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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K

(MARK ONE)
[X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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 0-26500

                        FIRSTCITY FINANCIAL CORPORATION
             (Exact name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      76-0243729
       (State or Other Jurisdiction of                        (I.R.S. Employer
        Incorporation or Organization)                      Identification No.)

        6400 IMPERIAL DRIVE, WACO, TX                              76712
   (Address of Principal Executive Offices)                      (Zip Code)
</TABLE>

                                 (254) 751-1750
              (Registrant's Telephone Number, Including Area Code)

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE

          Securities Registered Pursuant to Section 12(g) of the Act:

                              TITLE OF EACH CLASS

                          Common Stock, par value $.01
                 Adjusting Rate Preferred Stock, par value $.01

     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

     Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes [X]  No [ ]

     The number of shares of common stock outstanding at February 8, 2000 was
8,333,300. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based upon the closing price of
the common stock on the NASDAQ National Market System, was approximately
$23,547,223.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                                                              FORM 10-K
                                                              ---------
<S>                                                           <C>
Notice of Annual Meeting and Proxy Statement for the 2000
  Annual Meeting of Shareholders............................     III
</TABLE>

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<PAGE>   2

                        FIRSTCITY FINANCIAL CORPORATION

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
PART I
Item 1     Business....................................................     1
Item 2     Properties..................................................    13
Item 3     Legal Proceedings...........................................    13
Item 4     Submission of Matters to a Vote of Security Holders.........    14
PART II
Item 5     Market for Registrant's Common Equity and Related
             Stockholder Matters.......................................    14
Item 6     Selected Financial Data.....................................    15
Item 7     Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................    16
Item 7A    Quantitative and Qualitative Disclosures About Market
             Risk......................................................    40
Item 8     Financial Statements and Supplementary Data.................    43
Item 9     Changes in and Disagreements with Accountants on Accounting
             and Financial
           Disclosure..................................................    80
PART III
Item 10    Directors and Executive Officers of the Registrant..........    80
Item 11    Executive Compensation......................................    80
Item 12    Security Ownership of Certain Beneficial Owners and
             Management................................................    80
Item 13    Certain Relationships and Related Transactions..............    80
PART IV
Item 14    Exhibits, Financial Statement Schedules and Reports on Form
             8-K.......................................................    81
</TABLE>

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<PAGE>   3

FORWARD LOOKING INFORMATION

     This Annual Report on Form 10-K may contain forward-looking statements. The
factors identified under "Risk Factors" are important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by,
or on behalf of, the Company.

     When any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. When, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
expressions identify forward-looking statements.

                                     PART I

ITEM 1. BUSINESS.

GENERAL

     The Company is a diversified financial services company headquartered in
Waco, Texas with offices throughout the United States and a presence in France
and Mexico. The Company began operating in 1986 as a specialty financial
services company focused on acquiring and resolving distressed loans and other
assets purchased at a discount relative to the aggregate unpaid principal
balance of the loans or the appraised value of the other assets ("Face Value").
To date the Company has acquired, for its own account and through various
affiliated partnerships, pools of assets or single assets (collectively referred
to as "Portfolio Assets" or "Portfolios") with a Face Value of approximately
$4.0 billion. In 1996, the Company adopted a growth strategy to diversify and
expand its financial services business. To implement its growth strategy, the
Company has acquired or established several businesses in the financial services
industry, building upon its core strength and expertise as one of the earliest
participants in the business of acquiring and resolving distressed financial
assets and other assets. The Company's servicing expertise, which it has
developed largely through the resolution of distressed assets, is a cornerstone
of its growth strategy. Today the Company is engaged in two principal
businesses: (i) Portfolio Asset acquisition and resolution; and (ii) consumer
lending.

BUSINESS STRATEGY

     The Company's business strategy is to continue to broaden and expand its
business within the financial services industry while building on its core
servicing strengths and credit expertise. The following principles are key
elements to the execution of the Company's business strategy:

     - Expand the financial products and services offered by existing
       businesses.

     - Broaden its sources of revenue and operating earnings by developing or
       acquiring additional businesses that leverage its core strengths and
       management expertise.

     - Pursue new business opportunities through joint ventures, thereby
       capitalizing on the expertise of partners whose skills complement those
       of the Company.

     - Maximize growth in earnings, thereby permitting the utilization of the
       Company's net operating loss carryforwards ("NOLs").

                                        1
<PAGE>   4

BACKGROUND

     The Company began operating in the financial service business in 1986 as a
purchaser of distressed assets from the Federal Deposit Insurance Corporation
("FDIC") and the Resolution Trust Corporation ("RTC"). From its original office
in Waco, Texas, with a staff of four professionals, the Company's asset
acquisition and resolution business grew to become a significant participant in
an industry fueled by the problems experienced by banks and thrifts throughout
the United States. In the late 1980s, the Company also began acquiring assets
from healthy financial institutions interested in eliminating nonperforming
assets from their portfolios. The Company began its relationship with Cargill
Financial Services Corporation ("Cargill Financial") in 1991. Since that time,
the Company and Cargill Financial have formed a series of Acquisition
Partnerships through which they have jointly acquired over $3.2 billion in Face
Value of distressed assets. By the end of 1994, the Company had grown to nine
offices with over 180 professionals and had acquired portfolios with assets in
virtually every state.

     In July 1995, the Company acquired by merger (the "Merger") First City
Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had
been engaged in a proceeding under Chapter 11 of the Bankruptcy Code since
November 1992. As a result of the Merger, the Common Stock of the Company became
publicly held and the Company received $20 million of additional equity capital
and entered into an incentive-based servicing agreement to manage approximately
$300 million in assets for the benefit of the former equity holders of FCBOT. In
addition, as a result of the Merger, the Company retained FCBOT's rights to
approximately $596 million in NOLs, which the Company believes it can use to
offset taxable income generated by the Company and its consolidated
subsidiaries.

     Following the Merger, the Company adopted a growth and diversification
strategy designed to capitalize on its servicing and credit expertise to expand
into additional financial service businesses with management partners that have
distinguished themselves among competitors. To that end, in July 1997 the
Company acquired Harbor Financial Group, Inc. (formerly known as FirstCity
Mortgage Corp.), a company engaged in the residential and commercial mortgage
banking business since 1983. During 1997, the Company also expanded into related
niche financial services markets, such as consumer finance, conducted through
FirstCity Consumer Lending Corporation ("Consumer Corp."), a subsidiary formed
in 1997, and mortgage conduit banking, conducted through FC Capital Corp.
("Capital Corp."), a subsidiary formed in 1997.

     Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Harbor Financial Group,
Inc. and its subsidiaries (collectively referred to as "Mortgage Corp.") and
Capital Corp. These entities comprise the operations that were previously
reported as the Company's mortgage banking operations. Because the Company
formally adopted plans to discontinue the operations of Mortgage Corp. and
Capital Corp., and operations at each such entity have either ceased, or are
expected to cease in the near future (no later than one year following the
adoption of the plan to discontinue operations), the results of the current and
historical operations have been reflected as discontinued operations.

     On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. Neither FirstCity nor any of its other
affiliates or business units are contemplating filing bankruptcy.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     The Company engages in the Portfolio Asset acquisition and resolution
business through its wholly owned subsidiary, FirstCity Commercial Corporation,
and its subsidiaries ("Commercial Corp."). In the Portfolio Asset acquisition
and resolution business Commercial Corp. acquires and resolves portfolios of
performing and nonperforming commercial and consumer loans and other assets,
which are generally acquired at a discount to Face Value. Purchases may be in
the form of pools of assets or single assets. Performing assets are those as to
which debt service payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are those as to which
debt service payments are not being made in accordance
                                        2
<PAGE>   5

with the original or restructured terms of such assets, or as to which no debt
service payments are being made. Portfolios are designated as nonperforming
unless substantially all of the assets comprising the Portfolio are performing.
Once a Portfolio has been designated as either performing or nonperforming, such
designation is not changed regardless of the performance of the assets
comprising the Portfolio. Portfolios are either acquired for Commercial Corp.'s
own account or through investment entities formed with Cargill Financial or one
or more other co-investors (each such entity, an "Acquisition Partnership"). See
"-- Portfolio Asset Acquisition and Resolution Business -- Relationship with
Cargill Financial." To date, Commercial Corp. and the Acquisition Partnerships
have acquired over $4.0 billion in Face Value of assets.

  Portfolio Asset Acquisition and Resolution Business

     SOURCES OF ASSETS ACQUIRED

     In the early 1990s large quantities of nonperforming assets were available
for acquisition from the RTC and the FDIC. Since 1993, most sellers of
nonperforming assets have been private sellers, rather than government agencies.
These private sellers include financial institutions and other institutional
lenders, both in the United States and in various foreign countries, and, to a
lesser extent, insurance companies in the United States. As a result of mergers,
acquisitions and corporate downsizing efforts, other business entities
frequently seek to dispose of excess real estate property or other financial
assets not meeting the strategic needs of a seller. Sales of such assets improve
the seller's balance sheet, reduce overhead costs, reduce staffing requirements
and avoid management and personnel distractions associated with the intensive
and time-consuming task of resolving loans and disposing of real estate.
Consolidations within a broad range of industries, especially banking, have
augmented the trend of financial institutions and other sellers packaging and
selling asset portfolios to investors as a means of disposing of nonperforming
loans or other surplus or non-strategic assets.

     PORTFOLIO ASSETS

     Commercial Corp. acquires and manages Portfolio Assets, which are generally
purchased at a discount to Face Value by Commercial Corp. or through Acquisition
Partnerships. The Portfolio Assets are generally nonhomogeneous assets,
including loans of varying qualities that are secured by diverse collateral
types and foreclosed properties. Some Portfolio Assets are loans for which
resolution is tied primarily to the real estate securing the loan, while others
may be collateralized business loans, the resolution of which may be based
either on business real estate or other collateral cash flow. Consumer loans may
be secured (by real or personal property) or unsecured. Portfolio Assets may be
designated as performing or nonperforming. Commercial Corp. generally expects to
resolve Portfolio Assets within three to five years after purchase.

     To date, a substantial majority of the Portfolio Assets acquired by
Commercial Corp. have been designated as nonperforming. Commercial Corp. seeks
to resolve nonperforming Portfolio Assets through (i) a negotiated settlement
with the borrower in which the borrower pays all or a discounted amount of the
loan, (ii) conversion of the loan into a performing asset through extensive
servicing efforts followed by either a sale of the loan to a third party or
retention of the loan by Commercial Corp. or the Acquisition Partnership or
(iii) foreclosure of the loan and sale of the collateral securing the loan.
Commercial Corp. generally retains Portfolio Assets that are designated as
performing for the life of the loans comprising the Portfolio.

     Commercial Corp. has substantial experience acquiring, managing and
resolving a wide variety of asset types and classes. As a result, it does not
limit itself as to the types of Portfolios it will evaluate and purchase. The
main factors determining Commercial Corp.'s willingness to acquire Portfolio
Assets include the information that is available regarding the assets in a
portfolio, the price at which such portfolio can be acquired and the expected
net cash flows from the resolution of such assets. Commercial Corp. has acquired
Portfolio Assets in virtually all 50 states, the Virgin Islands, Puerto Rico,
France, Japan and Mexico. Commercial Corp. believes that its willingness to
acquire nonhomogeneous Portfolio Assets without regard to geographic location
provides it with an advantage over certain competitors that limit their
activities to either a specific asset type or geographic location. Although
Commercial Corp. imposes no constraints on geographic

                                        3
<PAGE>   6

locations of Portfolio Assets, the majority of assets acquired to date have been
in the Northeastern and Southern areas of the United States.

     Commercial Corp. also seeks to capitalize on emerging opportunities in
foreign markets where the market for nonperforming loans of the type generally
purchased by Commercial Corp. is less efficient than the market for such assets
in the United States. Through December 31, 1999, Commercial Corp. has acquired,
with Cargill Financial and a local French partner, eight Portfolios in France,
consisting of approximately 11,000 assets, for an aggregate purchase price of
approximately $205 million. Such assets had a Face Value of approximately $875
million. Commercial Corp.'s share of the equity interest in the Portfolios
acquired in France ranges from 10% to 33 1/3% and Commercial Corp. has made a
total equity investment therein of approximately $17 million. Commercial Corp.
has an established presence in Paris, France and is actively pursuing
opportunities to purchase additional pools of distressed assets in France and
other areas of Western Europe. In addition, Commercial Corp. has established
offices in Guadalajara and Mexico City, Mexico. Through December 31, 1999
Commercial Corp. has acquired, with various partners, two portfolios of
residential mortgages in Mexico consisting of approximately 3,700 assets for a
purchase price of approximately $12.4 million and a Face Value of approximately
$140.6 million. Commercial Corp.'s share of the equity interest in the two
Portfolios acquired in Mexico is 11.12% and 20% with a combined equity
investment by Commercial Corp. totaling $1.5 million. During 1999, Commercial
Corp. sold its interests in two groups of loans in Japan.

     The following table presents, for each of the years in the three-year
period ended December 31, 1999, selected data for the Portfolio Assets acquired
by Commercial Corp.

                                PORTFOLIO ASSETS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
Face Value...........................................  $516,518   $537,356   $504,891
Total purchase price.................................   210,799    139,691    183,229
Total equity invested................................    63,260     65,073     54,764
Commercial Corp. equity invested.....................  $ 11,203   $ 28,478   $ 37,109
Total number of Portfolio Assets.....................     5,769      4,966      5,503
</TABLE>

  Sources of Portfolio Assets

     Commercial Corp. develops its Portfolio Asset opportunities through a
variety of sources. The activities or contemplated activities of expected
sellers are publicized in industry publications and through other similar
sources. Commercial Corp. also maintains relationships with a variety of parties
involved as sellers or as brokers or agents for sellers. Many of the brokers and
agents concentrate by asset type and have become familiar with Commercial
Corp.'s acquisition criteria and periodically approach Commercial Corp. with
identified opportunities. In addition, repeat business referrals from Cargill
Financial or other co-investors in Acquisition Partnerships, repeat business
from previous sellers, focused marketing by Commercial Corp. and the nationwide
presence of Commercial Corp. and the Company are important sources of business.

     Commercial Corp. has identified and seeks to continue to identify foreign
partners that have contacts within each foreign market and can bring Portfolio
Asset opportunities to Commercial Corp. Commercial Corp. expects that it will
only pursue acquisitions in foreign markets in conjunction with a local foreign
partner and markets where Cargill Financial has a presence.

  Asset Analysis and Underwriting

     Prior to making an offer to acquire any Portfolio, Commercial Corp.
performs an extensive evaluation of the assets that comprise the Portfolio. If,
as is often the case, the Portfolio Assets are nonhomogeneous, Commercial Corp.
will evaluate all individual assets determined to be significant to the total of
the proposed purchase. If the Portfolio Assets are homogenous in nature, a
sample of the assets comprising the Portfolio is

                                        4
<PAGE>   7

selected for evaluation. The evaluation of an individual asset generally
includes analyzing the credit and collateral file or other due diligence
information supplied by the seller. Based upon such seller-provided information,
Commercial Corp. will undertake additional evaluations of the asset which, to
the extent permitted by the seller, will include site visits to and
environmental reviews of the property securing the loan or the asset proposed to
be purchased. Commercial Corp. will also analyze relevant local economic and
market conditions based on information obtained from its prior experience in the
market or from other sources, such as local appraisers, real estate principals,
realtors and brokers.

     The evaluation further includes an analysis of an asset's projected cash
flow and sources of repayment, including the availability of third party
guarantees. Commercial Corp. values loans (and other assets included in a
portfolio) on the basis of its estimate of the present value of estimated cash
flow to be derived in the resolution process. Once the cash flow estimates for a
proposed purchase and the financing and partnership structure, if any, are
finalized, Commercial Corp. can complete the determination of its proposed
purchase price for the targeted Portfolio Assets. Purchases are subject to
purchase and sale agreements between the seller and the purchasing affiliate of
Commercial Corp.

  Servicing

     After a Portfolio is acquired, Commercial Corp. assigns it to an account
servicing officer who is independent of the officer that performed the due
diligence evaluation in connection with the purchase of the Portfolio. Portfolio
Assets are serviced either at the Company's headquarters or in one of Commercial
Corp.'s other offices. Commercial Corp. generally establishes servicing
operations in locations in close proximity to significant concentrations of
Portfolio Assets. Most of such offices are considered temporary and are reviewed
for closing after the assets in the geographic region surrounding the office are
substantially resolved. The assigned account servicing officer develops a
business plan and budget for each asset based upon an independent review of the
cash flow projections developed during the investment evaluation, a physical
inspection of each asset or the collateral underlying the related loan,
evaluation of local market conditions and discussions with the relevant
borrower. Budgets are periodically reviewed and revised as necessary. Commercial
Corp. employs loan tracking software and other operational systems that are
generally similar to systems used by commercial banks, but which have been
enhanced to track both the collected and the projected cash flows from Portfolio
Assets.

     In prior years, Commercial Corp. completed three structured
securitization/financing transactions. To date, the net present value of
Commercial Corp.'s cash flows from serviced assets has exceeded initial
projections. The basis for such transactions differs from traditional
securitization structures in which the execution levels are predicated upon the
existence of an underlying contractual stream of cash flows from periodic
payments on underlying loans. Transactions completed by Commercial Corp. to date
have been based not only on the cash flow from performing assets but also the
projected cash flows from nonperforming assets such as unoccupied real estate
and raw land parcels. Commercial Corp. believes that its success in predicting
cash flows from Portfolio Assets has permitted it to access the securitization
markets on attractive terms.

     Commercial Corp. services all of the Portfolio Assets owned for its own
account, all of the Portfolio Assets owned by the Acquisition Partnerships and,
to a very limited extent, Portfolio Assets owned by related third parties. In
connection with the Acquisition Partnerships, Commercial Corp. generally earns a
servicing fee of between 1% and 8% of gross cash collections generated rather
than a management fee based on the Face Value of the asset being serviced. The
rate of servicing fee charged is a function of the average Face Value of the
assets within each pool being serviced (the larger the average Face Value of the
assets in a Portfolio, the lower the fee percentage within the prescribed
range).

  Structure and Financing of Portfolio Asset Purchases

     Portfolio Assets are acquired for the account of a subsidiary of Commercial
Corp. and through the Acquisition Partnerships. Portfolio Assets owned directly
by a subsidiary of Commercial Corp. are financed with cash contributed by
Commercial Corp. and secured senior debt that is recourse only to such
subsidiary.

                                        5
<PAGE>   8

     Each Acquisition Partnership is a separate legal entity, generally formed
as a limited partnership. Commercial Corp. and an investor typically form a
corporation to serve as the corporate general partner of each Acquisition
Partnership. Generally, Commercial Corp. and the investor each own 50% of the
general partner and a 49% limited partnership interest in the Acquisition
Partnership (the general partner owns the other 2% interest). Cargill Financial
or its affiliates are the investor in the vast majority of the Acquisition
Partnerships currently in existence. See "-- Relationship with Cargill
Financial." Certain institutional investors have also held limited partnership
interests in the Acquisition Partnerships and may hold interests in the related
corporate general partners. Acquisition Partnerships may also be formed as a
limited liability company, trust, corporation or other type of entity.

     The Acquisition Partnerships are generally financed by debt secured only by
the assets of the individual entity and are nonrecourse to the Company,
Commercial Corp., its co-investors and the other Acquisition Partnerships.
Commercial Corp. believes that such legal structure insulates it, the Company
and the other Acquisition Partnerships from certain potential risks, while
permitting Commercial Corp. to share in the economic benefits of each
Acquisition Partnership.

     Senior secured acquisition financing currently provides the majority of the
funding for the purchase of Portfolios. Commercial Corp. and the Acquisition
Partnerships have relationships with a number of senior lenders including
Cargill Financial. Senior acquisition financing is obtained at variable interest
rates ranging from LIBOR to prime based pricing with negotiated spreads to the
base rates. The final maturity of the senior secured acquisition debt is
normally two years from the date of funding of each advance under the facility.
The terms of the senior acquisition debt of the Acquisition Partnerships
generally allow, under certain conditions, distributions to equity partners
before the debt is repaid in full.

     Prior to maturity of the senior acquisition debt, the Acquisition
Partnerships typically refinance the senior acquisition debt with long-term debt
secured by the assets of partnerships or transfer assets from the Portfolios to
special purpose entities to effect structured financings or securitization
transactions. Such long-term debt generally accrues interest at a lower rate
than the senior acquisition debt, has collateral terms similar to the senior
acquisition debt, and permits distributions of excess cash flow generated by the
partnership to the equity partners so long as the partnership is in compliance
with applicable financial covenants.

  Relationship with Cargill Financial

     Cargill Financial, a diversified financial services company, is a wholly
owned subsidiary of Cargill, Incorporated, which is generally regarded as one of
the world's largest privately-held corporations and has offices worldwide.
Cargill Financial and its affiliates provide significant debt and equity
financing to the Acquisition Partnerships. In addition, Commercial Corp.
believes its relationship with Cargill Financial significantly enhances
Commercial Corp.'s credibility as a purchaser of Portfolio Assets and
facilitates its ability to expand into other businesses and foreign markets.

     Under a Right of First Refusal Agreement and Due Diligence Reimbursement
Agreement effective as of January 1, 1998, as amended (the "Right of First
Refusal Agreement") among the Company, FirstCity Servicing Corporation, Cargill
Financial and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), if the
Company receives an invitation to bid on or otherwise obtains an opportunity to
acquire interests in domestic loans, receivables, real estate or other assets in
which the aggregate amount to be bid exceeds $4 million, the Company is required
to follow a prescribed notice procedure pursuant to which CFSC has the option to
participate in the proposed purchase by requiring that such purchase or
acquisition be effected through an Acquisition Partnership formed by the Company
and Cargill Financial (or an affiliate). The Right of First Refusal Agreement
does not prohibit the Company from holding discussions with entities other than
CFSC regarding potential joint purchases of interests in loans, receivables,
real estate or other assets, provided that any such purchase is subject to
CFSC's right to participate in the Company's share of the investment. The Right
of First Refusal Agreement further provides that, subject to certain conditions,
CFSC will bear 50% of the due diligence expenses incurred by the Company in
connection with proposed asset purchases. The Right of First Refusal Agreement
is a restatement and extension of a similar agreement entered into among

                                        6
<PAGE>   9

the Company, certain members of the Company's management and Cargill Financial
in 1992. The Right of First Refusal Agreement is anticipated to be extended to
January 1, 2002.

  Business Strategy

     Historically, Commercial Corp. has leveraged its expertise in asset
resolution and servicing by investing in a wide variety of asset types across a
broad geographic scope. Commercial Corp. continues to follow this investment
strategy and seeks expansion opportunities into new asset classes and geographic
areas when it believes it can achieve attractive risk adjusted returns. The
following are the key elements of Commercial Corp.'s business strategy in the
portfolio acquisition and resolution business:

     - Niche markets. Commercial Corp. will continue to pursue profitable
       private market niches in which to invest. The niche investment
       opportunities that Commercial Corp. has pursued to date include (i) the
       acquisition of improved or unimproved real estate, including excess
       retail sites, and (ii) periodic purchases of single financial or real
       estate assets from banks and other financial institutions with which
       Commercial Corp. has established relationships, and from a variety of
       other sellers that are familiar with the Company's reputation for acting
       quickly and efficiently.

     - Emphasis on smaller Portfolios. Generally, Commercial Corp. seeks
       purchases of Portfolio Assets with a purchase price of less than $100
       million in order to avoid large portfolio offerings that attract larger
       institutional purchasers and hedge funds, which have lower threshold
       return requirements and lower funding costs than Commercial Corp.

     - Foreign markets. Commercial Corp. believes that the foreign markets for
       distressed assets are less developed than the U.S. market, and therefore
       provide a greater opportunity to achieve attractive risk adjusted
       returns. Commercial Corp. has purchased Portfolio Assets in France, Japan
       (sold in 1999) and Mexico and expects to continue to seek purchase
       opportunities outside of the United States.

CONSUMER LENDING

     The Company conducts all of its consumer receivable origination activities
through FirstCity Consumer Lending Corporation and its subsidiaries ("Consumer
Corp."). Consumer Corp.'s current focus is on the origination and servicing of
sub-prime consumer loans. Such loans are extended to borrowers who evidence an
ability and willingness to repay credit, but have experienced an adverse event,
such as a job loss, illness or divorce, or have had past credit problems, such
as delinquency, bankruptcy, repossession or charge-offs. The significant
majority of Consumer Corp.'s current business is focused on the sub-prime
automobile sector, with each loan funded after individual underwriting and
pricing of each proposed extension of credit.

  Market Background

     The sub-prime automobile finance business has been characterized by several
factors that the Company believes increase its likelihood of being able to
sustain a successful sub-prime automobile finance business. Within the past
several years, significant amounts of new capital have become available, thereby
allowing a large number of new market participants to originate loans to
sub-prime automobile borrowers. This increase in competition led to reduced
credit underwriting standards and lower dealer discounts as lenders sought to
maintain earnings by increasing loan origination levels. In the Company's view,
too little attention was paid to the structure of loans, the importance of
matching the discount to the expected loss per occurrence, and the special
effort required to service a sub-prime automobile loan. Because of many notable
failures, especially among mono-line automobile finance businesses, the Company
believes that the opportunity now exists to increase market share by providing a
fully underwritten loan product that utilizes risk-adjusted pricing to
franchised automobile dealerships that seek a steady source of funding supported
by meaningful and responsive service.

                                        7
<PAGE>   10

  Consumer Corp. Background

     The Company's initial venture into the sub-prime automobile market involved
the acquisition of a distressed sub-prime automobile loan portfolio from a
secured lender. In addition to acquiring the distressed loans, the Company
acquired the equity of the company that operated the program through which the
loans had been originated. This program involved the indirect acquisition of
automobile loans from financial intermediaries that had direct contact with
automobile dealerships. The Company was required to purchase loans that
satisfied minimum contractual underwriting standards and was not permitted to
negotiate purchase discounts for a loan based on the individual risk profile of
the loan and the borrower. After operating this program for approximately 15
months, the Company concluded that the contractual underwriting standards and
purchase discounts on which the program was based were insufficient to generate
sub-prime automobile loans of acceptable quality to the Company. As a result,
the Company terminated its obligations with the financial institutions
participating in such origination program effective as of January 31, 1998.

     With the benefit of the experience gained by the Company through its
initial attempt at originating acceptable sub-prime automobile loans, the
Company began, in early 1997, to explore other business models that it felt
would be successful in the current market environment. This investigation and
research resulted in the formation, during the third quarter of 1997, of
FirstCity Funding Corporation ("Funding"), 80% of which is owned by the Company
and 20% of which is owned by Funding's management team. Funding's management
team is experienced in the automobile finance business, with significant prior
experience in the sales and finance activities of franchised dealerships.
Funding's business model is predicated upon the acquisition of newly originated
sub-prime automobile finance contracts at a price that is adjusted to reflect
the expected loss per occurrence on defaulted contracts. The approach emphasizes
service to the dealership and a steady source of funding for contracts that meet
Funding's underwriting and pricing criteria. In addition, all loans are serviced
by divisions and subsidiaries of Funding ("Consumer Servicing"), which is
dedicated primarily to the servicing of consumer loans originated or acquired by
Consumer Corp.

     Consumer Corp. and the management shareholders of Funding entered into a
shareholders' agreement in connection with the formation of Funding in September
1997. Commencing on the fifth anniversary of such agreement, Consumer Corp. and
the management shareholders have put and call options with respect to the stock
of Funding held by the other party. Should one of the parties decide to exercise
its option, the price will be determined based on the current market conditions
at such time. Should the parties not be able to determine a price that is
mutually agreeable, an independent appraisal will be performed to establish such
price.

     During 1999, FirstCity Funding Corp. was converted to a limited
partnership, FirstCity Funding LP ("Funding"), with a newly formed FirstCity
Funding Corp. named as general partner. The effective ownership remained the
same, 80% of which is owned by the Company and 20% owned by Funding's management
team. Also, Funding purchased Consumer Servicing for an amount equal to book
value, which previously had been indirectly wholly owned.

  Product Description

     Consumer Corp. currently acquires and originates loans, secured by
automobiles, to borrowers who have had past credit problems or have little or no
credit experience. Such loans are individually underwritten to Consumer Corp.'s
underwriting and credit guidelines. See "-- Loan Acquisition and Underwriting."
The collateral for the loan generally is a used automobile purchased from a
franchised automobile dealership. The loans generally have a term of no more
than 60 months and generally accrue interest at the maximum rate allowed by
applicable state law.

  Origination Channels

     Through a sales staff managed by professionals with an extensive automobile
dealership background, Funding markets its loan products and dealership services
directly to participating franchised automobile dealerships. Funding currently
maintains approximately 1,074 automobile dealership relationships in Arizona,
California, Colorado, Florida, Georgia, Kansas, Missouri, North Carolina,
Oklahoma, South Carolina, and
                                        8
<PAGE>   11

Texas. Near term plans call for expansion into other states as staffing levels,
licensing and training permit. Funding is targeting expansion into states that
offer attractive opportunities due to population growth, attractive consumer
lending rate environments and lender-friendly repossession and collection
remedies with respect to defaulting borrowers.

     The dealership servicing and marketing staff of Funding consists of 23
marketing representatives who work with dealers that submit funding applications
to Funding. These marketing representatives call upon new dealership prospects
within the current marketing territories and work with existing dealerships to
solicit additional loan acquisition opportunities. All of the marketing staff
are full time employees of Funding and have completed an extensive training
program. In addition to the initial training, weekly updates with the marketing
representatives and monthly meetings for the entire staff are held to maintain
current knowledge of the dealership programs and product offerings.

     Participating dealerships submit funding applications for each prospective
loan to Funding's home office in Dallas, Texas. Applications are reviewed and
checked for completeness and all complete applications are forwarded to a credit
analyst for review. Within two hours after receipt of an application, a
representative of Funding will notify the dealership of the terms on which it
would acquire the loan, subject to confirmation of the application data. See
"-- Loan Acquisition and Underwriting." The geographic dispersion of loans
acquired by Funding during 1999, is displayed in the following table:

<TABLE>
<CAPTION>
                                                          FISCAL YEAR
                                                              1999
                                                          -----------
<S>                                                     <C>
Texas.................................................         59%
California............................................         11
Georgia...............................................          8
North Carolina........................................          8
South Carolina........................................          5
Other states..........................................          9
                                                              ---
          Total loan production.......................        100%
                                                              ===
</TABLE>

     In addition to Funding's operations, FirstCity Consumer Finance Corporation
("Consumer Finance"), a wholly owned subsidiary of Consumer Corp., originated
loans with borrowers who had established payment records on recently originated
automobile receivables through direct marketing to the consumer. Through
contractual relationships with third parties, Consumer Finance identified loan
prospects for underwriting, documentation and funding upon final approval of a
request for credit. Consumer Finance ceased funding new loans in the third
quarter of 1999, and its activities are not significant, with 76 loans having an
aggregate principal balance of approximately $1 million outstanding at December
31, 1999.

  Loan Acquisition and Underwriting

     Funding acquires sub-prime automobile loans originated by franchised
dealerships under a tiered pricing system. Under its pricing and underwriting
guidelines, each loan is purchased in an individually negotiated transaction
from the selling dealership only after it has been fully underwritten and
independently verified by Funding. A staff of 90 credit and compliance personnel
in Funding's home office completes the underwriting and due diligence for each
funding application. During the compliance phase of the underwriting review,
Funding verifies all pertinent information on a borrower's credit application,
including verification of landlord information for borrowers without a mortgage.
As an additional check on the quality of the prospective loan, each borrower is
personally contacted by Funding prior to the acquisition of the loan. At such
time, all of the details of the proposed transaction are confirmed with the
borrower, including the borrower's level of satisfaction with the purchased
vehicle.

     Each transaction is individually priced to achieve a risk-adjusted target
purchase price, which is expressed as a percentage of the par value of the loan.
The tiered pricing structure of Funding is designed as a guideline for
establishing minimum underwriting and pricing standards for the loans to be
acquired. The minimum amount of the discount from par for the four tiers ranges
from no discount for tier 1 loans to a 10% discount for
                                        9
<PAGE>   12

tier 4 loans. Funding's underwriting standards do not permit the purchase of a
loan for more than its par value. Other factors impacting the tier level of a
loan include, but are not limited to, prior credit history, repossession and
bankruptcy history, open credit account status, income minimums, down payment
requirements, payment ratio tests and the contract advance amount as a
percentage of the wholesale value of the collateral vehicle. The purpose of the
tiered underwriting and pricing structure is to acquire loans that are priced in
accordance with risk characteristics and the underlying value of the collateral.
The process is designed to approve loan applications for borrowers who are
likely to pay as agreed, and to minimize the risk of loss on the disposition of
the underlying collateral in the event that a default occurs.

     The following table depicts the 1999 loan characteristics by tier:

<TABLE>
<CAPTION>
                                                          TIER
                                          -------------------------------------
                                             1         2         3         4       TOTAL
                                          -------   -------   -------   -------   --------
                                                       (DOLLARS IN THOUSANDS)
<S>                                       <C>       <C>       <C>       <C>       <C>
Amount funded...........................  $24,635   $42,884   $37,453   $81,190   $186,162
Number of loans.........................    1,558     2,957     2,793     6,236     13,544
Average loan to value...................    102.3%    100.8%    100.1%     99.6%     100.3%
Average purchase discount...............      9.3%     13.2%     15.3%     16.1%      14.3%
Weighted average coupon.................     18.9%     19.1%     19.2%     19.2%      19.2%
Average term of loan (in months)........       56        55        54        54         54
Average total down payment percentage...     16.4%     18.5%     19.1%     19.8%      18.9%
</TABLE>

     Funding seeks to acquire loans that have the following characteristics:

     - Loans originated by a franchised dealership of new automobiles

     - Loans secured by automobiles that have established resale values and a
       targeted age of approximately two years

     - The borrower has made a substantial down payment on the automobile, which
       evidences a significant equity commitment

     - The loan is underwritten to provide a debt to income ratio permitting the
       borrower to comfortably afford the monthly payments

     - The borrower evidences a tendency toward repairing impaired credit

     - Funding's purchase price of the contract from the dealership is less than
       the published wholesale value of the automobile

     The average automobile financed by Funding 1999 was less than two years old
with approximately 24,000 miles. The ratio of the borrower's monthly debt
service amount to the borrower's monthly gross income was, on average, equal to
11.1%.

  Financing Strategy

     Funding finances its operations with a warehouse credit facility provided
by a commercial conduit with Enterprise Funding Corporation as issuer and Bank
of America, N.A. as collateral agent and majority investor for which the
principal and interest is fully secured by a credit enhancement provider. In
connection with this facility, Bank of America Securities has the right to
provide advisory and placement services to Funding. Funding has historically and
plans to continue to provide permanent financing for its acquired consumer loans
through securitizations of pools of loans totaling between $40 and $100 million.

     The securitization transactions are consummated through the creation of
special purpose trusts. The loans are transferred to a trust in exchange for
certificates representing the senior interest in the securitized loans held by
the trust and, if applicable, a subordinated interest in the securitized loans.
The subordinated interests generally consist of the excess spread between the
interest and principal paid by the borrowers on the loans pooled in the
securitization and the interest and principal of the senior interests issued in
the securitization,

                                       10
<PAGE>   13

and other unrated interests issued in the securitization. The senior interests
are subsequently sold to investors for cash. Consumer Corp. may elect to retain
the subordinated interests or may sell all or some portion of the subordinated
interests to investors for cash. Consumer Corp. retains the rights to the excess
spreads.

     Upon the sale of loans in securitization transactions, the sum of the cash
proceeds received and the estimated present values of the subordinated interests
less the costs of origination and securitization and the basis in the loans sold
results in a gain recognized at the time of the securitization transaction. The
present values of the subordinated interests to be recognized by Consumer Corp.
are determined based upon prepayment, loss and discount rate assumptions that
are determined in accordance with the unique underlying characteristics of the
loans comprising each securitization.

  Servicing

     Consumer Servicing is responsible for the loan accounting, collection,
payment processing, skip tracing and recovery activities associated with the
Company's consumer lending activities. During 1999, Funding purchased Consumer
Servicing for an amount equal to book value, which previously had been
indirectly wholly owned. Consumer Servicing has extensive experience in
servicing automobile loans and the Company believes that Consumer Servicing is a
critical element to the Company's ultimate success in the consumer loan
business. Consumer Servicing's activities are closely integrated with the
activities of Consumer Corp. This enables Consumer Servicing to take advantage
of the information regarding the quality of originated credit that is available
from a servicer in order to assist in the evaluation and modification of product
design and underwriting criteria.

     Consumer Servicing has servicing centers located in Tustin, California and
Dallas, Texas. The staffing of Consumer Servicing consists of 206 personnel,
including 169 assigned to customer service and collections. A group of 30
individuals are assigned to the special recovery activities associated with
assignments for repossession through the liquidation of the collateral. This
group also coordinates any contract reinstatements, notices of intent to dispose
of collateral and recovery of any insurance, warranty or other premium payments
subject to recovery in the event of cancellation. In addition, a portion of this
group is dedicated to asset recovery, which includes tracing of individuals who
cannot be located, seeking to collect on deficiencies, managing the storage of
repossessed vehicles prior to their disposition and physical damage claims on
collateral vehicles. An administrative staff handles the special issues
associated with borrowers in bankruptcy and the more complicated issues
associated with contracts involved in other legal disputes.

     The servicing practices associated with sub-prime loans are extensive. For
example, Consumer Servicing personnel contact each borrower three days prior to
the payment due date during each of the first three months of the contract. This
process assists in avoiding first payment defaults and confirms that the
customer can be located. If a borrower is delinquent in payment, an attempt to
contact the borrower is made on the first day of delinquency. Continual contact
is attempted until the borrower is located and payment is made, or a commitment
is made to bring the contract current. If the borrower cannot be contacted, the
account may be assigned to Consumer Servicing's asset recovery staff.

     If the borrower does not meet a payment commitment and has not indicated a
verifiable and reasonable intention to bring the loan current, the account is
assigned to outside agents for repossession at the thirty-third day of
delinquency. At such time, the borrower has missed two payments and has not
indicated a willingness to enter into a repayment plan. After the collateral is
repossessed, the borrower has a limited opportunity to reinstate the obligation
under applicable state law by bringing the payment current and reimbursing
Consumer Servicing for its repossession expenses. If the loan is not reinstated
within the reinstatement period, the collateral is sold by the asset liquidation
group. Repossessed automobiles are generally disposed at auction after a
thorough inspection and detailing. Historically, the Company used a third party
refurbishing center to process some of its repossessed vehicles. During 1999,
the Company experienced an immaterial loss of potential sales proceeds processed
by the third party provider. Due to these operational difficulties and in an
effort to strengthen the controls surrounding this process, the Company has
decided to process these vehicles internally. A representative of Funding
generally will attend the auction to represent Funding and ensure that the
automobile is properly represented by the auction firm.

                                       11
<PAGE>   14

  Strategy

     The Company continues to evaluate a number of business opportunities in the
consumer sector, which have the capability of generating or acquiring consumer
loans that represent identifiable and predictable credit quality and whose
return thresholds match or exceed those targeted by the Company. These include
secured consumer loan products and certain aspects of direct and indirect
unsecured consumer lending. Through contacts with investment banks, business
brokers and others in the consumer lending field, the Company seeks acquisition
or merger candidates or qualified management teams with which to associate in
start-up ventures. As with other aspects of its business, the Company seeks to
be opportunistic in targeting additional consumer lending opportunities.

GOVERNMENT REGULATION

     Many aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, the Company's loan originations, credit activities, maximum interest
rates, finance and other charges, disclosures to customers, the terms of secured
transactions, collection repossession and claims handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices.

     Regulation of Sub-prime Automobile Lending. Consumer Corp.'s automobile
lending activities are subject to various federal and state consumer protection
laws, including TILA, ECOA, FCRA, the Federal Fair Debt Collection Practices
Act, the Federal Trade Commission Act, the Federal Reserve Board's Regulations B
and Z, and state motor vehicle retail installment sales acts and other similar
laws that regulate the origination and collection of consumer receivables and
impact Consumer Corp.'s business. These laws, among other things, (i) require
Consumer Corp. to obtain and maintain certain licenses and qualifications, (ii)
limit the finance charges, fees and other charges on the contracts purchased,
(iii) require Consumer Corp. to provide specific disclosures to consumers, (iv)
limit the terms of the contracts, (v) regulate the credit application and
evaluation process, (vi) regulate certain servicing and collection practices,
and (vii) regulate the repossession and sale of collateral. These laws impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may give rise to defenses to the payment of the consumer's
obligation. In addition, certain of the laws make the assignee of a consumer
installment contract liable for the violations of the assignor.

     Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has complied with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify Consumer Corp. for any breach of any of the representations and
warranties and to repurchase any non-conforming contracts. Consumer Corp.
generally verifies dealer compliance with usury laws, but does not audit a
dealer's full compliance with applicable laws. There can be no assurance that
Consumer Corp. will detect all dealer violations or that individual dealers will
have the financial ability and resources either to repurchase contracts or
indemnify Consumer Corp. against losses. Accordingly, failure by dealers to
comply with applicable laws, or with their representations and warranties under
the dealer agreement, could have a material adverse effect on Consumer Corp.

     If a borrower defaults on a contract, Consumer Corp., as the servicer of
the contract, is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code (the "UCC"), which typically includes the right to
repossession by self-help unless such means would constitute a breach of peace.
The UCC and other state laws regulate repossession and sales of collateral by
requiring reasonable notice to the borrower of the date, time and place of any
public sale of collateral, the date after which any private sale of the
collateral may be held and the borrower's right to redeem the financed vehicle
prior to any such sale, and by providing that any such sale must be conducted in
a commercially reasonable manner.

     The Company believes that it is in compliance with applicable government
regulations relating to all aspects of the Company's lending activities,
including its loan origination activities, consumer credit transactions and
sub-prime automobile lending.

                                       12
<PAGE>   15

COMPETITION

     All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain of its
businesses are substantially larger and better capitalized than the Company.
Because of these resources, these companies may be better able than the Company
to obtain new customers for loan production, to acquire Portfolio Assets, to
pursue new business opportunities or to survive periods of industry
consolidation.

     The Company believes that it is one of the largest, independent,
full-service companies in the distressed asset business. There are, however, no
published rankings available, because many of the transactions that would be
used for ranking purposes are with private parties. Generally, there are three
aspects of the distressed asset business: due diligence, principal activities,
and servicing. The Company is a major participant in all three areas, whereas
certain of its competitors (including certain securities and banking firms) have
historically competed primarily as portfolio purchasers, as they have
customarily engaged other parties to conduct due diligence on potential
portfolio purchases and to service acquired assets, and certain other
competitors (including certain banking and other firms) have historically
competed primarily as servicing companies.

     The Company believes that its ability to acquire Portfolios for its own
account and through Acquisition Partnerships will be an important aspect of the
Company's overall future growth. Acquisitions of Portfolios are often based on
competitive bidding, which involves the danger of bidding too low (which
generates no business), or bidding too high (which could win the Portfolio at an
economically unattractive price).

     The sub-prime automobile finance market is highly fragmented and very
competitive. There are numerous financial services companies serving, or capable
of serving, this market, including traditional financial institutions such as
banks, thrifts, credit unions, and captive finance companies owned by automobile
manufacturers, as well as other non-traditional consumer finance companies, many
of which have significantly greater financial and other resources than the
Company. Many of these competitors also have long standing relationships with
automobile dealerships and may offer dealerships or their customers other forms
of financing, including dealer floor plan financing and leasing, which are not
provided by the Company. In seeking to establish itself as one of the financing
sources at the dealers it serves, the Company competes predominately on the
basis of its high level of dealer service and strong dealer relationships. There
can be no assurance that the Company will be able to compete successfully in
this market or against these competitors.

EMPLOYEES

     The Company had 464 employees as of December 31, 1999. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are good.

ITEM 2. PROPERTIES.

     FirstCity leases all its office locations. FirstCity leases its current
headquarters building from a related party under a noncancellable operating
lease which expires December 2001. All leases of the other offices of FirstCity
and subsidiaries expire prior to 2006.

ITEM 3. LEGAL PROCEEDINGS.

     On October 4, 1999, Chase Securities, Inc. filed suit alleging breach of
contractual terms outlined in an engagement letter retaining Chase Securities,
Inc. to render financial advisory services to the Company. Chase Securities,
Inc. is demanding approximately $2.4 million in actual damages, approximately $4
thousand in out of pocket costs, and attorneys fees and costs. The Company
answered these claims on December 3, 1999. A Motion for Stay pending trial and
determination of an action pending in the U.S. District Court for the Western
District of Texas was filed on December 3, 1999. This matter is in the early
stages of discovery and development, the probable outcome cannot be determined.
The Company intends to vigorously defend this suit.

                                       13
<PAGE>   16

     Periodically, FirstCity, its subsidiaries, its affiliates and the
Acquisition Partnerships are parties to or otherwise involved in legal
proceedings arising in the normal course of business. FirstCity does not believe
that there is any proceeding threatened or pending against it, its subsidiaries,
its affiliates or the Acquisition Partnerships which, if determined adversely,
would have a material adverse effect on the consolidated financial position,
results of operations or liquidity of FirstCity, its subsidiaries, its
affiliates or the Acquisition Partnerships.

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

     No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

                        COMMON AND PREFERRED STOCK DATA

     FirstCity's common stock, $.01 par value per share (the "Common Stock")
(FCFC), and adjusting rate preferred (FCFCO) stock are listed on the Nasdaq
National Market System. Its special preferred (FCFCP) stock was redeemed on
September 30, 1998. The number of common stockholders of record on March 21,
2000 was approximately 510. High and low stock prices and dividends for the
Common Stock, special preferred stock and adjusting rate preferred stock in 1999
and 1998 are displayed in the following table:

<TABLE>
<CAPTION>
                                            1999                          1998
                                 ---------------------------   ---------------------------
                                  MARKET PRICE       CASH       MARKET PRICE       CASH
                                 ---------------   DIVIDENDS   ---------------   DIVIDENDS
QUARTER ENDED                     HIGH     LOW       PAID       HIGH     LOW       PAID
-------------                    ------   ------   ---------   ------   ------   ---------
<S>                              <C>      <C>      <C>         <C>      <C>      <C>
Common Stock:
  March 31.....................  $16.75   $ 8.88        --     $31.50   $27.00        --
  June 30......................   11.44     5.06        --      33.38    27.38        --
  September 30.................    6.63     0.75        --      29.50    12.06        --
  December 31..................    2.75     1.13        --      15.50    10.38        --
Special Preferred Stock:
  March 31.....................      --       --        --     $22.88   $21.88    $.7875
  June 30......................      --       --        --      22.38    21.13     .7875
  September 30(1)..............      --       --        --      22.38    20.13     1.575
  December 31..................      --       --        --         --       --        --
Adjusting Rate Preferred
  Stock(2):
  March 31.....................  $20.75   $17.38    $0.525     $23.25   $21.75    $.7875
  June 30......................   18.25    15.00     0.525      23.88    21.50     .7875
  September 30.................   15.75     5.00     0.525      22.75    18.25     .7875
  December 31..................    9.63     6.00        --      19.00    14.69     .7875
</TABLE>

---------------

(1) Redeemed on September 30, 1998.

(2) In the third quarter of 1999, payment of dividends in respect to the
    Adjusting Rate Preferred Stock was suspended.

     The Company has never declared or paid a dividend on the Common Stock. The
Company currently intends to retain future earnings to finance its growth and
development and therefore does not anticipate that it will declare or pay any
dividends on the Common Stock in the foreseeable future. Any future
determination as to payment of dividends will be made at the discretion of the
Board of Directors of the Company and will depend upon the Company's operating
results, financial condition, capital requirements, general business

                                       14
<PAGE>   17

conditions and such other factors that the Board of Directors deems relevant.
The Company's Senior Facility and substantially all of the credit facilities to
which the Company's subsidiaries and the Acquisition Partnerships are parties
contain restrictions relating to the payment of dividends and other
distributions.

ITEM 6. SELECTED FINANCIAL DATA.

     Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Mortgage Corp and Capital
Corp. these entities comprise the operations that were previously reported as
the Company's residential and commercial mortgage banking business. Because the
Company formally adopted plans to discontinue the operations of Mortgage Corp.
and Capital Corp., and operations at each such entity have either ceased,or are
expected to cease in the near future (no later than one year following the
adoption of the plan to discontinue operations), the results of the current and
historical operations have been reflected as discontinued operations.

     On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. Neither FirstCity nor any of its other
affiliates or business units are contemplating filing bankruptcy.

     The Selected Financial Data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 of this Report and with the related Consolidated
Financial Statements and Notes thereto under Item 8 of this Report.

                            SELECTED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                1999        1998       1997       1996       1995
                                              ---------   --------   --------   --------   --------
<S>                                           <C>         <C>        <C>        <C>        <C>
Revenues....................................  $  58,928   $ 51,544   $ 63,896   $ 61,469   $ 39,523
Expenses....................................     56,619     51,719     49,482     42,077     23,854
Earnings (loss) from continuing
  operations................................     (4,241)       785     27,623     35,405     14,733
Earnings (loss) from discontinued
  operations................................   (103,915)   (20,977)     8,005      3,724        511
Net earnings (loss).........................   (108,156)   (20,192)    35,628     39,129     15,244
Redeemable preferred dividends..............      2,568      5,186      6,203      7,709      3,876
Net earnings (loss) to common
  shareholders(1)...........................   (110,724)   (25,378)    29,425     31,420     11,368
Net earnings (loss) from continuing
  operations per common share --
  Basic(1)..................................      (0.73)     (0.58)      3.28       4.26       2.08
  Diluted(1)................................      (0.73)     (0.58)      3.25       4.22       2.08
Dividends per common share..................         --         --         --         --         --
At year end:
  Total assets..............................    230,622    336,643    317,146    237,802    315,426
  Total notes payable.......................    169,792    165,922    152,216     91,924     85,518
  Preferred stock...........................     26,965     26,323     41,908     53,617     55,555
Total common equity.........................     26,587    136,955    112,758     84,802     52,788
</TABLE>

---------------

(1) Includes $1.2 million, $13.6 million and $16.2 million, respectively, of
    deferred tax benefits related to the recognition of benefits to be realized
    from net operating loss carryforwards (NOLs) in 1998, 1997 and 1996, and a
    deferred tax provision of $4.9 million in 1999.

                                       15
<PAGE>   18

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

OVERVIEW

     The Company is a diversified financial services company engaged in
Portfolio Asset acquisition and resolution and consumer lending. The Portfolio
Asset acquisition and resolution business involves acquiring Portfolio Assets at
a discount to Face Value and servicing and resolving such Portfolios in an
effort to maximize the present value of the ultimate cash recoveries. The
Company also seeks opportunities to originate and retain high yield commercial
loans to businesses and to finance real estate projects that are unable to
access traditional lending sources. The consumer lending business involves the
acquisition, origination, warehousing, securitization and servicing of consumer
receivables. The Company's current consumer lending operations are focused on
the acquisition of sub-prime automobile receivables.

     During 1999, the Company adopted plans of discontinuation for its mortgage
business operations, which consist of Mortgage Corp. and Capital Corp. The
Company realized losses in 1999 from the discontinued operations in the amount
of $103.9 million. The components of this loss are losses from operations of
$40.7 million, the write-off of the Company's investment in Mortgage Corp. of
$50.5 million, write down in the investment in Capital Corp. of $15.6 million,
offset by the future operations, net of reserves, of the residual assets of the
discontinued business of approximately $2.9 million. The anticipated disposition
is subject to many assumptions, including the financial and general market
conditions. Changes in these and other factors could materially effect the
results of this plan of discontinuation. Furthermore, changes in conditions
could dictate changes in the plan of discontinuation, which could result in a
material difference in the results of discontinuation.

     On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had the stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. Neither FirstCity nor any of its other
affiliates or business units are contemplating filing for bankruptcy protection.

     The Company posted a loss from continuing operations of $4.2 million in
1999. After dividends on the preferred stock and loss from discontinued
operations, the net loss available to common shareholders was $110.7 million or
$13.33 per common share for 1999. Such loss was primarily comprised of the loss
from discontinued operations of $103.9 million.

     The Company's financial results are affected by many factors including
levels of and fluctuations in interest rates, fluctuations in the underlying
values of real estate and other assets, and the availability and prices for
loans and assets acquired in all of the Company's businesses. The Company's
business and results of operations are also affected by the availability of
financing with terms acceptable to the Company and the Company's access to
capital markets, including the securitization markets.

     As a result of the significant period to period fluctuations in the
revenues and earnings of the Company's Portfolio Asset acquisition and
resolution business, and the timing of securitization transactions of Consumer
Corp., period to period comparisons of the Company's results of continuing
operations may not be meaningful.

                                       16
<PAGE>   19

ANALYSIS OF REVENUES AND EXPENSES

     The following table summarizes the revenues and expenses of each of the
Company's business segments and presents the contribution that each business
makes to the Company's operating margin.

                       ANALYSIS OF REVENUES AND EXPENSES

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------
                                                           1999          1998          1997
                                                       ------------   -----------   ----------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>            <C>           <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Gain on resolution of Portfolio Assets..........   $   4,054      $  9,208      $24,183
     Equity in earnings of Acquisition Partnerships
       and Servicing Entities........................      11,318        12,827        7,605
     Servicing fees(1)...............................       3,850         3,062       11,513
     Other...........................................       6,275         4,185        4,402
                                                        ---------      --------      -------
          Total......................................      25,497        29,282       47,703
  Expenses:
     Salaries and benefits...........................       4,864         4,619        5,353
     Interest on notes payable.......................       3,710         5,118        7,084
     Asset level expenses, occupancy, data processing
       and other.....................................       6,217         7,204       12,103
                                                        ---------      --------      -------
          Total......................................      14,791        16,941       24,540
                                                        ---------      --------      -------
  Operating contribution before direct taxes.........   $  10,706      $ 12,341      $23,163
                                                        =========      ========      =======
  Operating contribution, net of direct taxes........   $  10,620      $ 12,284      $22,970
                                                        =========      ========      =======
CONSUMER LENDING:
  Revenues:
     Gain on sale of automobile loans................   $  10,280      $  7,214      $    --
     Interest income.................................      17,787        10,035       10,182
     Servicing fees..................................       5,086         2,705          553
     Other...........................................         171           106         (454)
                                                        ---------      --------      -------
          Total......................................      33,324        20,060       10,281
  Expenses:
     Salaries and benefits...........................       8,053         5,602        2,959
     Provision for loan losses and impairment of
       residual interests............................       4,302         9,201        6,613
     Interest on notes payable.......................       3,932         3,196        3,033
     Occupancy, data processing and other............      11,283         5,819        3,272
                                                        ---------      --------      -------
          Total......................................      27,570        23,818       15,877
                                                        ---------      --------      -------
  Operating contribution (loss) before direct
     taxes...........................................   $   5,754      $ (3,758)     $(5,596)
                                                        =========      ========      =======
  Operating contribution (loss), net of direct
     taxes...........................................   $   5,689      $ (3,758)     $(5,599)
                                                        =========      ========      =======
  Total operating contribution, net of direct
     taxes...........................................   $  16,309      $  8,526      $17,371
                                                        =========      ========      =======
</TABLE>

                                       17
<PAGE>   20

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------
                                                           1999          1998          1997
                                                       ------------   -----------   ----------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                    <C>            <C>           <C>
CORPORATE OVERHEAD:
  Revenues:
     Interest income on Class A Certificate(2).......   $      --      $     --      $ 3,553
     Other...........................................         107         2,202        2,359
                                                        ---------      --------      -------
          Total......................................         107         2,202        5,912
  Corporate interest expense.........................      (8,649)       (3,774)      (1,129)
  Salaries and benefits, occupancy, professional and
     other income and expenses, net..................      (7,108)       (7,358)      (6,505)
  Deferred tax benefit (provision)...................      (4,900)        1,189       13,592
  Harbor Merger related expenses.....................          --            --       (1,618)
                                                        ---------      --------      -------
  Earnings (loss) from continuing operations.........      (4,241)          785       27,623
  Earnings (loss) from discontinued operations.......    (103,915)      (20,977)       8,005
                                                        ---------      --------      -------
  Net earnings (loss)................................    (108,156)      (20,192)      35,628
  Preferred dividends................................      (2,568)       (5,186)      (6,203)
                                                        ---------      --------      -------
  Net earnings (loss) to common shareholders.........   $(110,724)     $(25,378)     $29,425
                                                        =========      ========      =======
SHARE DATA:
  Basic earnings (loss) per common share are as
     follows:
     Earnings (loss) from continuing operations
       before accounting change per common share.....   $   (0.73)     $  (0.58)     $  3.28
     Discontinued operations per common share........      (12.51)        (2.77)        1.23
     Cumulative effect of accounting change..........       (0.09)           --           --
     Net earnings (loss) per common share............      (13.33)        (3.35)        4.51
     Weighted average common shares outstanding......       8,307         7,584        6,518
  Diluted earnings (loss) per common share are as
     follows:
     Earnings (loss) from continuing operations
       before accounting change per common share.....   $   (0.73)     $  (0.58)     $  3.25
     Discontinued operations per common share........      (12.51)        (2.77)        1.21
     Cumulative effect of accounting change..........       (0.09)           --           --
     Net earnings (loss) per common share............      (13.33)        (3.35)        4.46
     Weighted average common shares outstanding......       8,307         7,584        6,591
</TABLE>

---------------

(1) Includes $6.8 million in 1997 as a result of terminating the Investment
    Management Agreement with FirstCity Liquidating Trust.

(2) Represents dividends on preferred stock accrued or paid prior to June 30,
    1997.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     Revenues at Commercial Corp. consist primarily of gain on disposition of
assets, interest income on performing assets and equity in earnings of
affiliated Acquisition Partnerships. In addition, Commercial Corp. derives
servicing fees from Acquisition Partnerships for the servicing activities
performed related to the assets held in the Acquisition Partnerships. Following
the Merger, Commercial Corp. serviced assets held in an affiliated liquidating
trust created for the benefit of former FCBOT shareholders (the "Trust") and
derived servicing fees for its activities under a servicing agreement between
the Trust and Commercial Corp. During the first quarter of 1997, the Trust
terminated the servicing agreement and paid Commercial Corp. a termination
payment of $6.8 million representing the present value of servicing fees
projected to have been earned by Commercial Corp. upon the liquidation of the
assets of the Trust, which was expected to occur principally in 1997.

                                       18
<PAGE>   21

     In its Portfolio Asset acquisition and resolution business, Commercial
Corp. acquires Portfolio Assets that are designated as nonperforming, performing
or real estate. Each Portfolio is accounted for as a pool and not on an
individual asset basis. To date, a substantial majority of the Portfolio Assets
acquired by Commercial Corp. have been designated as nonperforming. Once a
Portfolio has been designated as either nonperforming or performing, such
designation is not changed regardless of the performance of the assets
comprising the Portfolio. The Company recognizes revenue from Portfolio Assets
and Acquisition Partnerships based on proceeds realized from the resolution of
Portfolio Assets, which proceeds have historically varied significantly and
likely will continue to vary significantly from period to period. The following
table presents selected information regarding the revenues and expenses of the
Company's Portfolio Asset acquisition and resolution business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                   PORTFOLIO ASSET ACQUISITION AND RESOLUTION

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      1998      1997
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
GAIN ON RESOLUTION OF PORTFOLIO ASSETS:
  Average investment:
     Nonperforming Portfolios...........................  $29,822   $41,873   $61,764
     Performing Portfolios..............................   15,618    14,629     9,759
     Real estate Portfolios.............................    9,154    15,919    21,602
  Gain on resolution of Portfolio Assets:
     Nonperforming Portfolios...........................  $ 3,047   $ 6,112   $20,288
     Performing Portfolios..............................       --       299        --
     Real estate Portfolios.............................    1,007     2,797     3,895
                                                          -------   -------   -------
          Total.........................................  $ 4,054   $ 9,208   $24,183
  Interest income on performing Portfolios..............  $ 2,397   $ 2,140   $ 2,052
  Gross profit percentage on resolution of Portfolio
     Assets:
     Nonperforming Portfolios...........................     19.8%     23.6%     27.8%
     Performing Portfolios..............................       --       8.0%       --
     Real estate Portfolios.............................     23.7%     20.9%     27.9%
     Weighted average gross profit percentage...........     20.7%     21.4%     27.8%
  Interest yield on performing Portfolios...............     15.4%     14.1%     21.0%
SERVICING FEE REVENUES:.................................  $ 3,850   $ 3,062   $11,513
PERSONNEL:
  Personnel expenses....................................  $ 4,864   $ 4,619   $ 5,353
  Number of personnel (at period end):
     Production.........................................       12        12         9
     Servicing..........................................       60        64        68
INTEREST EXPENSE:
  Average debt..........................................  $49,078   $71,091   $85,262
  Interest expense......................................    3,710     5,118     7,084
  Average yield.........................................      7.6%      7.2%      8.3%
</TABLE>

  Nonperforming Portfolio Assets

     Nonperforming Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed-upon collateral. Portfolio Assets are
designated as nonperforming unless substantially all of the assets comprising
the Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Commercial Corp. acquires such assets on the basis
of an evaluation of the timing and amount of cash flow expected to be derived
from borrower payments or disposition of the underlying asset securing the loan.
On a monthly basis, the amortized cost of each nonperforming Portfolio is
evaluated for

                                       19
<PAGE>   22

impairment. A valuation allowance is established for any impairment identified
with provisions to establish such allowance charged to earnings in the period
identified.

     All nonperforming Portfolio Assets are purchased at substantial discounts
from their Face Value. Net gain on the resolution of nonperforming Portfolio
Assets is recognized to the extent that proceeds collected on the Portfolio
exceed a pro rata portion of allocated costs of the resolved Portfolio Assets.
Proceeds from the resolution of Portfolio Assets that are nonperforming are
recognized as cash is realized from the collection, disposition and other
resolution activities associated with the Portfolio Assets. No interest income
or any other yield component of revenue is recognized separately on
nonperforming Portfolio Assets.

  Performing Portfolio Assets

     Performing Portfolio Assets consist of consumer and commercial loans
acquired at a discount from the aggregate amount of Face Value. Portfolio Assets
are classified as performing if substantially all of the loans comprising the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. On a monthly basis, the amortized cost of each
performing Portfolio is evaluated for impairment. A valuation allowance is
established for any identified impairment with provisions to establish such
allowance charged to earnings in the period identified.

     Interest income is recognized when accrued in accordance with the
contractual terms of the loans. The accrual of interest is discontinued once a
loan becomes past due 90 days or more. Acquisition discounts for the Portfolio
Assets as a whole are accreted as an adjustment to yield over the estimated life
of the Portfolio.

  Real Estate Portfolios

     Commercial Corp. also acquires Portfolios comprised solely of real estate.
Real estate Portfolios are recorded at the lower of cost or fair value less
estimated costs to sell. Costs relating to the development or improvement are
capitalized and costs relating to holding assets are charged to expense as
incurred. Rental income, net of expenses, is recognized as revenue when
received. Gains and losses are recognized based on the allocated cost of each
specific real estate asset.

  Equity in Earnings of Acquisition Partnerships

     Commercial Corp. accounts for its investments in Acquisition Partnerships
using the equity method of accounting. This accounting method generally results
in the pass-through of its pro rata share of earnings from the Acquisition
Partnerships' activities as if it had a direct investment in the underlying
Portfolio Assets held by the Acquisition Partnership. The revenues and earnings
of the Acquisition Partnerships are determined on a basis consistent with the
accounting methodology applied to nonperforming, performing and real estate
Portfolios described in the preceding paragraphs.

     Distributions of cash flow from the Acquisition Partnerships are a function
of the terms and covenants of the loan agreements related to the secured
borrowings of the Acquisition Partnerships. Generally, the terms of the
underlying loan agreements permit some distribution of cash flow to the equity
partners so long as loan to cost and loan to value relationships are in
compliance with the terms and covenants of the applicable loan agreement. Once
the secured borrowings of the Acquisition Partnerships are fully paid, all cash
flow in excess

                                       20
<PAGE>   23

of operating expenses is available for distribution to the equity partners. The
following chart presents selected information regarding the revenues and
expenses of the Acquisition Partnerships.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                            ACQUISITION PARTNERSHIPS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
REVENUES:
  Gain on resolution of Portfolio Assets.............  $ 51,035   $ 57,628   $ 33,398
  Gross profit percentage on resolution of Portfolio
     Assets..........................................      40.9%      33.9%      18.7%
  Interest income....................................  $ 16,409   $  9,714   $  8,432
  Other income.......................................     1,914      3,127      1,053
INTEREST EXPENSE:
  Interest expense...................................    15,626     13,081     10,294
  Average debt.......................................   159,827    159,145    111,422
  Average yield......................................       9.8%       8.2%       9.2%
OTHER EXPENSES:
  Servicing fees.....................................  $  6,391   $  5,360   $  4,984
  Legal..............................................     2,178      2,557      1,957
  Property protection................................     3,109      5,898      3,956
  Other..............................................     5,599      9,867      1,575
                                                       --------   --------   --------
          Total other expenses.......................    17,277     23,682     12,472
                                                       --------   --------   --------
          Net earnings...............................  $ 36,455   $ 33,706   $ 20,117
                                                       ========   ========   ========
Equity in earnings of Acquisition Partnerships.......  $ 11,444   $ 12,827   $  7,605
Equity in loss of Servicing Entities.................      (126)        --         --
                                                       --------   --------   --------
                                                       $ 11,318   $ 12,827   $  7,605
                                                       ========   ========   ========
</TABLE>

  Servicing Fee Revenues

     Commercial Corp. derives fee income for its servicing activities performed
on behalf of the Acquisition Partnerships. In connection with the Acquisition
Partnerships, Commercial Corp. generally earns a servicing fee of between 3% and
8% of gross cash collections generated by the Acquisition Partnerships, rather
than a periodic management fee based on the Face Value of the assets being
serviced. The rate of servicing fee charged is a function of the average Face
Value of the assets within each Portfolio being serviced (the larger the average
Face Value of the assets in a Portfolio, the lower the fee percentage within the
prescribed range).

                                       21
<PAGE>   24

CONSUMER LENDING

     The primary components of revenue derived by Consumer Corp. are interest
income and gain on sale of loans. The primary expenses of Consumer Corp. are
salaries and benefits, provision for loan losses and impairment of residual
interests and interest expense. The following chart presents selected
information regarding the revenues and expenses of Consumer Corp.'s consumer
lending business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                                CONSUMER LENDING

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1999      1998      1997
                                                          -------   -------   -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                       <C>       <C>       <C>
INTEREST INCOME:
  Average loans and investments:
     Auto...............................................  $56,540   $35,880   $48,682
     Investments........................................   41,864    26,720     4,278
  Interest income:
     Auto...............................................   11,811     7,542     9,067
     Investments........................................    5,487     2,181       548
  Average yield:
     Auto...............................................     20.9%     21.0%     18.6%
     Investments........................................     13.1%      8.2%     12.8%
SERVICING FEE REVENUES..................................  $ 5,086   $ 2,705   $   553
PERSONNEL:
  Personnel expenses....................................  $ 8,053   $ 5,602   $ 2,959
  Number of personnel (at period end):
     Production.........................................      142        93        53
     Servicing..........................................      206       110        53
INTEREST EXPENSE:
  Average debt..........................................  $53,948   $36,302   $34,129
  Interest expense......................................    3,932     3,196     3,033
  Average yield.........................................      7.3%      8.8%      8.9%
</TABLE>

  Interest Income

     Interest income is accrued on originated and acquired loans at the
contractual rate of interest of the underlying loan. The accrual of interest
income is discontinued once a loan becomes 90 days past due.

  Gain on Sale of Loans

     Consumer Corp. accumulates and pools automobile loans acquired from
franchised dealerships for sales in public and private securitization
transactions. Such transactions result in the recognition of gains to the extent
that the proceeds received (including the estimated value of the retained
subordinated interests) exceed the basis of the automobile loans and the costs
associated with the securitization process. When the automobile loans are
securitized and sold, the retained interests are valued at the discounted
present value of the cash flows expected to be realized over the anticipated
average life of the assets sold after future estimated credit losses, estimated
prepayments, servicing fees and other securitization fees related to the loans
sold. The discounted present value of such interests is computed using Consumer
Corp.'s assumptions of market discount rates, prepayment speeds, default rates,
credit losses and other costs based upon the unique underlying characteristics
of the automobile loans comprising each securitization.

     Consumer Corp. completed two securitization transactions in 1999, FAR
1999-1 and FAR 1999-2. Approximate aggregate loss assumptions were 10.7% and
11.0%, respectively, of the outstanding principal balance of underlying loans.
In its securitization transactions completed in 1998, NAF 1998-1, FAR 1998-2

                                       22
<PAGE>   25

and FAR 1998-3, Consumer Corp. assumed that losses would approximate an
aggregate of 19.8%, 15.4% and 11.2%, respectively, of the outstanding principal
balance of the underlying loans. Consumer Corp. calculated the present value of
future cash flows from the securitizations using discount rates ranging from
7.3% (on one rated security) to 15% per year and prepayment speeds ranging from
10% to 15%.

  Provision for Loan Losses and Impairment of Residual Interests

     The carrying value of consumer loans is evaluated on a monthly basis for
impairment. A valuation allowance is established for any impairment identified
with provisions to augment the allowance charged to earnings in the period
identified. The evaluation of the need for an allowance is determined on a pool
basis, with each pool being the loans originated or acquired during a quarterly
period of production or acquisition. Loans generally are acquired at a discount
from the Face Value of the loan with the acquisition discount established as an
allowance for losses at the acquisition date of the loan. If the initially
established allowance is deemed to be insufficient, additional allowances are
established through provisions charged to earnings.

     During 1997, the operating margin of Consumer Corp. was significantly
impacted by provisions for loan losses in the amount of approximately $6.6
million related to the loans originated in Consumer Corp.'s original sub-prime
auto receivable business. The Company's initial venture into the sub-prime
automobile market involved the acquisition of a distressed sub-prime portfolio
from a secured lender. Following the acquisition of the portfolio, the Company
began the acquisition of additional loans on an indirect basis from financial
institutions who originated loans pursuant to contractual agreements with a
subsidiary of Consumer Corp. The Company concluded that the contractual
underwriting standards and the purchase discounts on which the initial program
was based were insufficient to generate automobile loans of acceptable quality
to the Company. As a result, the Company terminated its obligations with the
financial institutions participating in the original origination program
effective January 31, 1998. The continued flow of production into 1998 under
this program resulted in the Company making provisions for loan losses and
impairment of residual interests totaling $9.2 million for the year, the
majority of which can be attributed to these loans. In 1999, these loans
continued in their lackluster performance and were again principally responsible
for $4.3 million in provisions for loan losses and impairment of residual
interests.

     Based upon the experience gained with its initial consumer origination
program, the Company undertook to develop an origination and underwriting
approach that would give Consumer Corp. significantly greater control over the
origination and pricing standards governing its consumer lending activities. The
formation of Funding resulted from these development activities. The
underwriting process and purchase discount methodology employed by Funding has
significantly changed the underwriting criteria and purchase standards of
Consumer Corp. from the methodology employed during the majority of 1996 and
1997. In Funding's case, the objectives established for purchasing loans from
originating dealers are designed to result in the purchase discount equaling or
exceeding the expected loss for all loans acquired.

INCOME TAXES

     As a result of the Merger, the Company has substantial federal NOLs, which
can be used to offset the tax liability associated with the Company's pre-tax
earnings until the earlier of the expiration or utilization of such NOLs. The
Company accounts for the benefit of the NOLs by recording the benefit as an
asset and then establishing an allowance to value the net deferred tax asset at
a value commensurate with the Company's expectation of being able to utilize the
recognized benefit in the foreseeable future. Such estimates are reevaluated on
a quarterly basis with the adjustment to the allowance recorded as an adjustment
to the income tax expense generated by the quarterly operating results.
Significant events that change the Company's view of its currently estimated
ability to utilize the tax benefits, such as the Harbor Merger in the third
quarter of 1997, result in substantial changes to the estimated allowance
required to value the deferred tax benefits recognized in the Company's periodic
financial statements. Due to the evaluation of the recoverability of the
deferred tax asset recognized related to the mortgage banking operations, the
Company increased its valuation allowance by $4.9 million in 1999. Similar
events could occur in the future, and would impact the recognition of the
Company's estimate of the required valuation allowance associated with its NOLs.
If there are changes in the estimated level of the required reserve, net
earnings will be affected accordingly.
                                       23
<PAGE>   26

     Results of operations for 1998 were nominally impacted by the effect of
recording a deferred tax benefit of $1.2 million to recognize the benefit
related to NOLs. Earnings for 1997 were significantly increased by the
recognition of tax benefits totaling $13.6 million resulting from the Company's
reassessment of the valuation allowance related to its NOL asset. Realization of
the asset is dependent upon generating sufficient taxable earnings to utilize
the NOL. Prior to 1996, the deferred tax asset resulting from the Company's NOL
was entirely offset by its valuation reserve. In 1997 and 1996, the valuation
reserve was adjusted based on the Company's estimate of its future pre-tax
income.

FIRSTCITY LIQUIDATING TRUST AND EXCHANGE OF PREFERRED STOCK

     In connection with the Merger, the Company received the Class A Certificate
of the Trust (the "Class A Certificate"). Distributions from the Trust in
respect of the Class A Certificate were used to retire the senior subordinated
notes of the Company and to pay dividends on, and repurchase some of, the
special preferred stock of the Company (the "Special Preferred"). Pursuant to a
June 1997 settlement agreement with the Company, the Trust's obligation to the
Company under the Class A Certificate was terminated (other than the Trust's
obligation to reimburse the Company for certain expenses) in exchange for the
Trust's agreement to pay the Company an amount equal to $22.75 per share for the
1,923,481 shares of Special Preferred outstanding at June 30, 1997, the 1997
second quarter dividend of $0.7875 per share, and 15% interest from June 30,
1997 on any unpaid portion of the settlement agreement. Under such agreement,
the Company assumed the obligation for the payment of the liquidation preference
amount and the future dividends on the Special Preferred. The Trust distributed
$44.1 million to the Company under the settlement agreement.

     In June 1997, the Company began an offer to exchange one share of newly
issued adjusting rate preferred stock ("Adjusting Rate Preferred") for each
outstanding share of Special Preferred. The Company completed such exchange
offer in the third quarter of 1997 pursuant to which 1,073,704 shares of Special
Preferred were tendered for a like number of shares of Adjusting Rate Preferred.
An additional 149,197 shares were exchanged in 1998. The remaining Special
Preferred was redeemed on September 30, 1998 for $14.7 million plus accrued
dividends. The Adjusting Rate Preferred has a redemption value of $21.00 per
share and a 15% annual dividend rate through September 30, 1998, at which time
the dividend rate is reduced to 10% per annum. The Adjusting Rate Preferred is
redeemable by the Company on or after September 30, 2003, with a mandatory
maturity date of September 30, 2005. In the third quarter of 1999, dividends
were suspended.

     The redemption by the Trust of its obligation on the Class A Certificate
represented a premium over the redemption value of the Special Preferred, which
was reflected as a deferred credit in the Company's financial statements. The
deferred credit was accreted to income over the weighted average life of the
Special Preferred and the Adjusting Rate Preferred through September 30, 1998.

RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of the Company (including the Notes
thereto) included elsewhere in this Annual Report on Form 10-K.

1999 COMPARED TO 1998

     The Company reported a net loss of $108.2 million in 1999 (including a
deferred tax provision of $4.9 million) compared to a loss of $20.2 million in
1998 (including a $1.2 million deferred tax benefit from NOLs). Net loss to
common shareholders was $110.7 million in 1999 compared to a loss of $25.4
million in 1998. On a per share basis, net loss attributable to common
shareholders was $13.33 in 1999 compared to $3.35 in 1998. The primary factor
contributing to the loss for 1999 was losses from discontinued mortgage
operations of $103.9 million or $12.51 per share for 1999 as compared to losses
of $21.0 million or $2.77 per share in 1998. Additionally, an accounting change
related to SOP 98-5 resulted in a loss of $.8 million in 1999 or $0.09 per
share.

                                       24
<PAGE>   27

  Portfolio Asset Acquisition and Resolution

     Commercial Corp.'s year end investment in Portfolio Assets decreased to
$39.4 million in 1999 from $68.4 million in 1998. Commercial Corp., through its
investment in Acquisition Partnerships invested $11.2 million in equity in
Portfolio Assets in 1999 compared to $28.5 million in 1998. Such investments
represented Commercial Corp.'s share of Portfolio Assets acquired totaling
$210.8 million and $139.7 million for 1999 and 1998, respectively.

     Gain on resolution of Portfolio Assets. Proceeds from the resolution of
Portfolio Assets decreased by 54% to $19.6 million in 1999 from $43.0 million in
1998. The net gain on resolution of Portfolio Assets decreased by 56% to $4.1
million in 1999 from $9.2 million in 1998 as the result of lower collections.
The average gross profit percentage on the resolution of Portfolio Assets in
1999 was 20.7% as compared to 21.4% in 1998.

     Equity in earnings of Acquisition Partnerships and Servicing
Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition
Partnerships decreased by 27% to $125 million in 1999 from $170 million in 1998
while the gross profit percentage increased to 40.9% in 1999 from 33.9% in 1998.
Interest income rose $6.7 million in 1999. Other expenses of the Acquisition
Partnerships decreased by $6.4 million in 1999 generally reflecting costs
associated with the resolution of Portfolio Assets in Europe which generated
proceeds of $62.2 million. The net result was an overall increase in the net
income of the Acquisition Partnerships of 8.2% to $36.5 million in 1999 from
$33.7 million in 1998. However, Commercial Corp.'s equity earnings from
Acquisition Partnerships decreased by 12% to $11.3 million in 1999 from $12.8
million in 1998 due primarily to lower equity interests in Portfolios purchased
through Acquisition Partnerships during 1999 and at the end of 1998.

     Servicing fee revenues. Servicing fees increased by 26% to $3.9 million in
1999 from $3.1 million in 1998 primarily as a result of collections from the
acquisition partnership in Mexico formed at year-end 1998.

     Other revenues. Other revenues increased by 50% to $6.3 million in 1999
from $4.2 million in 1998 due to $2.2 million of gains recognized in 1999 from
sales of investments in Acquisition Partnerships in Japan and France.

     Operating expenses. Operating expenses declined by 13% to $14.8 million in
1999 from $16.9 million in 1998 primarily as a result of reduced interest
expense and lower asset level expenses.

     Salaries and benefits were relatively flat year to year.

     Interest on notes payable declined $1.4 million or 28% due to lower debt
levels.

     Asset level expenses, occupancy, data processing and other expenses
decreased by 14% to $6.2 million in 1999 from $7.2 million in 1998 as a result
of lower investments in Portfolio Assets and the consolidation of servicing
offices in 1999.

  Consumer Lending

     Gain on sale of automobile loans. In 1999, Consumer Corp. realized a gain
of $10.3 million on the sale of automobile loans as compared to $7.2 million in
1998, primarily due to higher purchase discounts associated with the underlying
loans sold into the 1999 securitizations.

     Interest and other income. Interest income increased by 77% to $17.8
million in 1999 from $10.0 million in 1998, reflecting increased levels of loan
origination activity and an increase in the average balance of aggregate loans
and investments held by Consumer Corp. during 1999. Servicing fees increased
$2.4 million or 88% due to increased service fee revenue from securitization
trusts.

     Operating expenses. Operating expenses increased by 16% to $27.6 million in
1999 from $23.8 million in 1998 primarily as a result of increased operating
activity due to higher levels of loan fundings and servicing portfolio.

                                       25
<PAGE>   28

     Salaries and benefits increased by $2.5 million or 44% as a result of the
increased levels of operating activity.

     Provision for loan losses and impairment on residual interests decreased by
$4.9 million or 53% from 1998 as a result of decreased losses in the NAF
originated Auto Receivable residuals.

     Interest expense increased by 23% to $3.9 million in 1999 from $3.2 million
in 1998 as a result of a higher volume of debt.

     Occupancy, data processing and other expenses increased by 94% to $11.3
million in 1999 from $5.8 million in 1998 as a result of increased levels of
operating activity.

  Other Items Affecting Net Earnings

     The following items affect the Company's overall results of operations and
are not directly related to any one of the Company's businesses discussed above.

     Corporate interest expense. Company level interest expense increased by
129% to $8.6 million in 1999 from $3.8 million in 1998 as a result of higher
volumes of debt associated with the equity required to purchase Portfolio
Assets, equity interests in Acquisition Partnerships and capital support to
operating subsidiaries.

     Corporate overhead. Salary and benefits decreased 23% to $2.7 million in
1999 due to a reimbursement of salaries for certain corporate employees who
worked on special projects for other entities. Other overhead expenses were
flat, including a write-off of $.8 million of organization costs in accordance
with SOP 98-5. Additionally, during the first nine months of 1998 the Company
recognized deferred premium income of $2.1 million related to the redemption of
Special Preferred Stock.

     Income taxes. Federal income taxes are provided at a 35% rate applied to
taxable income (loss) and are offset by NOLs that the Company believes are
available. The tax benefit of the NOLs is recorded to the extent such is
expected to be realized in future periods. A valuation allowance is established
for the difference between the amount of NOLs available and the amount expected
to be utilized. The Company recorded a deferred tax provision of $4.9 million to
increase the valuation allowance on the deferred tax asset (based on an
evaluation of the realization of income from the discontinued mortgage banking
operations) in 1999 as compared to a benefit of $1.2 million in 1998.

1998 COMPARED TO 1997

     The Company reported a net loss of $20.2 million in 1998 (including a $1.2
million deferred tax benefit from NOLs) compared to earnings of $35.6 million
(including a $13.6 million deferred tax benefit from NOLs) in 1997. Net loss to
common shareholders was $25.4 million in 1998 compared to net earnings of $29.4
million in 1997. On a per share basis, basic net loss attributable to common
shareholders was $3.35 in 1998 compared to net earnings of $4.51 in 1997.
Diluted net loss per common share was $3.35 in 1998 compared to net earnings of
$4.46 ($2.40 excluding the deferred tax benefit from NOLs) in 1997. The primary
factor contributing to the 1998 loss was losses from discontinued mortgage
operations of $21.0 million or $2.77 per share in 1998 as compared to mortgage
operation earnings of $8.0 million or $1.21 per diluted share in 1997. The 1997
results reflect the positive effect of the $6.8 million, or $1.03 per share,
payment from the Trust in settlement of the Investment Management Agreement.

  Portfolio Asset Acquisition and Resolution

     Commercial Corp. purchased $139.7 million of Portfolio Assets during 1998
for its own account and through the Acquisition Partnerships compared to $183.2
million of acquisitions in 1997. Commercial Corp.'s investment in Portfolio
Assets decreased to $68.4 million in 1998 from $90.0 million in 1997. Commercial
Corp. invested $28.5 million in equity in Portfolio Assets in 1998 compared to
$37.1 million in 1997.

     Gain on resolution of Portfolio Assets. Proceeds from the resolution of
Portfolio Assets decreased 51% from 1997. The net gain on resolution of
Portfolio Assets decreased by 62% to $9.2 million in 1998 from $24.2 million in
1997 as the result of reduced collections and a lower gross profit percentage in
1998. The
                                       26
<PAGE>   29

weighted average gross profit percentage on the resolution of Portfolio Assets
in 1998 was 21.4% as compared to 27.8% in 1997.

     Equity in earnings of Acquisition Partnerships and Servicing
Entities. Proceeds from the resolution of Portfolio Assets for the Acquisition
Partnerships decreased by 4.5% to $170 million in 1998 from $178 million in 1997
while the gross profit percentage increased to 33.9% in 1998 from 18.7% in 1997.
Other expenses of the Acquisition Partnerships increased by $11.2 million in
1998 generally reflecting costs associated with the resolution of Portfolio
Assets in Europe which generated proceeds of $98.7 million. The net result was
an overall increase in the net income of the Acquisition Partnerships of 68% to
$33.7 million in 1998 from $20.1 million in 1997. As a result, Commercial
Corp.'s equity earnings from Acquisition Partnerships increased by 69% to $12.8
million in 1998 from $7.6 million in 1997.

     Servicing fee revenues. Servicing fees reported during 1997 included the
receipt of a $6.8 million cash payment related to the early termination of a
servicing agreement between the Company and the Trust, under which the Company
serviced the assets of the Trust. The $6.8 million payment represents the
present value of servicing fees projected to have been earned by Commercial
Corp. upon liquidation of the Trust assets, which was expected to occur
principally in 1997. Excluding fees related to Trust assets, servicing fees
decreased by 35% to $3.1 million in 1998 from $4.7 million in 1997 as a result
of lower domestic collection levels in the Acquisition Partnerships and
affiliated entities.

     Other revenues. Other revenues were relatively flat year to year.

     Operating expenses. Operating expenses declined to $16.9 million in 1998
from $24.5 million in 1997 primarily as a result of reduced salaries and
benefits, lower asset level expenses and reduced amortization expense.

     Salaries and benefits declined in 1998 as a result of the consolidation of
some of the servicing offices (Portfolios being serviced in the closed offices
reached final resolution).

     Interest on other notes payable declined by $2.0 million in 1998 due to
lower outstanding average balances of portfolio debt.

     Asset level expenses incurred in connection with the servicing of Portfolio
Assets decreased in 1998 as a result of lower investments in Portfolio Assets in
1998. Occupancy and other expenses decreased as a result of the consolidation of
servicing offices in 1998.

  Consumer Lending

     Gain on sale of automobile loans. The Company realized gains of $7.2
million on the sale of approximately $172 million of automobile loans in 1998.
During 1997, the Company completed one securitization sale of loans totaling $35
million; however, no gain was recognized due to the poor performance history
associated with the original automobile finance program.

     Interest and other income. Interest income was relatively flat year to
year. Servicing fees increased $2.2 million due to increased revenue from
securitization trusts.

     Interest expense. Interest expense was relatively flat year to year.

     Operating expenses. Salaries and benefits increased by 89% to $5.6 million
in 1998 from $3.0 million in 1997 as a result of the increased levels of
operating activity in 1998. Other expenses increased $2.5 million due to the
growth in the origination and servicing operations.

     Provision for loan losses and residual interests. The provision for loan
losses on automobile receivables and impairment of residual interests increased
to $9.2 million from $6.6 million in 1997. The provision for impairment on
residual interests totaled $4.5 million while the provision for loan losses
totaled $4.7 million in 1998. This provision is primarily a result of Consumer
Corp.'s review and increase of the underlying loss assumptions from a range of
13-14% to 16-18% based upon actual performance of the securitized assets and
anticipated losses on the loans originated under the discontinued initial
venture into the sub-prime automobile market.
                                       27
<PAGE>   30

  Other Items Affecting Net Earnings.

     The following items affect the Company's overall results of operations and
are not directly related to any one of the Company's businesses discussed above.

     Corporate interest expense. Interest income on the Class A Certificate
during 1997 represents reimbursement to the Company from the Trust of dividends
through June 30, 1997, of $3.6 million on special preferred stock and interest
paid under a June 1997 agreement to retire the Class A Certificate. Company
level interest expense increased to $3.8 million in 1998 from $1.1 million in
1997 as a result of higher volumes of debt associated with the equity required
to purchase Portfolio Assets, equity interests in Acquisition Partnerships and
capital support to operating subsidiaries.

     Corporate overhead. Salaries and benefits, occupancy and professional fees
account for the majority of other overhead expenses, which increased in 1998
compared to 1997, as a result of increased levels of borrowings during the year
and professional fees.

     Income taxes. Federal income taxes are provided at a 35% rate applied to
taxable income and are offset by NOLs that the Company believes are available.
The tax benefit of the NOLs is recorded in the period during which the benefit
is realized. The Company reported a deferred tax benefit from NOLs of $1.2
million in 1998 as compared to a benefit of $13.6 million in 1997.

LIQUIDITY AND CAPITAL RESOURCES

     Generally, the Company requires liquidity to fund its operations, working
capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to the Acquisition Partnerships, investments in
expanding businesses to support their growth, retirement of and dividends on
preferred stock, and other investments by the Company. The potential sources of
liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated
intercompany debt and dividends from the Company's subsidiaries, short-term
borrowings from revolving lines of credit, proceeds from equity market
transactions, securitization and other structured finance transactions and other
special purpose short-term borrowings.

     During the fourth quarter of 1999, FirstCity completed several transactions
that enhance the Company's liquidity position through additional funding. The
transactions were structured to provide the immediate funding needs of
FirstCity's remaining business units while containing incentives for the Company
to replace the borrowings with other sources of funding over time.

     The Company renewed and restructured its senior lending facility (the
"Senior Facility"). The Senior Facility was renewed at a maximum available
amount of $88 million. The restructured Senior Facility matures June 2001 and
carries pricing of Libor plus 4% on the outstanding indebtedness thereunder. The
Senior Facility provides for a facility fee of $1.65 million if the loan is paid
in full before September 30, 2000, or $2.5 million if paid thereafter. Defaults
at Harbor Financial Group, Inc. and its subsidiaries do not constitute defaults
under the Senior Facility. The Senior Facility also requires the consent of the
lenders prior to payment of any common and preferred dividends. The Company
continually evaluates its liquidity position giving priority to assuring
adequate funding levels for its two operating entities. Secondarily, management
will determine when and if it is appropriate to pay the dividends on the
Company's outstanding preferred stock. Currently, there are approximately 1.2
million preferred shares outstanding with accrued dividends of approximately
$1.3 million.

     During 1999, the Company issued $25 million in senior subordinated notes
maturing in December 2003. The notes bear interest at prime plus 3.75% in the
first year and provide for an increase of 1/2% in the rate each year thereafter.
The redemption price for the notes is equal to the principal amount of the notes
plus any accrued interest through December 31, 1999. The redemption price
increases by 1% of the principal amount on January 1, 2000 and each January 1
thereafter. In conjunction with this financing, the Company issued a warrant for
the purchase of 425,000 shares of the Company's common stock at $2.3125 per
share (the closing price on December 21, 1999). The estimated fair value of such
warrant of $875,000, was allocated to shareholders' equity with an offsetting
discount reflected on the debt. Such discount will be amortized over the
                                       28
<PAGE>   31

life of the debt. The obligation to issue a warrant for 250,000 shares of the
Company's common stock to the revolving lender was cancelled in conjunction with
this financing and the restructuring of the Senior Facility. The Company also
issued an option to the note holder allowing it to acquire an additional warrant
for 1,975,000 shares of non-voting common stock in the Company (currently no
such stock is authorized), which can be exercised after one year if the notes or
any portion thereof remains outstanding, but not prior thereto. The strike price
on these warrants is $2.3125. In the event that the notes are paid prior to the
expiration of such one-year period through a transaction involving the issuance
of warrants, the note holder is entitled to retain sufficient warrants to allow
the note holder to acquire approximately 4.86% of the Company's common stock.
The Company has until May 15, 2000 to take the necessary actions to authorize
the issuance of the non-voting common stock covered by the option.

     FirstCity Funding, L.P., the Company's automobile finance business unit,
completed securitizations of $56 million and $100 million of face value of
automobile receivables in 1999. The first transaction was structured with $48.9
million in senior bonds and the balance held by the Company in a residual
interest. The second transaction was structured with $73.7 million in senior
bonds, $9.3 million in junior bonds and the balance held by the Company in a
residual interest. Additionally, the credit enhancement provider for the
automobile warehouse facility has reestablished funding to a maximum available
funding amount of $70 million ($50 million at December 31, 1999 with an
additional $20 million available subsequent to year end) and has been extended
through June of 2000. The Company continues to work with the credit enhancement
provider on its automobile securitizations to continue extensions of the waivers
and consents of trigger events occurring from the Company's failure to meet
certain financial covenants resulting from losses in the Company's discontinued
mortgage operations.

     Although the above transactions enhanced the Company's immediate liquidity
concerns, management has identified the following areas that it believes are
essential to allow the Company to meet all of its financing needs and cover its
obligations during 2000:

     - the ability to continue to obtain warehouse financing for consumer
       lending operations and identify alternative sources for such funding;

     - identify alternative or additional sources of financing on residual
       interests obtained from securitization transactions;

     - the ability to continue to securitize automobile finance receivables,
       either with or without credit enhancement;

     - the ability to obtain additional financing required by Commercial Corp.
       for investment in additional Portfolio Assets; and

     - realize positive cash flows from existing equity investments in Portfolio
       Assets

     The Company has received an extension on its automobile finance warehouse
line through June 28, 2000, and is currently in discussions with various
warehouse lenders regarding the potential to structure alternative or additional
funding. Alternatives currently being explored include a whole loan sale
arrangement and an uninsured warehouse line.

     During January 2000, the Company increased its existing residual financing
from $4 million at December 31, 1999 to $7 million. Residual interests securing
this borrowing had a carrying value of $40.6 million at December 31, 1999.
Although there is no guarantee, the Company anticipates additional borrowings
against such residuals will be available in the future.

     During the first quarter of 2000, the Company completed an automobile
finance receivable securitization containing loans of approximately $41 million
at the end of March 2000. The ability of the Company to continue to securitize
is dependant on numerous factors including, but not limited to, conditions in
the securities market in general and conditions in the asset-backed
securitization market. The Company does not anticipate a significant down-turn
in market conditions that would have a significant adverse impact on the
Company's ability to securitize its loans.

                                       29
<PAGE>   32

     The Company anticipates closing a secured, $17 million equity acquisition
facility for the investment in future Acquisition Partnerships. This, along with
equity distributions (totaling approximately $1.6 million for the first quarter
of 2000) from existing Acquisition Partnerships, is adequate to meet the funding
needs of Commercial Corp.

     As an additional source of liquidity, the Company can sell portfolio
assets, loans or portions of operating businesses.

     Based on the above, management of the Company expects that it will be able
to meet its obligations as they come due during 2000.

     The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance its respective operations. Each of the
operating subsidiary credit facilities is nonrecourse to the Company and the
other operating subsidiaries, except as discussed below.

     The Company and its subsidiaries had credit facilities providing for
borrowings in an aggregate principal amount of $248 million (including the
proposed $17 million equity acquisition facility) and outstanding borrowings of
$170 million. The following table summarizes the material terms of the credit
facilities to which the Company, its major operating subsidiaries and the
Acquisition Partnerships were parties to as of April 5, 2000 and the outstanding
borrowings under such facilities as of December 31, 1999.

                               CREDIT FACILITIES

<TABLE>
<CAPTION>
                                          OUTSTANDING
                                           BORROWINGS
                                             AS OF
                              PRINCIPAL   DECEMBER 31,
                               AMOUNT         1999       INTEREST RATE   OTHER TERMS AND CONDITIONS
                              ---------   ------------   -------------   --------------------------
                               (DOLLARS IN MILLIONS)
<S>                           <C>         <C>            <C>            <C>
FIRSTCITY
Company Senior Facility.....    $ 88          $ 77       Libor + 4%     Secured by the assets of the
                                                                        Company, expires June 30,
                                                                        2001
Company senior subordinated
  term debt.................      25            25       Prime + 3.75%  Secured by the assets of the
                                                                        Company, expires December
                                                                        20, 2003
Term fixed asset
  facilities................      --             1       Prime + 1.0%   Secured by certain fixed
                                                                        assets, repaid February 2000
Term credit facilities......       8            10       LIBOR + 5.0%   Secured by stock of an
                                                         Fixed at       acquisition partnership and
                                                         7.25%          certain residual interests,
                                                                        expires April 15, 2000 and
                                                                        January 3, 2001
COMMERCIAL CORP.
Term facility...............       7             7       LIBOR + 4.0%   Term facility secured by
                                                                        existing Portfolio Assets,
                                                                        expires April 30, 2000
Term acquisition
  facilities................      24            24       Fixed at       Acquisition facilities for
                                                         7.00%          existing Portfolio Assets.
                                                         to 7.66%       Secured by Portfolio Assets.
                                                                        Expires June 5, 2002 and
                                                                        November 7, 2002
</TABLE>

                                       30
<PAGE>   33

<TABLE>
<CAPTION>
                                          OUTSTANDING
                                           BORROWINGS
                                             AS OF
                              PRINCIPAL   DECEMBER 31,
                               AMOUNT         1999       INTEREST RATE   OTHER TERMS AND CONDITIONS
                              ---------   ------------   -------------   --------------------------
                               (DOLLARS IN MILLIONS)
<S>                           <C>         <C>            <C>            <C>
Equity acquisition
  facility..................      17            --       LIBOR + 4.5%   Acquisition facility for the
                                                                        investment in future
                                                                        acquisition partnerships,
                                                                        anticipated to close April,
                                                                        2000. Expires March 31, 2001
CONSUMER CORP.
Warehouse facility..........      70            20       Rate based on  Commercial paper conduit
                                                         commercial     warehouse facility secured
                                                         paper rates    by automobile receivables,
                                                         combined with  expires June 28, 2000
                                                         certain
                                                         facility fees
Term facility...............       7             4       Prime + 1%     Term facility secured by
                                                                        residual interests in
                                                                        automobile securitized
                                                                        loans, expires May 3, 2000
Term fixed asset
  facilities................       2             2       Fixed at       Secured by certain fixed
                                                         9.33%          assets,
                                ----          ----
                                                         to 9.50%       expires July 31, 2002 and
                                                                        2003
          Total.............    $248          $170
                                ====          ====
Unconsolidated Acquisition
  Partnerships Term
  acquisition facilities....    $181          $181
                              --------    ---------
                              --------    ---------      Fixed at 8.5%  Senior and subordinated
                                                         to 13%,        loans secured by Portfolio
                                                         LIBOR + 2% to  Assets, various maturities
                                                         4% and
                                                         Prime + 1%
</TABLE>

     FirstCity. The Company Credit Facility is a $88 million revolving credit
facility secured by substantially all the assets of the Company, including a
pledge of the stock of substantially all of its operating subsidiaries and its
equity interests in the Acquisition Partnerships. At December 31, 1999, the
amount outstanding under the facility totaled approximately $77 million. The
Company Credit Facility matures on June 30, 2001.

     Commercial Corp. Commercial Corp. funds its activities with equity
investments and subordinated debt from the Company and nonrecourse financing
provided by a variety of bank and institutional lenders, primarily Cargill
Financial. Such lenders provide funds to the special purpose entities formed for
the purpose of acquiring Portfolio Assets or to Acquisition Partnerships formed
for the purpose of co-investing in asset pools with other investors, principally
Cargill Financial.

     Consumer Corp. Consumer Corp. conducts most of its activities through
Funding and funds its activities with equity investments and subordinated debt
from the Company and a limited recourse $70 million warehouse credit facility
with Bank of America. Funds are advanced under the facility in accordance with
an eligible loan borrowing base. Loans are eligible for inclusion in the
borrowing base if they meet documented underwriting standards as approved by
Bank of America and are not delinquent beyond terms established in the loan
agreement. Under the terms of the credit facility, the Company guarantees 25% of
the amount outstanding under the facility from time to time in addition to an
undertaking by the Company to support the liquidity requirements required in
securitization transactions.

     The borrowing facilities for the Company, Commercial Corp. and Consumer
Corp. each include key personnel provisions. These provisions generally provide
that if certain key personnel are no longer employed and suitable replacements
are not found within a defined time limit, such facilities become due and
payable.

                                       31
<PAGE>   34

FOURTH QUARTER

     Net earnings for the fourth quarter of 1999 were $1.2 million. After
deducting preferred dividends, net earnings attributable to common equity were
$.5 million, or $0.06 per basic and diluted share. Net earnings for the fourth
quarter of 1998 were $4.9 million, including a $.3 million deferred tax benefit.
After deducting preferred dividends, net earnings attributable to common equity
were $4.2 million in 1998, or $.51 per basic and diluted share ($0.38 from
continuing operations). The following table presents a summary of operations for
the fourth quarters of 1999 and 1998.

                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  FOURTH QUARTER
                                                              -----------------------
                                                                 1999         1998
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Revenues....................................................   $18,466      $15,907
Expenses....................................................    17,061       11,617
Earnings from continuing operations.........................     1,154        3,829
Earnings from discontinued operations.......................        --        1,059
                                                               -------      -------
Net earnings................................................     1,154        4,888
                                                               -------      -------
Preferred dividends.........................................       642          642
                                                               -------      -------
Net earnings to common shareholders.........................   $   512      $ 4,246
                                                               =======      =======
Net earnings from continuing operations per common share --
  basic and diluted.........................................   $  0.06      $  0.38
</TABLE>

EFFECT OF NEW ACCOUNTING STANDARDS

     Statement of Financial Accounting Standards ("SFAS No. 133"), "Accounting
for Derivative Instruments and for Hedging Activities," requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133
requires that changes in fair value of a derivative be recognized currently in
earnings unless specific hedge accounting criteria are met. Upon implementation
of SFAS 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to available for sale or trading. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," deferred the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 on January 1, 2001 and is evaluating the impact, if any, this
statement may have on its future Consolidated Financial Statements.

                                  RISK FACTORS

RISKS ASSOCIATED WITH RAPID GROWTH AND ENTRY INTO NEW BUSINESSES

     Following the Merger in 1995, the Company embarked upon a strategic
diversification of its business. Previously, the Company had been engaged
primarily in the Portfolio Asset acquisition and resolution business. During
1997, the Company entered the residential and commercial mortgage banking
business and the consumer lending business in 1996, through a combination of
acquisitions and the start-up of new business ventures. As previously discussed,
during 1999, the Company adopted formal plans to discontinue its mortgage
banking operations, which had a significant adverse impact on the Company's
results of operations.

     The entry of the Company into these new businesses has resulted in
increased demands on the Company's personnel and systems. The development and
integration of the new businesses requires the investment of additional capital
and the continuous involvement of senior management. The Company also must
manage a variety of businesses with differing markets, customer bases, financial
products, systems and managements. An inability to develop, integrate and manage
its businesses could have a material adverse

                                       32
<PAGE>   35

effect on the Company's financial condition, results of operations and business
prospects. The Company's ability to support and manage continued growth is
dependent upon, among other things, its ability to attract and retain senior
management for each of its businesses, to hire, train, and manage its workforce
and to continue to develop the skills necessary for the Company to compete
successfully in its existing and new business lines. There can be no assurance
that the Company will successfully meet all of these challenges.

RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS

     During the third quarter of 1999, management of the Company adopted formal
plans to discontinue the operations of Mortgage Corp. and Capital Corp.
Potential liability of the Company could arise in regard to the bankruptcy
filing of Mortgage Corp. The risk that the value of Capital Corp's. retained
interests in the securitizations could be adversely affected by the level and
fluctuation of interest rates, resulting in a lower realizable value. The above
items could have a material adverse impact on the formal plans of termination
and the future earnings of the Company.

CONTINUING NEED FOR FINANCING

     General. The successful execution of the Company's business strategy
depends on its continued access to financing for each of its major operating
subsidiaries. In addition to the need for such financing, the Company must have
access to liquidity to invest as equity or subordinated debt to meet the capital
needs of its subsidiaries. Liquidity is generated by the cash flow to the
Company from subsidiaries, access to the public debt and equity markets and
borrowings incurred by the Company. The Company's access to the capital markets
is affected by such factors as changes in interest rates, general economic
conditions, and the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects. In
addition, the Company's ability to issue and sell common equity (including
securities convertible into, or exercisable or exchangeable for, common equity)
is limited as a result of the tax laws relating to the preservation of the NOLs
available to the Company as a result of the Merger. There can be no assurance
that the Company's funding relationships with commercial banks, investment banks
and financial services companies (including Cargill Financial) that have
previously provided financing for the Company and its subsidiaries will continue
past their respective current maturity dates. The majority of the credit
facilities to which the Company and its subsidiaries are parties have short-term
maturities. Negotiations are underway to extend certain of such credit
facilities that are approaching maturity and the Company expects that it will be
necessary to extend the maturities of other such credit facilities in the near
future. There can be no assurance that such negotiations will be successful. If
such negotiations do not result in the extension of the maturities of such
credit facilities and the Company or its subsidiaries cannot find alternative
funding sources on satisfactory terms, or at all, the Company's financial
condition, results of operations and business prospects would be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

     Each of the Company and its major operating subsidiaries has its own source
of debt financing. In certain circumstances, a default by the Company or any of
its major operating subsidiaries in respect of indebtedness owed to a third
party constitutes a default under the Company Credit Facility. The credit
facilities to which the Company's major operating subsidiaries are party do not
contain similar cross-default or cross-acceleration provisions. Although the
Company intends to continue to segregate the debt obligations of each such
subsidiary, there can be no assurance that its existing financing sources will
continue to agree to such arrangements or that alternative financing sources
that would accept such arrangements would be available. In the event the
Company's major operating subsidiaries are compelled to accept cross-guarantees,
or cross-default or cross-acceleration provisions in connection with their
respective credit facilities, financial difficulties experienced by one of the
Company's subsidiaries could adversely impact the Company's other subsidiaries.

     Dependence on Warehouse Financing. As is customary in the consumer lending
businesses, the Company's subsidiaries depend upon warehouse credit facilities
with financial institutions or institutional lenders to finance the origination
and purchase of loans on a short-term basis pending sale or securitization.
Implementation of the Company's business strategy requires the continued
availability of warehouse credit facilities, and may require increases in the
permitted borrowing levels under such facilities. There can be no
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<PAGE>   36

assurance that such financing will be available on terms satisfactory to the
Company. The inability of the Company to arrange additional warehouse credit
facilities, to extend or replace existing facilities when they expire or to
increase the capacity of such facilities may have a material adverse effect on
the Company's financial condition, results of operations and business prospects.

RISKS OF SECURITIZATION

     Significance of Securitization. The Company believes that it will become
increasingly dependent upon its ability to securitize sub-prime automobile loans
and other loans to efficiently finance the volume of assets expected to be
generated. Accordingly, adverse changes in the secondary market for such loans
could impair the Company's ability to originate, purchase and sell loans on a
favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's financial condition, results of operations and
business prospects. Proceeds from the securitization of originated and acquired
loans are required to be used to repay borrowings under warehouse credit
facilities, thereby making such facilities available to finance the origination
and purchase of additional loan assets. There can be no assurance that, as the
Company's volume of loans originated or purchased increases and other new
products available for securitization increases, the Company will be able to
securitize its loan production efficiently. An inability to efficiently
securitize its loan production could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.

     Securitization transactions may be affected by a number of factors, some of
which are beyond the Company's control, including, among other things, the
adverse financial condition of, or developments related to, some of the
Company's competitors, conditions in the securities markets in general, and
conditions in the asset-backed securitization market. The Company's
securitizations typically utilize credit enhancements in the form of financial
guaranty insurance policies in order to achieve enhanced credit ratings. Failure
to obtain insurance company credit enhancement could adversely affect the timing
of or ability of the Company to effect securitizations. In addition, the failure
to satisfy rating agency requirements with respect to loan pools would adversely
impact the Company's ability to effect securitizations.

     Contingent Risks. Although the Company intends to sell substantially all of
the sub-prime automobile loans and other consumer loans that it originates or
purchases, the Company retains some degree of credit risk on substantially all
loans sold. During the period in which loans are held pending sale, the Company
is subject to various business risks associated with the lending business,
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. The Company expects that the terms of its
securitizations will require it to establish deposit accounts or build
over-collateralization levels through retention of distributions otherwise
payable to the holders of subordinated interests in the securitization. The
Company also expects to be required to commit to repurchase or replace loans
that do not conform to the representations and warranties made by the Company at
the time of sale.

     Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it securitizes. With respect to
acquired loans, the Company's representations rely in part on similar
representations made by the originators of such loans when they were purchased
by the Company. In the event of a breach of its representations, the Company may
be required to repurchase or replace the related loan using its own funds. While
the Company may have a claim against the originator in the event of a breach of
any of these representations made by the originators, the Company's ability to
recover on any such claim will be dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss associated with any of these contingencies.

     Performance Assumptions. Funding's future net income will be highly
dependent on realizing securitization gains on the sale of loans. Such gains
will be dependent largely upon the estimated present values of the subordinated
interests expected to be derived from the transactions and retained by the
Company. Management makes a number of assumptions in determining the estimated
present values for the subordinated interests. These assumptions include, but
are not limited to, prepayment speeds, default rates and subsequent losses on
the underlying loans, and the discount rates used to present value the future
cash flows. All of the

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assumptions are subjective. Varying the assumptions can have a material effect
on the present value determination in one securitization as compared to any
other. Subsequent events will cause the actual occurrences of prepayments,
losses and interest rates to be different from the assumptions used for such
factors at the time of the recognition of the sale of the loans. The effect of
the subsequently occurring events could cause a re-evaluation of the carrying
values of the previously estimated values of the subordinated interests and
excess spreads and such adjustment could be material.

     Because the subordinated interests to be retained by Funding represent
claims to future cash flow that are subordinated to holders of senior interests,
Funding retains a significant portion of the risk of whether the full value of
the underlying loans may be realized. In addition, holders of the senior
interests may have the right to receive certain additional payments on account
of principal in order to reduce the balance of the senior interests in
proportion to the credit enhancement requirements of any particular transaction.
Such payments for the benefit of the senior interest holders will delay the
payment, if any, of excess cash flow to Funding as the holder of the
subordinated interests.

IMPACT OF CHANGING INTEREST RATES

     Because most of the Company's borrowings are at variable rates of interest,
the Company will be impacted by fluctuations in interest rates. However, certain
effects of changes in interest rates, such as increased prepayments of
outstanding loans, cannot be mitigated. Fluctuations in interest rates could
have a material adverse effect on the Company's consolidated financial
condition, results of operations and business prospects.

     A substantial and sustained decline in interest rates may adversely impact
the amount of distressed assets available for purchase by Commercial Corp. The
value of the Company's interest-earning assets and liabilities may be directly
affected by the level of and fluctuations in interest rates, including the
valuation of any residual interests in securitizations that would be severely
impacted by increased loan prepayments resulting from declining interest rates.

     Conversely, a substantial and sustained increase in interest rates could
adversely affect the ability of the Company to originate loans and could reduce
the gains recognized by the Company upon their securitization and sale.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sale and the interest paid by the Company for funds borrowed under
the Company's warehouse credit facilities or otherwise.

CREDIT IMPAIRED BORROWERS

     The Company's sub-prime borrowers generally are unable to obtain credit
from traditional financial institutions due to factors such as an impaired or
poor credit history, low income or another adverse credit event. The Company is
subject to various risks associated with these borrowers, including, but not
limited to, the risk that the borrowers will not satisfy their debt service
obligations and that the realizable value of the assets securing their loans
will not be sufficient to repay the borrowers' debt. While the Company believes
that the underwriting criteria and collection methods it employs enable it to
identify and control the higher risks inherent in loans made to such borrowers,
and that the interest rates charged compensate the Company for the risks
inherent in such loans, no assurance can be given that such criteria or methods,
or such interest rates, will afford adequate protection against, or compensation
for, higher than anticipated delinquencies, foreclosures or losses. The actual
rate of delinquencies, foreclosures or losses could be significantly accelerated
by an economic downturn or recession. Consequently, the Company's consolidated
financial condition, results of operations and business prospects could be
materially adversely affected. The Company has established an allowance for loan
losses through periodic earnings charges and purchase discounts on acquired
receivables to cover anticipated loan losses on the loans currently in its
portfolio. No assurance can be given, however, that loan losses in excess of the
allowance will not occur in the future or that additional provisions will not be
required to provide for adequate allowances in the future.

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AVAILABILITY OF PORTFOLIO ASSETS

     The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Portfolio Assets available for purchase by investors such as the Company has
generally declined since 1993 as large pools of distressed assets acquired by
governmental agencies in the 1980s and early 1990s have been resolved or sold.
The Company cannot predict its future annual acquisition volume of Portfolio
Assets. Moreover, future Portfolio Asset purchases will depend on the
availability of Portfolios offered for sale, the availability of capital and the
Company's ability to submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets has become highly competitive in the United
States. This may require the Company to acquire Portfolio Assets at higher
prices thereby lowering profit margins on the resolution of such Portfolios.
Under certain circumstances, the Company may choose not to bid for Portfolio
Assets that it believes cannot be acquired at attractive prices. As a result of
all the above factors, Portfolio Asset purchases, and the revenue derived from
the resolution of Portfolio Assets, may vary significantly from quarter to
quarter.

AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS

     The Company believes that, as a result of the Merger, approximately $596
million of NOLs were available to the Company to offset future taxable income as
of December 31, 1995. Since December 31, 1995, the Company has generated an
additional $105 million in tax operating losses. Accordingly, as of December 31,
1999, the Company believes that it has approximately $701 million of NOLs
available to offset future taxable income. In accordance with the terms of
Financial Accounting Standards Board Statement Number 109 (relating to
accounting for income taxes), the Company has established a future utilization
valuation allowance equivalent to approximately $77.4 million of the total $701
million of NOLs, which equates to a $27.1 million deferred tax asset on the
Company's books and records. However, because the Company's position in respect
of its $596 million NOLs resulting from the Merger is based upon factual
determinations and upon legal issues with respect to which there is uncertainty
and because no ruling has been obtained from the Internal Revenue Service (the
"IRS") regarding the availability of the NOLs to the Company, there can be no
assurance that the IRS will not challenge the availability of such NOLs and, if
challenged, that the IRS will not be successful in disallowing this portion of
the Company's NOLs, with the result that the Company's $27.1 million deferred
tax asset would be reduced or eliminated.

     Assuming that the $701 million in NOLs is available to the Company, the
entire amount of such NOLs may be carried forward to offset future taxable
income of the Company until the tax year 2005. Thereafter, the NOLs begin to
expire. The ability of the Company to utilize such NOLs will be severely limited
if there is a more than 50% ownership change of the Company during a three-year
testing period within the meaning of section 382 of the Internal Revenue Code of
1986, as amended (the "Tax Code").

     If the Company were unable to utilize its NOLs to offset future taxable
income, it would lose significant competitive advantages that it now enjoys.
Such advantages include, but are not limited to, the Company's ability to offset
non-cash income recognized by the Company in connection with certain
securitizations, to generate capital to support its expansion plans on a
tax-advantaged basis, to offset its and its consolidated subsidiaries' pretax
income, and to have access to the cash flow that would otherwise be represented
by payments of federal tax liabilities.

ASSUMPTIONS REGARDING RECOGNITION OF DEFERRED TAX ASSET

     As noted above, the Company has net operating loss carryforwards for
federal income tax purposes available to offset future federal taxable income,
if any, through the year 2019. A valuation allowance is provided to reduce the
deferred tax assets to a level which, more likely than not, will be realized.
The ultimate realization of the resulting net deferred tax asset is dependent
upon generating sufficient taxable income prior to expiration of the net
operating loss carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the recorded deferred tax asset,
net of the allowance, will be realized. The amount of the deferred tax asset
considered realizable, however, could be adjusted in the future if estimates of
future taxable income during the carryforward period change. The change in
valuation allowance represents a

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<PAGE>   39

change in the estimate of the future taxable income during the carryforward
period since the prior year end and utilization of net operating loss
carryforwards since the Merger. The ability of the Company to realize the
deferred tax asset is periodically reviewed and the valuation allowance is
adjusted accordingly.

ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE

     The purchase price and carrying value of Portfolio Assets acquired by
Commercial Corp. are determined largely by estimating expected future cash flows
from such assets. Commercial Corp. develops and revises such estimates based on
its historical experience and current market conditions, and based on the
discount rates that the Company believes are appropriate for the assets
comprising the Portfolios. In addition, many obligors on Portfolio Assets have
impaired credit, with risks associated with such obligors similar to the risks
described in respect of borrowers under "-- Credit Impaired Borrowers." If the
amount and timing of actual cash flows is materially different from estimates,
the Company's consolidated financial condition, results of operations and
business prospects could be materially adversely affected.

GENERAL ECONOMIC CONDITIONS

     Periods of economic slowdown or recession, or declining demand for
commercial real estate, automobile loans or other commercial or consumer loans
may adversely affect the Company's business. Economic downturns may reduce the
number of loan originations by the Company's consumer and commercial finance
businesses and negatively impact its securitization activity and generally
reduce the value of the Company's assets. In addition, periods of economic
slowdown or recession, whether general, regional or industry-related, may
increase the risk of default on loans and could have a material adverse effect
on the Company's consolidated financial condition, results of operations and
business prospects. Such periods also may be accompanied by declining values of
automobiles and other property securing outstanding loans, thereby weakening
collateral coverage and increasing the possibility of losses in the event of
default. Significant increases in automobiles for sale during recessionary
economic periods may depress the prices at which such collateral may be sold or
delay the timing of such sales. There can be no assurance that there will be
adequate markets for the sale of repossessed automobiles. Any material
deterioration of such markets could reduce recoveries from the sale of
collateral.

     Such economic conditions could also adversely affect the resolution of
Portfolio Assets, lead to a decline in prices or demand for collateral
underlying Portfolio Assets, or increase the cost of capital invested by the
Company and the length of time that capital is invested in a particular
Portfolio. All or any one of these events could decrease the rate of return and
profits to be realized from such Portfolio and materially adversely affect the
Company's consolidated financial condition, results of operations and business
prospects.

RISK OF DECLINING VALUE OF COLLATERAL

     The value of the collateral securing automobile and other consumer loans
and loans acquired for resolution, as well as real estate or other acquired
distressed assets, is subject to various risks, including uninsured damage,
change in location or decline in value caused by use, age or market conditions.
Any material decline in the value of such collateral could adversely affect the
consolidated financial condition, results of operations and business prospects
of the Company.

GOVERNMENT REGULATION

     Many aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, the Company's loan originations, credit activities, maximum interest
rates, finance and other charges, disclosures to customers, the terms of secured
transactions, collection, repossession and claims handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. The Company believes it is currently
in compliance in all material respects with applicable regulations, but there
can be no assurance that the Company will be able to maintain such compliance.
Failure to comply with, or changes in, these laws or regulations, or the
expansion of the

                                       37
<PAGE>   40

Company's business into jurisdictions that have adopted more stringent
regulatory requirements than those in which the Company currently conducts
business, could have an adverse effect on the Company by, among other things,
limiting the interest and fee income the Company may generate on existing and
additional loans, limiting the states in which the Company may operate or
restricting the Company's ability to realize on the collateral securing its
loans. See "Business -- Government Regulation."

ENVIRONMENTAL LIABILITIES

     The Company, through its subsidiaries and affiliates, acquires real
property in its Portfolio Asset acquisition and resolution business. There is a
risk that properties acquired by the Company could contain hazardous substances
or waste, contaminants or pollutants. The Company may be required to remove such
substances from the affected properties at its expense, and the cost of such
removal may substantially exceed the value of the affected properties or the
loans secured by such properties. Furthermore, the Company may not have adequate
remedies against the prior owners or other responsible parties to recover its
costs, either as a matter of law or regulation, or as a result of such prior
owners' financial inability to pay such costs. The Company may find it difficult
or impossible to sell the affected properties either prior to or following any
such removal.

COMPETITION

     All of the businesses in which the Company operates are highly competitive.
Some of the Company's principal competitors are substantially larger and better
capitalized than the Company. Because of their resources, these companies may be
better able than the Company to obtain new customers for loan production, to
acquire Portfolio Assets, to pursue new business opportunities or to survive
periods of industry consolidation. Access to and the cost of capital are
critical to the Company's ability to compete. Many of the Company's competitors
have superior access to capital sources and can arrange or obtain lower cost of
capital, resulting in a competitive disadvantage to the Company with respect to
such competitors.

     In addition, certain of the Company's competitors may have higher risk
tolerances or different risk assessments, which could allow these competitors to
establish lower margin requirements and pricing levels than those established by
the Company. In the event a significant number of competitors establish pricing
levels below those established by the Company, the Company's ability to compete
would be adversely affected.

RISK ASSOCIATED WITH FOREIGN OPERATIONS

     Commercial Corp. has acquired, and manages and resolves, Portfolio Assets
located in France and Mexico and is actively pursuing opportunities to purchase
additional pools of distressed assets in these locations as well as other areas
of Western Europe and Southeast Asia. Foreign operations are subject to various
special risks, including currency translation risks, currency exchange rate
fluctuations, exchange controls and different political, social and legal
environments within such foreign markets. To the extent future financing in
foreign currencies is unavailable at reasonable rates, the Company would be
further exposed to currency translation risks, currency exchange rate
fluctuations and exchange controls. In addition, earnings of foreign operations
may be subject to foreign income taxes that reduce cash flow available to meet
debt service requirements and other obligations of the Company, which may be
payable even if the Company has no earnings on a consolidated basis. Any or all
of the foregoing could have a material adverse effect on the Company's financial
condition, results of operations and business prospects.

DEPENDENCE ON AUTOMOBILE DEALERSHIP RELATIONSHIPS

     The ability of the Company to expand into new geographic markets and to
maintain or increase its volume of automobile loans is dependent upon
maintaining and expanding the network of franchised automobile dealerships from
which it purchases contracts. Increased competition, including competition from
captive finance affiliates of automobile manufacturers, could have a material
adverse effect on the Company's ability to maintain or expand its dealership
network.

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LITIGATION

     Industry participants in the consumer lending businesses from time to time
are named as defendants in litigation involving alleged violations of federal
and state consumer protection or other similar laws and regulations. A judgment
against the Company in connection with any such litigation could have a material
adverse effect on the Company's consolidated financial condition, results of
operations and business prospects.

RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL

     The Company's relationship with Cargill Financial is significant in a
number of respects. Cargill Financial, a subsidiary of Cargill, Incorporated, a
privately held, multi-national agricultural and financial services company,
provides equity and debt financings for many of the Acquisition Partnerships.
Cargill Financial owns approximately 2.7% of the Company's outstanding Common
Stock, and a Cargill Financial designee, David W. MacLennan, serves as a
director of the Company. The Company believes its relationship with Cargill
Financial significantly enhances the Company's credibility as a purchaser of
Portfolio Assets and facilitates its ability to expand into other businesses and
foreign markets. Although management believes that the Company's relationship
with Cargill Financial is excellent, there can be no assurance that such
relationship will continue in the future. Absent such relationship, the Company
and the Acquisition Partnerships would be required to find alternative sources
for the financing that Cargill Financial has historically provided. There can be
no assurance that such alternative financing would be available. Any termination
of such relationship could have a material adverse effect on the Company's
consolidated financial condition, results of operations and business prospects.

DEPENDENCE ON KEY PERSONNEL

     The Company is dependent on the efforts of its senior executive officers,
particularly James R. Hawkins (Chairman and Chief Executive Officer) and James
T. Sartain (President and Chief Operating Officer). The Company is also
dependent on several of the key members of management of each of its operating
subsidiaries, many of whom were instrumental in developing and implementing the
business strategy for such subsidiaries. The inability or unwillingness of one
or more of these individuals to continue in his present role could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects. Certain senior executive officers have
entered into an employment agreement with the Company. There can be no assurance
that any of the foregoing individuals will continue to serve in his current
capacity or for what time period such service might continue. The Company does
not maintain key person life insurance for any of its senior executive officers.

     The borrowing facilities for the Company, Commercial Corp. and Consumer
Corp. each include key personnel provisions. These provisions generally provide
that if certain key personnel are no longer employed and suitable replacements
are not found within a defined time limit certain facilities become due and
payable.

INFLUENCE OF CERTAIN SHAREHOLDERS

     The directors and executive officers of the Company collectively
beneficially own 17.9% of the Common Stock. Although there are no agreements or
arrangements with respect to voting such Common Stock among such persons except
as described below, such persons, if acting together, may effectively be able to
control any vote of shareholders of the Company and thereby exert considerable
influence over the affairs of the Company. James R. Hawkins, the Chairman of the
Board and Chief Executive Officer of the Company, is the beneficial owner of
11.48% of the Common Stock. James T. Sartain, President and Chief Operating
Officer of the Company, and ATARA I, Ltd. ("ATARA"), an entity associated with
Rick R. Hagelstein, former Executive Vice President of the Company and former
Chief Executive Officer of Mortgage Corp. each beneficially owns 4.1% of the
outstanding Common Stock. In addition, Cargill Financial owns approximately 2.7%
of the Common Stock. Mr. Hawkins, Mr. Sartain, Cargill Financial and ATARA are
parties to a shareholder voting agreement (the "Shareholder Voting Agreement").
Under the Shareholder Voting Agreement, Mr. Hawkins, Mr. Sartain and ATARA are
required to vote their shares in favor of Cargill Financial's designee for
director of the Company, and Cargill Financial is required to vote its shares in
favor of one or more of the designees of Messrs. Hawkins and Sartain and ATARA.
There can be no assurance that the interests of management or the other entities
and individuals named above will be aligned with the Company's other
shareholders.

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SHARES ELIGIBLE FOR FUTURE SALE

     The utilization of the Company's $596 million in NOLs resulting from the
Merger may be limited or prohibited under the Tax Code in the event of certain
ownership changes. The Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") contains provisions
restricting the transfer of its securities that are designed to avoid the
possibility of such changes. Such restrictions may prevent certain holders of
common stock of the Company from transferring such stock even if such holders
are permitted to sell such stock without restriction under the Securities Act,
and may limit the Company's ability to sell common stock to certain existing
holders of common stock at an advantageous time or at a time when capital may be
required but unavailable from any other source.

ANTI-TAKEOVER CONSIDERATIONS

     The Company's Certificate of Incorporation and by-laws contain a number of
provisions relating to corporate governance and the rights of shareholders.
Certain of these provisions may be deemed to have a potential "anti-takeover"
effect to the extent they are utilized to delay, defer or prevent a change of
control of the Company by deterring unsolicited tender offers or other
unilateral takeover proposals and compelling negotiations with the Company's
Board of Directors rather than non-negotiated takeover attempts even if such
events may be in the best interests of the Company's shareholders. The
Certificate of Incorporation also contains certain provisions restricting the
transfer of its securities that are designed to prevent ownership changes that
might limit or eliminate the ability of the Company to use its NOLs resulting
from the Merger.

PERIOD TO PERIOD VARIANCES

     The Company Portfolio Assets and Acquisition Partnerships based proceeds
realized from the resolution of the Portfolio Assets, which proceeds have
historically varied significantly and likely will continue to vary significantly
from period to period. Consequently, the Company's period to period revenue and
net income have historically varied, and are likely to continue to vary,
correspondingly. Such variances, alone or with other factors, such as conditions
in the economy or the financial services industries or other developments
affecting the Company, may result in significant fluctuations in the reported
earnings of the Company and in the trading prices of the Company's securities,
particularly the Common Stock.

TAX, MONETARY AND FISCAL POLICY CHANGES

     The Company originates and acquires financial assets, the value and income
potential of which are subject to influence by various state and federal tax,
monetary and fiscal policies in effect from time to time. The nature and
direction of such policies are entirely outside the control of the Company, and
the Company cannot predict the timing or effect of changes in such policies.
Changes in such policies could have a material adverse effect on the Company's
consolidated financial condition, results of operations and business prospects.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's earnings are materially impacted by net gains on
sales of loans and net interest margins. The level of gains from loan sales the
Company achieves is dependent on demand for the products originated. Net
interest margins are dependent on the Company to maintain the spread or interest
differential between the interest it charges the customer for loans and the
interest the Company is charged for the financing of those loans. The following
describes each component of interest bearing assets held by the Company and how
each could be effected by changes in interest rates.

     Portfolio assets consist of investments in pools of non-homogenous assets
that predominantly consist of loan and real estate assets. Earnings from these
assets are based on the estimated future cash flows from such assets and
recorded when those cash flows occur. The underlying loans within these pools
bear both fixed and variable rates. Due to the non-performing nature and history
of these loans, changes in prevailing bench-mark rates (such as the prime rate
or LIBOR) generally have a nominal effect on the ultimate future cash flow to be
realized from the loan assets. Furthermore, these pools of assets are held for
sale, not for investment; therefore, the disposition strategy is to liquidate
these assets as quickly as possible.

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<PAGE>   43

     The sub-prime loans the Company sells generally are included in asset
backed securities the investor or purchaser issues. These securities are priced
at spreads over the LIBOR or an equivalent term treasury security. These spreads
are determined by demand for the security. Demand is affected by the perception
of credit quality and prepayment risk associated with the loans the Company
originates and sells. Interest rates offered to customers also affect prices
paid for loans. These rates are determined by review of competitors rate
offerings to the public and current prices being paid to the Company for the
products. The Company does not hedge these price risks.

     The Company's residual interests in securitizations represent the present
value of the excess cash flows the Company expects to receive over the life of
the underlying sub-prime automobile loans. The sub-prime automobile residual
interests are affected less by prepayment speeds due to the shorter term of the
underlying assets and the fact that the loans are fixed rate, generally at the
highest rate allowable by law.

     Additionally the Company has various sources of financing which have been
previously described in the Liquidity and Capital Resources section of Item 7.
All of the financing arrangements listed in the table below have variable
interest rates which, in the event of rising rates, would negatively impact the
earnings of the Company due to higher levels of interest expense.

     In summary, the Company would be negatively impacted by rising interest
rates and declining prices for its sub-prime loans. Rising interest rates would
negatively impact the value of residual interests in securitizations and costs
of borrowings. Declining prices for the Company's sub-prime loans would
adversely effect the levels of gains achieved upon the sale of those loans.

     The following table is a summary of the interest earning assets and
interest bearing liabilities, as of December 31, 1999, segregated by asset type
as described in the previous paragraphs, with expected maturity or sales dates
as indicated (dollars in thousands):

<TABLE>
<CAPTION>
                              WEIGHTED                                           GREATER
                              AVERAGE      0-3       3-6       6-9      9-12      THAN
                                RATE     MONTHS    MONTHS    MONTHS    MONTHS   12 MONTHS    TOTAL
                              --------   -------   -------   -------   ------   ---------   --------
<S>                           <C>        <C>       <C>       <C>       <C>      <C>         <C>
INTEREST BEARING ASSETS
Portfolio assets(1).........     N/A     $14,369   $ 2,305   $ 4,060   $1,453    $17,250    $ 39,437
Automobile loans and student
  finance receivables(2)....   19.03%     24,789       553       579      607      2,733      29,261
Residual interests in
  securitizations...........   13.14%      5,359     4,393     5,079    3,142     37,688      55,661
                                         -------   -------   -------   ------    -------    --------
                                         $44,517   $ 7,251   $ 9,718   $5,202    $57,671    $124,359
                                         =======   =======   =======   ======    =======    ========
INTEREST BEARING LIABILITIES
Lines of credit:(3)
Portfolio assets............    9.21%    $ 9,600   $28,715        --       --         --    $ 38,315
Automobile loans and student
  finance receivables.......    8.41%     20,092        --        --       --         --      20,092
Residual interests in
  securitizations...........    9.50%      4,257        --        --       --         --       4,257
                                         -------   -------   -------   ------    -------    --------
                                         $33,949   $28,715        --       --         --    $ 62,664
                                         =======   =======   =======   ======    =======    ========
Company credit facility.....   10.48%         --        --        --       --    $77,000    $ 77,000
</TABLE>

---------------

(1) Portfolio assets are shown based on estimated proceeds from disposition,
    which could occur much faster or slower than anticipated or as directed.

(2) Automobile loans and consumer loans are shown in the table based upon the
    expected date of sale or repayment.

(3) Lines of credit mature in the periods indicated. This does not necessarily
    indicate when the outstanding balances would be paid. The lines of credit
    fund up to 100% of the corresponding asset class. If the asset balance
    declines whether through a sale or a payment from the borrower, the
    corresponding liability must be paid.

                                       41
<PAGE>   44

                                 OTHER MATTERS

YEAR 2000

     The Company did not experience any disruptions in its operations during the
transition into the Year 2000. In the fourth quarter of 1999, the Company
completed necessary assessments, modifications or replacement and testing of
systems critical to the Company's operations and believed it had met its Year
2000 readiness objectives. The amounts incurred and expensed for developing and
carrying out the overall Year 2000 plan totaled approximately $.4 million. While
the Company did not experience any Year 2000 disruptions during the transition
into the Year 2000, it will continue to monitor its operations and systems and
address any date-related problems that may arise as the year progresses.

                                       42
<PAGE>   45

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1999         1998
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Cash and cash equivalents...................................   $ 11,263     $  5,955
Portfolio Assets, net.......................................     39,437       68,423
Loans receivable, net.......................................     30,144       14,854
Residual interests in securitizations.......................     55,661       41,849
Equity investments in Acquisition Partnerships and Servicing
  Entities..................................................     31,104       41,466
Deferred tax benefit, net...................................     27,101       32,162
Other assets, net...........................................     15,786       15,844
Net assets of discontinued operations.......................     20,126      116,090
                                                               --------     --------
          Total Assets......................................   $230,622     $336,643
                                                               ========     ========

          LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY

Liabilities:
  Notes payable.............................................   $169,792     $165,922
  Other liabilities.........................................      7,278        7,443
                                                               --------     --------
          Total Liabilities.................................    177,070      173,365
Commitments and contingencies...............................         --           --
Redeemable preferred stock:
  Adjusting rate preferred stock, including dividends (in
     arrears in 1999) of $1,284 and $642, respectively (par
     value $.01, redemption value of $21 per share;
     2,000,000 shares authorized; 1,222,901 shares issued
     and outstanding).......................................     26,965       26,323
Shareholders' equity:
  Optional preferred stock (par value $.01 per share;
     98,000,000 shares authorized; no shares issued or
     outstanding)...........................................         --           --
  Common stock (par value $.01 per share; 100,000,000 shares
     authorized; issued and outstanding: 8,333,300 and
     8,287,959 shares, respectively)........................         83           83
  Paid in capital...........................................     79,562       78,456
  Retained earnings (accumulated deficit)...................    (52,663)      58,061
  Accumulated other comprehensive income (loss).............       (395)         355
                                                               --------     --------
          Total Shareholders' Equity........................     26,587      136,955
                                                               --------     --------
          Total Liabilities, Redeemable Preferred Stock and
           Shareholders' Equity.............................   $230,622     $336,643
                                                               ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       43
<PAGE>   46

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                              --------------------------------------
                                                                 1999           1998         1997
                                                              -----------    ----------    ---------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>            <C>           <C>
Revenues:
  Gain on sales of automobile loans.........................   $  10,280      $  7,214      $    --
  Servicing fees............................................       8,936         5,767       12,066
  Gain on resolution of Portfolio Assets....................       4,054         9,208       24,183
  Equity in earnings of Acquisition Partnerships and
    Servicing Entities......................................      11,318        12,827        7,605
  Interest income...........................................      20,502        12,590       13,437
  Other income..............................................       3,838         3,938        3,052
  Interest income on Class A Certificate....................          --            --        3,553
                                                               ---------      --------      -------
         Total revenues.....................................      58,928        51,544       63,896
Expenses:
  Interest on notes payable.................................      16,291        12,088       11,246
  Salaries and benefits.....................................      15,621        13,755       11,793
  Provision for loan losses and impairment of residual
    interests...............................................       4,302         9,201        6,613
  Harbor Merger related expenses............................          --            --        1,618
  Occupancy, data processing, communication and other.......      20,405        16,675       18,212
                                                               ---------      --------      -------
         Total expenses.....................................      56,619        51,719       49,482
                                                               ---------      --------      -------
Earnings (loss) from continuing operations before income
  taxes, minority interest and accounting change............       2,309          (175)      14,414
Benefit (provision) for income taxes........................      (5,051)        1,132       13,396
                                                               ---------      --------      -------
Earnings (loss) from continuing operations before minority
  interest and accounting change............................      (2,742)          957       27,810
Minority interest...........................................        (734)         (172)        (187)
Cumulative effect of accounting change......................        (765)           --           --
                                                               ---------      --------      -------
Earnings (loss) from continuing operations..................      (4,241)          785       27,623
Earnings (loss) from discontinued operations, net of benefit
  (provision) for income taxes of $0-, $(89) and $2,089,
  respectively..............................................    (103,915)      (20,977)       8,005
                                                               ---------      --------      -------
Net earnings (loss).........................................    (108,156)      (20,192)      35,628
Preferred dividends(1)......................................      (2,568)       (5,186)      (6,203)
                                                               ---------      --------      -------
         Net earnings (loss) to common shareholders.........   $(110,724)     $(25,378)     $29,425
                                                               =========      ========      =======
Basic earnings (loss) per common share are as follows:
  Earnings (loss) from continuing operations before
    accounting change per common share......................   $   (0.73)     $  (0.58)     $  3.28
  Discontinued operations per common share..................      (12.51)        (2.77)        1.23
  Cumulative effect of accounting change....................       (0.09)           --           --
  Net earnings (loss) per common share......................   $  (13.33)     $  (3.35)     $  4.51
  Weighted average common shares outstanding................       8,307         7,584        6,518
Diluted earnings (loss) per common share are as follows:
  Earnings (loss) from continuing operations before
    accounting change per common share......................   $   (0.73)     $  (0.58)     $  3.25
  Discontinued operations per common share..................      (12.51)        (2.77)        1.21
  Cumulative effect of accounting change....................       (0.09)           --           --
  Net earnings (loss) per common share......................   $  (13.33)     $  (3.35)     $  4.46
  Weighted average common shares outstanding................       8,307         7,584        6,591
</TABLE>

---------------

(1) Includes accumulated dividends in arrears for the six months ended December
    31, 1999.

          See accompanying notes to consolidated financial statements.

                                       44
<PAGE>   47

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                ACCUMULATED
                                                                  RETAINED         OTHER
                                 NUMBER OF                        EARNINGS     COMPREHENSIVE       TOTAL
                                  COMMON     COMMON   PAID IN   (ACCUMULATED      INCOME       SHAREHOLDERS'
                                  SHARES     STOCK    CAPITAL     DEFICIT)        (LOSS)          EQUITY
                                 ---------   ------   -------   ------------   -------------   -------------
                                                           (DOLLARS IN THOUSANDS)
<S>                              <C>         <C>      <C>       <C>            <C>             <C>
BALANCES, DECEMBER 31,
  1996.......................    6,513,346    $65     $29,783    $  54,954         $  --         $  84,802
Exercise of warrants, options
  and purchase of shares
  through employee stock
  purchase
  plan.......................       13,164     --         318           --            --               318
Change in subsidiary year
  end........................           --     --          --       (1,239)           --            (1,239)
Comprehensive income:
  Net earnings for 1997......           --     --          --       35,628            --            35,628
  Foreign currency items.....           --     --          --           --            44                44
                                                                                                 ---------
Total comprehensive income...                                                                       35,672
                                                                                                 ---------
Preferred dividends..........           --     --          --       (6,203)           --            (6,203)
Other........................           --     --        (592)          --            --              (592)
                                 ---------    ---     -------    ---------         -----         ---------
BALANCES, DECEMBER 31,
  1997.......................    6,526,510     65      29,509       83,140            44           112,758
Exercise of warrants, options
  and purchase of shares
  through employee stock
  purchase
  plan.......................      519,299      5      12,675           --            --            12,680
Issuance of common stock to
  acquire the minority
  interest of subsidiary.....       41,000      1       2,149           --            --             2,150
Issuance of common stock in
  public offering............    1,201,150     12      34,123           --            --            34,135
Comprehensive loss:
  Net loss for 1998..........           --     --          --      (20,192)           --           (20,192)
  Foreign currency items.....           --     --          --           --           311               311
                                                                                                 ---------
Total comprehensive loss.....                                                                      (19,881)
                                                                                                 ---------
Other........................           --     --          --          299            --               299
Preferred dividends..........           --     --          --       (5,186)           --            (5,186)
                                 ---------    ---     -------    ---------         -----         ---------
BALANCES, DECEMBER 31,
  1998.......................    8,287,959     83      78,456       58,061           355           136,955
Purchase of shares through
  employee stock purchase
  plan.......................       45,341     --         231           --            --               231
Issuance of common stock
  warrant....................           --     --         875           --            --               875
Comprehensive loss:
  Net loss for 1999..........           --     --          --     (108,156)           --          (108,156)
  Foreign currency items.....           --     --          --           --          (750)             (750)
                                                                                                 ---------
Total comprehensive loss.....                                                                     (108,906)
                                                                                                 ---------
Preferred dividends..........           --     --          --       (2,568)           --            (2,568)
                                 ---------    ---     -------    ---------         -----         ---------
BALANCES, DECEMBER 31,
  1999.......................    8,333,300    $83     $79,562    $ (52,663)        $(395)        $  26,587
                                 =========    ===     =======    =========         =====         =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       45
<PAGE>   48

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1999        1998        1997
                                                              ---------   ---------   ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net earnings (loss).......................................  $(108,156)  $ (20,192)  $  35,628
  Adjustments to reconcile net earnings (loss) to net cash
    provided by (used in) operating activities, net of
    effect of acquisitions:
    (Earnings) loss from discontinued operations............    103,915      20,977      (8,005)
    Proceeds from resolution of Portfolio Assets............     19,610      42,976      87,138
    Gain on resolution of Portfolio Assets..................     (4,054)     (9,208)    (24,183)
    Purchase of Portfolio Assets and loans receivable,
      net...................................................       (307)    (26,420)    (44,350)
    Origination of automobile receivables, net of purchase
      discount..............................................   (166,476)   (119,096)    (89,845)
    Provision for loan losses and impairment of residual
      interests.............................................      4,302       9,201       6,613
    Equity in earnings of Acquisition Partnerships and
      Servicing Entities....................................    (11,318)    (12,827)     (7,605)
    Proceeds from performing Portfolio Assets and loans
      receivable, net.......................................    150,043     144,627      78,813
    (Increase) decrease in net deferred tax asset...........      5,061      (1,637)    (14,627)
    Depreciation and amortization...........................      2,912       2,058       3,273
    (Increase) decrease in other assets.....................        895     (10,246)    (67,607)
    Increase in other liabilities...........................      1,198      12,742      17,264
    Adjustment to equity from change in subsidiary year
      end...................................................         --          --      (1,239)
                                                              ---------   ---------   ---------
         Net cash provided by (used in) operating
           activities.......................................     (2,375)     32,955     (28,732)
                                                              ---------   ---------   ---------
Cash flows from investing activities, net of effect of
  acquisitions:
  Advances to Acquisition Partnerships and affiliates.......         --          --         (50)
  Payments on advances to Acquisition Partnerships and
    affiliates..............................................         --          --       1,029
  Acquisition of subsidiaries...............................         --          --       1,118
  Principal payments on Class A Certificate.................         --          --      46,477
  Property and equipment, net...............................     (5,321)     (1,840)     (1,157)
  Contributions to Acquisition Partnerships and Servicing
    Entities................................................    (15,500)    (22,534)    (25,282)
  Distributions from Acquisition Partnerships and Servicing
    Entities................................................     36,045      28,050      11,833
                                                              ---------   ---------   ---------
         Net cash provided by investing activities..........     15,224       3,676      33,968
                                                              ---------   ---------   ---------
Cash flows from financing activities, net of effect of
  acquisitions:
  Borrowings under notes payable............................    237,702     340,680     229,301
  Payments of notes payable.................................   (235,598)   (329,232)   (171,115)
  Purchase or redemption of special preferred stock.........         --     (14,716)    (12,567)
  Proceeds from issuance of common stock....................        231      46,815         318
  Distributions to minority interest........................         --          --      (5,129)
  Preferred dividends paid..................................     (1,926)     (6,059)     (6,627)
                                                              ---------   ---------   ---------
         Net cash provided by financing activities..........        409      37,488      34,181
                                                              ---------   ---------   ---------
  Net cash provided by continuing operations................  $  13,258   $  74,119   $  39,417
  Net cash used by discontinued operations..................     (7,950)    (95,489)    (22,983)
                                                              ---------   ---------   ---------
Net increase (decrease) in cash.............................  $   5,308   $ (21,370)  $  16,434
Cash, beginning of year.....................................      5,955      27,325      10,891
                                                              ---------   ---------   ---------
Cash, end of year...........................................  $  11,263   $   5,955   $  27,325
                                                              =========   =========   =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
    Interest................................................  $  16,097   $  12,399   $  10,182
                                                              =========   =========   =========
    Income taxes............................................  $     235   $     627   $     754
                                                              =========   =========   =========
  Non-cash investing activities:
    Investment securities received as a result of sales of
      loans through securitizations.........................  $  27,306   $  44,309   $   6,925
                                                              =========   =========   =========
  Non-cash financing activities:
    Dividends accumulated and not paid on preferred stock...  $   1,284   $     642   $   1,515
    Issuance of common stock warrant........................        875          --          --
                                                              ---------   ---------   ---------
                                                              $   2,159   $     642   $   1,515
                                                              =========   =========   =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       46
<PAGE>   49

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) BASIS OF PRESENTATION

     On July 3, 1995, FirstCity Financial Corporation (the "Company" or
"FirstCity") was formed by the merger of J-Hawk Corporation and First City
Bancorporation of Texas, Inc. (the "Merger"). The Company's merger with Harbor
Financial Group, Inc. ("Mortgage Corp.") on July 1, 1997 was accounted for as a
pooling of interests.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include the estimation of future
collections on purchased portfolio assets used in the calculation of net gain on
resolution of portfolio assets, interest rate environments, valuation of the
deferred tax asset, and prepayment speeds and collectibility of loans held in
inventory, securitization trusts and for investment. Actual results could differ
materially from those estimates.

(b) DESCRIPTION OF BUSINESS

     The Company is a diversified financial services company with offices
throughout the United States, and a presence in France and Mexico. At December
31, 1999, the Company was engaged in two principal reportable segments: (i)
portfolio asset acquisition and resolution; and (ii) consumer lending. Refer to
Note 10 for operational information related to each of these principal segments.
Effective in the third quarter of 1999, the Company adopted formal plans to
discontinue its mortgage banking operations (refer to Note 2), which had
previously also been reported as a principal segment. Activities related to the
mortgage banking operations have been reclassified in the accompanying
consolidated financial statements to discontinued operations.

     In the portfolio asset acquisition and resolution business the Company
acquires and resolves portfolios of performing and nonperforming commercial and
consumer loans and other assets (collectively, "Portfolio Assets" or
"Portfolios"), which are generally acquired at a discount to their legal
principal balance. Purchases may be in the form of pools of assets or single
assets. The Portfolio Assets are generally nonhomogeneous assets, including
loans of varying qualities that are secured by diverse collateral types and
foreclosed properties. Some Portfolio Assets are loans for which resolution is
tied primarily to the real estate securing the loan, while others may be
collateralized business loans, the resolution of which may be based either on
business or real estate or other collateral cash flow. Portfolio Assets are
acquired on behalf of the Company or its wholly owned subsidiaries, and on
behalf of legally independent domestic and foreign partnerships and other
entities ("Acquisition Partnerships" which include the WAMCO Partnerships) in
which a partially owned affiliate of the Company is the general partner and the
Company and other investors are limited partners.

     The Company's consumer lending activities include the origination,
acquisition and servicing of sub-prime consumer loans principally secured by
automobiles with the intention of selling the acquired loans in securitization
transactions.

     The Company services, manages and ultimately resolves or otherwise disposes
of substantially all of the assets it, its Acquisition Partnerships, or other
related entities acquire. The Company services all such assets until they are
collected or sold and normally does not manage assets for non-affiliated third
parties.

                                       47
<PAGE>   50
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(c) PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
all of the majority owned subsidiaries of the Company. Investments in 20 percent
to 50 percent owned affiliates are accounted for on the equity method. All
significant intercompany transactions and balances have been eliminated in
consolidation.

(d) CASH EQUIVALENTS

     For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. The Company has maintained balances in
various operating and money market accounts in excess of federally insured
limits.

(e) PORTFOLIO ASSETS

     Portfolio Assets are reflected in the accompanying consolidated financial
statements as non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. The following is a description of each classification
and the related accounting policy accorded to each Portfolio type:

  Non-Performing Portfolio Assets

     Non-performing Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed upon collateral. Portfolio Assets are
designated as non-performing unless substantially all of the loans in the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Such Portfolios are acquired on the basis of an
evaluation by the Company of the timing and amount of cash flow expected to be
derived from borrower payments or other resolution of the underlying collateral
securing the loan.

     All non-performing Portfolio Assets are purchased at substantial discounts
from their outstanding legal principal amount, the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation
allowance is established for any impairment identified through provisions
charged to earnings in the period the impairment is identified. No valuation
allowance was required as of December 31, 1999, 1998 or 1997.

     Net gain on resolution of non-performing Portfolio Assets is recognized as
income to the extent that proceeds collected exceed a pro rata portion of
allocated cost from the Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the pool. No interest
income is recognized separately on non-performing Portfolio Assets. All
proceeds, of whatever type, are included in proceeds from resolution of
Portfolio Assets in determining the gain on resolution of such assets.
Accounting for Portfolios is on a pool basis as opposed to an individual
asset-by-asset basis.

  Performing Portfolio Assets

     Performing Portfolio Assets consist primarily of Portfolios of consumer and
commercial loans acquired at a discount from the aggregate amount of the
borrowers' obligation. Portfolios are classified as performing if substantially
all of the loans in the Portfolio are being repaid in accordance with the
contractual terms of the underlying loan agreements.

     Performing Portfolio Assets are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts. Interest is accrued when
earned in accordance with the contractual terms of the loans. The accrual of
interest is discontinued once a loan becomes past due 90 days or more.
Acquisition discounts for the Portfolio as a whole are accreted as an adjustment
to yield over the estimated life of the Portfolio. Accounting for these
Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

                                       48
<PAGE>   51
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company accounts for performing Portfolio Assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 1141,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
which requires creditors to evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss accrual.
Impairment is measured based on the present value of the expected future cash
flows discounted at the loans' effective interest rates, or the fair value of
the collateral, less estimated selling costs, if any loans are collateral
dependent and foreclosure is probable.

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate are capitalized, whereas those relating to holding
assets are charged to expense. Income or loss is recognized upon the disposal of
the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received. Accounting for the Portfolios is on a pool basis as
opposed to an individual asset-by-asset basis.

(f) LOANS RECEIVABLE

     Automobile and consumer finance receivables consist of sub-prime automobile
finance receivables and student loan receivables, which are originated and
acquired from third party dealers and other originators, purchased at a
non-refundable discount from the contractual principal amount. This discount is
allocated between discount available for loan losses and discount available for
accretion to interest income. Discounts allocated to discounts available for
accretion are deferred and accreted to income using the interest method. To date
all acquired discounts have been allocated as discounts available for loan
losses. To the extent the discount is considered insufficient to absorb
anticipated losses on the loans receivable, additions to the allowance are made
through a periodic provision for loan losses (see Note 6). The evaluation of the
allowance considers loan portfolio performance, historical losses, delinquency
statistics, collateral valuations and current economic conditions. Such
evaluation is made on an individual loan basis using static pool analyses.

     Interest is accrued when earned in accordance with the contractual terms of
the loans. The accrual of interest is discontinued once a loan becomes past due
90 days or more.

(g) RESIDUAL INTERESTS IN SECURITIZATIONS

     The Company has residual interests in securitizations consisting of rated
securities, retained interests and related interest only strips (collectively
referred to as residual interests) which are attributable to loans sold through
securitization transactions by the Company. The residual interests are
classified as available for sale. Accordingly, the Company records these
investments at estimated fair value. The increases or decreases in estimated
fair value are recorded as unrealized gains or losses in the accompanying
consolidated statements of shareholders' equity. The determination of fair value
is based on the present value of the anticipated excess cash flows using
valuation assumptions unique to each securitization. Impairment in the fair
value of residual interests that is deemed to be other than temporary is
reflected in a valuation allowance with provisions charged to earnings in the
period in which the impairment is identified.

(h) PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost, less accumulated depreciation
and are included in other assets. Depreciation is provided using accelerated
methods over the estimated useful lives of the assets.

                                       49
<PAGE>   52
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) INTANGIBLES

     Intangible assets represent the excess of cost over fair value of assets
acquired in connection with purchase transactions (goodwill) as well as the
purchase price of future service fee revenues and are included in other assets.
These intangible assets are amortized over periods estimated to coincide with
the expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired.

     An accounting change due to the adoption of Statement of Financial Position
98-5, Reporting on the Cost of Start-Up Activities, which requires previously
capitalized start-up costs including organizational costs to be written off and
future costs related to start-up entities to be charged to expense as incurred,
resulted in a write-off of $.8 million in previously capitalized organizational
costs during the first quarter of 1999 and has been reflected as a cumulative
effect of a change in accounting principle.

(j) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     The Company adopted SFAS No. 130 ("SFAS 130"), Reporting Comprehensive
Income as of January 1, 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive income and its components in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
also requires the accumulated balance of other comprehensive income to be
displayed separately in the equity section of the consolidated balance sheet.
The adoption of this statement had no material impact on results of operations
or shareholders' equity. The Company's other comprehensive income consists of
foreign currency transactions only and had an accumulated balance of $(395) and
$355 at December 31, 1999 and 1998, respectively.

(k) FOREIGN CURRENCY TRANSLATIONS

     The Company has determined that the local currency is the functional
currency for its operations outside the United States (primarily France and
Mexico). Assets and liabilities denominated in foreign functional currencies are
translated at the exchange rate as of the balance sheet date. Translation
adjustments are recorded as a separate component of shareholders' equity in
accumulated other comprehensive income (loss). Revenues, costs and expenses
denominated in foreign currencies are translated at the weighted average
exchange rate for the period.

(l) INCOME TAXES

     The Company files a consolidated federal income tax return with its 80% or
greater owned subsidiaries. The Company records all of the allocated federal
income tax provision of the consolidated group in the parent corporation.

     Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effects of future changes in tax laws or changes in
tax rates are not anticipated. The measurement of deferred tax assets, if any,
is reduced by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.

(m) NET EARNINGS (LOSS) PER COMMON SHARE

     Basic net earnings per common share calculations are based upon the
weighted average number of common shares outstanding. Earnings (loss) included
in the earnings per common share calculation are
                                       50
<PAGE>   53
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reduced by minority interest and preferred stock dividends. Potentially dilutive
common share equivalents include warrants and stock options in the diluted
earnings per common share calculations.

(n) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     The Company assesses the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

(o) RECLASSIFICATIONS

     Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.

(2) DISCONTINUED OPERATIONS

     Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Harbor Financial Group,
Inc. (formerly known as FirstCity Mortgage Corp.) and its subsidiaries
(collectively referred to as "Mortgage Corp."), and FC Capital Corp. ("Capital
Corp."). These entities comprise the operations that were previously reported as
the Company's residential and commercial mortgage banking business. As formal
termination plans were adopted and operations at each entity are expected to
cease in the near future (within 12 months), the results of current and
historical operations have been reflected as discontinued operations in the
accompanying consolidated statements of operations. Additionally, a net asset
related to the resolution of activity from the discontinued operations has been
reflected in the accompanying consolidated balance sheets. The following is a
summary of activity related to each of the entity's operations:

     Mortgage Corp. -- During the third quarter of 1999, Mortgage Corp. incurred
significant losses from operations and the liquidation of certain assets.
Ultimately, on October 14, 1999, Mortgage Corp. filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Northern District of Texas. In the
filings, the stated assets of Mortgage Corp. were approximately $95 million and
the stated liabilities were approximately $98 million. Additionally, it is
anticipated that the liquidation of any remaining assets will yield proceeds
which are less than the stated amount of the assets as listed in the filings.
The Company does not guarantee any of the debt of Mortgage Corp. nor is there
any recourse to the Company on any of Mortgage Corp.'s liabilities. Furthermore,
management of the Company was not involved in the daily operations of Mortgage
Corp. during a significant portion of the third quarter of 1999 and no longer
has access to financial records of Mortgage Corp.

     Based on the above, Mortgage Corp. is deemed insolvent and the Company has
written-off its entire investment in and advances to (collectively referred to
as the Net Investment) Mortgage Corp. At June 30, 1999, the Net Investment in
Mortgage Corp. totaled $50.5 million. The Company did not fund any of the
operations of Mortgage Corp. subsequent to June 30, 1999.

     Capital Corp. -- Management of the Company made the decision to completely
exit all mortgage banking activities due to the significant negative impact
realized from Mortgage Corp. The Company ceased acquiring mortgage loans under
Capital Corp.'s platform during the fourth quarter of 1999. At December 31,
1999, Capital Corp. had loans totaling $140 million remaining in its inventory.
A sale of substantially all of the remaining inventory is anticipated to close
near the beginning of the second quarter of 2000, and the remainder of the
wind-down of operations to be completed by the end of the second quarter of
2000.

                                       51
<PAGE>   54
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     It is projected that the only assets remaining from Capital Corp.'s
operations will be the investment securities resulting from the retention of
residual interests in securitization transactions completed by Capital Corp. The
Company has considered the estimated future income from such investment
securities in the computation of the loss from discontinued operations.

     A summary of the mortgage banking operation's net assets at December 31,
1998, as previously reported is as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1998
                                                              ------------
<S>                                                           <C>
Mortgage loans held for sale and other loan receivables.....   $1,238,876
Mortgage servicing rights...................................       91,440
Receivable for servicing advances and accrued interest......       58,161
Residual interests in securitizations.......................       23,893
Other assets................................................       31,054
                                                               ----------
          Total assets......................................    1,443,424
Notes payable...............................................    1,296,309
Other liabilities...........................................       31,025
                                                               ----------
          Total liabilities.................................    1,327,334
                                                               ----------
          Net assets of discontinued operations.............   $  116,090
                                                               ==========
At December 31, 1999, the net assets from discontinued
  operations consist of the following:
  Investment securities, net of valuation allowance.........   $   28,602
  Accrual for loss on operations and disposal of
     discontinued operations................................       (8,476)
                                                               ----------
          Net assets of discontinued operations.............   $   20,126
                                                               ==========
</TABLE>

     A summary of the results of operations from the discontinued operations for
the six months ended June 30, 1999 and the years ended December 31, 1998 and
1997 is as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                SIX MONTHS ENDED    ------------------------
                                                 JUNE 30, 1999         1998          1997
                                                ----------------    -----------    ---------
<S>                                             <C>                 <C>            <C>
Revenues:
  Net mortgage warehouse income...............      $  9,486         $   7,782      $ 3,499
  Gain on sale of mortgage loans..............        39,874           109,383       36,496
  Loss on sale of mortgage servicing rights...        (8,693)               --           --
  Servicing fees..............................        10,370            25,537       14,732
  Other.......................................         5,245             5,298       10,999
                                                    --------         ---------      -------
          Total...............................        56,282           148,000       65,726
Expenses:
  Salaries and benefits.......................        45,128            68,955       30,398
  Amortization of mortgage servicing rights...         7,154            19,110        7,550
  Provision for valuation of mortgage
     servicing rights.........................         2,294            29,305           --
  Provision for loan losses and residual
     interests................................         1,708             1,973           --
  Interest on other notes payables............         3,778             2,800        1,187
  Occupancy, data processing, communication
     and other................................        36,903            46,745       20,675
                                                    --------         ---------      -------
          Total...............................        96,965           168,888       59,810
                                                    --------         ---------      -------
Operating contribution (loss), before direct
  taxes.......................................      $(40,683)        $ (20,888)     $ 5,916
                                                    ========         =========      =======
Operating contribution (loss), net of direct
  taxes.......................................      $(40,683)        $ (20,977)     $ 8,005
                                                    ========         =========      =======
</TABLE>

                                       52
<PAGE>   55
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition to the above loss from discontinued operations during 1999, the
Company also reflected losses in the third quarter related to the write off of
the Company's investment in Mortgage Corp. of $50,558, the write down in the
investment in Capital Corp. of $15,571, offset by the future operations, net of
reserves, of the residual assets of the discontinued business of approximately
$2,897.

(3) LIQUIDITY AND CAPITAL RESOURCES

     Generally, the Company requires liquidity to fund its operations, working
capital, payment of debt, equity for acquisition of Portfolio Assets,
investments in and advances to the Acquisition Partnerships, investments in
expanding businesses to support their growth, retirement of and dividends on
preferred stock, and other investments by the Company. The potential sources of
liquidity are funds generated from operations, equity distributions from the
Acquisition Partnerships, interest and principal payments on subordinated
intercompany debt and dividends from the Company's subsidiaries, short-term
borrowings from revolving lines of credit, proceeds from equity market
transactions, securitization and other structured finance transactions and other
special purpose short-term borrowings.

     During the fourth quarter of 1999, the Company completed several
transactions that improved the Company's liquidity position through additional
funding. The transactions were structured to provide the immediate funding needs
of the Company's remaining business units while containing incentives for the
Company to replace the borrowings with other sources of funding over time. Below
is a description of such financing transactions.

     The Company renewed and restructured its senior lending facility (the
"Senior Facility"). The Senior Facility was renewed at a maximum available
amount of $88 million. The restructured Senior Facility matures June 2001 and
carries pricing of Libor plus 4% (10.48% at December 31, 1999) on the
outstanding indebtedness thereunder. The Senior Facility provides for a facility
fee of $1.65 million if the loan is paid in full before September 30, 2000, or
$2.5 million if paid thereafter. Defaults at Mortgage Corp. do not constitute
defaults under the Senior Facility. The Senior Facility also requires the
consent of the lenders prior to payment of any common and preferred dividends.
The Company continually evaluates its liquidity position giving priority to
assuring adequate funding levels for its two operating entities. Secondarily,
management will determine when and if it is appropriate to pay the dividends on
the Company's outstanding preferred stock. Currently, there are approximately
1.2 million preferred shares outstanding with accrued dividends of approximately
$1.3 million.

     The Company issued $25 million in senior subordinated notes maturing in
December 2003. The notes bear interest at prime plus 3.75% (12.25% at December
31, 1999) during the first year and provide for an increase of 1/2% in the rate
each year thereafter. The redemption price for the notes is equal to the
principal amount of the notes plus any accrued interest through December 31,
1999. The redemption price increases by 1% of the principal amount on January 1,
2000 and each January 1 thereafter. In conjunction with this financing, the
Company issued a warrant for the purchase of 425,000 shares of the Company's
common stock at $2.3125 per share (the closing price on December 21, 1999). The
estimated fair value of such warrant totaling $875 thousand was allocated to
shareholders' equity with an offsetting discount reflected on the debt. Such
discount will be amortized over the life of the debt. The warrant for 250,000
shares of the Company's common stock which was previously issued to the
revolving lender was cancelled in conjunction with this financing and the
restructuring of the Senior Facility. The Company also issued an option to the
note holder allowing it to acquire an additional warrant for 1,975,000 shares of
the non-voting common stock in the Company (currently no such stock is
authorized), which can be exercised after one year if the notes or any portion
thereof remains outstanding, but not prior thereto. The strike price on these
warrants is $2.3125. In the event that the notes are paid prior to the
expiration of such one-year period through a transaction involving the issuance
of warrants, the note holder is entitled to retain sufficient warrants to allow
the note holder to acquire approximately 4.86% of the Company's common stock.
The Company has until May 15, 2000 to take the necessary actions to authorize
the issuance of the non-voting common stock covered by the option.

                                       53
<PAGE>   56
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     FirstCity Funding, L.P., the Company's automobile finance business unit,
completed securitizations of $56 million and $100 million of face value of
automobile receivables in 1999. The first transaction was structured with $48.9
million in senior bonds and the balance held by the Company in a residual
interest. The second transaction was structured with $73.7 million in senior
bonds, $9.3 million in junior bonds and the balance held by the Company in a
residual interest. Additionally, subsequent to December 31, 1999, the credit
enhancement provider for the automobile warehouse facility has reestablished
funding to a maximum available funding amount of $70 million ($50 million at
December 31, 1999 with an additional $20 million made available subsequent to
year end). The Company continues to work with the credit enhancement provider on
its automobile securitizations to continue extensions of the waivers and
consents of trigger events occurring from the Company's failure to meet certain
financial covenants resulting from losses in the Company's discontinued mortgage
operations.

     Although the above transactions enhanced the Company's immediate liquidity
concerns, management has identified the following areas that it believes are
essential to allow the Company to meet all of its financing needs and cover its
obligations during 2000:

     - the ability to continue to obtain warehouse financing for consumer
       lending operations and identify alternative sources for such funding;

     - identify alternative or additional sources of financing on residual
       interests obtained from securitization transactions;

     - the ability to continue to securitize automobile finance receivables,
       either with or without credit enhancement;

     - the ability to obtain additional financing required by Commercial Corp.
       for investment in additional Portfolio Assets; and

     - realize positive cash flows from existing equity investments in Portfolio
       Assets

     The Company has received an extension on its automobile finance warehouse
line through June 28, 2000, and is currently in discussions with various
warehouse lenders regarding the potential to structure alternative or additional
funding. Alternatives currently being explored include a whole loan sale
arrangement, and an uninsured warehouse line.

     During January 2000, the Company increased its existing residual financing
from $4 million at December 31, 1999 to $7 million. Residual interests securing
this borrowing had a carrying value of $40.6 million at December 31, 1999.
Although there is no guarantee, the Company anticipates additional borrowings
against such residuals will be available in the future.

     During the first quarter of 2000, the Company completed an automobile
finance receivable securitization containing loans of approximately $41 million.
The ability of the Company to continue to securitize is dependant on numerous
factors including, but not limited to, conditions in the securities market in
general and conditions in the asset-backed securitization market. The Company
does not anticipate a significant down-turn in market conditions that would have
a significant adverse impact on the Company's ability to securitize its loans.

     The Company anticipates closing a secured, $17 million equity acquisition
facility for the investment in future Acquisition Partnerships. This, along with
equity distributions (totaling approximately $1.6 million for the first quarter
of 2000) from existing Acquisition Partnerships, is adequate to meet the funding
needs of Commercial Corp.

     As an additional source of liquidity, the Company can sell portfolio
assets, loans or portions of operating businesses.

                                       54
<PAGE>   57
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Based on the above, management of the Company expects that it will be able
to meet its obligations as they come due during 2000.

(4) MERGERS AND ACQUISITIONS

     On July 1, 1997, the Company merged with Mortgage Corp. (the "Harbor
Merger"). The Company issued 1,580,986 shares of its common stock in exchange
for 100% of Mortgage Corp.'s outstanding capital stock in a transaction
accounted for as a pooling of interests. Mortgage Corp. originated and serviced
residential and commercial mortgage loans prior to the Company discontinuance of
operations as discussed previously in Note 2. Mortgage Corp. had approximately
$12 million in equity, assets of over $300 million and 700 employees prior to
the Harbor Merger. The consolidated financial statements of the Company have
been restated to reflect the Harbor Merger as if it occurred at the beginning of
the earliest periods presented.

     At year end 1997, an unrelated party exercised warrants to acquire a four
percent minority interest in Mortgage Corp.'s subsidiary, Harbor Financial
Mortgage Corporation. On March 31, 1998, the Company issued 41,000 shares of
common stock in exchange for the four percent minority interest in this
subsidiary.

(5) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Non-performing Portfolio Assets.............................  $ 72,396   $ 93,716
Performing Portfolio Assets.................................    17,878     24,759
Real estate Portfolios......................................     7,663     11,267
                                                              --------   --------
          Total Portfolio Assets............................    97,937    129,742
Adjusted purchase discount required to reflect Portfolio
  Assets at carrying value..................................   (58,500)   (61,319)
                                                              --------   --------
          Portfolio Assets, net.............................  $ 39,437   $ 68,423
                                                              ========   ========
</TABLE>

     Portfolio Assets are pledged to secure non-recourse notes payable.

(6) LOANS RECEIVABLE

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Automobile and consumer finance receivables.................  $37,718   $16,475
Other loans held for investment.............................      883     4,273
Allowance for loan losses...................................   (8,457)   (5,894)
                                                              -------   -------
          Loans receivable, net.............................  $30,144   $14,854
                                                              =======   =======
</TABLE>

                                       55
<PAGE>   58
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The activity in the allowance for loan losses is summarized as follows for
the periods indicated:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Balances, beginning of year..........................  $  5,894   $  9,282   $  2,693
Provision for loan losses............................       368      4,751      6,613
Discounts acquired...................................    26,484     18,334     13,152
Reduction in contingent liabilities..................        --         --        458
Allocation of reserves to sold loans.................   (22,036)   (17,133)    (1,363)
Charge off activity:
  Principal balances charged off.....................    (4,362)   (12,958)   (15,126)
  Recoveries.........................................     2,109      3,618      2,855
                                                       --------   --------   --------
     Net charge offs.................................    (2,253)    (9,340)   (12,271)
                                                       --------   --------   --------
Balances, end of year................................  $  8,457   $  5,894   $  9,282
                                                       ========   ========   ========
</TABLE>

     The provision for loan losses during 1998 and 1997 was predominantly for
automobile finance receivables generated by the Company's original automobile
platform, referred to as NAF, that was discontinued in January 1998. During 1997
a note recorded at the time of purchase of the initial automobile finance
receivables pool and contingent on the ultimate performance of the pool was
adjusted to reflect a reduction in anticipated payments due pursuant to the
contingency. The reduction in the recorded contingent liability was recorded as
an increase in the allowance for losses.

(7) RESIDUAL INTERESTS IN SECURITIZATIONS

     The Company has residual interests in securitizations consisting of rated
securities, retained interests and related interest only strips (collectively
referred to as residual interests) which are attributable to loans sold through
securitization transactions by the Company. Residual interests are comprised of
the following as of the dates indicated:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1999      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Rated securities............................................  $ 1,313   $ 2,073
Residual interests..........................................   62,167    43,874
Accrued interest............................................      565       352
Valuation allowance.........................................   (8,384)   (4,450)
                                                              -------   -------
                                                              $55,661   $41,849
                                                              =======   =======
</TABLE>

     The activity related to residual interests is as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                            1999      1998      1997
                                                          --------   -------   ------
<S>                                                       <C>        <C>       <C>
Balance, beginning of year..............................  $ 41,849   $ 6,935   $   --
Cost allocated from securitizations.....................    27,306    44,309    6,925
Interest accreted.......................................     5,487     2,181      548
Cash received from trusts...............................   (15,047)   (7,126)    (538)
Provision for permanent impairment of value.............    (3,934)   (4,450)      --
                                                          --------   -------   ------
Balance, end of year....................................  $ 55,661   $41,849   $6,935
                                                          ========   =======   ======
</TABLE>

                                       56
<PAGE>   59
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Through December 31, 1999, the Company had completed six securitization
transactions. Three of such transactions were either totally or substantially
comprised of loans acquired under the Company's original automobile finance
program. At December 31, 1999, the carrying value of residual assets related to
these three transactions totaled $16,553. The remainder of the transactions were
comprised of loans acquired under the new automobile finance program and the
carrying value of residual interests from these transactions total $39,108 at
December 31, 1999.

     The fair value of residual interests is calculated using estimated loss
rates, prepayment speeds and discount rates. Loss rates used by the Company on
the residuals resulting from the original program range from 15.4% to 19.8%. The
lower rate is used on a transaction that had approximately 35% of the loans
acquired under the new program. A loss rate of 11% is used on the remainder of
the residuals. The Company uses a prepayment speed of 15% on all residuals
resulting from the original program and prepayment speeds ranging from 10% to
15% on the residuals resulting from the new programs. A discount rate of 12% to
15% is used on all residual interests. Additionally, the Company uses a discount
rate of 7.3% on the rated security.

(8) EQUITY INVESTMENTS IN ACQUISITION PARTNERSHIPS AND SERVICING ENTITIES

     The Company has investments in Acquisition Partnerships and their general
partners that are accounted for on the equity method. Acquisition Partnerships
invest in Portfolio Assets in a manner similar to the Company, as described in
Note 1. During 1999, the Company also acquired investments in Servicing Entities
that are accounted for on the equity method. Activity relating to the Servicing
Entities was not significant during 1999. The condensed combined financial
position and results of operations of the Acquisition Partnerships (excluding
Servicing Entities), which include the domestic and foreign Acquisition
Partnerships and their general partners, are summarized below:

                       CONDENSED COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Assets......................................................  $324,954   $295,114
                                                              ========   ========
Liabilities.................................................   210,967    190,590
Net equity..................................................   113,987    104,524
                                                              --------   --------
                                                              $324,954   $295,114
                                                              ========   ========
Equity investment in Acquisition Partnerships...............  $ 29,639   $ 41,466
Equity investment in Servicing Entities.....................     1,465         --
                                                              --------   --------
                                                              $ 31,104   $ 41,466
                                                              ========   ========
</TABLE>

                     CONDENSED COMBINED SUMMARY OF EARNINGS

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999       1998       1997
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Proceeds from resolution of Portfolio Assets.........  $124,912   $170,187   $178,222
Gain on resolution of Portfolio Assets...............    51,035     57,628     33,398
Interest income on performing Portfolio Assets.......    16,409      9,714      8,432
Net earnings.........................................  $ 36,455   $ 33,706   $ 20,117
                                                       ========   ========   ========
Equity in earnings of Acquisition Partnerships.......  $ 11,444   $ 12,827   $  7,605
Equity in loss of Servicing Entities.................      (126)        --         --
                                                       --------   --------   --------
                                                       $ 11,318   $ 12,827   $  7,605
                                                       ========   ========   ========
</TABLE>

                                       57
<PAGE>   60
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) NOTES PAYABLE

     Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Collateralized loans, secured by Portfolio Assets:
  Fixed rate (7.66% at December 31, 1999), due 2002.........  $ 21,873   $ 32,656
  French franc LIBOR plus 3.50%, due 1999...................        --      8,865
  LIBOR (6.48% at December 31, 1999) plus 4% to 5%, due
     2000...................................................    16,442     18,105
  Japanese yen LIBOR plus 3.50%, due 1999...................        --      1,260
Collateralized loans, secured by automobile finance
  receivables:
  LIBOR plus 1.00% to 3.00%, due 1999.......................        --      7,017
  Commercial paper (5.74% at December 31, 1999) combined
     with certain facility fees, due 2000...................    20,092         --
Collateralized loan, secured by residual interests in
  securitizations:
  Prime (8.50% at December 31, 1999) plus 1.00%, due 2000...     4,257         --
Repurchase agreements, secured by investment securities:
  LIBOR plus 3.00%, due 1999................................        --      9,478
Senior Credit Facility, secured and with recourse to the
  Company...................................................    77,000     84,807
Senior subordinated notes...................................    24,125         --
Other borrowings, secured by fixed assets...................     2,604        780
                                                              --------   --------
  Notes payable, secured....................................   166,393    162,968
  Notes payable to others at various fixed rates between 7%
     and 10%, due at various dates through 2002.............     3,399      2,954
                                                              --------   --------
                                                              $169,792   $165,922
                                                              ========   ========
</TABLE>

     Refer to Note 3 for a description of terms related to the Company's Senior
Credit Facility, Senior subordinated notes and automobile finance receivable
warehouse line at December 31, 1999 and other matters concerning the Company's
liquidity.

     Under terms of certain borrowings, the Company and its subsidiaries are
required to maintain certain tangible net worth levels and debt to equity and
debt service coverage ratios. The terms also restrict future levels of debt. The
aggregate maturities of notes payable for the four years ending December 31,
2003 are as follows: $45,076 in 2000, $77,357 in 2001, $22,217 in 2002 and
$25,142 in 2003.

                                       58
<PAGE>   61
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) SEGMENT REPORTING

     As previously described in Note 1, at December 31, 1999, the Company was
engaged in two reportable segments i) portfolio asset acquisition and
resolution; and ii) consumer lending. These segments have been segregated based
on products and services offered by each. Prior to June 30, 1999, the Company
also reflected operations from its mortgage banking segment. As described in
Note 2, the Company has discontinued operations in the mortgage banking segment
effective in the third quarter of 1999. Accordingly, all activity related to the
mortgage banking segment has been reclassified as discontinued operations in the
consolidated financial statements. The following is a summary of results of
operations for each of the two remaining segments and a reconciliation to net
earnings (loss) from continuing operations for 1999, 1998 and 1997.

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Gain on resolution of Portfolio Assets.................  $ 4,054   $ 9,208   $24,183
     Equity in earnings of Acquisition Partnerships and
      Servicing Entities....................................   11,318    12,827     7,605
     Servicing fees.........................................    3,850     3,062    11,513
     Other..................................................    6,275     4,185     4,402
                                                              -------   -------   -------
          Total.............................................   25,497    29,282    47,703
  Expenses:
     Salaries and benefits..................................    4,864     4,619     5,353
     Interest on notes payable..............................    3,710     5,118     7,084
     Asset level expenses, occupancy, data processing and
      other.................................................    6,217     7,204    12,103
                                                              -------   -------   -------
          Total.............................................   14,791    16,941    24,540
                                                              -------   -------   -------
  Operating contribution before direct taxes................  $10,706   $12,341   $23,163
                                                              =======   =======   =======
  Operating contribution, net of direct taxes...............  $10,620   $12,284   $22,970
                                                              =======   =======   =======
CONSUMER LENDING:
  Revenues:
     Gain on sale of automobile loans.......................  $10,280   $ 7,214   $    --
     Interest income........................................   17,787    10,035    10,182
     Servicing fees.........................................    5,086     2,705       553
     Other..................................................      171       106      (454)
                                                              -------   -------   -------
          Total.............................................   33,324    20,060    10,281
  Expenses:
     Salaries and benefits..................................    8,053     5,602     2,959
     Provision for loan losses and impairment of residual
      interests.............................................    4,302     9,201     6,613
     Interest on notes payable..............................    3,932     3,196     3,033
     Occupancy, data processing and other...................   11,283     5,819     3,272
                                                              -------   -------   -------
          Total.............................................   27,570    23,818    15,877
                                                              -------   -------   -------
  Operating contribution (loss) before direct taxes.........  $ 5,754   $(3,758)  $(5,596)
                                                              =======   =======   =======
  Operating contribution (loss), net of direct taxes........  $ 5,689   $(3,758)  $(5,599)
                                                              =======   =======   =======
          Total operating income, net of direct taxes.......  $16,309   $ 8,526   $17,371
                                                              =======   =======   =======
</TABLE>

                                       59
<PAGE>   62
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      1998      1997
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
CORPORATE OVERHEAD:
  Revenues:
     Interest income on Class A Certificate.................  $    --   $    --   $ 3,553
     Other..................................................      107     2,202     2,359
                                                              -------   -------   -------
          Total.............................................      107     2,202     5,912
  Corporate interest expense................................   (8,649)   (3,774)   (1,129)
  Salaries and benefits, occupancy, professional and other
     expenses...............................................   (7,108)   (7,358)   (6,505)
  Deferred tax benefit (provision) from NOLs................   (4,900)    1,189    13,592
  Harbor Merger related expenses............................       --        --    (1,618)
                                                              -------   -------   -------
  Net earnings (loss) from continuing operations............  $(4,241)  $   785   $27,623
                                                              =======   =======   =======
</TABLE>

     Total assets for each of the segments and a reconciliation to total assets
is as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Portfolio acquisition and resolution assets.................  $ 71,479   $114,596
Consumer assets.............................................    85,261     52,029
Deferred tax benefit, net...................................    27,101     32,162
Other assets, net...........................................    26,655     21,766
Net assets of discontinued operations.......................    20,126    116,090
                                                              --------   --------
          Total assets......................................  $230,622   $336,643
                                                              ========   ========
</TABLE>

(11) PREFERRED STOCK, SHAREHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE

     In May 1998, the Company closed the public offering of 1,542,150 shares of
FirstCity common stock, of which 341,000 shares were sold by selling
shareholders. Net proceeds (after expenses) of $34.1 million were used to retire
debt. On May 11, 1998, the Company notified holders of its outstanding 1995
warrants to purchase shares of common stock that it was exercising its option to
repurchase such warrants for $1.00 each. In June 1998, as a result of such
notification, warrants representing 471,380 shares of common stock were
exercised for an aggregate warrant purchase price of $11.8 million. On July 17,
1998 the Company filed a shelf registration statement with the Securities and
Exchange Commission which allows the Company to issue up to $250 million in debt
and equity securities from time to time in the future. The registration
statement became effective July 28, 1998. As of December 31, 1999, there have
been no securities issued under this registration statement.

     As previously discussed in Note 3, in connection with the issuance of $25
million in senior subordinated debt, the Company issued a warrant for the
purchase of 425,000 shares of the Company's common stock at $2.3125 per share
(the closing price on the date of issuance of December 21, 1999). The estimated
fair value of the warrant totaling $875, was allocated to shareholders' equity
with an offsetting discount reflected on the debt.

     The Company also issued an option to the note holder allowing it to acquire
an additional warrant for 1,975,000 shares of non-voting common stock in the
Company (currently no such stock is authorized), which can be exercised after
one year if the notes or any portion thereof remains outstanding, but not prior
thereto. The strike price on these warrants is also $2.3125. In the event that
the notes are paid prior to the expiration of such one-year period through a
transaction involving the issuance of warrants, the note holder is entitled to
retain sufficient warrants to allow the note holder to acquire approximately
4.86% of the Company's common

                                       60
<PAGE>   63
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock. The Company has until May 15, 2000 to take the necessary actions to
authorize the issuance of the non-voting common stock covered by the option.

     The holders of shares of common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. In order to
preserve certain tax benefits available to the Company, transactions involving
shareholders holding or proposing to acquire more than 4.75% of outstanding
common shares are prohibited unless the prior approval of the Board of Directors
is obtained.

     In 1997, the Company purchased 537,430 shares (representing $11.3 million
in liquidation preference) of special preferred stock. The special preferred
stock was redeemed for $14.7 million plus accrued dividends in 1998. Dividends
of $2.7 million and $5.8 million, respectively, or $3.15 per share, were paid in
1998 and 1997.

     In June 1997, the Company initiated an offer to exchange one share of
special preferred stock for one share of the newly designated adjusting rate
preferred stock. The adjusting rate preferred stock has a redemption value of
$21.00 per share and cumulative quarterly cash dividends at the annual rate of
$3.15 per share through September 30, 1998, adjusting to $2.10 per share through
the redemption date of September 30, 2005. The Company may redeem the adjusting
rate preferred stock after September 30, 2003 for $21 per share plus accrued
dividends. The adjusting rate preferred stock carries no voting rights except in
the event of non-payment of dividends. Pursuant to the exchange offer, 1,073,704
shares in 1997 and 149,197 shares in 1998 of special preferred stock were
exchanged for a like number of shares of adjusting rate preferred stock.
Dividends of $1.9 million, $3.4 million and $.8 million, respectively, or
$1.575, $3.15 and $.7875 per share, respectively, were paid in 1999, 1998 and
1997. In the third quarter of 1999, dividends on the Company's adjusting rate
preferred stock were suspended. At December 31, 1999, accumulated dividends in
arrears on such preferred stock totaled $1.3 million, or $1.05 per share. If the
Company fails to pay quarterly dividends for any six consecutive or
non-consecutive quarters, the holders of adjusting rate preferred stock are
entitled to elect two directors to the Company's Board until cumulative
dividends have been paid in full.

     The Board of Directors of the Company may designate the relative rights and
preferences of the optional preferred stock when and if issued. Such rights and
preferences can include liquidation preferences, redemption rights, voting
rights and dividends and shares can be issued in multiple series with different
rights and preferences. The Company has no current plans for the issuance of an
additional series of optional preferred stock.

     The Company has stock option and award plans for the benefit of key
individuals, including its directors, officers and key employees. The plans are
administered by a committee of the Board of Directors and provide for the grant
of up to a total of 730,000 shares of common stock.

     The per share weighted-average fair value of stock options granted during
1999 and 1998 was $2.53 and $23.49, respectively, on the grant date using the
Black-Scholes option pricing model with the following assumptions: $0 expected
dividend yield, risk-free interest rate of 6.0%, expected volatility of 30%, and
an expected life of 10 years.

     The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option and award plans and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net earnings

                                       61
<PAGE>   64
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(loss) to common shareholders and net earnings (loss) per common share would
have been reflected as the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                         1999        1998      1997
                                                       ---------   --------   -------
<S>                                                    <C>         <C>        <C>
Net earning (loss) to common shareholders:
  As reported........................................  $(110,724)  $(25,378)  $29,425
  Pro forma..........................................   (111,078)   (26,659)   28,263
Net earning (loss) per common share -- diluted:
  As reported........................................  $  (13.33)  $  (3.35)  $  4.46
  Pro forma..........................................     (13.37)     (3.52)     4.29
</TABLE>

     Stock option activity during the periods indicated is as follows:

<TABLE>
<CAPTION>
                                    1999                  1998                 1997
                             -------------------   ------------------   ------------------
                                        WEIGHTED             WEIGHTED             WEIGHTED
                                        AVERAGE              AVERAGE              AVERAGE
                                        EXERCISE             EXERCISE             EXERCISE
                              SHARES     PRICE     SHARES     PRICE     SHARES     PRICE
                             --------   --------   -------   --------   -------   --------
<S>                          <C>        <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of
  year.....................   284,950    $23.06    314,300    $22.64    223,100    $21.07
Granted....................   310,500      3.06     15,000     29.69    125,200     26.47
Exercised..................        --        --    (12,350)    22.04     (4,750)    20.00
Cancelled..................  (171,150)    22.89         --        --         --        --
Forfeited..................   (48,300)    23.54    (32,000)    22.50    (29,250)    25.91
                             --------    ------    -------    ------    -------    ------
Outstanding at end of
  year.....................   376,000    $ 6.68    284,950    $23.06    314,300    $22.64
                             ========    ======    =======    ======    =======    ======
</TABLE>

     At December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $3.06 to $30.75 and 7.12
years, respectively. In addition, 42,000 options were exercisable with a
weighted-average exercise price of $23.57.

     The Company has an employee stock purchase plan which allows employees to
acquire approximately 150,000 shares of common stock of the Company at 85% of
the fair value at the end of each quarterly plan period. The value of the shares
purchased under the plan is limited to the lesser of 10% of compensation or
$25,000 per year. Under the plan, 45,341 shares were issued in 1999, 35,220
shares were issued in 1998 and 8,308 shares were issued during 1997. At December
31, 1999, approximately 64,000 shares of common stock are available for issuance
pursuant to the plan.

     A reconciliation between the weighted average shares outstanding (in
thousands) used in the basic and diluted EPS computations is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1999        1998      1997
                                                       ---------   --------   -------
<S>                                                    <C>         <C>        <C>
Net earnings (loss) to common shareholders...........  $(110,724)  $(25,378)  $29,425
                                                       =========   ========   =======
Weighted average common shares outstanding --basic...      8,307      7,584     6,518
Effect of dilutive securities:
  Assumed exercise of stock options..................         --         --        49
  Assumed exercise of warrants.......................         --         --        24
                                                       ---------   --------   -------
Weighted average common shares
  outstanding -- diluted.............................      8,307      7,584     6,591
                                                       =========   ========   =======
Net earnings (loss)per common share -- basic.........  $  (13.33)  $  (3.35)  $  4.51
Net earnings (loss) per common share -- diluted......  $  (13.33)  $  (3.35)  $  4.46
</TABLE>

                                       62
<PAGE>   65
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     No effect was given to dilutive securities in the 1999 and 1998 EPS
calculations as such had an anti-dilutive effect. However, during 1999, an
average of 278,767 options were outstanding that could have a potentially
dilutive basic EPS effect in the future.

(12) INCOME TAXES

     Income tax benefit (expense) from continuing operations consists of:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            1999      1998     1997
                                                           -------   ------   -------
<S>                                                        <C>       <C>      <C>
Federal and state current benefit (expense)..............  $    10   $ (505)  $(1,231)
Federal deferred benefit (expense).......................   (5,061)   1,637    14,627
                                                           -------   ------   -------
          Total..........................................  $(5,051)  $1,132   $13,396
                                                           =======   ======   =======
</TABLE>

     Income taxes attributed to discontinued operations consist of deferred
benefit (expense) totalling $0, $(89) and $2,089 during 1999, 1998 and 1997,
respectively.

     The actual income tax benefit (expense) attributable to earnings (loss)
from continuing operations differs from the expected tax benefit (expense)
(computed by applying the federal corporate tax rate of 35% to earnings (loss)
from continuing operations before income taxes, minority interest and accounting
change) as follows:

<TABLE>
<CAPTION>
                                                            1999      1998     1997
                                                           -------   ------   -------
<S>                                                        <C>       <C>      <C>
Computed expected tax benefit (expense)..................  $  (808)  $   61   $(5,045)
(Increase) reduction in income taxes resulting from:
  Tax effect of Class A Certificate......................       --       --     1,243
  Change in valuation allowance..........................   (4,253)   1,777    19,239
  Alternative minimum tax and state income tax...........       --     (505)   (1,646)
  REMIC excess inclusion income..........................       --       --      (268)
  Other..................................................       10     (201)     (127)
                                                           -------   ------   -------
                                                           $(5,051)  $1,132   $13,396
                                                           =======   ======   =======
</TABLE>

                                       63
<PAGE>   66
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1999 and 1998, are as
follows:

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred tax assets:
  Investments in Acquisition Partnerships, principally due
     to differences in basis for tax and financial reporting
     purposes...............................................  $     676   $   2,521
  Intangibles, principally due to differences in
     amortization...........................................        325       1,613
  Book loss reserve greater than tax loss reserve...........      2,960          76
  Tax basis in fixed assets greater than book...............      2,118          42
  Federal net operating loss carryforward...................    199,633     202,871
                                                              ---------   ---------
          Total gross deferred tax assets...................    205,712     207,123
  Valuation allowance.......................................   (178,611)   (174,358)
                                                              ---------   ---------
          Net deferred tax assets...........................     27,101      32,765
Deferred tax liabilities:
  Book basis in servicing rights greater than tax basis.....         --          --
  Other, net................................................         --        (603)
                                                              ---------   ---------
          Total deferred tax liabilities....................         --        (603)
                                                              ---------   ---------
Net deferred tax asset......................................  $  27,101   $  32,162
                                                              =========   =========
</TABLE>

     The Company has net operating loss carryforwards for federal income tax
purposes of approximately $570.2 million from continuing operations and $130.8
million from discontinued operations at December 31, 1999, available to offset
future federal taxable income, if any, through the year 2019. A valuation
allowance is provided to reduce the deferred tax assets to a level which, more
likely than not, will be realized. During 1999, 1998 and 1997, the Company
adjusted the previously established valuation allowance to recognize a deferred
tax benefit (expense) of $(4.3) million, $1.8 million and $19.2 million,
respectively. The ultimate realization of the resulting net deferred tax asset
is dependent upon generating sufficient taxable income from its continuing
operations remaining prior to expiration of the net operating loss
carryforwards. The expense recognized in 1999 can be attributed to a revaluation
of the realization of the deferred tax asset for the effects of the
discontinuance of the mortgage operations. Although realization is not assured,
management believes it is more likely than not that all of the recorded deferred
tax asset, net of the allowance, will be realized. The amount of the deferred
tax asset considered realizable, however, could be adjusted in the future if
estimates of future taxable income during the carryforward period change. The
change in valuation allowance represents a change in the estimate of the future
taxable income during the carryforward period since the prior year end and the
utilization of net operating loss carryforwards since the Merger. The ability of
the Company to realize the deferred tax asset is periodically reviewed and the
valuation allowance is adjusted accordingly.

(13) EMPLOYEE BENEFIT PLAN

     The Company has a defined contribution 401(k) employee profit sharing plan
pursuant to which the Company matches employee contributions at a stated
percentage of employee contributions to a defined maximum. The Company's
contributions to the 401(k) plan were $238 in 1999, $192 in 1998 and $186 in
1997.

(14) LEASES

     The Company leases its current headquarters from a related party under a
noncancellable operating lease. The lease calls for monthly payments of $7.5
through its expiration in December 2001 and includes an option

                                       64
<PAGE>   67
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to renew for two additional five-year periods. Rental expense for 1999, 1998 and
1997 under this lease was $90 each year.

     The Company also leases office space and equipment from unrelated parties
under operating leases expiring in various years through 2006. Rental expense
under these leases for 1999, 1998 and 1997 was $2.1 million, $1.1 million and
$0.9 million, respectively. As of December 31, 1999, the future minimum lease
payments under all noncancellable operating leases are: $1,366 in 2000, $1,180
in 2001, $1,049 in 2002, $873 in 2003 and $1,952 in 2004 and beyond.

(15) OTHER RELATED PARTY TRANSACTIONS

     The Company has contracted with FirstCity Liquidating Trust (the "Trust"),
the Acquisition Partnerships and related parties as a third party loan servicer.
Servicing fees totaling $8.9 million, $5.8 million and $12.1 million (including
$6.8 million from the termination of a management agreement with the Trust) for
1999, 1998 and 1997, respectively, and due diligence fees (included in other
income) were derived from such affiliates.

     During 1997, the Company, along with selected Acquisition Partnerships,
sold certain assets to an entity 80% owned by the Company. The gain on the sale
of the assets was deferred and is being recognized as the assets are ultimately
resolved.

(16) COMMITMENTS AND CONTINGENCIES

     On October 4, 1999, Chase Securities, Inc. filed suit against the Company
alleging breach of contractual terms outlined in an engagement letter retaining
Chase Securities, Inc. to render financial advisory services to the Company.
Chase Securities, Inc. is demanding approximately $2.4 million in actual
damages, approximately $4 thousand in out of pocket costs, and attorneys fees
and costs. The Company answered these claims on December 3, 1999. A Motion for
Stay pending trial and determination of an action pending in the U.S. District
Court for the Western District of Texas was filed on December 3, 1999. This
matter is in the early stages of discovery and development, the probable outcome
cannot be determined. The Company intends to vigorously defend this suit.

     On October 14, 1999, Harbor Financial Group, Inc., Harbor Financial
Mortgage Corporation and certain of their subsidiaries filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code before the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. In a
motion filed in those proceedings requesting the appointment of a Chapter 11
Trustee, the debtors have stated that they are reviewing pre-petition transfers
to the Company to determine if those transfers are avoidable. The Company
believes that it has valid defenses to any allegations that might be made to
avoid any pre-petition transfers in connection with the Mortgage Corp.
bankruptcy proceedings.

     The Company is involved in various other legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the consolidated financial condition,
results of operations or liquidity of the Company or the Acquisition
Partnerships.

     The Company is a 50% owner in an entity that is obligated to advance up to
$2.5 million toward the acquisition of Portfolio Assets from financial
institutions in California. At December 31, 1999, advances of $1.8 million had
been made under the obligation.

                                       65
<PAGE>   68
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) FINANCIAL INSTRUMENTS

     SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires that the Company disclose estimated fair values of its financial
instruments. Fair value estimates, methods and assumptions are set forth below.

(a) CASH AND CASH EQUIVALENTS

     The carrying amount of cash and cash equivalents approximated fair value at
December 31, 1999 and 1998.

(b) PORTFOLIO ASSETS AND LOANS RECEIVABLE

     The Portfolio Assets and loans receivable are carried at the lower of cost
or estimated fair value. The estimated fair value is calculated by discounting
projected cash flows on an asset-by-asset basis using estimated market discount
rates that reflect the credit and interest rate risks inherent in the assets.
The carrying value of the Portfolio Assets and loans receivable was $69.6
million and $83.3 million, respectively, at December 31, 1999 and 1998. The
estimated fair value of the Portfolio Assets and loans receivable was
approximately $71.8 million and $90.7 million, respectively, at December 31,
1999 and 1998.

(c) RESIDUAL INTERESTS IN SECURITIZATIONS

     Residual interests in securitizations are carried at estimated fair value.
Carrying values which are believed to approximate fair value were $55,661 and
$41,849 at December 31, 1999 and 1998, respectively. The residual interests are
valued using various discount rates, loss and prepayment assumptions, as
described in Note 7.

(d) NOTES PAYABLE

     Management believes that the repayment terms for similar rate financial
instruments with similar credit risks and the stated interest rates at December
31, 1999 and 1998 approximate the market terms for similar credit instruments.
Accordingly, the carrying amount of notes payable is believed to approximate
fair value.

(e) REDEEMABLE PREFERRED STOCK

     Redeemable preferred stock is carried at redemption value plus accrued but
unpaid dividends. Carrying values were $26,965 and $26,323 at December 31, 1999
and 1998, respectively. Fair market values based on quoted market rates were
$11,770 and $22,165 at December 31, 1999 and 1998, respectively.

                                       66
<PAGE>   69

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
FirstCity Financial Corporation:

     We have audited the accompanying consolidated balance sheets of FirstCity
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstCity
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.

     As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for organizational costs in accordance
with the American Institute of Certified Public Accountants Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities.

                                                          KPMG LLP

Fort Worth, Texas
March 31, 2000

                                       67
<PAGE>   70

                        FIRSTCITY FINANCIAL CORPORATION

                       SELECTED QUARTERLY FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                               1999                                      1998
                                              ---------------------------------------   --------------------------------------
                                               FIRST     SECOND     THIRD     FOURTH     FIRST    SECOND     THIRD     FOURTH
                                              QUARTER   QUARTER    QUARTER    QUARTER   QUARTER   QUARTER   QUARTER    QUARTER
                                              -------   --------   --------   -------   -------   -------   --------   -------
<S>                                           <C>       <C>        <C>        <C>       <C>       <C>       <C>        <C>
Revenues....................................  $10,977   $ 16,396   $ 13,089   $18,466   $13,457   $11,706   $ 10,474   $15,907
Expenses....................................  11,953      13,539     14,066   17,061    13,934    10,708      15,460    11,617
Earnings (loss) from continuing
  operations................................  (2,027)     (2,499)      (869)   1,154       409     1,524      (4,977)    3,829
Earnings (loss) from discontinued
  operations(2).............................     525     (41,382)   (63,058)      --     5,387     6,100     (33,523)    1,059
Net earnings (loss).........................  (1,502)    (43,881)   (63,927)   1,154     5,796     7,624     (38,500)    4,888
Preferred dividends.........................     642         642        642      642     1,515     1,515       1,514       642
Net earnings (loss) to common
  shareholders..............................  $(2,144)  $(44,523)  $(64,569)  $  512    $4,281    $6,109    $(40,014)  $ 4,246
Net earnings (loss) from continuing
  operations per common share -- Basic(1)...  $(0.32)   $  (0.38)  $  (0.18)  $ 0.06    $(0.17)   $ 0.00    $  (0.78)  $  0.38
Net earnings (loss) from continuing
  operations per common
  share -- Diluted(1).......................  $(0.32)   $  (0.38)  $  (0.18)  $ 0.06    $(0.17)   $ 0.00    $  (0.78)  $  0.38
</TABLE>

---------------

(1) Includes the effect of accounting change during the first quarter of 1999.

(2) During the second and third quarters of 1999 and the third quarter of 1998,
    the Company reflected significant losses from discontinued operations.

        The loss in the second quarter 1999 was comprised primarily of losses on
    sales of loans of $6.6 million, losses on sales of mortgage servicing rights
    of $11.3 million, reserves and write-offs of other assets of $9.1 million,
    with the balance representing losses from operations.

        The loss in the third quarter 1999 is primarily due to the write-off of
    the Company's investment in Mortgage Corp of $50.5 million and Capital Corp
    of $15.6 million, offset by a net accrual for future operations of $2.9
    million.

        The loss in the third quarter of 1998 can be primarily be attributable
    to provisions for impairment on mortgage servicing rights totaling $28.7
    million.

                                       68
<PAGE>   71

                               WAMCO PARTNERSHIPS

                            COMBINED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
                             (DOLLARS IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Cash........................................................  $  6,453   $ 12,109
Portfolio Assets, net.......................................   225,622    148,142
Investments in partnerships.................................     1,681        591
Investments in trust certificates...........................     6,486      6,097
Receivable from affiliates..................................     5,259         54
Deferred profit sharing.....................................     7,882      5,307
Other assets, net...........................................     1,656      2,261
                                                              --------   --------
                                                              $255,039   $174,561
                                                              ========   ========
                        LIABILITIES AND PARTNERS' CAPITAL
Accounts payable (including $282 and $37 to affiliates in
  1999 and 1998, respectively)..............................  $    480   $  1,086
Accrued liabilities (including $43 to affiliates in 1999)...     2,066      2,010
Deferred compensation.......................................    12,857      9,420
Long-term debt (including $4,930 and $49,849 to affiliates
  in 1999 and 1998, respectively)...........................   171,908    105,989
                                                              --------   --------
          Total liabilities.................................   187,311    118,505
Commitments and contingencies...............................        --         --
Preferred equity............................................     3,556         --
Partners' capital...........................................    64,172     56,056
                                                              --------   --------
                                                              $255,039   $174,561
                                                              ========   ========
</TABLE>

            See accompanying notes to combined financial statements.

                                       69
<PAGE>   72

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Proceeds from resolution of Portfolio Assets................  $ 51,459   $ 71,473   $159,159
Cost of Portfolio Assets resolved...........................    34,108     49,855    132,626
                                                              --------   --------   --------
Gain on resolution of Portfolio Assets......................    17,351     21,618     26,533
Interest income on performing Portfolio Assets..............    15,599      8,341      8,432
Interest expense (including $9,624, $4,494 and $8,187 to
  affiliates in 1999, 1998 and 1997, respectively)..........   (11,425)    (7,483)   (10,659)
General, administrative and operating expenses..............    (6,949)   (10,033)   (10,338)
Other income, net...........................................     1,938      1,772      1,008
                                                              --------   --------   --------
          Net earnings......................................  $ 16,514   $ 14,215   $ 14,976
                                                              ========   ========   ========
</TABLE>

            See accompanying notes to combined financial statements.

                                       70
<PAGE>   73

                               WAMCO PARTNERSHIPS

              COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          CLASS B
                                      CLASS A EQUITY       EQUITY
                                    -------------------   --------
                                    GENERAL    LIMITED    LIMITED    GENERAL    LIMITED
                                    PARTNERS   PARTNERS   PARTNERS   PARTNERS   PARTNERS    TOTAL
                                    --------   --------   --------   --------   --------   --------
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>
Balance at December 31, 1996......   $ 274     $13,410    $ 18,706    $ 373     $ 18,355   $ 51,118
  Contributions...................      --          --          --      522       29,592     30,114
  Distributions...................    (113)     (5,522)    (16,533)    (375)     (18,395)   (40,938)
  Net earnings....................     111       5,432       1,173      162        8,098     14,976
                                     -----     -------    --------    -----     --------   --------
Balance at December 31, 1997......     272      13,320       3,346      682       37,650     55,270
  Contributions...................      10         483          --      503       34,077     35,073
  Distributions...................    (111)     (5,456)     (1,111)    (699)     (41,125)   (48,502)
  Net earnings....................      (5)       (224)       (290)     201       14,533     14,215
                                     -----     -------    --------    -----     --------   --------
Balance at December 31, 1998......     166       8,123       1,945      687       45,135     56,056
  Contributions...................       1          40          --      540       27,558     28,139
  Distributions...................     (48)     (2,355)       (440)    (527)     (33,167)   (36,537)
  Net earnings....................      10         476         (81)     250       15,859     16,514
                                     -----     -------    --------    -----     --------   --------
Balance at December 31, 1999......   $ 129     $ 6,284    $  1,424    $ 950     $ 55,385   $ 64,172
                                     =====     =======    ========    =====     ========   ========
</TABLE>

            See accompanying notes to combined financial statements.

                                       71
<PAGE>   74

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               1999        1998       1997
                                                             ---------   --------   ---------
<S>                                                          <C>         <C>        <C>
Cash flows from operating activities:
  Net earnings.............................................  $  16,514   $ 14,215   $  14,976
  Adjustments to reconcile net earnings to net cash
     provided by (used in) operating activities:
     Amortization of loan origination and commitment
       fees................................................      1,334        678       1,707
     Provision (credit) for losses.........................         --         --        (587)
     Gain on resolution of Portfolio Assets................    (17,351)   (21,618)    (26,533)
     Purchase of Portfolio Assets..........................   (107,704)   (91,713)    (73,734)
     Capitalized costs on Portfolio Assets.................     (5,304)    (2,095)     (1,143)
     Proceeds from resolution of Portfolio Assets..........     51,459     71,473     159,159
     Increase in Accounts Receivable.......................        (62)      (406)         --
     (Increase) decrease in receivable from affiliates.....        284        838        (660)
     Increase in deferred profit sharing...................     (3,336)    (5,307)         --
     (Increase) decrease in other assets...................       (360)        19      (1,556)
     Increase (decrease) in accounts payable...............       (549)       645      (1,304)
     Increase (decrease) in accrued liabilities............        (22)       929        (601)
     Increase in deferred compensation.....................      3,437      9,420          --
                                                             ---------   --------   ---------
          Net cash provided by (used in) operating
            activities.....................................    (61,660)   (22,922)     69,724
Cash flows from investing activities:
  Contribution to subsidiaries.............................         --         --        (185)
  Purchase of trust certificates...........................         --       (281)       (225)
  Payments received from trust certificates................         --         --         191
                                                             ---------   --------   ---------
          Net cash used in operating activities............         --       (281)       (219)
Cash flows from financing activities:
  Borrowing of debt........................................    160,903     93,308      34,489
  Repayment of debt........................................   (100,057)   (56,269)   (106,593)
  Issuance of preferred equity.............................      3,556         --          --
  Capital contributions....................................     28,139     35,073      30,114
  Capital distributions....................................    (36,537)   (48,502)    (25,420)
                                                             ---------   --------   ---------
          Net cash provided by (used in) financing
            activities.....................................     56,004     23,610     (67,410)
                                                             ---------   --------   ---------
Net increase (decrease) in cash............................     (5,656)       407       2,095
Cash at beginning of year..................................     12,109     11,702       9,607
                                                             ---------   --------   ---------
Cash at end of year........................................  $   6,453   $ 12,109   $  11,702
                                                             =========   ========   =========
</TABLE>

Supplemental disclosure of cash flow information (note 6):

     Cash paid for interest was approximately $11,104, $6,889 and $11,091 and
     for 1999, 1998 and 1997, respectively.

     WAMCO IX, WAMCO XXI and WAMCO XXII contributed $1,542 of portfolio assets
     in exchange for an equity interest in a related party in 1997. This equity
     interest was subsequently distributed to the partners of the partnerships.

     In January, 1997 a partner purchased the other 50% interest in the
     Whitewater partnership, thus removing $14,043 in Portfolio and other assets
     and $14,043 of other liabilities and partners' capital from the accounts of
     the combined WAMCO partnerships.

            See accompanying notes to combined financial statements.

                                       72
<PAGE>   75

                               WAMCO PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS

     The combined financial statements include the accounts of WAMCO III, Ltd.;
WAMCO V, Ltd.; WAMCO IX, Ltd.; WAMCO XVII, Ltd.; WAMCO XXI, Ltd.; WAMCO XXII,
Ltd.; WAMCO XXIII, Ltd.; WAMCO XXIV, Ltd.; WAMCO XXV, Ltd.; WAMCO XXVI; WAMCO
XXVII; Calibat Fund, LLC; DAP City Partners, L.P.; First B Realty, L.P.; First
Paradee, L.P.; First Street LLC; FC Properties, Ltd; FCS Creamer, Ltd.; FCS
Wildhorse, Ltd.; FCS Wood, Ltd.; GLS Properties, Ltd.; Imperial Fund I, L.P.;
VOJ Partners, L.P. and Whitewater Acquisition Co. One L.P., all of which are
Texas limited partnerships (Acquisition Partnerships or Partnerships). FirstCity
Financial Corporation or its subsidiaries, FirstCity Commercial Corporation and
FirstCity Holdings Corporation, owns limited and general partnership interests
in all of the Partnerships. All significant intercompany balances have been
eliminated.

     The Partnerships were formed to acquire, hold and dispose of Portfolio
Assets acquired from the Federal Deposit Insurance Corporation, Resolution Trust
Corporation and other nongovernmental agency sellers, pursuant to certain
purchase agreements or assignments of such purchase agreements. In accordance
with the purchase agreements, the Partnerships retain certain rights of return
regarding the assets related to defective title, past due real estate taxes,
environmental contamination, structural damage and other limited legal
representations and warranties.

     Generally, the partnership agreements of the Partnerships provide for
certain preferences as to the distribution of cash flows. Proceeds from
disposition of and payments received on the Portfolio Assets are allocated based
on the partnership and other agreements which ordinarily provide for the payment
of interest and mandatory principal installments on outstanding debt before
payment of intercompany servicing fees and return of capital and restricted
distributions to partners.

     Additionally, WAMCO III, Ltd., WAMCO V, Ltd., WAMCO XVII, Ltd., WAMCO XXI,
Ltd. and Whitewater Acquisition Co. One L.P. provide for Class A and Class B
Equity partners in their individual partnership agreements. The Class B Equity
limited partners are allocated 20 percent of cumulative net income recognized by
the respective partnerships prior to allocation to the Class A Equity limited
partners and the general partners.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PORTFOLIO ASSETS

     The Partnerships acquire and resolve portfolios of performing and
nonperforming commercial and consumer loans and other assets (collectively,
"Portfolio Assets" or "Portfolios"), which are generally acquired at a discount
to their legal principal balance. Purchases may be in the form of pools of
assets or single assets. The Portfolio Assets are generally nonhomogeneous
assets, including loans of varying qualities that are secured by diverse
collateral types and foreclosed properties. Some Portfolio Assets are loans for
which resolution is tied primarily to the real estate securing the loan, while
others may be collateralized business loans, the resolution of which may be
based either on business or real estate or other collateral cash flow. Portfolio
Assets are acquired on behalf of legally independent partnerships ("Acquisition
Partnerships") in which a corporate general partner, FirstCity Financial
Corporation ("FirstCity") and other investors are limited partners.

                                       73
<PAGE>   76
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     Portfolio Assets are reflected in the accompanying combined financial
statements as non-performing Portfolio Assets, performing Portfolio Assets or
real estate Portfolios. The following is a description of each classification
and the related accounting policy accorded to each Portfolio type:

  Non-Performing Portfolio Assets

     Non-performing Portfolio Assets consist primarily of distressed loans and
loan related assets, such as foreclosed upon collateral. Portfolio Assets are
designated as non-performing unless substantially all of the loans in the
Portfolio are being repaid in accordance with the contractual terms of the
underlying loan agreements. Such Portfolios are acquired on the basis of an
evaluation by the Partnerships of the timing and amount of cash flow expected to
be derived from borrower payments or other resolution of the underlying
collateral securing the loan.

     All non-performing Portfolio Assets are purchased at substantial discounts
from their outstanding legal principal amount, the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
Portfolio Assets is evaluated for impairment on a quarterly basis. A valuation
allowance is established for any impairment identified through provisions
charged to earnings in the period the impairment is identified.

     Net gain on resolution of non-performing Portfolio Assets is recognized as
income to the extent that proceeds collected exceed a pro rata portion of
allocated cost from the Portfolio. Cost allocation is based on a proration of
actual proceeds divided by total estimated proceeds of the Portfolio. No
interest income is recognized separately on non-performing Portfolio Assets. All
proceeds, of whatever type, are included in proceeds from resolution of
Portfolio Assets in determining the gain on resolution of such assets.
Accounting for Portfolios is on a pool basis as opposed to an individual
asset-by-asset basis.

  Performing Portfolio Assets

     Performing Portfolio Assets consist primarily of Portfolios of consumer and
commercial loans acquired at a discount from the aggregate amount of the
borrowers' obligation. Portfolios are classified as performing if substantially
all of the loans in the Portfolio are being repaid in accordance with the
contractual terms of the underlying loan agreements.

     Performing Portfolio Assets are carried at the unpaid principal balance of
the underlying loans, net of acquisition discounts. Interest is accrued when
earned in accordance with the contractual terms of the loans. The accrual of
interest is discontinued once a loan becomes past due 90 days or more.
Acquisition discounts for the Portfolio as a whole are accreted as an adjustment
to yield over the estimated life of the Portfolio. Accounting for these
Portfolios is on a pool basis as opposed to an individual asset-by-asset basis.

     The Partnerships account for performing Portfolio Assets in accordance with
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
which requires creditors to evaluate the collectibility of both contractual
interest and principal of loans when assessing the need for a loss accrual.
Impairment is measured based on the present value of the expected future cash
flows discounted at the loans' effective interest rates, or the fair value of
the collateral, less estimated selling costs, if any loans are collateral
dependent and foreclosure is probable.

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate are capitalized, whereas those relating to holding
assets are charged to expense. Income or loss is recognized upon the disposal of
the real estate. Rental income, net of expenses, on real estate Portfolios is
recognized when received.
                                       74
<PAGE>   77
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     Assets are foreclosed when necessary through an arrangement with an
affiliated entity whereby title to the foreclosed asset is held by the
affiliated entity and a note receivable from the affiliate is held by the
Partnerships. For financial statement presentation, the affiliated entity note
receivable created by the arrangement is included in Portfolio Assets and is
recorded at the lower of allocated cost or fair value less estimated cost to
sell the underlying asset.

(b) INVESTMENT IN TRUST CERTIFICATES

     The Partnerships hold an investment in trust certificates, representing an
interest in a REMIC created by the sale of certain Partnership assets. This
interest is subordinate to the senior tranches of the certificate. The
investment is carried at the lower of cost (the unpaid balance of the
certificate, net of acquisition discounts) or fair market value. Interest is
accrued in accordance with the contractual terms of the agreement. Acquisition
discounts are accreted as an adjustment to yield over the estimated life of the
investment.

(c) INCOME TAXES

     Under current Federal laws, partnerships are not subject to income taxes;
therefore, no provision has been made for such taxes in the accompanying
combined financial statements. For tax purposes, income or loss is included in
the individual tax returns of the partners.

(d) USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(3) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              ---------   --------
<S>                                                           <C>         <C>
Non-performing Portfolio Assets.............................  $ 121,055   $ 83,530
Performing Portfolio Assets.................................    182,534     94,271
Real estate Portfolios......................................     39,491     48,212
                                                              ---------   --------
          Total Portfolio Assets............................    343,080    226,013
Discount required to reflect Portfolio Assets at carrying
  value.....................................................   (117,458)   (77,871)
                                                              ---------   --------
          Portfolio Assets, net.............................  $ 225,622   $148,142
                                                              =========   ========
</TABLE>

     Portfolio Assets are pledged to secure non-recourse notes payable.

(4) DEFERRED PROFIT SHARING

     In connection with the formation of FC Properties, Ltd. during 1998, an
agreement was entered into which provided for potential payments to the project
manager based on a percentage of total estimated sales. The deferred amount is
amortized into expense in proportion to actual sales realized. The provisions of
the agreement provide that no profit participation will be paid until all debt
of the entity is extinguished and a 20% return on investments is recognized by
the limited partners. During 1999, the long-term debt was extinguished and it is
anticipated the 20% return threshold will be met during 2000. Accordingly, as of

                                       75
<PAGE>   78
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1999, no profit participation amounts had been paid out. At
December 31, 1999 and 1998, the estimated liability for this profit
participation was $11,767 and $8,429, respectively, and was included in deferred
compensation in the accompanying combined balance sheets. Additionally,
amortization of $761 and $3,122 was recognized during 1999 and 1998,
respectively, and has been included in general, administrative and operating
expense in the accompanying statements of operations.

(5) LONG-TERM DEBT

     Long-term debt at December 31, 1999 and 1998 consists of the following:

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Senior collateralized loans, secured by Portfolio Assets:
  Prime (8.5% at December 31, 1999) plus 0.5% to 7%.........  $  4,650   $  1,123
  LIBOR (5.832% at December 31, 1999) plus 2.25% to 4%......   142,951     85,452
  Fixed rate -- 6.5% to 13%.................................    22,020     18,690
Subordinated collateralized loans, secured by Portfolio
  Assets:
  Prime (8.5% at December 31, 1999) plus 1% to 7%...........     1,215        724
Uncollateralized intercompany loans:
  Prime (8.5% at December 31, 1999) plus 1%.................     1,072         --
                                                              --------   --------
                                                              $171,908   $105,989
                                                              ========   ========
</TABLE>

     Collateralized loans are typically payable based on proceeds from
disposition of and payments received on the Portfolio Assets.

     Contractual maturities (excluding principal and interest payments payable
from proceeds from dispositions of and payments received on the Portfolio
Assets) of long term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
<S>                                                         <C>
  2000....................................................   140,272
  2001....................................................    11,573
  2002....................................................     9,492
  2003....................................................        --
  2004....................................................        --
  Thereafter..............................................    10,571
                                                            --------
                                                            $171,908
                                                            ========
</TABLE>

     It is anticipated that debts maturing in 2000 will be renewed or refinanced
into financing arrangements with terms similar to current facilities.

     The loan agreements and master note purchase agreements, under which notes
payable were incurred, contain various covenants including limitations on other
indebtedness, maintenance of service agreements and restrictions on use of
proceeds from disposition of and payments received on the Portfolio Assets. As
of December 31, 1999, the Partnerships were in compliance with the
aforementioned covenants.

     In connection with the long term debt, the Partnerships incurred
origination and commitment fees. These fees are amortized proportionate to the
principal reductions on the related notes and are included in general,
administrative and operating expenses. At December 31, 1999 and 1998,
approximately $792 and $1,139, respectively, of origination and commitment fees
are included in other assets, net.

                                       76
<PAGE>   79
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(6) TRANSACTIONS WITH AFFILIATES

     Under the terms of the various servicing agreements between the
Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds
from resolution of the Portfolio Assets for processing transactions on the
Portfolio Assets and for conducting settlement, collection and other resolution
activities. Included in general, administrative and operating expenses in the
accompanying combined statements of operations is approximately $2,613, $2,752,
and $4,353 in servicing fees incurred by the Partnerships in 1999, 1998 and
1997, respectively.

     On January 1, 1997, FirstCity purchased the other limited partner's
interest in Whitewater for $4,165.

     During 1997, WAMCO XXI, Ltd. and Whitewater merged into WAMCO XXII, Ltd.
After the merger, WAMCO XXII, Ltd. transferred $47,517 in assets and $516 in
liabilities to Bosque Asset Corporation (Bosque) in exchange for cash and an
investment in Bosque. Subsequent to the transaction, WAMCO XXII, Ltd.
distributed its investment in Bosque to its partners and dissolved. During 1997,
WAMCO IX, Ltd. contributed $3,316 in notes to Bosque in exchange for cash and an
investment in Bosque. Subsequent to the transfer, WAMCO IX, Ltd. distributed its
investment in Bosque to its partners.

(7) FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Partnerships disclose
estimated fair values of their financial instruments. Fair value estimates,
methods and assumptions are set forth below.

(a) CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

     The carrying amount of cash, receivable from affiliates, accounts payable
and accrued liabilities approximates fair value at December 31, 1999 and 1998
due to the short-term nature of such accounts.

(b) PORTFOLIO ASSETS

     Portfolio Assets are carried at the lower of cost or estimated fair value.
The estimated fair value is calculated by discounting projected cash flows on an
asset-by-asset basis using estimated market discount rates that reflect the
credit and interest rate risk inherent in the assets. The carrying value of
Portfolio Assets was $225,622 and $148,142 at December 31, 1999 and 1998,
respectively. The estimated fair value of the Portfolio Assets was approximately
$277,397 and $174,776 at December 31, 1999 and 1998, respectively.

(c) INVESTMENTS IN TRUST CERTIFICATES

     Investments in trust certificates are carried at the lower of cost or
estimated fair value. Fair value of the investments are estimated by discounting
future anticipated cash flows at a rate consistent with similar types of
investments. The carrying value of Investments in Trust Certificates was $6,486
and $6,097 at December 31, 1999 and 1998, respectively. The estimated fair value
of the Investments in Trust Certificates was approximately $8,335 and $8,419,
respectively.

(d) LONG-TERM DEBT

     Management believes that for similar financial instruments with comparable
credit risks, the stated interest rates at December 31, 1999 and 1998
approximate market rates. Accordingly, the carrying amount of long-term debt is
believed to approximate fair value. Additional, the majority of the
partnerships' debt is at variable rates of interest.

                                       77
<PAGE>   80
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(8) PREFERRED EQUITY

     WAMCO XXIV, Ltd. invested in Community Development Investment LLC in 1999.
This investment carries Preferred Equity belonging to a third party. All net
cash flow is payable monthly first to the Preferred Equity member in an amount
equal to its unreturned contribution, plus interest accrued thereon at a rate of
Libor (5.832%) plus 5%, compounded monthly, until such contribution plus accrued
interest is returned in full. The remainder, if any, is distributed to the
common member interest holder, WAMCO XXIV, Ltd. Not withstanding anything to the
contrary, all net losses, net cash use or other situations resulting in a
situation requiring additional contributions shall be allocated to, or made by,
WAMCO XXIV, Ltd.

(9) COMMITMENTS AND CONTINGENCIES

     Calibat Fund, LLC has committed to make additional investments in
partnerships up to $710 at December 31, 1999.

     The Partnerships are involved in various legal proceedings in the ordinary
course of business. In the opinion of management, the resolution of such matters
will not have a material adverse impact on the combined financial condition,
results of operations or liquidity of the Partnerships.

                                       78
<PAGE>   81

                          INDEPENDENT AUDITORS' REPORT

The Partners
WAMCO Partnerships:

     We have audited the accompanying combined balance sheets of the WAMCO
Partnerships as of December 31, 1999 and 1998, and the related combined
statements of operations, changes in partners' capital, and cash flows for each
of the years in the three-year period ended December 31, 1999. These combined
financial statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

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

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the WAMCO
Partnerships as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.

                                            KPMG LLP

Fort Worth, Texas
March 31, 2000

                                       79
<PAGE>   82

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

     Not applicable.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information called for by this item with respect to the Company's
directors and executive officers is incorporated by reference from the Company's
definitive proxy statement pertaining to the 2000 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION.

     The information called for by this item is incorporated by reference from
the Company's definitive proxy statement pertaining to the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The information called for by this item is incorporated by reference from
the Company's definitive proxy statement pertaining to the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information called for by this item is incorporated by reference from
the Company's definitive proxy statement pertaining to the 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.

                                       80
<PAGE>   83

                                    PART IV

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

     (a) 1. Financial Statements

          The consolidated financial statements of FirstCity and combined
     financial statements of the WAMCO Partnerships (Acquisition Partnerships)
     are incorporated herein by reference to Item 8, "Financial Statements and
     Supplementary Data," of this Report.

          2. Financial Statement Schedules

          Financial statement schedules have been omitted because the
     information is either not required, not applicable, or is included in Item
     8, "Financial Statements and Supplementary Data."

          3. Exhibits

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Joint Plan of Reorganization by First City Bancorporation
                            of Texas, Inc., Official Committee of Equity Security
                            Holders and J-Hawk Corporation, with the Participation of
                            Cargill Financial Services Corporation, Under Chapter 11
                            of the United States Bankruptcy Code, Case No.
                            392-39474-HCA-11 (incorporated herein by reference to
                            Exhibit 2.1 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          2.2            -- Agreement and Plan of Merger, dated as of July 3, 1995,
                            by and between First City Bancorporation of Texas, Inc.
                            and J-Hawk Corporation (incorporated herein by reference
                            to Exhibit 2.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          3.1            -- Amended and Restated Certificate of Incorporation of the
                            Company (incorporated herein by reference to Exhibit 3.1
                            of the Company's Current Report on Form 8-K dated July 3,
                            1995 filed with the Commission on July 18, 1995).
          3.2            -- Bylaws of the Company (incorporated herein by reference
                            to Exhibit 3.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          4.1            -- Certificate of Designations of the New Preferred Stock
                            ($0.01 par value) of the Company. (incorporated herein by
                            reference to Exhibit 4.1 to the Company's Current Report
                            on form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
          4.2            -- Warrant Agreement, dated July 3, 1995, by and between the
                            Company and American Stock Transfer & Trust Company, as
                            Warrant Agent (incorporated herein by reference to
                            Exhibit 4.2 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          4.3            -- Registration Rights Agreement, dated July 1, 1997, among
                            the Company, Richard J. Gillen, Bernice J. Gillen, Harbor
                            Financial Mortgage Company Employees Pension Plan,
                            Lindsey Capital Corporation, Ed Smith and Thomas E.
                            Smith. (incorporated herein by reference to Exhibit 4.3
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 26, 1998).
          4.4            -- Stock Purchase Agreement, dated March 24, 1998, between
                            the Company and Texas Commerce Shareholders Company.
                            (incorporated herein by reference to Exhibit 4.4 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
</TABLE>

                                       81
<PAGE>   84

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          4.5            -- Registration Rights Agreement, dated March 24, 1998,
                            between the Company and Texas Commerce Shareholders
                            Company. (incorporated herein by reference to Exhibit 4.5
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 24, 1998).
          9.1            -- Shareholder Voting Agreement, dated as of June 29, 1995,
                            among ATARA I Ltd., James R. Hawkins, James T. Sartain
                            and Cargill Financial Services Corporation. (incorporated
                            herein by reference to Exhibit 9.1 of the Company's Form
                            10-K dated March 24,1998 filed with the Commission on
                            March 26, 1998).
         10.1            -- Trust Agreement of FirstCity Liquidating Trust, dated
                            July 3, 1995 (incorporated herein by reference to Exhibit
                            10.1 of the Company's Current Report on Form 8-K dated
                            July 3, 1995 filed with the Commission on July 18, 1995).
         10.2            -- Investment Management Agreement, dated July 3, 1995,
                            between the Company and FirstCity Liquidating Trust
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Current Report on Form 8-K dated July 3, 1995
                            filed with the Commission on July 18, 1995
         10.3            -- Lock-Box Agreement, dated July 11, 1995, among the
                            Company, NationsBank of Texas, N.A., as lock-box agent,
                            FirstCity Liquidating Trust, FCLT Loans, L.P., and the
                            other Trust-Owned Affiliates signatory thereto, and each
                            of NationsBank of Texas, N.A. and Fleet National Bank, as
                            co-lenders (incorporated herein by reference to Exhibit
                            10.3 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.4            -- Custodial Agreement, dated July 11, 1995, among Fleet
                            National Bank, as custodian, Fleet National Bank, as
                            agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and
                            the Company (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.5            -- Tier 3 Custodial Agreement, dated July 11, 1995, among
                            the Company, as custodian, Fleet National Bank, as agent,
                            FCLT Loans, L.P., FirstCity Liquidating Trust, and the
                            Company, as servicer (incorporated herein by reference to
                            Exhibit 10.5 of the Company's Form 8-A/A dated August 25,
                            1995 filed with the Commission on August 25, 1995).
         10.6            -- 12/97 Amended and Restated Facilities Agreement, dated
                            effective as of December 3, 1997, among Harbor Financial
                            Mortgage Corporation, New America Financial, Inc., Texas
                            Commerce Bank National Association and the other
                            warehouse lenders party thereto. (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.7            -- Modification Agreement, dated January 26, 1998, to the
                            Amended and Restated Facilities Agreement, dated as of
                            December 3, 1997, among Harbor Financial Mortgage
                            Corporation, New America Financial, Inc. and Chase Bank
                            of Texas, National Association (formerly known as Texas
                            Commerce Bank National Association). (incorporated herein
                            by reference to Exhibit 10,7 of the company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.8            -- $50,000,000 3/98 Chase Texas Temporary Additional
                            Warehouse Note, dated March 17, 1998, by Harbor Financial
                            Mortgage Corporation and New America Financial, Inc., in
                            favor of Chase Bank of Texas, National Association.
                            (incorporated herein by reference to Exhibit 10.8 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
</TABLE>

                                       82
<PAGE>   85

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.9            -- Employment Agreement, dated as of July 1, 1997, by and
                            between Harbor Financial Mortgage Corporation and Richard
                            J. Gillen. (incorporated herein by reference to Exhibit
                            10.9 of the Company's 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.10           -- Employment Agreement, dated as of September 8, 1997, by
                            and between FirstCity Funding Corporation and Thomas R.
                            Brower, with similar agreements between FC Capital Corp.
                            and each of James H. Aronoff and Christopher J.
                            Morrissey. (incorporated herein by reference to Exhibit
                            10.10 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.11           -- Shareholder Agreement, dated as of September 8, 1997,
                            among FirstCity Funding Corporation, FirstCity Consumer
                            Lending Corporation, Thomas R. Brower, Scot A. Foith,
                            Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,
                            Stephen H. Trent and Blake P. Bozman. (incorporated
                            herein by reference to Exhibit 10.11 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
         10.12           -- Revolving Credit Loan Agreement, dated as of March 20,
                            1998, by and between FC Properties, Ltd. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.12 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.13           -- Revolving Credit Loan Agreement, dated as of February 27,
                            1998, by and between FH Partners, L.P. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.13 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.14           -- Note Agreement, dated as of June 6, 1997, among Bosque
                            Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
                            Investment Realty Partners, L.P. and Bankers Trust
                            Company of California, N.A. (incorporated herein by
                            reference to Exhibit 10.14 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.15           -- 60,000,000 French Franc Revolving Promissory Note, dated
                            September 25, 1997, by J-Hawk International Corporation
                            in favor of the Bank of Scotland. (incorporated herein by
                            reference to Exhibit 10.15 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.16           -- Loan Agreement, dated as of September 25, 1997, by and
                            between Bank of Scotland and J-Hawk International
                            Corporation. (incorporated herein reference to Exhibit
                            10.16 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.17           -- Guaranty Agreement, dated as of September 25, 1997, by
                            J-Hawk (incorporated herein by reference to Exhibit 10.17
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.18           -- Guaranty Agreement, dated as of September 25, 1997, by
                            FirstCity Financial Corporation in favor of Bank of
                            Scotland. (incorporated herein by reference to Exhibit
                            10.18 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.19           -- Warehouse Credit Agreement, dated as of May 17, 1996,
                            among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust
                            and National Auto Funding Corporation. (incorporated
                            herein by reference to Exhibit 10.19 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
</TABLE>

                                       83
<PAGE>   86

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.20           -- Funding Commitment, dated as of May 17, 1996 by and
                            between ContiTrade Services L.L.C. and The Company.
                            (incorporated herein by reference to Exhibit 10.20 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.21           -- Revolving Credit Agreement, dated as of December 29,
                            1995, by and between the Company and Cargill financial
                            Services Corporation, as amended by the Eighth Amendment
                            to Revolving Credit Agreement dated February 1998.
                            (incorporated herein by reference to Exhibit 10.21 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.22           -- Master Repurchase Agreement Governing Purchased and Sales
                            of Mortgage Loans, dated as of July 1998, between Lehman
                            Commercial Paper Inc. and FHB Funding Corp. (incorporated
                            herein by reference to Exhibit 10.1 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 18, 1998).
         10.23           -- Warehouse Credit Agreement, dated as of April 30, 1998
                            among ContiTrade Services, L.L.C., FirstCity Consumer
                            Lending Corporation, FirstCity Auto Receivables L.L.C.
                            and FirstCity Financial Corporation. (incorporated herein
                            by reference to Exhibit 10.2 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission August
                            16, 1998).
         10.24           -- Servicing Agreement, dated as of April 30, 1998 among
                            FirstCity Auto Receivables L.L.C. , FirstCity Servicing
                            Corporation of California, FirstCity Consumer Lending
                            Corporation and ContiTrade Services L.L.C. (incorporated
                            herein by reference to Exhibit 10.3 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 16, 1998).
         10.25           -- Security and Collateral Agreement, dated as of April 30,
                            1998 among FirstCity Auto Receivables L.L.C., ContiTrade
                            Services L.L.C. and Chase Bank of Texas, National
                            Association. (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 10-Q dated August 14, 1998,
                            filed with the Commission August 16, 1998).
         10.26           -- Loan Agreement, dated as of July 24, 1998, between
                            FirstCity Commercial Corporation and CFSC Capital Corp.
                            XXX (incorporated herein by reference Exhibit 10.5 of the
                            Company's Form 10-Q dated August 14, 1998, filed with the
                            Commission on August 18, 1998).
         10.27           -- Loan Agreement, dated April 8, 1998 between Bank of
                            Scotland and the Company (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission on
                            August 18, 1998)
         10.28           -- First Amendment to Loan Agreement, dated July 20, 1998,
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.7 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission on
                            August 18, 1998).
         10.29           -- Employment Agreement, dated October 1, 1998, by and
                            between FirstCity. Financial Mortgage Corporation, and
                            Buddy L. Terrell (incorporated herein by reference to
                            Exhibit 10.29 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
</TABLE>

                                       84
<PAGE>   87

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.30           -- Security Agreement, dated as of April 30, 1998 among
                            Enterprise Funding Corporation, FCAR Receivables L.L.C.,
                            MBIA Insurance Corporation, FirstCity Funding
                            Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
                            Loan Servicing enterprise (incorporated herein by
                            reference to Exhibit 10.30 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.31           -- Note purchase agreement, dated March 30, 1999 among
                            Enterprise Funding Corporation, FCAR Receivables, L.L.C.
                            and NationsBank, N.A. (incorporated herein by reference
                            to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
         10.32           -- Custodian Agreement, dated March 30, 1999, among FCAR
                            Receivables L.L.C., FirstCity Funding Corporation,
                            NationsBank, N.A., Enterprise Funding Corporation and
                            Chase Bank of Texas, N.A. (incorporated herein by
                            reference to Exhibit 10.32 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.33           -- Credit agreement dated effective as of May 28, 1999 made
                            by and among Harbor Financial Mortgage, New America
                            Financial, Inc., FirstCity Financial Mortgage
                            Corporation, and Guaranty Federal Bank F.S.B. as
                            Administrative Agent and Bank One, Texas, N.A. as
                            Collateral Agent (incorporated herein by reference to
                            Exhibit 10.33 of the Company's Form 10-Q dated August 16,
                            1999, filed with the commission on August 16, 1999).
         10.34           -- Tenth Amendment to Loan Agreement, dated August 11, 1999
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.34 of the Company's
                            Form 10-Q dated August 16, 1999, filed with the
                            Commission on August 16, 1999).
         10.35           -- Amended and Restated Loan Agreement, dated December 20,
                            1999, By and Among FirstCity Financial Corporation as
                            Borrower and The Lenders Named Herein, as Lenders and
                            Bank of Scotland as Agent (incorporated herein by
                            reference to Exhibit 10.1 of the Company's Form 8-K dated
                            December 22, 1999, filed with the commission on December
                            28, 1999).
         10.36           -- Subordinated Secured Senior Note Purchase Agreement,
                            dated December 20, 1999, between FirstCity Financial
                            Corporation, as Issuer and IFA Corporation, as Purchaser
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Form 8-K dated December 22, 1999, filed with
                            the commission on December 28, 1999).
         10.37           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and Terry R.
                            DeWitt.
         10.38           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and G. Stephen
                            Fillip.
         10.39           -- Shareholder Agreement, dated October 1, 1999, by and
                            among FirstCity Holdings Corporation, FirstCity
                            Commercial Corporation, Terry R. DeWitt, G. Stephen
                            Fillip and James C. Holmes.
         23.1            -- Consent of KPMG LLP.
         23.2            -- Consent of KPMG LLP.
</TABLE>

                                       85
<PAGE>   88

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         27.1            -- Financial Data Schedule. (Exhibit 27.1 is being submitted
                            as an exhibit only in the electronic format of this
                            Quarterly Report on Form 10-K being submitted to the
                            Securities and Exchange Commission. Exhibit 27.1 shall
                            not be deemed filed for purposes of Section 11 of the
                            Securities Act of 1933, Section 18 of the Securities Act
                            of 1934, as amended, or Section 323 of the Trust
                            Indenture Act of 1939, as amended, or otherwise be
                            subject to the liabilities of such sections, nor shall it
                            be deemed a part of any registration statement to which
                            it relates.)
</TABLE>

     (b) Reports on Form 8-K.

          The Company filed the following Current Reports on Form 8-K, with the
     Commission during the fourth quarter of 1999.

          1. Form 8-K dated December 28, 1999:

             Items reported: Item 5 (Other Events)

                                       86
<PAGE>   89

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                                            FIRSTCITY FINANCIAL CORPORATION

                                            By:    /s/ JAMES R. HAWKINS
                                              ----------------------------------
                                                       James R. Hawkins
                                                    Chairman of the Board

April 6, 2000

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                      <S>                            <C>

                /s/ JAMES R. HAWKINS                     Chairman of the Board,          April 6, 2000
-----------------------------------------------------      Chief Executive Officer
                  James R. Hawkins                         and Director (Principal
                                                           Executive Officer)

                /s/ JAMES T. SARTAIN                     President, Chief Operating      April 6, 2000
-----------------------------------------------------      Officer and Director
                  James T. Sartain

                 /s/ GARY H. MILLER                      Senior Vice President, and      April 6, 2000
-----------------------------------------------------      Chief Financial Officer
                   Gary H. Miller                          (Principal financial
                                                           officer)

                 /s/ RICHARD E. BEAN                     Director                        April 6, 2000
-----------------------------------------------------
                   Richard E. Bean

                 /s/ C. IVAN WILSON                      Director                        April 6, 2000
-----------------------------------------------------
                   C. Ivan Wilson

               /s/ ROBERT E. GARRISON                    Director                        April 6, 2000
-----------------------------------------------------
                 Robert E. Garrison

                   /s/ DANE FULMER                       Director                        April 6, 2000
-----------------------------------------------------
                     Dane Fulmer
</TABLE>

                                       87
<PAGE>   90

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1            -- Joint Plan of Reorganization by First City Bancorporation
                            of Texas, Inc., Official Committee of Equity Security
                            Holders and J-Hawk Corporation, with the Participation of
                            Cargill Financial Services Corporation, Under Chapter 11
                            of the United States Bankruptcy Code, Case No.
                            392-39474-HCA-11 (incorporated herein by reference to
                            Exhibit 2.1 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          2.2            -- Agreement and Plan of Merger, dated as of July 3, 1995,
                            by and between First City Bancorporation of Texas, Inc.
                            and J-Hawk Corporation (incorporated herein by reference
                            to Exhibit 2.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          3.1            -- Amended and Restated Certificate of Incorporation of the
                            Company (incorporated herein by reference to Exhibit 3.1
                            of the Company's Current Report on Form 8-K dated July 3,
                            1995 filed with the Commission on July 18, 1995).
          3.2            -- Bylaws of the Company (incorporated herein by reference
                            to Exhibit 3.2 of the Company's Current Report on Form
                            8-K dated July 3, 1995 filed with the Commission on July
                            18, 1995).
          4.1            -- Certificate of Designations of the New Preferred Stock
                            ($0.01 par value) of the Company. (incorporated herein by
                            reference to Exhibit 4.1 to the Company's Current Report
                            on form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
          4.2            -- Warrant Agreement, dated July 3, 1995, by and between the
                            Company and American Stock Transfer & Trust Company, as
                            Warrant Agent (incorporated herein by reference to
                            Exhibit 4.2 of the Company's Current Report on Form 8-K
                            dated July 3, 1995 filed with the Commission on July 18,
                            1995).
          4.3            -- Registration Rights Agreement, dated July 1, 1997, among
                            the Company, Richard J. Gillen, Bernice J. Gillen, Harbor
                            Financial Mortgage Company Employees Pension Plan,
                            Lindsey Capital Corporation, Ed Smith and Thomas E.
                            Smith. (incorporated herein by reference to Exhibit 4.3
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 26, 1998).
          4.4            -- Stock Purchase Agreement, dated March 24, 1998, between
                            the Company and Texas Commerce Shareholders Company.
                            (incorporated herein by reference to Exhibit 4.4 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission on March 26, 1998).
          4.5            -- Registration Rights Agreement, dated March 24, 1998,
                            between the Company and Texas Commerce Shareholders
                            Company. (incorporated herein by reference to Exhibit 4.5
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission on March 24, 1998).
          9.1            -- Shareholder Voting Agreement, dated as of June 29, 1995,
                            among ATARA I Ltd., James R. Hawkins, James T. Sartain
                            and Cargill Financial Services Corporation. (incorporated
                            herein by reference to Exhibit 9.1 of the Company's Form
                            10-K dated March 24,1998 filed with the Commission on
                            March 26, 1998).
         10.1            -- Trust Agreement of FirstCity Liquidating Trust, dated
                            July 3, 1995 (incorporated herein by reference to Exhibit
                            10.1 of the Company's Current Report on Form 8-K dated
                            July 3, 1995 filed with the Commission on July 18, 1995).
</TABLE>
<PAGE>   91

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.2            -- Investment Management Agreement, dated July 3, 1995,
                            between the Company and FirstCity Liquidating Trust
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Current Report on Form 8-K dated July 3, 1995
                            filed with the Commission on July 18, 1995
         10.3            -- Lock-Box Agreement, dated July 11, 1995, among the
                            Company, NationsBank of Texas, N.A., as lock-box agent,
                            FirstCity Liquidating Trust, FCLT Loans, L.P., and the
                            other Trust-Owned Affiliates signatory thereto, and each
                            of NationsBank of Texas, N.A. and Fleet National Bank, as
                            co-lenders (incorporated herein by reference to Exhibit
                            10.3 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.4            -- Custodial Agreement, dated July 11, 1995, among Fleet
                            National Bank, as custodian, Fleet National Bank, as
                            agent, FCLT Loans, L.P., FirstCity Liquidating Trust, and
                            the Company (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 8-A/A dated August 25, 1995
                            filed with the Commission on August 25, 1995).
         10.5            -- Tier 3 Custodial Agreement, dated July 11, 1995, among
                            the Company, as custodian, Fleet National Bank, as agent,
                            FCLT Loans, L.P., FirstCity Liquidating Trust, and the
                            Company, as servicer (incorporated herein by reference to
                            Exhibit 10.5 of the Company's Form 8-A/A dated August 25,
                            1995 filed with the Commission on August 25, 1995).
         10.6            -- 12/97 Amended and Restated Facilities Agreement, dated
                            effective as of December 3, 1997, among Harbor Financial
                            Mortgage Corporation, New America Financial, Inc., Texas
                            Commerce Bank National Association and the other
                            warehouse lenders party thereto. (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.7            -- Modification Agreement, dated January 26, 1998, to the
                            Amended and Restated Facilities Agreement, dated as of
                            December 3, 1997, among Harbor Financial Mortgage
                            Corporation, New America Financial, Inc. and Chase Bank
                            of Texas, National Association (formerly known as Texas
                            Commerce Bank National Association). (incorporated herein
                            by reference to Exhibit 10,7 of the company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.8            -- $50,000,000 3/98 Chase Texas Temporary Additional
                            Warehouse Note, dated March 17, 1998, by Harbor Financial
                            Mortgage Corporation and New America Financial, Inc., in
                            favor of Chase Bank of Texas, National Association.
                            (incorporated herein by reference to Exhibit 10.8 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.9            -- Employment Agreement, dated as of July 1, 1997, by and
                            between Harbor Financial Mortgage Corporation and Richard
                            J. Gillen. (incorporated herein by reference to Exhibit
                            10.9 of the Company's 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.10           -- Employment Agreement, dated as of September 8, 1997, by
                            and between FirstCity Funding Corporation and Thomas R.
                            Brower, with similar agreements between FC Capital Corp.
                            and each of James H. Aronoff and Christopher J.
                            Morrissey. (incorporated herein by reference to Exhibit
                            10.10 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
</TABLE>
<PAGE>   92

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.11           -- Shareholder Agreement, dated as of September 8, 1997,
                            among FirstCity Funding Corporation, FirstCity Consumer
                            Lending Corporation, Thomas R. Brower, Scot A. Foith,
                            Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,
                            Stephen H. Trent and Blake P. Bozman. (incorporated
                            herein by reference to Exhibit 10.11 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
         10.12           -- Revolving Credit Loan Agreement, dated as of March 20,
                            1998, by and between FC Properties, Ltd. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.12 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.13           -- Revolving Credit Loan Agreement, dated as of February 27,
                            1998, by and between FH Partners, L.P. and Nomura Asset
                            Capital Corporation. (incorporated herein by reference to
                            Exhibit 10.13 of the Company's Form 10-K dated March 24,
                            1998 filed with the Commission March 26, 1998).
         10.14           -- Note Agreement, dated as of June 6, 1997, among Bosque
                            Asset Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
                            Investment Realty Partners, L.P. and Bankers Trust
                            Company of California, N.A. (incorporated herein by
                            reference to Exhibit 10.14 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.15           -- 60,000,000 French Franc Revolving Promissory Note, dated
                            September 25, 1997, by J-Hawk International Corporation
                            in favor of the Bank of Scotland. (incorporated herein by
                            reference to Exhibit 10.15 of the Company's Form 10-K
                            dated March 24, 1998 filed with the Commission March 26,
                            1998).
         10.16           -- Loan Agreement, dated as of September 25, 1997, by and
                            between Bank of Scotland and J-Hawk International
                            Corporation. (incorporated herein reference to Exhibit
                            10.16 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.17           -- Guaranty Agreement, dated as of September 25, 1997, by
                            J-Hawk (incorporated herein by reference to Exhibit 10.17
                            of the Company's Form 10-K dated March 24, 1998 filed
                            with the Commission March 26, 1998).
         10.18           -- Guaranty Agreement, dated as of September 25, 1997, by
                            FirstCity Financial Corporation in favor of Bank of
                            Scotland. (incorporated herein by reference to Exhibit
                            10.18 of the Company's Form 10-K dated March 24, 1998
                            filed with the Commission March 26, 1998).
         10.19           -- Warehouse Credit Agreement, dated as of May 17, 1996,
                            among ContiTrade Services L.L.C., N.A.F. Auto Loan Trust
                            and National Auto Funding Corporation. (incorporated
                            herein by reference to Exhibit 10.19 of the Company's
                            Form 10-K dated March 24, 1998 filed with the Commission
                            March 26, 1998).
         10.20           -- Funding Commitment, dated as of May 17, 1996 by and
                            between ContiTrade Services L.L.C. and The Company.
                            (incorporated herein by reference to Exhibit 10.20 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
         10.21           -- Revolving Credit Agreement, dated as of December 29,
                            1995, by and between the Company and Cargill financial
                            Services Corporation, as amended by the Eighth Amendment
                            to Revolving Credit Agreement dated February 1998.
                            (incorporated herein by reference to Exhibit 10.21 of the
                            Company's Form 10-K dated March 24, 1998 filed with the
                            Commission March 26, 1998).
</TABLE>
<PAGE>   93

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.22           -- Master Repurchase Agreement Governing Purchased and Sales
                            of Mortgage Loans, dated as of July 1998, between Lehman
                            Commercial Paper Inc. and FHB Funding Corp. (incorporated
                            herein by reference to Exhibit 10.1 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 18, 1998).
         10.23           -- Warehouse Credit Agreement, dated as of April 30, 1998
                            among ContiTrade Services, L.L.C., FirstCity Consumer
                            Lending Corporation, FirstCity Auto Receivables L.L.C.
                            and FirstCity Financial Corporation. (incorporated herein
                            by reference to Exhibit 10.2 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission August
                            16, 1998).
         10.24           -- Servicing Agreement, dated as of April 30, 1998 among
                            FirstCity Auto Receivables L.L.C. , FirstCity Servicing
                            Corporation of California, FirstCity Consumer Lending
                            Corporation and ContiTrade Services L.L.C. (incorporated
                            herein by reference to Exhibit 10.3 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission
                            August 16, 1998).
         10.25           -- Security and Collateral Agreement, dated as of April 30,
                            1998 among FirstCity Auto Receivables L.L.C., ContiTrade
                            Services L.L.C. and Chase Bank of Texas, National
                            Association. (incorporated herein by reference to Exhibit
                            10.4 of the Company's Form 10-Q dated August 14, 1998,
                            filed with the Commission August 16, 1998).
         10.26           -- Loan Agreement, dated as of July 24, 1998, between
                            FirstCity Commercial Corporation and CFSC Capital Corp.
                            XXX (incorporated herein by reference Exhibit 10.5 of the
                            Company's Form 10-Q dated August 14, 1998, filed with the
                            Commission on August 18, 1998).
         10.27           -- Loan Agreement, dated April 8, 1998 between Bank of
                            Scotland and the Company (incorporated herein by
                            reference to Exhibit 10.6 of the Company's Form 10-Q
                            dated August 14, 1998, filed with the Commission on
                            August 18, 1998)
         10.28           -- First Amendment to Loan Agreement, dated July 20, 1998,
                            between Bank of Scotland and the Company (incorporated
                            herein by reference to Exhibit 10.7 of the Company's Form
                            10-Q dated August 14, 1998, filed with the Commission on
                            August 18, 1998).
         10.29           -- Employment Agreement, dated October 1, 1998, by and
                            between FirstCity. Financial Mortgage Corporation, and
                            Buddy L. Terrell (incorporated herein by reference to
                            Exhibit 10.29 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
         10.30           -- Security Agreement, dated as of April 30, 1998 among
                            Enterprise Funding Corporation, FCAR Receivables L.L.C.,
                            MBIA Insurance Corporation, FirstCity Funding
                            Corporation, NationsBank N.A. and CSC Logic/MSA LLP d/b/a
                            Loan Servicing enterprise (incorporated herein by
                            reference to Exhibit 10.30 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.31           -- Note purchase agreement, dated March 30, 1999 among
                            Enterprise Funding Corporation, FCAR Receivables, L.L.C.
                            and NationsBank , N.A. (incorporated herein by reference
                            to Exhibit 10.31 of the Company's Form 10-Q dated May 17,
                            1999, filed with the commission on May 17, 1999).
</TABLE>
<PAGE>   94

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.32           -- Custodian Agreement, dated March 30, 1999, among FCAR
                            Receivables L.L.C., FirstCity Funding Corporation,
                            NationsBank, N.A., Enterprise Funding Corporation and
                            Chase Bank of Texas, N.A. (incorporated herein by
                            reference to Exhibit 10.32 of the Company's Form 10-Q
                            dated May 17, 1999, filed with the commission on May 17,
                            1999).
         10.33           -- Credit agreement dated effective as of May 28, 1999 made
                            by and among Harbor Financial Mortgage, New America
                            Financial, Inc., FirstCity Financial Mortgage
                            Corporation, and Guaranty Federal Bank F.S.B. as
                            Administrative Agent and Bank One, Texas, N.A. as
                            Collateral Agent. (incorporated herein by reference to
                            Exhibit 10.33 of the Company's Form 10-Q dated August 16,
                            1999, filed with the commission on August 16, 1999)
         10.34           -- Tenth Amendment to Loan Agreement, dated August 11, 1999
                            between Bank of Scotland and the Company. (incorporated
                            herein by reference to Exhibit 10.34 of the Company's
                            Form 10-Q dated August 16, 1999, filed with the
                            Commission on August 16, 1999).
         10.35           -- Amended and Restated Loan Agreement, dated December 20,
                            1999, By and Among FirstCity Financial Corporation as
                            Borrower and the Lenders Named Herein, as Lenders and
                            Bank of Scotland as Agent (incorporated herein by
                            reference to Exhibit 10.1 of the Company's Form 8-K dated
                            December 22, 1999, filed with the commission on December
                            28, 1999).
         10.36           -- Subordinated Secured Senior Note Purchase Agreement,
                            dated December 20, 1999, between FirstCity Financial
                            Corporation, as Issuer and IFA Corporation, as Purchaser
                            (incorporated herein by reference to Exhibit 10.2 of the
                            Company's Form 8-K dated December 22 1999, filed with the
                            commission on December 28, 1999).
         10.37           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and Terry R.
                            DeWitt.
         10.38           -- Employment Agreement, dated October 1, 1999, by and
                            between FirstCity Commercial Corporation and G. Stephen
                            Fillip.
         10.39           -- Shareholder Agreement, dated October 1, 1999, by and
                            among FirstCity Holdings Corporation, FirstCity
                            Commercial Corporation, Terry R. DeWitt, G. Stephen
                            Fillip and James C. Holmes.
         23.1            -- Consent of KPMG LLP.
         23.2            -- Consent of KPMG LLP.
         27.1            -- Financial Data Schedule. (Exhibit 27.1 is being submitted
                            as an exhibit only in the electronic format of this
                            Quarterly Report on Form 10-K being submitted to the
                            Securities and Exchange Commission. Exhibit 27.1 shall
                            not be deemed filed for purposes of Section 11 of the
                            Securities Act of 1933, Section 18 of the Securities Act
                            of 1934, as amended, or Section 323 of the Trust
                            Indenture Act of 1939, as amended, or otherwise be
                            subject to the liabilities of such sections, nor shall it
                            be deemed a part of any registration statement to which
                            it relates.)
</TABLE>