stock (valued at their
fair market value at the time of exercise), or by a combination of cash and
shares. At the discretion of the Compensation Committee, options may be issued
in tandem with stock appreciation rights entitling the option holder to receive
an amount in cash or in shares of Common Stock, or a combination thereof, equal
in value to any increase since the date of grant in the fair market value of the
Common Stock covered by the option.

A summary of the status of the Company's stock option plans for the years
ended April 30, 2000, 2001 and 2002 is presented below:

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of the status of options outstanding at April 30,
2002:

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

The Company accounts for these plans under APB Opinion No. 25 under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model.

The following weighted-average assumptions were used:

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

14. COMMITMENTS AND CONTINGENCIES

EMPLOYMENT AGREEMENT. As of April 30, 2002, the Company was not a party to
any employment agreements.

LITIGATION. The Company from time to time becomes involved in various
routine legal proceedings which are incidental to the business. Management of
the Company vigorously defends such matters. As of April 30, 2002, management
believes there are no such legal proceedings that would have a material adverse
impact on the Company's financial position or results of operations.

LEASES. The Company is a party to a lease agreement for office space in
Houston that expires on February 28, 2005. The Company is party to a lease
agreement for office space in Atlanta which expires on June 30, 2007. The
Company also holds equipment under operating leases that expire in fiscal year
2003. Rent expense for office space and other operating leases for the years
ended April 30, 2000, 2001 and 2002, was $1,149,646, $1,192,466 and $910,816,
respectively. Required minimum lease payments for the remaining terms of the
above leases are:

Year ending April 30-
2003......................... $ 828,468
2004......................... 863,725
2005......................... 768,150
2006......................... 574,839
2007......................... 585,459
Thereafter................... 97,874

15. EARNINGS PER SHARE

Earnings per share amounts are based on the weighted average number of
shares of common stock and potential dilutive common shares outstanding during
the period. The weighted average number of shares used to compute basic and
diluted earnings per share for the years ended April 30, 2000, 2001 and 2002 are
as follows:

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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At April 30, 2002, the Company had 475,446 employee stock options and
warrants and 70,000 director options which were not included in the computation
of diluted earnings per share because to do so would have been antidilutive for
the period presented.

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 2002.

The table below sets forth the unaudited consolidated operating results by
quarter for the year ended April 30, 2001.

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