<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 JANUARY 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-26686
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 76-0465087
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
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.
<Table>
<Caption>
Shares Outstanding At
Class February 28, 2002
--------------------------------- -------------------------------
Common Stock-$.001 Par Value 5,396,669
</Table>
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<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC.
AND SUBSIDIARIES
FORM 10-Q
JANUARY 31, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2001 and
January 31, 2002................................................................ 3
Consolidated Statements of Operations for the Three Months and Nine
Months Ended January 31, 2001 and 2002.......................................... 4
Consolidated Statement of Shareholders' Equity and Comprehensive
Income (Loss) for the Nine Months Ended January 31, 2002........................ 5
Consolidated Statements of Cash Flows for the Nine Months Ended
January 31, 2001 and 2002....................................................... 6
Notes to Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 29
PART II OTHER INFORMATION
Item 6. Exhibits and Reports On Form 8-K................................................ 30
SIGNATURES................................................................................. 31
</Table>
2
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- APRIL 30, 2001 AND JANUARY 31, 2002
<Table>
<Caption>
APRIL 30, JANUARY 31,
2001 2002
(AUDITED) (UNAUDITED)
----------------- ---------------
ASSETS
------
Receivables Held for Investment, net....................................... $ 248,185,744 $ 219,959,364
Receivables Acquired for Investment, net................................... 26,121,344 12,140,416
Cash and Short-Term Investments, including restricted cash of
$24,089,763 and $51,862,374, respectively............................. 25,101,012 53,729,493
Accrued Interest Receivable................................................ 3,277,066 3,520,234
Assets Held for Sale....................................................... 1,501,760 1,609,647
Other Assets:
Funds held under reinsurance agreement................................ 3,192,755 3,616,873
Deferred financing costs and other assets, net of accumulated
amortization and depreciation of $4,827,936 and $4,237,690,
respectively ..................................................... 4,895,204 4,945,774
Current income taxes receivable, net.................................. 594,360 --
Deferred income taxes receivable, net................................. -- 1,267,479
Interest rate derivative positions.................................... -- 3,237,054
----------------- ---------------
Total assets........................................................ $ 312,869,245 $ 304,026,334
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt:
Warehouse credit facilities........................................... $ 168,249,709 38,994,205
Term Notes............................................................ 84,925,871 208,255,392
Acquisition term facility............................................. 11,126,050 5,561,368
Working capital facility.............................................. 12,825,000 13,134,233
Other borrowings...................................................... -- 525,000
Other Liabilities:
Accounts payable and accrued liabilities.............................. 3,607,677 2,027,865
Current income taxes payable, net..................................... -- 184,338
Deferred income taxes payable, net.................................... 195,486 --
Interest rate derivative positions.................................... -- 6,366,039
----------------- ---------------
Total liabilities................................................... 280,929,793 275,048,440
================= ===============
Commitments and Contingencies
Minority Interest.......................................................... 1,586,959 807,819
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 11,955,915
Accumulated other comprehensive income - unrealized derivative gains
(losses), net of taxes.............................................. -- (1,955,082)
Less, treasury stock, at cost, - and 170,000 shares, respectively..... -- (515,000)
----------------- ---------------
Total shareholders' equity.......................................... 30,352,493 28,170,075
----------------- ---------------
Total liabilities and shareholders' equity................................. $ 312,869,245 $ 304,026,334
================= ===============
</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 AND NINE MONTHS ENDED JANUARY 31, 2001 AND 2002
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
--------------------------------- ------------------------------
2001 2002 2001 2002
---------------- ---------------- ------------- ---------------
Interest Income ......................................... $ 11,407,967 $ 9,094,845 $ 33,999,021 $ 29,177,483
Interest Expense ........................................ 5,092,333 2,817,377 15,263,071 10,543,402
---------------- ---------------- ------------- ---------------
Net interest income ........................... 6,315,634 6,277,468 18,735,950 18,634,081
Provision for Credit Losses ............................. 1,868,384 2,474,025 6,176,834 6,177,825
Loss on Receivables Acquired for Investment ............. -- 1,260,000 -- 1,260,000
--------------- ---------------- --------------- ---------------
Net Interest Income After Provision for Credit Losses ... 4,447,250 2,543,443 12,559,116 11,196,256
Other Income (Expense):
Late fees and other .............................. 579,779 408,715 2,039,171 1,391,901
Servicing ........................................ 85,772 -- 432,616 --
Unrealized loss on interest rate derivative
positions ........................................ -- (9,981) -- (109,917)
---------------- ---------------- --------------- ---------------
Total other income ............................ 665,551 398,734 2,471,787 1,281,984
Operating Expenses:
Salaries and benefits ............................ 2,293,877 2,063,247 7,009,468 6,053,907
Other interest expense ........................... 337,322 184,552 1,015,685 617,437
Other ............................................ 1,558,901 2,000,005 4,168,203 5,205,729
---------------- ---------------- ------------- ---------------
Total operating expenses ...................... 4,190,100 4,247,804 12,193,356 11,877,073
---------------- ---------------- ------------- ---------------
Income (Loss) Before Provision for Income Taxes
and Minority Interest................................ 922,701 (1,305,627) 2,837,547 601,167
---------------- ---------------- ------------- ---------------
Provision (Benefit) for Income Taxes:
Current .......................................... 152,204 264,402 738,067 364,087
Deferred ......................................... 184,582 (740,957) 297,638 (144,661)
---------------- ---------------- ------------- ---------------
Total provision for income taxes .............. 336,786 (476,555) 1,035,705 219,426
Minority Interest ....................................... 200,858 (147,928) 417,225 132,834
---------------- ---------------- ------------- ---------------
Net Income (Loss) ....................................... $ 385,057 $ (681,144) $ 1,384,617 $ 248,907
================ ================ ============= ===============
Basic and Diluted Net Income (Loss)
per Common Share .................................... $ 0.07 $ (0.12) $ 0.25 $ 0.04
================ ================ ============= ===============
</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 NINE MONTHS ENDED JANUARY 31, 2002
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED
OTHER OTHER
ADDITIONAL TREASURY COMPREHENSIVE COMPREHENSIVE
COMMON PAID-IN RETAINED STOCK, INCOME INCOME
STOCK CAPITAL EARNINGS AT COST (LOSS) (LOSS) TOTAL
------- ------------ ------------ ----------- ------------- -------------- ------------
Balance, April 30, 2001 ....... $ 5,567 $ 18,639,918 $ 11,707,008 $ -- $ -- $ -- $ 30,352,493
Net income .................. -- -- 248,907 -- -- 248,907 248,907
Warrants issued ............. -- 38,757 -- -- -- -- 38,757
Treasury stock purchases .... -- -- -- (515,000) -- -- (515,000)
Cumulative effect of
accounting change, net of
tax benefit of $1,437,925 -- -- -- -- (2,501,595) (2,501,595) (2,501,595)
Unrealized gains (losses)
on derivatives, net of tax
benefit of $38,309 .......... -- -- -- -- (66,646) (66,646) (66,646)
Reclassification of
earnings, net of taxes of
$352,446 .................... -- -- -- -- 613,159 613,159 613,159
--------------
Comprehensive income
(loss)....................... $ (1,706,175)
------- ------------ ------------ ----------- ------------- ============== ------------
Balance, January 31, 2002 ..... $ 5,567 $ 18,678,675 $ 11,955,915 $ (515,000) $ (1,955,082) $ 28,170,075
======= ============ ============ =========== ============= ============
</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 NINE MONTHS ENDED JANUARY 31, 2001 AND 2002
(UNAUDITED)
<Table>
<Caption>
2001 2002
----------- --------------
Cash Flows From Operating Activities:
Net income ................................................................. $ 1,384,617 $ 248,907
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization expense ............................. 3,610,606 4,060,781
Provision for credit losses ....................................... 6,176,834 6,177,825
Minority Interest ................................................. 417,225 132,834
(Increase) decrease in:
Accrued interest receivable ....................................... (536,239) (243,168)
Restricted cash ................................................... (3,778,264) (2,772,611)
Deferred financing costs and other assets ......................... (1,587,003) (1,648,318)
Funds held under reinsurance agreement ............................ 270,534 (424,118)
Deferred income taxes receivable, net ............................. 64,875 (1,267,479)
Current income tax receivable, net ................................ (80,235) 594,360
Interest rate derivative positions ................................ -- (3,237,054)
Increase (decrease) in:
Accounts payable and accrued liabilities .......................... 499,544 (1,579,811)
Current income taxes payable ...................................... (527,042) 184,338
Deferred income taxes payable, net ................................ 232,763 (195,486)
Interest rate derivative positions ................................ -- 4,410,957
----------- --------------
Net cash provided by operating activities .................. 6,148,215 4,441,957
----------- --------------
Cash Flows From Investing Activities:
Purchase of Receivables Held for Investment ................................ (93,647,134) (55,063,234)
Purchase of Receivables Acquired for Investment ............................ (8,110,849) --
Principal payments from Receivables Held for Investment .................... 57,901,294 69,397,086
Principal payments from Receivables Acquired for Investment ................ 10,996,861 13,068,954
Principal payments from Trust Investment Certificates ...................... 3,108,065 --
Payments received on Assets Held for Sale .................................. 7,233,294 5,508,332
Purchase of furniture and equipment ........................................ (349,185) (325,793)
----------- --------------
Net cash provided by (used in) investing activities ................................. (22,867,654) 32,585,345
=========== ==============
Cash Flows From Financing Activities:
Proceeds from advances on--
Warehouse credit facilities ....................................... 93,868,563 54,335,464
Term Notes ........................................................ -- 159,036,000
Working capital facility .......................................... 200,000 13,134,233
Other borrowings .................................................. -- 525,000
Principal payments made on--
Warehouse credit facilities ....................................... (15,230,710) (183,590,968)
Term Notes ........................................................ (50,062,581) (35,706,479)
Acquisition term facility ......................................... (12,780,258) (5,564,682)
Working capital facility .......................................... -- (12,825,000)
Restricted Cash-Prefunding Account under Term Note ....................... -- (25,000,000)
Treasury stock purchased ................................................... -- (515,000)
----------- --------------
Net cash provided by (used in) financing activities ...... 15,995,014 (36,171,432)
----------- --------------
Increase (decrease) in Cash and Short-Term Investments. ............................. (724,425) 855,870
Cash and Short-Term Investments at Beginning of Period .............................. 2,108,865 1,011,249
----------- --------------
Cash and Short-Term Investments at End of Period $ 1,384,440 $ 1,867,119
=========== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for--
Interest .......................................................... $14,947,238 $ 10,586,685
Income taxes ...................................................... 1,105,522 (414,613)
Non-cash financing activities--
Exchange of warrants for financing fees ........................... $ 175,000 $ 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
JANUARY 31, 2002
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 January
31, 2002, approximately 27 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
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 $229 million as of January 31,
2002.
On August 8, 2000, the Company entered into a partnership agreement whereby
a subsidiary of the Company is the general partner owning 70 percent of the
partnership assets and First Union Investors, Inc. serves as the limited partner
and owns 30 percent of the partnership assets (the "Partnership"). The
Partnership consists primarily of a portfolio of loans previously owned or
securitized by FISC and certain other financial assets including charged-off
accounts owned by FISC.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of First Investors and its wholly - and majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
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 January 31, 2002, and the results of its
operations for the three and nine months ended January 31, 2001 and 2002, and
its cash flows for the nine months ended January 31, 2001 and 2002.
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
7
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting criteria are met. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities --
an Amendment of FASB Statement No. 133".
Effective May 1, 2001, the Company adopted SFAS No. 133 concurrently with
SFAS No. 138. Accordingly, the Company designated 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 (loss) and the derivative liability is classified in the interest rate
derivative positions 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 earnings approximately $827,797,
net of taxes of $475,820, 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 unrealized loss on interest rate derivative
positions 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 (loss), 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 for the nine months
ending January 31, 2002 was to increase other comprehensive income by $66,646,
net of taxes of $38,309. The Company does expect, however, to report material
fluctuations in other comprehensive income and shareholders' equity in periods
of interest rate volatility.
TREASURY STOCK. On December 14, 2001, the Board of Directors authorized the
Company to repurchase up to 5% of the Company's outstanding common stock. During
the quarter ended January 31, 2002, 170,000 shares were repurchased under this
authorization at an average price of $3.03. No shares were repurchased in prior
periods.
RECLASSIFICATIONS. Certain reclassifications have been made to the 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, JANUARY 31,
2001 2002
------------- -------------
Receivables.................................................... $ 244,684,343 $ 217,179,396
Unamortized premium and deferred fees.......................... 6,190,178 5,168,269
Allowance for credit losses.................................... (2,688,777) (2,388,301)
------------- -------------
Net receivables........................................... $ 248,185,744 $ 219,959,364
============= =============
</Table>
8
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for credit losses was as follows:
<Table>
<Caption>
FOR THE NINE MONTHS
ENDED JANUARY 31,
------------------------------------
2001 2002
--------------- --------------
Balance, beginning of period ............................................ $ 2,133,994 $ 2,688,777
Provision for credit losses ............................................. 6,176,834 6,177,825
Charge-offs, net of recoveries .......................................... (5,990,788) (6,478,301)
--------------- --------------
Balance, end of period .................................................. $ 2,320,040 $ 2,388,301
=============== ==============
</Table>
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 January 31, 2002:
<Table>
<Caption>
APRIL 30, JANUARY 31,
2001 2002
--------------- ---------------
Contractual payments receivable from Receivables Acquired for Investment
purchased at a discount relating to credit quality.................... $ 31,892,326 $ 15,901,697
Nonaccretable difference.................................................. (2,735,961) (2,014,481)
Accretable yield.......................................................... (3,035,021) (1,746,800)
--------------- ---------------
Receivables Acquired for Investment purchased at a discount relating to
credit quality, net.................................................. $ 26,121,344 $ 12,140,416
=============== ===============
</Table>
The carrying amount of Receivables Acquired for Investment is net of
accretable yield and nonaccretable difference. Nonaccretable difference
represents contractual principal and interest payments that the Company has
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........................................................... -- (2,241,325)
Additions........................................................... 1,288,885 --
Eliminations........................................................ (1,057,261) --
Reclassifications................................................... (953,104) 953,104
--------------- --------------
Balance at January 31, 2002............................................ $ 2,014,481 $ 1,746,800
=============== ==============
</Table>
Additions to nonaccretable difference for the quarter ended January 31,
2002 were due to a $1,260,000 loss recorded on the Receivables Acquired for
Investment. Receivables Acquired for Investment are comprised of loans
previously orginated by Auto Lenders Acceptance Corporation and include a
portfolio of warehouse loans and a portfolio of loans that were previously
securitized. The securitized loans were subsequently redeemed and funded
through the FIACC credit facility. The loss reduced the book value by
increasing the nonaccretable difference. The loss relates to a 1.44% increase
in the cumulative loss rate for the warehouse portfolio and a .42% increase
in the FIACC portfolio. The increase in the cumulative loss rates relates to
the recessionary environment and the impact it has on customers' ability to
maintain comparable paying employment. Additionally, the effective decrease
in prices of new automobiles through incentive programs offered by captives
during the quarter ending January 31, 2002, contributed to decreasing prices
and demands for used vehicles. This results in lower recovery rates realized
through repossessions. The collateral comprising the Receivables Acquired for
Investment is at higher risk as it is primarily older model used cars with
higher mileage. Nonaccretable difference eliminations represent contractual
principal and interest amounts on loans charged-off for the period ended
January 31, 2002. The increase in accretable yield results from increasing
the expected term of the remaining cash flow in order to allow for
collections on charged off receivables. By extending the cash flow projection
model life, accretable yield must be increased to provide for future income.
9
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and January 2002, the Company issued $168 million and $159 million,
respectively, in asset-backed notes ("Term Notes") secured by discrete pools of
receivables. Proceeds from the two note issuances were used to repay outstanding
borrowings under the various revolving credit facilities. Substantially all
receivables retained by the Company are pledged as collateral for the credit
facilities and the Term Notes. The weighted average interest rate for the
Company's secured borrowings including the effect of program fees, dealer fees
and other comprehensive income (loss) amortization was 5.0% and 6.0% for the
three month and nine month periods ending January 31, 2002. The weighted average
interest rate for the Company's secured borrowings including the effect of
program fees, dealer fees and derivative instruments was 7.5% and 7.9% for the
three month and nine month periods ending January 31, 2001.
FIRC CREDIT FACILITY. The primary source of initial acquisition financing
for receivables has been provided through a syndicated warehouse credit facility
agented by First Union National Bank. The borrowing base is defined as the sum
of the principal balance of the receivables pledged and the amount on deposit
with the Company to fund receivables to be acquired. The Company is required to
maintain a reserve account equal to the greater of one percent of the principal
amount of receivables financed or $250,000. Borrowings under the FIRC credit
facility bear interest at a rate selected by the Company at the time of the
advance of either the base rate, defined as the higher of the prime rate or the
federal funds rate plus .5 percent, the LIBOR rate plus .5 percent, or a rate
agreed to by the Company and the banks. The facility also provides for the
payment of a fee of .25 percent per annum based on the total committed amount.
On November 14, 2001, the facility was renewed to December 7, 2001. On
December 7, 2001, the Company entered into an agreement with First Union
National Bank to extend the maturity date of the facility until December 5,
2002. In conjunction with this renewal, First Union assumed the role of agent
and increased its commitment to $50 million from $20 million. The total
commitment remains at $50 million and there were no other material changes to
the terms and conditions of the facility. Under the renewal mechanics of the
facility, should the lenders elect not to renew the facility beyond December 5,
2002, the facility would convert to a term loan facility which would mature six
months thereafter and amortize monthly in accordance with the borrowing base
with any remaining balance due at maturity.
Borrowings under the FIRC credit facility were $36,040,000 and $34,640,000
at April 30, 2001 and January 31, 2002, respectively.
The Company presently intends to seek a renewal of the facility from its
lenders prior to maturity. Management considers its relationship with its
lenders to be satisfactory and has no reason to believe that this credit
facility will not be renewed. If the facility were not renewed however, or if
material changes were made to its terms and conditions, it could have a material
adverse effect on the Company.
FIARC COMMERCIAL PAPER FACILITY. The Company has indirect access to the
commercial paper market through a commercial paper conduit facility provided by
Variable Funding Capital Corporation (VFCC), a commercial paper conduit
administered by First Union National Bank (the "FIARC commercial paper
facility"). Receivables are transferred periodically from the FIRC credit
facility to FIARC commercial paper facility through the assignment of an
undivided interest in a specified group of receivables. VFCC issues commercial
paper (indirectly secured by the receivables), the proceeds of which are used to
repay the FIRC credit facility.
The financing is provided to a special-purpose, wholly-owned subsidiary of
the Company, FIARC. Credit enhancement for the $150 million facility is provided
to the commercial paper investors by a surety bond issued by MBIA Insurance
Corporation. The Company is not a guarantor of, or otherwise a party to, such
commercial
10
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paper. Borrowings under the commercial paper facility bear interest at the
commercial paper rate plus a borrowing spread equal to .30 percent per annum.
Additionally, the agreement provides for additional fees based on the unused
amount of the facility and dealer fees associated with the issuance of the
commercial paper. A surety bond premium equal to .35 percent per annum is
assessed based on the outstanding borrowings under the facility. A one percent
cash reserve must be maintained as additional credit support for the facility.
At April 30, 2001, the Company had borrowings of $121,808,808 outstanding under
the commercial paper facility. The Company had no outstanding borrowings under
the FIARC facility as of January 31, 2002.
The FIARC commercial paper facility expired on January 12, 2002. In
conjunction with the renewal of the facility to January 13, 2003 the facility
commitment was assigned from Enterprise Funding Corporation, a commercial paper
conduit administered by Bank of America, to VFCC. No other material changes were
made to the facility in conjunction with the assignment to VFCC.
If the facility was not extended beyond the maturity date, receivables
pledged, as collateral would be allowed to amortize; however, no new receivables
would be allowed to transfer from the 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 January 31, 2002, borrowings were $10,400,901 and
$4,354,205, respectively, under the FIACC commercial paper facility. The current
term of the FIACC commercial paper facility expires on March 11, 2003. If the
facility were not renewed on or prior to the maturity date, the outstanding
balance under the facility would continue to amortize utilizing cash collections
from the receivables pledged as collateral. The Company presently intends to
seek a renewal of the facility from its lenders prior to maturity. Management
considers its relationship with its lenders to be satisfactory and has no reason
to believe that this credit facility will not be renewed. If the facility were
not renewed however, or if material changes were made to its terms and
conditions, it could have a material adverse effect on the Company.
On September 15, 2000, the Company elected to exercise its right to
repurchase the senior notes issued in connection with the ALAC Automobile
Receivables Owner Trust 1997-1, (the "ALAC 97-1 Securitization"). Accordingly,
the Company acquired $8,110,849 in outstanding receivables from the trust and
borrowed $6,408,150 under the FIACC facility which, combined with amounts on
deposit in the collection account and the outstanding balance in a cash reserve
account, was utilized to repay $7,874,689 in senior notes and redeem $1,033,456
of the trust certificates. On March 15, 2001, the Company elected to exercise
its right to repurchase the senior notes issued in connection with the ALAC
Automobile Receivables Owner Trust 1998-1, (the "ALAC 98-1 Securitization).
Accordingly, the Company acquired $9,257,612 in outstanding receivables from the
trust and borrowed $7,174,509 under the FIACC facility which, combined with
amounts on deposit in the collection account and the outstanding balance in a
cash reserve account, was utilized to repay $7,997,615 in senior notes and
redeem $1,946,178 of the Trust Certificates. The receivables purchased were used
as collateral to secure the FIACC borrowing with any residual cash flow
generated by the receivables pledged to the Partnership. As a result of
utilizing FIACC to fund the repurchase of the ALAC securitizations, the Company
has elected to utilize the FIACC commercial paper facility solely as the
financing source for the repurchases and does not expect to utilize the facility
to finance Receivables Held for Investment.
11
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TERM NOTES. On January 29, 2002, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002 Auto
Trust") completed the issuance of $159,036,000 of 3.46% percent Class A
asset-backed notes ("2002-A Term Notes"). The initial pool of automobile
receivables transferred to the 2002 Auto Trust totaled $135,643,109, which were
previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In addition to
the issuance of the Class A Notes, the 2002 Auto Trust also issued $4,819,000 in
Class B Notes which were retained by the Company and pledged to secure the
Working Capital Facility as further described below. Proceeds from the issuance,
which totaled $159,033,471 were used to (i) fund a $25,000,000 pre-funding
account to be used for future loan originations; (ii) repay all outstanding
borrowings under the FIARC commercial paper facility, (iii) reduce the
outstanding borrowings under the FIRC credit facility, (iv) pay transaction fees
related to the 2002-A Term Note issuance, and (v) fund a cash reserve account of
2 percent or $2,712,862 of the initial receivables pledged which will serve as a
portion of the credit enhancement for the transaction. The $25,000,000 pre-fund
amount is included as restricted cash as of January 31, 2002. The Class A Term
Notes bear interest at 3.46 percent and require monthly principal reductions
sufficient to reduce the balance of the Class A Term Notes to 97 percent of the
outstanding balance of the underlying receivables pool. The final maturity of
the 2002-A Term Notes is December 15, 2008. The Class B Notes do not bear
interest but require principal reductions sufficient to reduce the balance of
the Class B Notes to 3 percent of the outstanding balance of the underlying
receivables pool. A surety bond issued by MBIA Insurance Corporation provides
credit enhancement for the Class A Notes. Additional credit support is provided
by the cash reserve account, which equals 2 percent of the original balance of
the receivables pool plus 2 percent of the original balance of receivables
transferred under the pre-funding provision. Further enhancement is provided
through an initial 1 percent overcollateralization which is required to be
increased to 3 percent through excess monthly principal and interest
collections. In the event that certain asset quality covenants are not met, the
reserve account target level will increase to 6 percent of the then current
principal balance of the receivables pool.
On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust") completed the
issuance of $167,969,000 of 7.174 percent asset-backed notes ("2000-A Term
Notes"). A pool of automobile receivables totaling $174,968,641, which were
previously owned by FIRC, FIARC and FIACC, secures the 2000-A Term Notes.
Proceeds from the issuance, which totaled $167,967,690 were used to repay all
outstanding borrowings under the FIARC and FIACC commercial paper facilities, to
reduce the outstanding borrowings under the FIRC credit facility, to pay
transaction fees related to the 2000-A Term Note issuance and to fund a cash
reserve account of 2 percent or $3,499,373 which will serve as a portion of the
credit enhancement for the transaction. The 2000-A Term Notes bear interest at
7.174 percent and require monthly principal reductions sufficient to reduce the
balance of the 2000-A Term Notes to 96 percent of the outstanding balance of the
underlying receivables pool. The final maturity of the 2000-A Term Notes is
February 15, 2006. As of April 30, 2001 and January 31, 2002, the outstanding
principal balances on the 2000-A Term Notes were $84,925,871 and $49,219,391,
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 overcollateralization requirement. In the
event that certain asset quality covenants are not met, the reserve account
target level will increase to 6 percent of the then current principal balance of
the receivables pool.
ACQUISITION FACILITY. On October 2, 1998, the Company, through its
indirect, wholly-owned subsidiary, FIFS Acquisition Funding Company LLC (FIFS
Acquisition), entered into a $75 million non-recourse bridge financing facility
with VFCC, an affiliate of First Union National Bank, to finance the Company's
acquisition of FISC. Contemporaneously with the Company's purchase of FISC, FISC
transferred certain assets to FIFS Acquisition, consisting primarily of (i) all
receivables owned by FISC as of the acquisition date, (ii) FISC's ownership
interest in certain Trust Certificates and subordinated spread or cash reserve
accounts related to two asset securitizations previously conducted by FISC, and
(iii) certain other financial assets, including charged-off accounts owned by
FISC as of the acquisition date. These assets, along with a $1 million cash
reserve account funded at closing serve as the collateral for the bridge
facility. The facility bore interest at VFCC's commercial paper rate plus 2.35
percent and expired on August 14, 2000. Under the terms of the facility, all
cash collections from the receivables or cash distributions to the certificate
holder under the securitizations are first applied to pay FISC a servicing fee
12
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5,561,368 at April 30, 2001
and January 31, 2002, respectively. 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 January 31, 2002, $972,427 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 required 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 was due at maturity on December 22, 2002. Pricing under the
facility was based on the LIBOR rate plus 3 percent. The term loan was secured
by all unencumbered assets of the Company, excluding receivables owned and
financed by wholly-owned, special purpose subsidiaries of the Company and is
guaranteed by First Investors Financial Services Group, Inc. and all
subsidiaries that are not special purpose subsidiaries. In consideration for
refinancing the working capital facility, the Company paid each lender an
upfront fee and issued warrants to each lender to purchase, in aggregate,
167,001 shares of the Company's common stock at a strike price of $3.81 per
share. The warrants expire on December 22, 2010. On December 22, 2000, the
warrant value of $175,000 was estimated based on the expected difference between
financing costs with and without the warrants. These costs were included as
deferred financing costs and were to be amortized through the maturity date of
the debt. In addition, if certain conditions were met,
13
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company agreed to issue additional warrants to Bank of America to acquire up
to a maximum of 47,945 additional shares of stock at a price equal to the
average closing price for the immediately preceding 30 trading days prior to
each grant date which is June 30, 2001 and December 31, 2001. Pursuant to this
requirement, the Company issued 36,986 warrants to Bank of America at a strike
price of $3.56 per share on June 30, 2001. All other terms and conditions of the
warrants were identical to the warrants issued in December 2000. The amount of
warrants, if any, to be issued on December 31, 2001 was to be determined by the
outstanding balance owed to Bank of America under the term loan. In no event,
however, could the additional warrants issued on December 31, 2001 exceed
10,959. The fair value of the warrants issued on June 30, 2001 of $38,757 is
included as deferred financing costs and amortized through the maturity date of
the debt. At April 30, 2001, there was $12,825,000 outstanding under this
facility.
On December 6, 2001, the Company entered into an agreement with First
Union National Bank to refinance the $11,175,000 outstanding balance of the
working capital term loan and increase the size of the facility to $13.5
million. The renewal facility was provided to a special-purpose, wholly-owned
subsidiary of the Company, First Investors Residual Funding LP. Upon the
issuance of the 2002-A Term Notes on January 29, 2002, a portion of this
facility was converted to a $4.5 million term loan tranche which amortizes
monthly as principal payments are collected under the 2002-A Term Note
facility. The monthly principal amortization must be sufficient to reduce the
amounts outstanding under the term loan tranche of this facility to no
greater than 3 percent of the outstanding receivables securing the 2002-A
Term Note transaction. The term loan tranche of this working capital facility
will be evidenced by the Class B Notes issued in conjunction with the 2002
Auto Trust financing. This principal repayment requirement replaces the
current $675,000 per quarter and the additional $600,000 per annum required
under the previous facility. The remaining $9 million of the $13.5 million
working capital facility revolves monthly in accordance with a borrowing base
consisting of the overcollateralization amount and reserve accounts for each
of the Company's other credit facilities. The new facility is secured solely
by the residual cash flow and cash reserve accounts related to the Company's
warehouse credit facilities, the acquisition facility and the existing and
future term note facilities. This compares to the previous requirement that
all assets of the Company, excluding receivables owned and financed by
special purpose subsidiaries, secure the indebtedness. Pricing under the
facility was not changed. The maturity of the facility was extended to
December 5, 2002. In the event that the facility is not renewed at maturity,
residual cash flows from the various receivables financing transactions will
be applied to amortize the debt over the remaining life of the underlying
receivables. Further, as a result of the refinancing, the Company is not
obligated to issue additional warrants covering 10,959 shares of the
Company's common stock to Bank of America on December 31, 2001. At January
31, 2002, there was $13,134,233 outstanding under this facility. In
conjunction with the refinancing, the Company repaid the working capital term
loan and entered into the new working capital facility. Consequently,
$554,896 of deferred financing costs and warrants were written off.
The Company presently intends to seek a renewal of the working capital
facility from its lender prior to maturity. Should the facility not be renewed,
the outstanding balance of the receivables would be amortized in accordance with
the borrowing base. Management considers its relationship with its lenders to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility were not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on the
Company.
SHAREHOLDER LOANS - On December 3, 2001 the Company entered into an
agreement with one of its existing shareholders and a member of its Board of
Directors under which the Company may, from time to time, borrow up to $2.5
million. The proceeds of the borrowings will be utilized to fund certain private
and open market purchases of the Company's common stock pursuant to a Stock
Repurchase Plan authorized by the Board of Directors and for general corporate
purposes. Borrowings under the facility bear interest at a fixed rate of 10
percent per annum. The facility is unsecured and expressly subordinated to the
Company's senior credit facilities. The facility matures on December 3, 2008 but
may be repaid at any time unless the Company is in default on one of its other
credit facilities. As of January 31, 2002, $525,000 was outstanding under this
facility.
INTEREST RATE MANAGEMENT. The Company's warehouse credit facilities bear
interest at floating interest rates which are reset on a short-term basis while
the secured Term Notes bear interest at a fixed rate of interest. The Company's
receivables bear interest at fixed rates that do not generally vary with the
change in interest rates.
14
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since a primary contributor to the Company's profitability is its ability to
manage its net interest spread, the Company seeks to maximize the net interest
spread while minimizing exposure to changes in interest rates. In connection
with managing the net interest spread, the Company may periodically enter into
interest rate swaps or caps to minimize the effects of market interest rate
fluctuations on the net interest spread. To the extent that the Company has
outstanding floating rate borrowings or has elected to convert a portion of its
borrowings from fixed rates to floating rates, the Company will be exposed to
fluctuations in short-term interest rates.
In connection with the issuance of the 2000-A Term Notes, the Company
entered into a swap agreement with Bank of America pursuant to which the Company
pays a floating rate equal to the prevailing one month LIBOR rate plus 0.505
percent and receives a fixed rate of 7.174 percent from the counterparty. The
initial notional amount of the swap was $167,969,000, which amortizes in
accordance with the expected amortization of the Term Notes. Final maturity of
the swap was August 15, 2002.
On September 27, 2000, the Company elected to terminate the floating swap
at no material gain or loss and enter into a new swap under which the Company
would pay a fixed rate of 6.30 percent on a notional amount of $100 million.
Under the terms of the swap, the counterparty had the option of extending the
swap for an additional three years to mature on April 15, 2004 at a fixed rate
of 6.42 percent. On April 15, 2001, the counterparty exercised its extension
option.
On June 1, 2001, the Company entered into interest rate swaps with an
aggregate notional amount of $100 million and a maturity date of April 15, 2004.
Under the terms of these swaps, the Company will pay a floating rate based on
one-month LIBOR and receive a fixed rate of 5.025 percent. Management elected to
enter into these swap agreements to offset the 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 was December 15, 2001. On March 15,
2001, in connection with the repurchase of the ALAC 1998-1 Securitization and
the financing of that purchase through the FIACC subsidiary, the Company and the
counterparty modified the existing interest rate swap increasing the notional
amount initially to $11,238,710 and reducing the fixed rate from 6.76 percent to
5.12 percent. The new notional amount is scheduled to amortize monthly in
accordance with the expected principal amortization of the underlying
borrowings. The expiration date of the swap was changed from December 15, 2001
to September 1, 2002.
On October 2, 1998, in connection with the $75 million acquisition
facility, the Company, through FIFS Acquisition, entered into a series of
hedging instruments with First Union National Bank designed to hedge floating
rate borrowings under the acquisition facility against changes in market rates.
Accordingly, the Company entered into two interest rate swap agreements, the
first in the initial notional amount of $50.1 million ("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
15
<Page>
FIRST INVESTORS FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (loss). In connection
with the decision to enter into the $100 million floating rate swaps on June 1,
2001, the Company elected to change the designation of the $100 million fixed
rate swap and not account for the instrument as a hedge under SFAS No. 133. As a
result, the change in fair value of both swaps is reflected in net earnings for
the period subsequent to May 31, 2001.
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 and nine months ended January
31, 2001 and 2002, are as follows:
<Table>
<Caption>
For the Three Months Ended For the Nine Months Ended
January 31, January 31,
------------------------------------ ----------------------------------
2001 2002 2001 2002
-------------- ----------------- --------------- ---------------
Weighted average shares:
Weighted average shares outstanding
for basic earnings per share 5,566,669 5,506,604 5,566,669 5,546,503
Effect of dilutive stock options and
warrants -- -- 18 --
-------------- ----------------- --------------- ---------------
Weighted average shares outstanding
for diluted earnings per share 5,566,669 5,506,604 5,566,687 5,546,503
</Table>
For the three months ended January 31, 2001 and 2002 and the nine months
ended January 31, 2001 and January 31, 2002, the Company had 460,001; 544,487;
459,983 and 544,487, 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.
16
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Net loss for the three months ended January 31, 2002 was $(681,144), a
decrease of 277% from net income reported for the comparable period in the
preceding year of $385,057. Net income for the nine months ended January 31,
2002 was $248,907 a decrease of 82% from that reported for the comparable period
in the preceding year of $1,384,617. Earnings (loss) per common share were
$(0.12) and $0.07 for the three months ended January 31, 2002 and January 31,
2001, respectively. Earnings per common share were $0.04 for the nine months
ended January 31, 2002, compared to $0.25 per common share for the prior year
period. Results for the period ended January 31, 2002 were negatively impacted
through a $1,260,000 loss on the Receivables Acquired for Investment due to the
increase in projected loss rates. The effect net of taxes and minority interest
is $560,070. Additionally the Company amortized deferred financing costs and
warrants of $602,162, or $382,373 net of taxes, related to the restructuring of
debt facilities.
NET INTEREST INCOME
The following tables summarize the Company's receivables and net interest
income (dollars in thousands):
<Table>
<Caption>
AS OF OR FOR THE
NINE MONTHS ENDED
JANUARY 31,
-----------------------------
2001 2002
------------- -------------
Receivables Held for Investment:
Number................................................................ 20,807 18,519
Principal balance..................................................... $ 251,910 $ 217,179
Average principal balance of receivables outstanding
During the nine-month period...................................... $ 247,261 $ 230,706
Average principal balance of receivables outstanding
During the three-month period..................................... $ 252,045 $ 221,112
Receivables Acquired for Investment:
Number................................................................ 3,647 2,963
Principal balance..................................................... $ 22,181 $ 11,555
Securitized Receivables(1):
Number................................................................ 1,748 --
Principal balance..................................................... $ 9,944 --
Total Managed Receivables Portfolio:
Number................................................................ 26,202 21,482
Principal balance..................................................... $ 284,035 $ 228,734
</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.
17
<Page>
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
-------------------------------- ---------------------------
2001 2002 2001 2002
--------------- ------------- ------------ -----------
Interest income (1):
Receivables Held for Investment................. $ 10,343 $ 8,540 $ 30,556 $ 26,926
Receivables Acquired for Investment and
Investment in Trust Certificates (2)............ 1,065 555 3,443 2,251
--------------- ------------- ------------ -----------
11,408 9,095 33,999 29,177
Interest expense:
Receivables Held for Investment (3)............. 4,786 2,711 14,440 10,043
Receivables Acquired for Investment and
Investment in Trust Certificates................ 306 107 823 500
--------------- ------------- ------------ -----------
5,092 2,818 15,263 10,543
--------------- ------------- ------------ -----------
Net interest income.................................. $ 6,316 $ 6,277 $ 18,736 $ 18,634
=============== ============= ============ ===========
</Table>
(1) Amounts shown are net of amortization of premium and deferred fees.
(2) Amounts shown for the three and nine months ended January 31, 2001
reflect $315 and $656, respectively, in interest income related to
minority interest. Amounts shown for the three and nine months ended
January 31, 2002 reflect $145 and $587, respectively, in interest
income related to minority interest.
(3) Includes facility fees and fees on the unused portion of the credit
facilities.
The following table sets forth information with regard to the Company's net
interest spread, which represents the difference between the effective yield on
Receivables Held for Investment and the Company's average cost of debt utilized
to fund these receivables, and its net interest margin (averages based on
month-end balances):
<Table>
<Caption>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------------------ -------------------------------
2001 2002 2001 2002
-------------- ------------- --------------- -------------
Receivables Held for Investment:
Effective yield on Receivables Held
for Investment (1) 16.4% 15.5% 16.5% 15.6%
Average cost of debt (2) 7.5% 5.0% 7.9% 6.0%
Net interest spread (3) 8.9% 10.5% 8.6% 9.6%
Net interest margin (4) 8.8% 10.6% 8.7% 9.8%
</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 was $6.3 million for the
three months ended January 31, 2002 and January 31, 2001. Net interest income
decreased to $18.6 million for the nine months ended January 31, 2002 from $18.7
million for the nine months ended January 31, 2001.
18
<Page>
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 Nine Months Ended
January 31, 2001 to 2002 January 31, 2001 to 2002
---------------------------------------- -----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
Change in Change in
------------------------ ------------------------
Total
Average Net Average Total Net
Principal Average Increase Principal Average Increase
Amount Rate (Decrease) Amount Rate (Decrease)
---------- ---------- ----------- ---------- ---------- -------------
Receivables Held for Investment:
Interest income.................. $ (1,270) $ (533) $ (1,803) $ (2,047) $ (1,583) $ (3,630)
Interest expense................. (685) (1,390) (2,075) (1,186) (3,211) (4,397)
---------- ---------- ----------- ---------- ---------- -------------
Net interest income.............. $ (585) $ 857 $ 272 $ (861) $ 1,628 $ 767
========== ========== =========== ========== ========== =============
</Table>
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 2002 AND 2001 (DOLLARS IN
THOUSANDS)
INTEREST INCOME. Interest income for the 2002 periods decreased to $9,095
and $29,177 compared with $11,408 and $33,999 for the comparable periods in
2001. Interest income on Receivables Held for Investment decreased 17% and 12%
from the 2001 periods. This is due to a 12% and 7% decline in the average
Receivables Held for Investment outstanding over the three-month and nine-month
period and to a reduction of 90 basis points, which is a 5% decrease, in the
yield on the Receivables Held for Investment for the three months and nine
months ended January 31, 2002 compared to the same period for 2001. Interest
income on Receivables Acquired for Investment and Investment in Trust
Certificates decreased by 48% for the comparable three-month period and 35% for
the comparable nine-month period. The decreases are primarily attributable to a
62% and 59% reduction in the average principal balances of the Receivables
Acquired for Investment and Investment in Trust Certificates for the comparable
three-month and nine-month periods.
INTEREST EXPENSE. Interest expense in 2002 decreased for both the
three-month and nine-month periods to $2,818 and $10,543 as compared to $5,092
and $15,263 in 2001. Interest expense on Receivables Held for Investment
decreased 43% and 30% for their respective periods. This is primarily due to
a) a reduction of 250 basis points and 190 basis points, which is a 33% and 24%
decrease, in the interest rate on the outstanding borrowings in the three-month
and nine-months periods in 2002 compared to 2001, and b) a reduction in the
average outstanding borrowings of 14% and 8% for the three-month and nine-month
periods in 2002 compared to 2001. Additionally, $47,266 of deferred financing
costs were written off during the period ended January 31, 2002 related to the
restructuring of the FIRC credit facility. Interest expense also includes other
comprehensive income amortization of $326 and $966 for the three-month and
nine-month period ended January 31, 2002 related to the adoption of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" on May 1, 2001.
Subsequent to May 1, 2001, other comprehensive income amortization is recorded
as interest expense and the monthly settlements on the derivatives are recorded
as unrealized gains or losses. Interest expense on Receivables Acquired for
Investment and Investment in Trust Certificates decreased by 65% for the
comparable three-month period and 39% for the comparable nine-month period. The
decrease is attributable to a net reduction in the weighted average borrowings
under the acquisition term and FIACC facilities.
NET INTEREST INCOME. Net interest income decreased to $6,277 and $18,634, a
decrease of 1% over the comparable three-month and nine-month periods in the
prior year. The decreases resulted from lower average outstandings and lower
yields on the Receivables Held for Investment and lower interest income from the
Receivables Acquired for Investment due to the liquidating balance of the
portfolio. This is offset by lower cost of funds and lower borrowings to finance
the Receivables Held for Investment and lower borrowings on the Receivables
Acquired for Investment.
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<Page>
PROVISION FOR CREDIT LOSSES. The provision for credit losses for 2002
increased to $2,474 and $6,178 as compared to $1,868 and $6,177 in 2001. The
provision is affected by a) increases or decreases in the portfolio size, b)
amount of net charge offs, and c) changes in the target percentage of overall
allowance to outstanding receivables. When the Company charges off accounts, the
allowance is reduced. At period end, the allowance is increased to a stated
percentage of the outstanding receivables. In April 2001, the allowance
percentage was increased from .9% to 1.1%. Additionally, charge offs for the
three-month and nine-month periods increased to $2,567 and $6,478, respectively,
from $1,873 and $5,991 for the comparable periods in the previous year. These
increases are due to weakened economic conditions and the ability of customers
to maintain comparable employment. Additionally, recovery rates on repossessions
have suffered due to decreasing prices and increased incentives for new vehicles
which decreased the demand and price for used vehicles. Offsetting these
increases was the effect of a 4% and 11% reduction in the Receivables Held for
Investment over the three-month and nine-month periods compared to a 1% decrease
and 9% increase over the same periods in the prior year. As the portfolio size
decreases, less provision expense is required to replenish the allowance to the
stated percentage.
LOSS ON RECEIVABLES ACQUIRED FOR INVESTMENT. During the quarter ended
January 31, 2002, a loss of $1,260 was recorded on the Receivables Acquired
for Investment. Receivables Acquired for Investment are comprised of loans
previously orginated by Auto Lenders Acceptance Corporation and include a
portfolio of warehouse loans and a portfolio of loans that were previously
securitized. The securitized loans were subsequently redeemed and funded
through the FIACC credit facility. During the prior three-month and
nine-month period in fiscal 2001, no loss was incurred. The loss in the
current quarter is due to a .42%, or $334,052 and 1.44%, or $954,833,
increase in the cumulative loss rate for the FIACC and warehouse portfolios,
respectively. The increase in the cumulative loss rates was necessary due to
higher loss frequency and loss severity in these portfolios. The higher
frequency is primarily attributable to weakened economic conditions and the
effect it has on job stability for our customers. The higher severity is
principally due to the older automobiles in these portfolios and a lower
recovery rate from auction proceeds than was originally anticipated.
LATE FEES AND OTHER INCOME. Late fees and other income decreased to $409
and $1,392 in 2002 from $580 and $2,039 in 2001 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 as well as lower
cash collections due to the declining portfolio balances.
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.
UNREALIZED LOSS ON INTEREST RATE DERIVATIVE POSITIONS. In conjunction with
the adoption of SFAS 133, the Company is required to report the fair value of
interest rate derivative positions. Unrealized losses are primarily relate to
mark to market movements in the $100 million 6.42% pay fixed versus movements in
the $100 million 5.025% receive floating swap. These two derivatives will not
directly offset over the life of the derivatives due to interest rate
fluctuations between periods.
SALARIES AND BENEFIT EXPENSES. Salaries and benefit costs decreased to
$2,063 and $6,054 in 2002 from $2,294 and $7,009 in 2001. The decrease is
primarily due to reduced headcount needs related to lower originations and a
lower managed portfolio.
OTHER INTEREST EXPENSE. Other interest expense in 2002 decreased to $185
for the three-month period and $617 for the nine-month period as compared to
$337 and $1,016, respectively, in 2001. The decrease was primarily due to a 6%
reduction in the average outstanding borrowings and a 38% reduction in the
average interest rate on this facility for the three months ended January 31,
2002 compared to 2001 and a 9% reduction in the average outstanding borrowings
and a 32% reduction in the average interest rate for the nine months ended
January 31, 2002 compared to 2001.
20
<Page>
OTHER EXPENSES. Other expenses increased to $2,000 and $5,206 in 2002 from
$1,559 and $4,168 in 2001. The increase is attributable to amortization of
deferred financing costs and stock warrants related to the term loan working
capital facility restructured with Bank of America on December 22, 2000.
Amortization of these fees and warrants were $650 and $836 higher for the
three-month and nine-month periods ending January 31, 2002 compared to the same
periods in the prior year. Included in these increases is $555 of amortization
related to the termination of the term loan working capital facility on December
6, 2001. A new term loan facility with First Union National Bank was entered
into on December 6, 2001 in order to refinance the outstanding borrowings and
increase the size of the facility. This increase is offset by a decrease in
depreciation expense of $107 and $132 for the comparable three-month and
nine-month periods, respectively, due to the completion of capital lease
depreciation in November 2001. The capital lease was initiated in December 1998
to purchase the assets of FISC. Additionally, for the nine months ended January
31, 2002 and 2001, third party service bureau fees increased $192. In December
2000, the Company outsourced the collection and servicing software systems to a
third party service bureau to increase the stability of operations. Thus only
two months of expenses were incurred for the prior nine-month period.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST.
During 2002, income (loss) before provision (benefit) for income taxes and
minority interest decreased to $(1,306) and $601 from $923 and $2,838 for the
comparable periods in 2001. Decreases were primarily a result of the loss on
Receivables Acquired for Investment during the current quarter, lower
reinvestment income and servicing fees, the amortization of deferred financing
fees and warrants related to the payoff of the term loan working capital
facility, offset by lower salaries and interest expense.
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 $18.3 million and $55.1 million for
receivables acquired for the three months and nine months ended January 31, 2002
compared to $23.4 million and $93.6 million paid in the comparable 2001 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
Variable Funding Capital Corporation (VFCC), a commercial paper conduit
administered by First Union Securities 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, the Company had borrowings of
$121,808,808 outstanding under the FIARC commercial paper facility. The Company
had no outstanding borrowings under the FIARC facility as of January 31, 2002.
21
<Page>
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 percent of the
face amount of the receivables being transferred. In addition, a cash reserve
equal to 1 percent 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 December 5, 2002.
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 expires on
January 13, 2003. 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 $34,640,000 at April 30, 2001 and
January 31, 2002, 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 percent of the face amount of receivables
which are pledged as collateral for the commercial paper borrowings. In
addition, a cash reserve equal to 2 percent 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 March
11, 2003. As a result of utilizing FIACC to fund the repurchase of the ALAC
securitizations, the Company does not expect to use the 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 January 31, 2002,
borrowings were $10,400,901 and $4,354,205, 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 working capital facility
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
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<Page>
closing price for the immediately preceding 30 trading days prior to each grant
date which is June 30, 2001 and December 31, 2001. Pursuant to this requirement,
the Company issued 36,986 warrants to Bank of America at a strike price of $3.56
per share on June 30, 2001. All other terms and conditions of the warrants were
identical to the warrants issued in December 2000. The amount of warrants, if
any, to be issued on December 31, 2001 was to be determined by the outstanding
balance owed to Bank of America under the term loan. In no event, however, 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, there was $12,825,000 outstanding under this facility.
On December 6, 2001, the Company entered into an agreement with First Union
National Bank to refinance the $11,175,000 outstanding balance of the working
capital term loan and increase the size of the facility to $13.5 million. The
renewal facility was provided to a special-purpose, wholly-owned subsidiary of
the Company, First Investors Residual Funding LP. Upon the issuance of the
2002-A Term Notes on January 29, 2002, a portion of the this facility was
converted to a $4.5 million term loan tranche which amortizes monthly as
principal payments are collected under the 2002-A Term Note facility. The
monthly principal amortization must be sufficient to reduce the amounts
outstanding under the term loan tranche of this facility to no greater than 3
percent of the outstanding receivables securing the 2002-A Term Note
transaction. The term loan tranche of this working capital facility will be
evidenced by the Class B Notes issued in conjunction with the 2002 Auto Trust
financing. This principal repayment requirement replaces the current $675,000
per quarter and the additional $600,000 per annum required under the previous
facility. The remaining $9 million of the $13.5 million working capital facility
revolves monthly in accordance with a borrowing base consisting of the
overcollateralization amount and reserve accounts for each of the Company's
other credit facilities. The new facility is secured solely by the residual cash
flow and cash reserve accounts related to the Company's warehouse credit
facilities, the acquisition facility and the existing and future term note
facilities. This compares to the previous requirement that all assets of the
Company, excluding receivables owned and financed by special purpose
subsidiaries, secure the indebtedness. Pricing under the facility was not
changed. The maturity of the facility was extended to December 5, 2002. In the
event that the facility is not renewed at maturity, residual cash flows from the
various receivables financing transactions will be applied to amortize the debt
over the remaining life of the underlying receivables. Further, as a result of
the refinancing, the Company is not obligated to issue additional warrants
covering 10,959 shares of the Company's common stock to Bank of America on
December 31, 2001. At January 31, 2002, there was $13,134,233 outstanding under
this facility. In conjunction with the refinancing, the Company repaid the
working capital term loan and entered into the new working capital facility.
Consequently, $554,896 of deferred financing costs and warrants were written
off.
The Company presently intends to seek a renewal of the working capital
facility from its lender prior to maturity. Should the facility not be renewed,
the outstanding balance of the receivables would be amortized in accordance with
the borrowing base. Management considers its relationship with its lenders to be
satisfactory and has no reason to believe that this credit facility will not be
renewed. If the facility were not renewed however, or if material changes were
made to its terms and conditions, it could have a material adverse effect on the
Company.
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. As of January 31, 2002, the Company had available unused credit
facilities of $190,360,000, including the $25,000,000 prefunding of Term Notes.
The prefunding of $25,000,000 is classified as restricted cash as of January 31,
2002. As of January 31, 2001, the Company had $48,704,403 of available unused
credit facilities.
TERM NOTES. On January 29, 2002, the Company, through its indirect,
wholly-owned subsidiary First Investors Auto Owner Trust 2002-A ("2002 Auto
Trust") completed the issuance of $159,036,000 of 3.46 percent Class A
asset-backed notes ("2002-A Term Notes"). The initial pool of automobile
receivables transferred to the 2002 Auto Trust totaled $135,643,109, which were
previously owned by FIRC and FIARC, secure the 2002-A Term Notes. In addition to
the issuance of the Class A Notes, the 2002 Auto Trust also issued $4,819,000 in
Class B Notes which were retained by the Company and pledged to secure the
Working Capital Facility as further described below. Proceeds from the issuance,
which totaled $159,033,471 were used to (i) fund a $25,000,000 pre-funding
account to be used for future loan originations; (ii) repay all outstanding
borrowings under the FIARC commercial paper facility, (iii) reduce the
outstanding borrowings under the FIRC credit facility, (iv) pay transaction fees
related to the 2002-A Term Note issuance, and (v) fund a cash reserve account of
2 percent or
23
<Page>
$2,712,862 of the initial receivables pledged which will serve as a portion of
the credit enhancement for the transaction. The Class A Term Notes bear interest
at 3.46 percent and require monthly principal reductions sufficient to reduce
the balance of the Class A Term Notes to 97 percent of the outstanding balance
of the underlying receivables pool. The final maturity of the 2002-A Term Notes
is December 15, 2008. The Class B Notes do not bear interest but require
principal reductions sufficient to reduce the balance of the Class B Notes to 3
percent of the outstanding balance of the underlying receivables pool. A surety
bond issued by MBIA Insurance Corporation provides credit enhancement for the
Class A Notes. Additional credit support is provided by the cash reserve
account, which equals 2 percent of the original balance of the receivables pool
plus 2 percent of the original balance of receivables transferred under the
pre-funding provision. Further enhancement is provided through an initial 1
percent overcollateralization which is required to be increased to 3 percent
through excess monthly principal and interest collections. In the event that
certain asset quality covenants are not met, the reserve account target level
will increase to 6 percent of the then current principal balance of the
receivables pool.
On January 24, 2000, the Company, through its indirect, wholly-owned
subsidiary First Investors Auto Owner Trust 2000-A ("Auto Trust") completed the
issuance of $167,969,000 of 7.174 percent asset-backed notes ("2000-A 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 2000-A Note issuance and to fund a cash reserve account of 2
percent or $3,499,373 which will serve as a portion of the credit enhancement
for the transaction. The 2000-A Notes bear interest at 7.174 percent and require
monthly principal reductions sufficient to reduce the balance of the Notes to 96
percent of the outstanding balance of the underlying receivables pool. The final
maturity of the Notes is February 15, 2006. Credit enhancement for the 2000-A
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 percent of the original balance of the receivables pool and a 4 percent
over-collateralization requirement amount. 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. As of
April 30, 2001 and January 31, 2002, the outstanding principal balance on the
2000-A Notes was $84,925,871 and $49,219,391, 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 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 percent. 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. 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
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<Page>
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.
On December 3, 2001 the Company entered into an agreement with one of its
existing shareholders and a member of its Board of Directors under which the
Company may, from time to time, borrow up to $2.5 million. The proceeds of the
borrowings will be utilized to fund certain private and open market purchases of
the Company's common stock and for general corporate purposes. Borrowings under
the facility bear interest at a fixed rate of 10 percent per annum. The facility
is unsecured and expressly subordinated to the Company's senior credit
facilities. The facility matures on December 3, 2008 but may be repaid at any
time unless the Company is in default on one of its other credit facilities. As
of January 31, 2002, $525,000 was outstanding under this facility.
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 $96.1 million and $87.9 million for the nine months
ended January 31, 2002 and 2001, 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 and excess cash
flow is used to fund operations. During the nine months ended January 31,
2002, the Company's principal collections on Receivables Held for Investment
exceeded cash required to purchase Receivables Held for Investment by $14.3
million. During the nine months ended January 31, 2001, the Company required
net cash of $35.7 million as the receivable purchases exceeded the principal
collections.
In addition to the excess cash flow generated from the principal and
interest collections on the receivables portfolio, the Company collects
servicing fees funded from each of the credit facilities. Servicing fees range
from 2% to 2.5% of the outstanding principal balance of the loans. Excess cash
flows and servicing fees are received after month end but relate to the prior
month activity. Thus upon filing of the monthly servicing statements, a portion
of the restricted cash is converted to cash available to fund operations. At
January 31, 2002 and 2001, the Company's unencumbered cash was $1,867,119 and
$1,384,440, respectively. Excess cash and servicing fees collected after month
end but related to the prior month activity totaled $1,039,921 and $2,044,612 as
of January 31, 2002 and 2001, respectively. The decrease in available cash is
primarily due to the declining portfolio's effect on excess cash and servicing
fees. Management believes the unencumbered cash and cash inflows are adequate to
fund cash requirements for operations.
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
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<Page>
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 swaps on June
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1, 2001, the Company elected to change the designation of the $100 million fixed
rate swap and not account for the instrument as a hedge under SFAS No. 133. As a
result, the change in fair value of both swaps is reflected in net earnings for
period subsequent to May 31, 2001. In conjunction with this designation and the
adoption of SFAS 133 and SFAS 138, the Company recorded a transition adjustment
in the aggregate amount of $(2,501,595), net of a tax benefit of $1,437,925, as
a reduction to shareholders' equity and recorded a corresponding liability to
reflect the fair market value of the derivatives as of May 1, 2001. The equity
adjustment is classified as other comprehensive income (loss) and the derivative
liability is classified in the interest rate derivative positions liability.
Over a period ending in April 2004, the maturity date of the final swap, the
Company will reclassify into earnings substantially all of the transition
adjustment originally recorded.
DELINQUENCY AND CREDIT LOSS EXPERIENCE
The Company's results of operations, financial condition and liquidity may
be adversely affected by nonperforming receivables. The Company seeks to manage
its risk of credit loss through (i) prudent credit evaluations, (ii) risk
management activities, (iii) effective collection procedures, and (iv) by
maximizing recoveries on defaulted loans. An allowance for credit losses of
$2,388,301 as of January 31, 2002 and $2,688,777 as of April 30, 2001 as a
percentage of the Receivables Held for Investment of $217,179,396 as of January
31, 2002 and $244,684,343 as of April 30, 2001 was 1.1% at January 31, 2002 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 January 31, 2002 and April 30, 2001,
the nonaccretable loss reserve as a percentage of Receivables Acquired for
Investment was 12.7% and 8.6%, respectively. The nonaccretable portion
represents the excess of the loan's scheduled contractual principal and interest
payments over its expected cash flows. The increase as of January 31, 2002 is
related to additional reserve provided by the current quarter write down of $1.3
million related to increasing the cumulative loss rate in the cash flow
projections. This write down occurred due to higher severity and frequency of
losses realized to date and to reserve for potential losses based on the higher
loss curve expected.
The Company considers a loan to be delinquent when the borrower fails to
make a scheduled payment of principal and interest. Accrual of interest is
suspended when the payment from the borrower is over 90 days past due.
Generally, repossession procedures are initiated 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 $2,474,025 and
$1,868,384 have been recorded for the three months ended January 31, 2002, and
January 31, 2001, respectively, for losses on receivables which are either
uninsured or which are reinsured by the Company's captive insurance subsidiary.
Provisions for credit losses of $6,177,825 and $6,176,834 have been recorded for
the nine months ended January 31, 2002 and January 31, 2001, respectively.
The Company calculates the allowance for credit losses in accordance with
SFAS 5, "Accounting for Contingencies". SFAS 114, "Accounting for Creditors for
Impairment of a Loan" does not apply to the Company since the Receivables Held
for Investment are comprised of a large group of smaller balance homogenous
loans.
The Company applies a systematic methodology in order to determine the
amount of loan loss reported. The specific methodology utilized is a six-month
migration analysis whereby the Company compares the status of each loan from six
months prior to the loan status as of the reporting date. These factors are then
applied to the status of each loan at the reporting date in order to calculate
the number of loans that are expected to migrate to impaired status in the next
six months. The estimated number of impairments is then multiplied by estimated
loss per loan, which is based on historical information. The computed reserve is
then compared to the amount recorded for adequacy. The Company compares the
six-month result to prior six-month periods to compare trends
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and evaluate any other internal or external factors that may affect
collectibility. The allowance for credit losses is based on estimates and
qualitative evaluations and ultimate losses will vary from current estimates.
These estimates are reviewed periodically and as adjustments, either positive or
negative, become necessary, are reported in earnings in the period they become
known.
For Receivables Acquired for Investment, nonaccretable difference
represents contractual principal and interest payments the Company will be
unable to collect. The Company analyzes the composition of these liquidating
portfolios in order to estimate a future loss rate. Criteria evaluated include
delinquencies, historical charge offs, recovery rates, portfolio seasoning and
economic conditions. A cash flow model that considers term, interest rate, loss
rate, prepayment rate and recovery rate is consistently applied to project
expected cash flows. The difference between expected cash flows and total
contractual principal and interest payments is the nonaccretable difference.
During the quarter ended January 31, 2002, the Company increased the cumulative
loss rates on the warehouse and FIACC portfolios by 1.44% and .42%,
respectively. The total increase to nonaccretable difference of $1,288,885
is related to the recessionary environment and the impact it has on customer's
ability to maintain comparable paying employment. Additionally, the effective
decrease in prices of new automobiles through incentive programs offered by
captives during the quarter ending January 31, 2002, contributed to decreasing
prices and demands for used vehicles. This results in lower recovery rates
realized through repossessions. The collateral comprising the Receivables
Acquired for Investment is at higher risk as it is primarily older model used
cars with higher mileage. The increase in accretable yield results from
increasing the expected term of the remaining cash flow in order to allow for
collections on charged off receivables. By extending the cash flow projection
model life, accretable yield must be increased to provide for future income.
The following table summarizes the status and collection experience of
receivables by the Company (dollars in thousands):
<Table>
<Caption>
AS OF OR FOR THE NINE MONTHS ENDED JANUARY 31,
-------------------------------------------------------------------
2001 2002
------------------------------- ---------------------------------
NUMBER NUMBER
OF LOANS AMOUNT OF LOANS AMOUNT
------------- --------------- --------------- ---------------
Receivables Held for Investment:
Delinquent amount outstanding:
30 - 59 days.................................... 412 $ 4,990 149 $ 1,795
60 - 89 days.................................... 176 2,103 80 1,038
90 days or more................................. 206 2,602 279 3,392
------------- --------------- --------------- ---------------
Total delinquencies............................. 794 $ 9,695 508 $ 6,225
Total delinquencies as a percentage of
Outstanding receivables.................... 3.8% 3.8% 2.7% 2.9%
Net charge-offs as a percentage of average
Receivables outstanding during the
period(1).................................. 3.2% 3.7%
</Table>
(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 was 7.4% and 6.0% as of January 31, 2002 and
April 30, 2001, respectively.
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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 January 31, 2002, the Company had $45.5 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 $289,000, assuming the Company maintains a level
amount of floating rate debt and assuming an immediate increase in rates. As of
January 31, 2001, the Company had $49.8 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 $316,000, 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)
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.98(a) First Omnibus Amendment to the Transaction Documents dated December 6, 2001 between F.I.R.C., Inc.,
First Investors Financial Services, Inc., First Investors Servicing Corporation, Bank of America,
N.A., First Union Securities, Inc. and Wells Fargo Bank Minnesota, National Association
10.99(a) Security Agreement dated December 6, 2001 between First Investors Residual Funding L.P. and First
Union Securities, Inc.
10.100(b) Sale and Servicing Agreement dated December 6, 2001 between First Investors Residual Funding L.P.,
First Investors Financial Services, Inc. and First Union Securities, Inc.
10.101(c) Note Purchase Agreement dated December 6, 2001 between First Investors Residual Funding L.P, First
Union Securities, Inc., First Union National Bank and Variable Funding Capital Corporation
10.102(d) Asset Purchase Agreement dated December 6, 2001 between First Investors Residual Funding L.P., FIFS
Acquisition Funding Company LLC, First Investors Auto Investment Corp. and First Investors Auto
Receivables Corporation
10.103(a) Indenture dated January 1, 2002 between First Investors Auto Owner Trust 2002-A, First Investors
Financial Services, Inc. and Wells Fargo Bank Minnesota, National Association
10.104(b) Sale and Allocation Agreement dated January 1, 2002 between First Investors Auto Owner Trust 2002-A,
First Investors Financial Services, Inc., First Investors Servicing Corporation, First Investors Auto
Funding Corporation and Wells Fargo Bank Minnesota, National Association
10.105(c) Amended and Restated Trust Agreement dated January 1, 2002 between First Investors Auto Funding
Corporation and Bankers Trust (Delaware)
10.106(a) First Omnibus Amendment to Transaction Documents dated January 14, 2002 between First Investors Auto
Receivables Corporation, First Investors Financial Services, Inc., First Investors Servicing
Corporation, Enterprise Funding Corporation, Bank of America, N.A., Variable Funding Capital
Corporation, First Union Securities, Inc., MBIA Insurance Corporation, and Wells Fargo Bank Minnesota,
National Association
10.107(b) Amendment No. 3 to Note Purchase Agreement dated January 14, 2002 between First Investors Auto
Receivables Corporation and Variable Funding Capital Corporation
10.108(c) Amendment No. 4 to Security Agreement dated January 14, 2002 between First Investors Auto Receivables
Corporation, First Investors Financial Services, Inc., First Investors Servicing Corporation, Variable
Funding Capital Corporation, First Union Securities, Inc., MBIA Insurance Corporation and Wells Fargo
Bank Minnesota, National Association
</Table>
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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: March 18, 2002 By: /s/ TOMMY A. MOORE, JR.
Tommy A. Moore, Jr.
President and Chief Executive Officer
Date: March 18, 2002 By: /s/ BENNIE H. DUCK
Bennie H. Duck
Secretary, Treasurer and Chief Financial Officer
31