<Page>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0465087
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
OR ORGANIZATION) NO)
675 BERING DRIVE, SUITE 710 77057
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(713) 977-2600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding At
Class August 31, 2001
---------------------------- ---------------------
Common Stock-$.001 Par Value 5,566,669
===============================================================================
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FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JULY 31, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2001 and
July 31, 2001............................................................ 3
Consolidated Statements of Operations for the Three Months
Ended July 31, 2000 and 2001............................................. 4
Consolidated Statement of Shareholders' Equity and Comprehensive
Income (Loss) for the Three Months Ended July 31, 2001................... 5
Consolidated Statements of Cash Flows for the Three Months Ended
July 31, 2000 and 2001................................................... 6
Notes to Consolidated Financial Statements............................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 24
PART II OTHER INFORMATION
Item 6. Exhibits and Reports On Form 8-K......................................... 25
SIGNATURES......................................................................... 25
</Table>
2
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2001 AND JULY 31, 2001
<Table>
<Caption>
APRIL 30, JULY 31,
2001 2001
(AUDITED) (UNAUDITED)
------------ ------------
ASSETS
------
Receivables Held for Investment, net............................................ $248,185,744 $238,574,363
Receivables Acquired for Investment, net........................................ 26,121,344 21,115,326
Cash and Short-Term Investments, including restricted cash of
$24,089,763 and $24,757,140, respectively..................................... 25,101,012 25,944,018
Accrued Interest Receivable..................................................... 3,277,066 3,122,563
Assets Held for Sale............................................................ 1,501,760 1,397,634
Other Assets:
Funds held under reinsurance agreement..................................... 3,192,755 3,125,771
Deferred financing costs and other assets, net of accumulated
amortization and depreciation of $4,827,936 and $4,622,148,
respectively ......................................................... 4,895,204 4,866,646
Current income taxes receivable, net....................................... 594,360 664,942
Deferred income taxes receivable, net...................................... -- 851,601
Interest rate hedging position............................................. -- 1,403,564
------------ ------------
Total assets.......................................................... $312,869,245 $301,066,428
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt:
Warehouse credit facilities................................................ $168,249,709 $170,228,581
Term Notes................................................................. 84,925,871 71,892,095
Acquisition term facility.................................................. 11,126,050 9,195,599
Working capital facility................................................... 12,825,000 11,850,000
Other Liabilities:
Accounts payable and accrued liabilities................................... 3,607,677 3,021,119
Deferred income taxes payable, net......................................... 195,486 --
Interest rate hedging position............................................. -- 5,184,976
------------ ------------
Total liabilities..................................................... 280,929,793 271,372,370
------------ ------------
Commitments and Contingencies
Minority Interest............................................................... 1,586,959 1,242,134
Shareholders' Equity:
Common stock, $0.001 par value, 10,000,000 shares authorized,
5,566,669 shares issued and outstanding............................... 5,567 5,567
Additional paid-in capital................................................. 18,639,918 18,678,675
Retained earnings.......................................................... 11,707,008 12,160,317
Accumulated other comprehensive income -- unrealized derivative gains
(losses), net of taxes................................................ -- (2,392,635)
------------ ------------
Total shareholders' equity............................................ 30,352,493 28,451,924
------------ ------------
Total liabilities and shareholders' equity...................................... $312,869,245 $301,066,428
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 2001
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED JULY 31
2000 2001
----------- -----------
Interest Income............................................................ $10,989,191 $10,263,225
Interest Expense........................................................... 5,090,998 4,218,029
----------- -----------
Net interest income........................................ 5,898,193 6,045,196
Provision for Credit Losses................................................ 1,979,650 1,793,750
----------- -----------
Net Interest Income After Provision for Credit Losses...................... 3,918,543 4,251,446
----------- -----------
Other Income:
Late fees and Other................................................ 640,235 547,115
Servicing.......................................................... 203,828 --
----------- -----------
Total other income......................................... 844,063 547,115
Operating Expenses:
Salaries and benefits.............................................. 2,393,348 2,013,174
Other interest expense............................................. 331,387 238,330
Other.............................................................. 1,258,977 1,572,361
----------- -----------
Total operating expenses................................... 3,983,712 3,823,865
----------- -----------
Income Before Provision for Income Taxes and Minority Interest............. 778,894 974,696
----------- -----------
Provision (Benefit) for Income Taxes:
Current............................................................ 407,184 (67,876)
Deferred........................................................... (122,888) 423,494
----------- -----------
Total provision for income taxes........................... 284,296 355,618
Minority Interest.......................................................... -- 165,769
----------- -----------
Net Income ................................................................ $ 494,598 $ 453,309
=========== ===========
Basic and Diluted Net Income per Common Share.............................. $ 0.09 $ 0.08
=========== ===========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 31, 2001
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON ADDITIONAL RETAINED COMPREHENSIVE
STOCK PAID-IN CAPITAL EARNINGS INCOME (LOSS) TOTAL
-------- ----------------- ------------- --------------- -------------
Balance, April 30, 2001 $5,567 $18,639,918 $11,707,008 $ -- $30,352,493
Net income -- -- 453,309 -- 453,309
Warrants issued -- 38,757 -- -- 38,757
Cumulative effect of
accounting change, net of tax
benefit of $1,437,925 -- -- -- (2,501,595) (2,501,595)
Unrealized gains (losses) on
derivatives, net of tax
benefit of $51,906 -- -- -- (90,301) (90,301)
Reclassification of
earnings, net of taxes of
$114,536 -- -- -- 199,261 199,261
-------- ----------------- ------------- --------------- -------------
Balance, July 31, 2001 $5,567 $18,678,675 $12,160,317 $(2,392,635) $28,451,924
======== ================= ============= =============== =============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 2001
(UNAUDITED)
<Table>
<Caption>
2000 2001
------------ ------------
Cash Flows From Operating Activities:
Net income............................................................... $ 494,598 $ 453,309
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Depreciation and amortization expense........................... 1,206,829 1,248,500
Provision for credit losses..................................... 1,979,650 1,793,750
Charge-offs, net of recoveries.................................. (1,828,256) (1,896,208)
Minority Interest............................................... -- 165,769
(Increase) decrease in:
Accrued interest receivable..................................... (118,946) 154,503
Restricted cash................................................. (1,603,337) (667,377)
Deferred financing costs and other assets....................... (83,442) (173,922)
Funds held under reinsurance agreement.......................... (232,395) 66,984
Deferred income taxes receivable, net........................... (122,888) --
Current income tax receivable, net.............................. -- (70,582)
Increase (decrease) in:
Accounts payable and accrued liabilities........................ (397,809) (586,558)
Current income taxes payable.................................... (71,368) --
Deferred income taxes payable, net.............................. -- 328,209
------------ ------------
Net cash provided by (used in) operating activities...... (777,364) 816,377
------------ ------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for Investment.............................. (39,026,822) (19,569,073)
Principal payments from Receivables Held for Investment.................. 19,807,241 26,979,353
Principal payments from Receivables Acquired for Investment.............. 3,524,425 4,495,424
Principal payments from Trust Investment Certificates.................... 900,843 --
Payments received on Assets Held for Sale................................ 1,769,526 1,677,513
Purchase of furniture and equipment...................................... (45,811) (263,610)
------------ ------------
Net cash provided by (used in) investing activities.............. (13,070,598) 13,319,607
------------ ------------
Cash Flows From Financing Activities:
Proceeds from advances on--
Warehouse credit facilities..................................... 40,414,935 19,166,370
Principal payments made on--
Warehouse credit facilities..................................... (2,644,155) (17,187,498)
Term Notes....................................................... (17,512,460) (13,033,776)
Acquisition term facility....................................... (6,027,972) (1,930,451)
Working capital facility........................................ -- (975,000)
------------ ------------
Net cash provided by (used in) financing activities.... 14,230,348 (13,960,355)
------------ ------------
Increase in Cash and Short-Term Investments....................................... 382,386 175,629
Cash and Short-Term Investments at Beginning of Period............................. 2,108,865 1,011,249
------------ ------------
Cash and Short-Term Investments at End of Period.................................. $ 2,491,251 $ 1,186,878
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for--
Interest........................................................ $ 4,889,932 $ 4,152,592
Income taxes.................................................... 478,552 2,706
Non-cash financing activities--
Exchange of 36,986 warrants for financing fees.................. $ -- $ 38,757
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2001
1. THE COMPANY
ORGANIZATION. First Investors Financial Services Group, Inc. (First
Investors) together with its wholly- and majority-owned subsidiaries
(collectively referred to as the Company) is principally involved in the
business of acquiring and holding for investment retail installment contracts
and promissory notes secured by new and used automobiles and light trucks
(receivables) originated by factory authorized franchised dealers. As of July
31, 2001, approximately 26 percent of Receivables Held for Investment had been
originated in Texas. The Company currently operates in 26 states.
On October 2, 1998, the Company completed the acquisition of First
Investors Servicing Corporation (FISC) formerly known as Auto Lenders
Acceptance Corporation. 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 $255.2 million as of July 31, 2001.
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 (i) a portfolio of loans previously owned by
FISC, (ii) 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.
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.
The results for the interim periods are not necessarily indicative of the
results of operations that may be expected for the fiscal year. In the opinion
of management, the information furnished reflects all adjustments which are of
a normal recurring nature and are necessary for a fair presentation of the
Company's financial position as of July 31, 2001, and the results of its
operations for the three months ended July 31, 2000 and 2001, and its cash
flows for the three months ended July 31, 2000 and 2001.
The consolidated financial statements for the interim periods have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information not misleading. These financial statements should be read
in conjunction with the audited consolidated financial statements included in
the Company's 2001 Annual Report on Form 10-K filed July 24, 2001.
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".
7
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective May 1, 2001, the Company adopted SFAS No. 133 concurrently
with SFAS No. 138. Accordingly, the Company designated 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
$(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 and the derivative liability is
classified in the interest rate hedging position liability. Over a period
ending in April 2004, the maturity date of the final swap, the Company will
reclassify into earnings substantially all of the transition adjustment
originally recorded. Over the next twelve months, the Company expects to
reclassify into earning approximately $1,419,225, net of taxes of $815,775,
of the transition adjustment. In connection with the decision to enter into
the $100 million floating rate swaps on June 1, 2001 (see Note 5), 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. Accordingly
subsequent to May 31, 2001, the Company recorded the change in the fair value
of this derivative as an increase to interest expense in the current period.
The Company 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, which have been designated as cash flow hedges,
resulting from the mark-to-market process are recorded as unrealized gains or
losses and reflected as an increase or reduction in stockholders' equity
through other comprehensive income, net of taxes, with an offsetting entry to
a interest rate hedging position asset or liability. 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 is recorded through net income. The net effect
of the mark-to-market adjustments at July 31, 2001 was to increase the
interest rate hedging position assets by $1,403,564, increase the interest
rate hedging position liabilities by $1,245,456, increase other comprehensive
income by $108,960, net of taxes of $62,630, with the remaining $13,482
reducing interest expense, net of minority interest. The Company believes
that the extent of any ineffectiveness or any gain or loss associated with
derivatives not designated as hedges will be immaterial to net income. The
Company does expect, however, to report material fluctuations in other
comprehensive income and shareholders'equity in periods of interest rate
volatility.
RECLASSIFICATIONS. Certain reclassifications have been made to the fiscal
2001 amounts to conform with the fiscal 2002 presentation.
3. RECEIVABLES HELD FOR INVESTMENT
Net receivables consisted of the following:
<Table>
<Caption>
APRIL 30, JULY 31,
2001 2001
------------- -------------
Receivables.................................................... $ 244,684,343 $ 235,242,719
Unamortized premium and deferred fees.......................... 6,190,178 5,917,963
Allowance for credit losses.................................... (2,688,777) (2,586,319)
------------- -------------
Net receivables........................................... $ 248,185,744 $ 238,574,363
============= =============
</Table>
Activity in the allowance for credit losses was as follows:
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
JULY 31,
--------------------------------
2000 2001
------------- -------------
Balance, beginning of period................................... $ 2,133,994 $ 2,688,777
Provision for credit losses........................... 1,979,650 1,793,750
Charge-offs, net of recoveries......................... (1,828,256) (1,896,208)
------------- -------------
Balance, end of period......................................... $ 2,285,388 $ 2,586,319
============= =============
</Table>
8
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RECEIVABLES ACQUIRED FOR INVESTMENT
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 July 31, 2001:
<Table>
<Caption>
APRIL 30, JULY 31,
2001 2001
----------- -----------
Contractual payments receivable from Receivables Acquired for
Investment purchased at a discount relating to credit quality...... $31,892,326 $25,647,857
Nonaccretable difference................................................ (2,735,961) (1,972,426)
Accretable yield........................................................ (3,035,021) (2,560,105)
Receivables Acquired for Investment purchased at a discount relating to ----------- -----------
credit quality, net................................................ $26,121,344 $21,115,326
=========== ===========
</Table>
The carrying amount of Receivables Acquired for Investment are net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
determined that it would be unable to collect.
<Table>
<Caption>
NONACCRETABLE ACCRETABLE
DIFFERENCE YIELD
-------------- -------------
Balance at April 30, 2001......................................... $ 2,735,961 $ 3,035,021
Accretion.................................................... -- (978,381)
Eliminations................................................. (260,070) --
Reclassifications............................................ (503,465) 503,465
-------------- -------------
Balance at July 31, 2001.......................................... $ 1,972,426 $ 2,560,105
============== =============
</Table>
Nonaccretable difference eliminations represent contractual principal and
interest amounts on loans charged-off for the period ended July 31, 2001. The
increase in accretable yield includes a reclassification from nonaccretable
difference for cash flows expected to be collected in excess of those previously
expected.
5. 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, the Company issued $168 million in asset-backed notes ("Term Notes")
secured by a pool of receivables. Proceeds from the note issuance 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.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing for
receivables has been provided through a syndicated warehouse credit facility
agented by Bank of America. 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. The current term of the FIRC credit facility
expires on November 14, 2001. This maturity date reflects a renewal of the
facility effective November 15, 2000. Under the terms of the renewal, the
maximum facility limit was reduced from $65 million to $50 million effective
December 31, 2000 to coincide with the increase in the FIARC commercial paper
facility. Further, under the renewal mechanics of the facility, should the
lenders elect not to renew the facility beyond November 14, 2001, 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. No other material changes were made to the existing
terms and conditions of the facility in connection with the renewal. 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
9
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Borrowings under the FIRC credit facility were $36,040,000 and $41,910,000
at April 30, 2001 and July 31, 2001, respectively, and had weighted average
interest rates, including the effect of facility fees and hedge instruments, as
applicable, of 6.91 percent and 5.79 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 through
Enterprise Funding Corporation (Enterprise), a commercial paper conduit
administered by Bank of America, (the "FIARC commercial paper facility").
Receivables are transferred periodically from the FIRC credit facility to
Enterprise through the assignment of an undivided interest in a specified group
of receivables. Enterprise 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 and July 31, 2001, the Company had borrowings
of $121,808,080 and $119,863,206, respectively, outstanding under the
commercial paper facility at weighted average interest rates, including the
effect of program fees, dealer fees and hedge instruments, as applicable, of
6.60 percent and 4.48 percent, respectively.
The current term of the FIARC commercial paper facility expires on
November 28, 2001. This maturity date reflects a renewal of the facility
effective November 29, 2000. Pursuant to this renewal, the maximum facility
amount was increased from $135 million to $150 million and the
overcollateralization which serves as the primary credit enhancement for the
facility was reduced from 10 percent to 6 percent allowing the Company to now
borrow up to 94 percent against the receivables pledged as collateral for the
FIARC commercial paper facility. No other material changes were made to the
terms and conditions of the facility in connection with the renewal. If the
facility was not extended beyond the maturity date, receivables pledged as
collateral would be allowed to amortize; however, no new receivables would be
allowed to be transferred 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 .30
percent. At April 30, 2001 and July 31, 2001, borrowings were $10,400,901 and
$8,455,375, respectively, under the FIACC commercial
10
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paper facility, at weighted average interest rates of 5.56 percent and 5.22
percent, respectively, including the effects of program fees and hedge
instruments. The current term of the FIACC commercial paper facility expires on
November 14, 2001. If the facility were not renewed on or prior to the maturity
date, the outstanding balance under the facility would continue to amortize
utilizing cash collections from the receivables pledged as collateral. The
Company presently intends to seek a renewal of the facility from its lenders
prior to maturity. Management considers its relationship with its lenders to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility were not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on
the Company.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1, (the "ALAC 97-1 Securitization"). Accordingly,
the Company acquired $8,110,849 in outstanding receivables from the trust and
borrowed $6,408,150 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding balance in a cash reserve
account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456
of the trust certificates. On March 15, 2001, the Company elected to exercise
its right to repurchase the senior notes issued in connection with the ALAC
Automobile Receivables Owner Trust 1998-1, (the "ALAC 98-1 Securitization").
Accordingly, the Company acquired $9,257,612 in outstanding receivables from
the trust and borrowed $7,174,509 under the FIACC facility which, combined with
amounts on deposit in the collection account and the outstanding balance in a
cash reserve account, was utilized to repay $7,997,615 in senior notes and
redeem $1,946,178 of the Trust Certificates. The receivables purchased were
used as collateral to secure the FIACC borrowing with any residual cash flow
generated by the receivables pledged to the Partnership. As a result of
utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company
has elected to utilize the FIACC commercial paper facility solely as the
financing source for the repurchases and does not expect to utilize the
facility to finance Receivables Held for Investment.
TERM NOTES. On January 24, 2000, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust")
completed the issuance of $167,969,000 of 7.174 percent asset-backed notes
("Term Notes"). A pool of automobile receivables totaling $174,968,641, which
were previously owned by FIRC, FIARC and FIACC, secures the Term Notes.
Proceeds from the issuance, which totaled $167,967,690 were used to repay all
outstanding borrowings under the FIARC and FIACC commercial paper facilities,
to reduce the outstanding borrowings under the FIRC credit facility, to pay
transaction fees related to the Term Note issuance and to fund a cash reserve
account of 2 percent or $3,499,373 which will serve as a portion of the credit
enhancement for the transaction. The Term Notes bear interest at 7.174 percent
and require monthly principal reductions sufficient to reduce the balance of
the Term Notes to 96 percent of the outstanding balance of the underlying
receivables pool. The final maturity of the Term Notes is February 15, 2006. As
of April 30, 2001 and July 31, 2001, the outstanding principal balances on the
Term Notes were $84,925,871 and $71,892,095, respectively. A surety bond issued
by MBIA Insurance Corporation provides credit enhancement for the Term Note
holders. Additional credit support is provided by the cash reserve account,
which equals 2 percent of the original balance of the receivables pool and a 4
percent over-collateralization requirement. In the event that certain asset
quality covenants are not met, the reserve account target level will increase
to 6 percent of the then current principal balance of the receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC, 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
11
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 $11,126,050 and $9,195,599 at April 30, 2001 and
July 31, 2001, respectively, and had weighted average interest rates of 6.26
percent and 5.55 percent, including the effects of program fees and hedge
instruments, as of such dates. 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 the period ended July 31, 2001, $574,014 was distributed to the
limited partner. The amount of the partners' cash flow will vary depending on
the timing and amount of residual cash flows. The Company is accounting for
First Union's limited partnership interest in the Partnership as a minority
interest.
The Class A Notes mature on July 31, 2002. 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 an additional principal payment of
$300,000 on June 30, 2001 under certain conditions relating to the size of Bank
of America's portion of the outstanding balance. Pursuant to this requirement,
the Company paid $300,000 to Bank of America effective June 30, 2001. The
remaining unpaid balance of the term loan is due at maturity on December 22,
2002. Pricing under the facility is based on the LIBOR rate plus 3 percent. The
term loan is secured by all unencumbered assets of the Company, excluding
receivables owned and financed by wholly-owned, special purpose subsidiaries of
the Company and is guaranteed by First Investors Financial
12
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Services Group, Inc. and all subsidiaries that are not special purpose
subsidiaries. In consideration for refinancing the working capital facility,
the Company paid each lender an upfront fee and issued warrants to each lender
to purchase, in aggregate, 167,001 shares of the Company's common stock at a
strike price of $3.81 per share. The warrants expire on December 22, 2010. On
December 22, 2000, the warrant value of $175,000 was estimated based on the
expected difference between financing costs with and without the warrants.
These costs are included as deferred financing costs and will be amortized
through the maturity date of the debt. In addition, if certain conditions were
met, the Company agreed to issue additional warrants to Bank of America to
acquire up to a maximum of 47,945 additional shares of stock at a price equal
to the average closing price for the immediately preceding 30 trading days
prior to each grant date which is June 30, 2001 and December 31, 2001. Pursuant
to this requirement, the Company issued 36,986 warrants to Bank of America at a
strike price of $3.56 per share on June 30, 2001. All other terms and
conditions of the warrants were identical to the warrants issued in December
2000. The amount of warrants, if any, to be issued on December 31, 2001 will be
determined by the outstanding balance owed to Bank of America under the term
loan. In no event, however, can the additional warrants issued on December 31,
2001 exceed 10,959. The fair value of the warrants issued on June 30, 2001 of
$38,757 is included as deferred financing costs and amortized through the
maturity date of the debt. At April 30, 2001 and July 31, 2001, there was
$12,825,000 and $11,850,000, respectively, 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 with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of
America pursuant to which the Company's interest rate was fixed at 5.565
percent on a notional amount of $120 million. The swap agreement expired on
January 12, 2000. In connection with the issuance of the Term Notes, the
Company entered into a swap agreement with Bank of America pursuant to which
the Company pays a floating rate equal to the prevailing one month LIBOR rate
plus 0.505 percent and receives a fixed rate of 7.174 percent from the
counterparty. The initial 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 uneconomical position
of the existing pay fixed swap created by rapidly declining market interest
rates.
In connection with the repurchase of the ALAC 97-1 Securitization and
the financing of 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 is
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
13
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("Class A swap") 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 ("Class B swap") 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. Class A swap has a final maturity of
December 20, 2002 while Class B swap 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 that 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 Class A swap
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 Class B swap and the underlying indebtedness. The interest rate
cap expires February 20, 2002 and the cost of the cap is imbedded in the fixed
rate applicable to Class B swap. Pursuant to the refinance of the acquisition
facility on August 8, 2000, the Class B cap was terminated and the notional
amounts of the Class A swap and Class A cap were adjusted downward to reflect
the lower outstanding balance of the Class A Notes. The amendment or
cancellation of these instruments resulted in a gain of $418,609. This
derivative net gain is being amortized over the life of the initial derivative
instrument. In addition, the two remaining hedge instruments were assigned by
FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated 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 stockholders'equity through other comprehensive income. In
connection with the decision to enter into the $100 million floating rate swaps
on June 1, 2001, the Company elected to change the designation of the $100
million fixed rate swap and not account for the instrument as a hedge under
SFAS No. 133. As a result, the change in fair value of both swaps is reflected
as a gain or loss in net income for the period subsequent to May 31, 2001.
Management believes that since these two positions effectively offset, any net
gains or losses will be immaterial to income.
14
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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 three months ended July 31, 2000 and 2001,
are as follows:
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED JULY 31,
---------------------------
2000 2001
--------- ---------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share....................... 5,566,669 5,566,669
Effect of dilutive stock options and warrants...... 55 --
--------- ---------
Weighted average shares outstanding
for diluted earnings per share..................... 5,566,724 5,566,669
========= =========
</Table>
For the three months ended July 31,2000 and 2001, the Company had 136,945
and 566,987, respectively, of stock options and stock warrants which were not
included in the computation of diluted earnings per share because to do so would
have been antidilutive for the period presented.
15
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Net income for the three months ended July 31, 2001 was $453,309, a
decrease of 8% from that reported for the comparable period in the preceding
year of $494,598. Earnings per common share were $0.08 for the three months
ended July 31, 2001, compared to $0.09 per common share for the prior year
period.
NET INTEREST INCOME
The following table summarizes the Company's receivables and net interest
income (dollars in thousands):
<Table>
<Caption>
AS OF OR FOR THE
THREE MONTHS ENDED
JULY 31,
------------------------
2000 2001
-------- --------
Receivables Held for Investment:
Number............................................................. 20,322 19,696
Principal balance.................................................. $248,192 $235,242
Average principal balance of receivables outstanding
during the three month period.................................... 240,183 239,935
Receivables Acquired for Investment:
Number............................................................. 3,089 4,106
Principal balance.................................................. $ 24,228 $ 20,020
Securitized Receivables(1):
Number............................................................. 3,769 --
Principal balance.................................................. $ 23,904 --
Total Managed Receivables Portfolio:
Number............................................................. 27,180 23,802
Principal balance.................................................. $296,324 $255,262
</Table>
(1) Represents receivables previously owned by FISC which were sold in
connection with two asset securitizations and on which the Company
retains the servicing rights to those receivables. Both securitizations
were liquidated during the year ended April 30, 2001 and the
receivables were repurchased. Subsequent to the repurchase, these
receivables are included in Receivables Acquired for Investment.
<Table>
<Caption>
THREE MONTHS ENDED
JULY 31,
------------------------
2000 2001
-------- --------
Interest income (1):
Receivables Held for Investment..................................... $ 9,749 $ 9,280
Receivables Acquired for Investment and Investment in Trust
Certificates (2)................................................. 1,240 983
-------- --------
10,989 10,263
Interest expense:
Receivables Held for Investment (3)................................ 4,746 3,992
Receivables Acquired for Investment and Investment in Trust
Certificates..................................................... 345 226
-------- --------
5,091 4,218
-------- --------
Net interest income................................................ $ 5,898 $ 6,045
======== ========
</Table>
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the three months ended July 31, 2001 reflect $261 in
interest income related to minority interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.
16
<Page>
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):
<Table>
<Caption>
THREE MONTHS ENDED
JULY 31,
-------------------
2000 2001
------ ------
Receivables Held for Investment:
Effective yield on Receivables
Held for Investment(1).................. 16.2% 15.5%
Average cost of debt(2)................. 7.9% 6.7%
------ ------
Net interest spread(3).................. 8.3% 8.8%
Net interest margin(4).................. 8.4% 8.8%
</Table>
(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.
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 increased for the three
months ended July 31, 2001 to $6.0 million from $5.9 million for the comparable
period in the preceding year. Net interest income in 2001 represents an increase
of 2% from the same period in 2000.
Changes in the principal amount and rate components associated with the
Receivables Held for Investment and debt can be segregated to analyze the
periodic changes in net interest income on such receivables. The following table
analyzes the changes attributable to the principal amount and rate components of
net interest income (dollars in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
JULY 31, 2000 TO 2001
------------------------------------------
INCREASE (DECREASE)
DUE TO
CHANGE IN
------------------------
AVERAGE TOTAL
PRINCIPAL AVERAGE NET INCREASE
AMOUNT RATE (DECREASE)
--------- ------- ------------
Receivables Held for Investment:
Interest income............................ $ (10) $ (459) $ (469)
Interest expense........................... (42) (712) (754)
----- ------ ------
Net interest income........................ $ 32 $ 253 $ 285
===== ====== ======
</Table>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2001 AND 2000 (DOLLARS IN THOUSANDS)
INTEREST INCOME. Interest income for the 2001 period decreased to $10,263
compared with $10,989 for the comparable period in 2000. Interest income on
Receivables Held for Investment decreased 5% for the three-month period. This is
due to a reduction of 70 basis points, which is a 4% decrease, in the yield on
the Receivables Held for Investment for the three months ended July 31, 2001
compared to the comparable period for 2000. Interest income on Receivables
Acquired for Investment and Investment in Trust Certificates
17
<Page>
decreased by 21% for the comparable three-month period. The quarterly
decrease is primarily attributable to a 57% reduction in the average
principal balances of the Receivables Acquired for Investment and Investment
in Trust Certificates. Additionally, for the three-month period ended July
31, 2001, interest income includes amounts payable to a limited partner.
These amounts are accounted for as a minority interest. During the
three-month period ended July 31, 2000, interest income was recorded net of
estimated cash flows that were to be sold to the limited partner.
INTEREST EXPENSE. Interest expense in 2001 decreased for the three-month
period to $4,218 as compared to $5,091 in 2000. Interest expense on Receivables
Held for Investment decreased 16% for the three-month period. This is primarily
due to a reduction of 120 basis points, which is a 15% decrease, in the interest
rate on the outstanding borrowings in 2001 compared to 2000. Interest expense on
Receivables Acquired for Investment and Investment in Trust Certificates
decreased by 34% for the comparable three-month period. The decrease is
attributable to a reduction in the weighted average borrowings under the
acquisition term facility.
NET INTEREST INCOME. Net interest income increased to $6,045, an increase
of 2%. The increase resulted primarily from lower cost of funds to finance the
Receivables Held for Investment offset by the reduction in the yield received on
the Receivables Held for Investment.
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2001
decreased to $1,794 as compared to $1,980 in 2000. The decrease was the result
of a 4% reduction in the Receivables Held for Investment from April 30, 2001 to
July 31, 2001 compared to a 7% increase for the same period in the prior year.
This decrease is offset by an increase in the allowance for credit losses to
1.1% of receivables for the quarter ended July 31, 2001 compared to .9% of
receivables for the same period in 2000.
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. Both securitizations were
liquidated and the underlying receivables were repurchased during the year ended
April 30, 2001. Subsequent to the call date, no further servicing income is
earned.
LATE FEES AND OTHER INCOME. Late fees and other income decreased to $547 in
2001 from $640 in 2000 which primarily represents fees collected from customers
for late fees, extension fees and other payment related fees and additionally
includes interest income earned on short-term marketable securities and money
market instruments. The decrease is primarily attributable to a decrease in the
reinvestment rates on the cash collections offset by higher fees collected from
the customer.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs decreased to
$2,013 in 2001 from $2,393 in 2000. The decrease is primarily due to reduced
headcount needs related to lower originations and a lower managed portfolio
coupled with headcount reductions from improved efficiencies.
OTHER INTEREST EXPENSE. Other interest expense in 2001 decreased to $238
for the three-month period as compared to $331 in 2000. The decrease was
primarily due to a 7% reduction in the average outstanding borrowings and a 25%
reduction in the average interest rate on this facility.
OTHER EXPENSES. Other expenses increased to $1,572 in 2001 from $1,259 in
2000. The increase is attributable to third party service bureau expenses and
amortization of bank fees and warrants related to the restructure of the working
capital facilities. The use of a third party service bureau and restructure of
the working capital facility were incurred in December 2000 thus no expenses
were reflected in the three-month period ended July 31, 2000. Additionally,
repossession expenses and related collection expenses increased for 2001
compared to 2000 as a result of more active collection activity on significantly
past due and charged off accounts.
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST. During
2001, income before provision for income taxes and minority interest decreased
to $453 or 8% from the comparable period in 2000. This change was a result of
the decrease servicing, late fee and other income offset by an increase in net
interest income after provision for credit losses, inclusive of minority
interest.
18
<Page>
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, 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 from dealers. The Company paid $19.6 million for receivables
acquired for the three months ended July 31, 2001 compared to $39.0 million paid
in the comparable 2000 period.
The Company funds the purchase price of the receivables through the use of
a $50 million warehouse credit facility provided to F.I.R.C., Inc. ("FIRC") a
wholly-owned special purpose financing subsidiary of the Company. The current
FIRC credit facility generally permits the Company to draw advances up to the
outstanding principal balance of qualified receivables. Receivables that have
accumulated in the FIRC credit facility may be transferred to a commercial paper
conduit facility at the option of the Company. Credit enhancement for the
warehouse lenders is provided by an Auto Loan Protection Insurance ("ALPI")
policy issued by National Union Fire Insurance Company of Pittsburgh and
reinsured by the Company's captive insurance subsidiary.
To provide additional liquidity to fund the receivables portfolio, the
Company utilized a $150 million commercial paper conduit financing through
Enterprise Funding Corporation, a commercial paper conduit administered by Bank
of America as an additional source of warehouse financing for Receivables Held
for Investment. The financing was provided to a special-purpose, wholly-owned
subsidiary of the Company, First Investors Auto Receivables Corporation
("FIARC"). Credit enhancements for the $150 million facility are provided to the
commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. At April 30, 2001 and July 31, 2001, the Company had borrowings of
$121,808,808 and $119,863,206, respectively, outstanding under the FIARC
commercial paper facility.
Receivables originally purchased by the Company are financed with
borrowings under the FIRC credit facility. Once a sufficient amount of
receivables have been accumulated, the receivables are transferred from FIRC to
FIARC with advances under the FIARC commercial paper facility used to repay
borrowings under the FIRC credit facility. Once receivables are transferred to
the FIARC subsidiary and pledged as collateral for commercial paper borrowings,
the ALPI policy with respect to the transferred receivables is cancelled with
any unearned premiums returned to FIRC. FIARC may borrow up to 94% of the face
amount of the receivables being transferred. In addition, a cash reserve equal
to 1% of the outstanding borrowings under the FIARC commercial paper facility
must be maintained in a reserve account for the benefit of the creditors and
surety bond provider.
The current term of the FIRC credit facility expires on November 14,
2001. In the event that the facility is not renewed prior to its maturity date,
the facility will automatically convert to a term loan which will amortize in
accordance with the borrowing base over a six month period when the outstanding
balance will be due and payable. The FIARC commercial paper facility was
provided for a term of one year and has been extended to November 28, 2001. If
the facility was terminated, receivables pledged as collateral would be allowed
to amortize; however, no new receivables would be allowed to be transferred from
the FIRC credit facility. Borrowings under the FIRC credit facility were
$36,040,000 and $41,910,000 at April 30, 2001 and July 31, 2001, respectively.
The Company also maintains a commercial paper conduit financing through
Variable Funding Capital Corporation ("VFCC"), a commercial paper conduit
administered by First Union National Bank. The financing was provided to a
special-purpose, wholly-owned subsidiary of the Company, First Investors Auto
Capital Corporation ("FIACC") to fund the acquisition of receivables previously
securitized by FISC.
FIACC acquires receivables from the Company in conjunction with the
Company's repurchase of previously securitized receivables acquired for
investment and may borrow up to 88% of the face amount of receivables which are
pledged as collateral for the commercial paper borrowings. In addition, a cash
reserve equal to 2% of the outstanding borrowings under the FIACC commercial
paper facility must be maintained in a reserve account for the benefit of the
creditors.
The current term of the FIACC commercial paper facility expires on November
14, 2001. As a result of utilizing FIACC to fund the repurchase of the ALAC
securitizations, the Company does not expect to use the
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facility to finance Receivables Held for Investment. If the facility was
terminated, receivables pledged as collateral would be allowed to amortize;
however, no new receivables could be transferred to the facility. At April
30, 2001 and July 31, 2001, borrowings were $10,400,901 and $8,455,375,
respectively, under the FIACC commercial paper facility.
In addition to the $200 million in credit facilities utilized to fund the
acquisition of new receivables, the Company also has a term loan facility
initially utilized to fund working capital requirements of the Company. This
facility was converted to a term loan on December 22, 2000. 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 an
additional principal payment of $300,000 on June 30, 2001 under certain
conditions relating to the size of Bank of America's portion of the outstanding
balance. The remaining unpaid balance of the term loan is due at maturity on
December 22, 2002. Pricing under the facility is based on the LIBOR rate plus
3%. The term loan is secured by all unencumbered assets of the Company,
excluding receivables owned and financed by wholly-owned, special purpose
subsidiaries of the Company and is guaranteed by First Investors Financial
Services Group, Inc. and all subsidiaries that are not special purpose
subsidiaries. In consideration for refinancing the working capital facility, the
Company paid each lender an upfront fee and issued warrants to each lender to
purchase, in aggregate, 167,001 shares of the Company's common stock at a strike
price of $3.81 per share. The warrants expire on December 22, 2010. The warrant
value of $175,000 was estimated based on the expected difference between
financing costs with and without the warrants. These costs are included as
deferred financing costs and will be amortized through the maturity date of the
debt. In addition, the Company agreed to issue additional warrants to Bank of
America to acquire up to a maximum of 47,945 additional shares of stock at a
price equal to the average closing price for the immediately preceding 30
trading days prior to each grant date which is June 30, 2001 and December 31,
2001. Pursuant to this requirement, the Company issued 36,986 warrants to Bank
of America at a strike price of $3.56 per share on June 30, 2001. All other
terms and conditions of the warrants were identical to the warrants issued in
December 2000. The amount of warrants, if any, to be issued on December 31, 2001
will be determined by the outstanding balance owed to Bank of America under the
term loan. In no event, however, can the additional warrants issued on December
31, 2001 exceed 10,959. The fair value of the warrants issued on June 30, 2001
of $38,757 is included as deferred financing costs and amortized through the
maturity date of the debt. At April 30, 2001 and July 31, 2001, there was
$12,825,000 and $11,850,000, respectively, outstanding under this facility.
The Company expects to initiate discussions with its lenders regarding the
renewal and extension of the warehouse credit facilities prior to maturity.
Management considers its relationship with the lenders under these facilities to
be satisfactory and has no reason to believe that these facilities will not be
renewed. If these facilities 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.
On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust") completed the
issuance of $167,969,000 of 7.174% asset-backed notes ("Notes"). The Notes are
secured by a pool of automobile receivables totaling $174,968,641 which were
previously owned by FIRC, FIARC and FIACC. 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 Note issuance and to fund a cash reserve account of 2% or $3,499,373 which
will serve as a portion of the credit enhancement for the transaction. The Notes
bear interest at 7.174% and require monthly principal reductions sufficient to
reduce the balance of the Notes to 96% of the outstanding balance of the
underlying receivables pool. The final maturity of the Notes is February 15,
2006. Credit enhancement for the Noteholders is provided by a surety bond issued
by MBIA Insurance Corporation. Additional credit support is provided by a cash
reserve account which is equal to 2% of the original balance of the receivables
pool and a 4% over-collateralization requirement amount. In the event that
certain asset quality covenants are not met, the reserve account target level
will increase to 6% of the then current principal balance of the receivables
pool. As of April 30, 2001 and July 31, 2001, the outstanding principal balance
on the Notes was $84,925,871 and $71,892,095, respectively.
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
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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 bears interest at VFCC's commercial paper rate plus 2.35%. 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. The bridge
facility expired on August 14, 2000.
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 owning 70
percent of the partnership assets and First Union Investors, Inc., an affiliate
of First Union, serves as the limited partner owning 30 percent of the
partnership assets (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 will bear interest at VFCC's commercial
paper rate plus 0.95 percent per annum and will 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 as of the previous month end. The Class B Notes will bear interest at
VFCC's commercial paper rate plus 5.38 percent per annum and will amortize on a
monthly basis by an amount which will vary 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. Once the Class B
Notes have been paid in full, all cash flows received after payment of Class A
Note principal and interest, servicing fees and other costs, will be 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 the residual cash flows. Subsequent
to the closing of this financing, the Company accounts for First Union's limited
partnership interest in the Partnership as a minority interest.
Substantially all of the Company's receivables are pledged to collateralize
the credit facilities. Management considers its relationship with all of the
Company's lenders and the Noteholders to be satisfactory and has no reason to
believe that the credit facilities will not be renewed.
The Company's most significant source of cash flow is the principal and
interest payments from the receivables portfolio. The Company received such
payments in the amount of $36.4 million and $31.2 million for the three months
ended July 31, 2001 and 2000, respectively. Such cash flow funds repayment of
amounts borrowed under the FIRC credit and commercial paper facilities and other
holding costs, primarily interest expense and custodian fees. During the three
months ended, the Company generated net cash flow of $7.4 million in 2001 and
required net cash flow of $17.5 million in 2000 (cash required to acquire
Receivables Held for Investment net of principal payments on receivables) to
fund the growth of its receivables portfolio.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates that do not generally vary with the
change in interest rates. Since a primary contributor to the Company's
profitability is its ability to manage its net interest spread, the Company
seeks to maximize the net interest spread while minimizing exposure to changes
in interest rates. In connection with managing the net interest spread, the
Company may periodically enter into interest rate swaps or caps to minimize the
effects of market interest rate fluctuations on the net interest spread. To the
extent that the Company has outstanding floating rate borrowings or has elected
to convert a portion of its borrowings from fixed rates to floating rates, the
Company will be exposed to fluctuations in short-term interest rates.
The Company was previously a party to a swap agreement with Bank of
America pursuant to which the Company's interest rate was fixed at 5.565 percent
on a notional amount of $120 million. The swap agreement expired on January 12,
2000. In connection with the issuance of the Term Notes, the Company entered
into a swap agreement with Bank of America pursuant to which the Company pays a
floating rate equal to the prevailing one month LIBOR rate plus 0.505 percent
and receives a fixed rate of 7.174 percent from the
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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 uneconomical position of the
existing pay fixed swap created by rapidly declining market interest rates.
In connection with the repurchase of the ALAC 97-1 Securitization and the
financing of 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 is 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 ("Class A swap") 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 ("Class B swap") 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. Class A swap has a final maturity of December 20,
2002 while Class B swap 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 that 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 Class A swap 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 Class B
swap and the underlying indebtedness. The interest rate cap expires February 20,
2002 and the cost of the cap is imbedded in the fixed rate applicable to Class B
swap. Pursuant to the refinance of the acquisition facility on August 8, 2000,
the Class B cap was terminated and the notional amounts of the Class A swap and
Class A cap were adjusted downward to reflect the lower outstanding balance of
the Class A Notes. The amendment or cancellation of these instruments resulted
in a gain of $418,609. This derivative net gain is being amortized over the life
of the initial derivative instrument. In addition, the two remaining hedge
instruments were assigned by FIFS Acquisition to the Partnership.
As of May 1, 2001 the Company had designated 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 stockholders'equity through other comprehensive income. In connection with
the decision to enter into the $100 million floating rate
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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 as a gain or loss in net income for period subsequent to May 31,
2001. Management believes that since these two positions effectively offset,
any net gains or losses will be immaterial to income.
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
$2,586,319 as of July 31, 2001 and $2,688,777 as of April 30, 2001 as a
percentage of the Receivables Held for Investment of $235,242,719 as of July 31,
2001 and $244,684,343 as of April 30, 2001 was 1.1% at July 31, 2001 and April
30, 2001.
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 July 31, 2001 and April 30, 2001, the
nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 9.3% 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 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 60 to 90 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 Auto Trust, FIARC and FIACC commercial paper facilities do
not carry default insurance. Provisions for credit losses of $1,793,750 and
$1,979,650 have been recorded for the three months ended July 31, 2001, and July
31, 2000, respectively, for losses on receivables which are either uninsured or
which are reinsured by the Company's captive insurance subsidiary.
The allowance for credit losses represents management's estimate of losses
for receivables that have become impaired. In making this estimate, management
analyzes portfolio characteristics in the light of its underwriting criteria,
delinquency and repossession statistics, historical loss experience, and size,
quality and concentration of the receivables, as well as external factors such
as current economic conditions. 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.
The following table summarizes the status and collection experience of
receivables by the Company (dollars in thousands):
<Table>
<Caption>
AS OF OR FOR THE THREE MONTHS ENDED JULY 31,
------------------------------------------------
2000 2001
------------------- ---------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
Receivables Held for Investment:
Delinquent amount outstanding:
30 -- 59 days................................... 364 $4,457 313 $3,782
60 -- 89 days................................... 87 1,096 144 1,731
90 days or more................................. 137 1,640 248 3,140
-------- ------ -------- ------
Total delinquencies............................. 588 $7,193 705 $8,653
Total delinquencies as a percentage of
outstanding receivables.................... 2.9% 2.9% 3.6% 3.7%
Net charge-offs as a percentage of average
receivables outstanding during the
period (1)................................. 3.0% 3.2%
</Table>
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(1) The percentages have been annualized and are not necessarily
indicative of the results for a full year.
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 10.9% and
6.0% as of July 31, 2001 and April 30, 2001, respectively.
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 increases 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
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 July 31, 2001, the Company had $158.3 million of floating rate
secured debt outstanding considering the effect of swap and cap agreements. For
every 1% increase in commercial paper rates or LIBOR, annual after-tax earnings
would decrease by approximately $1 million, assuming the Company maintains a
level amount of floating rate debt and assuming an immediate increase in rates.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Investors Financial Services Group, Inc.
(Registrant)
Date: September 13, 2001 By: /s/ TOMMY A. MOORE, JR.
Tommy A. Moore, Jr.
President and Chief Executive Officer
Date: September 13, 2001 By: /s/ BENNIE H. DUCK
Bennie H. Duck
Secretary, Treasurer and Chief Financial
Officer
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