<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
 
                                   FORM 10-K
 
<TABLE>
<C>         <S>
(MARK ONE)
   /X/      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
            SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR

   / /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
            SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                  FOR THE TRANSITION PERIOD FRO            TO
</TABLE>
 
                         COMMISSION FILE NUMBER 1-7614
 
                        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>
 
                                 (817) 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
                    Special 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    / /       NO   /X/   (1)

     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.  / /
 
     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 29, 1996 WAS
4,921,422. AS OF SUCH DATE, THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD
BY NON-AFFILIATES, BASED UPON THE CLOSING PRICE OF THESE SHARES ON THE NASDAQ
NATIONAL MARKET SYSTEM, WAS APPROXIMATELY $51,853,000.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
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<CAPTION>
                                                                                     PART OF
                                                                                    FORM 10-K
                                                                                    ---------
<S>                                                                                 <C>
Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders.........    III
</TABLE>
 
---------------
 
(1) Prior to July 3, 1995, the registrant (then known as First City
    Bancorporation of Texas, Inc.) was a debtor-in-possession in a Chapter 11
    proceeding. During the period in the preceding twelve months while the
    registrant was a debtor-in-possession, in lieu of filing reports required by
    Section 13 of 15(d) of the Securities Exchange Act of 1934, registrant filed
    with the Securities and Exchange Commission, on a monthly basis under cover
    of Form 8-K, the monthly financial information it was required to file with
    the United States Bankruptcy Court for the Northern District of Texas,
    Dallas Division during the pendency of the bankruptcy proceeding.
 
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<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS.
 
     FirstCity Financial Corporation, a Delaware corporation ("FirstCity" or the
"Company"), is a specialized financial services company which evaluates,
acquires, manages, services and disposes of portfolios of performing loans,
non-performing loans, other real estate and other financial assets
(collectively, "purchased asset pools"). A significant amount of loans are
secured by real estate located throughout the United States. The Company
purchases these asset pools at substantial discounts from their original legal
principal amounts from financial institutions, other lenders and regulatory
agencies of the United States. Purchased asset pools are acquired in privately
negotiated transactions, in sealed bid sales limited to a small number of
invited participants, and in public sealed bid sales. Purchased asset pools are
acquired on behalf of the Company or its wholly-owned subsidiaries, and on
behalf of affiliated partnerships ("acquisition partnerships") in which an
affiliate of the Company is the general partner and the Company and other
investors are limited partners.
 
     The Company also services, manages and disposes of all of the assets it,
its affiliated acquisition partnerships, or other related entities acquire until
they are collected or sold. The Company does not service or manage assets for
non-affiliated third parties. In the ordinary course of business, the Company
sells assets to commercial banks, investment banks, finance companies and other
investment partnerships.
 
     The Company was formed by the merger of First City Bancorporation of Texas,
Inc., a Delaware corporation (the "Debtor"), and J-Hawk Corporation, a Texas
corporation ("J-Hawk"), on July 3, 1995. The Debtor was formed as a multi-bank
holding company in 1988 for the purpose of reorganizing First City
Bancorporation of Texas, Inc., a Texas corporation. Beginning in the summer of
1990, the financial condition of the Debtor began to deteriorate and worsened
progressively throughout 1990 and 1991. On October 30, 1992, regulatory agencies
closed the Debtor's banks. On October 31, 1992, certain of the Debtor's
unsecured creditors filed an involuntary chapter 11 bankruptcy petition against
the Debtor in the United States Bankruptcy Court for the Northern District of
Texas, Dallas Division. On November 23, 1992, the Debtor consented to the entry
of an order for relief against it under chapter 11 of the Bankruptcy Code. Until
July 3, 1995, the Debtor operated its remaining businesses and managed its
property as debtor-in-possession.
 
     J-Hawk is direct successor to a retail products company incorporated in the
State of Texas in 1965. J-Hawk commenced its financial services operations in
1986 by purchasing pools of consumer loans from the Federal Deposit Insurance
Corporation ("FDIC"). Since 1992, J-Hawk has been a party with Cargill Financial
Services Corporation ("CFSC") to agreements ("CFSC Agreements") under which CFSC
agreed to provide J-Hawk a fixed monthly payment to defray overhead expenses and
to reimburse one-half of all approved due diligence expenses incurred by J-Hawk
in the pursuit of prospective portfolio purchases. In return, J-Hawk agreed to
offer to CFSC the right to participate as an equity investor in any potential
acquisition of assets qualifying for an acquisition partnership. Since the
execution of the CFSC Agreements in March 1992 through December 31, 1995,
J-Hawk's affiliated acquisition partnerships have acquired over $1.3 billion
(original principal amount) of distressed assets for a total consideration of
approximately $591 million.
 
     The Joint Plan of Reorganization by the Debtor, Official Committee of
Equity Security Holders, and J-Hawk, with the Participation of Cargill Financial
Services Corporation, under Chapter 11 of the United States Bankruptcy Code,
Case No. 392-39474-HCA-11 (the "Plan of Reorganization"), was confirmed by the
Bankruptcy Court for the Northern District of Texas, Dallas Division, by an
order entered on May 31, 1995, and became effective on July 3, 1995. Pursuant to
the Plan of Reorganization, and an Agreement and Plan of Merger between the
Debtor and J-Hawk, on July 3, 1995, J-Hawk was merged (the "Merger") with and
into First City Bancorporation of Texas, Inc. Pursuant to the Merger, (i) the
former holders of common stock of J-Hawk received, in the aggregate,
approximately 49.9% of the outstanding common stock of the surviving entity, in
exchange for their shares of J-Hawk common stock, (ii) approximately 50.1% of
the outstanding common stock of the surviving entity was distributed among
former security holders of the Debtor pursuant to the Plan, and (iii) the name
of the corporation was changed to FirstCity Financial Corporation. As a result
of the implementation of the Plan and the consummation of the Merger, FirstCity
also issued
 
                                        2
<PAGE>   3
 
(i) $106.7 million of 9% senior subordinated notes, (ii) warrants to purchase
500,000 shares of its common stock at an exercise price of $25 per share, and
(iii) $51.7 million of special preferred stock to certain former security
holders of the Debtor.
 
     Substantially all of J-Hawk's interests in its acquisition partnerships,
all of its servicing operations, and all of its leasehold improvements and
equipment became assets of FirstCity as a result of the reorganization and
merger, and its entire management team became the management of FirstCity.
Certain remaining assets and liabilities of J-Hawk were spun out to Combined
Financial Corporation (a corporation formed and owned by the former J-Hawk
shareholders) in June 1995 prior to the merger.
 
     Pursuant to the Plan, substantially all of the legal and beneficial
interest in the assets of the Debtor, other than $20 million in cash, were
transferred to the newly-formed FirstCity Liquidating Trust (the "Trust"), or to
subsidiaries of the Trust. Such assets will be liquidated over the life of the
Trust pursuant to the terms thereof. FirstCity, as the sole holder of the Class
"A" Certificate under the Trust, will receive from the Trust amounts sufficient
to pay certain expenses and its obligations under the 9% senior subordinated
notes and the special preferred stock. Any amounts in excess of such sums shall
be paid to certain of the former security holders of the Debtor pursuant to the
terms of the Class "B" and Class "C" certificates of beneficial interests in the
Trust. The liquidation of the assets transferred to the Trust will be managed by
FirstCity pursuant to an Investment Management Agreement between the Trust and
FirstCity.
 
     In connection with the sale of the Debtor's banks by the FDIC to
third-party acquirers (the "Loss-Sharing Banks"), the FDIC guaranteed certain
recoveries on loans acquired by the Loss-Sharing Banks. (These agreements are
referred to as "Loss-Sharing Agreements".) On July 12, 1995, in order to reduce
the uncertain effect of the Loss-Sharing Agreements on future distributions to
the Trust by the FDIC, subsidiaries of the Trust purchased assets (the
"Loss-Sharing Settlement") for approximately $206 million from the Loss-Sharing
Banks. With the purchase of these assets, the Loss-Sharing Banks released the
FDIC from its future obligations under the Loss-Sharing Agreements. See
financial statements of FirstCity Liquidating Trust appearing elsewhere herein.
 
     On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc. (collectively,
"Diversified") for $12.9 million in cash and notes. A portion of the notes ($2.8
million) is contingent upon the future performance of the Diversified
portfolios. Diversified also specializes in the acquisition and disposition of
distressed loans and loan-related assets. The acquisition, accounted for as a
purchase, increased FirstCity's assets by approximately $79 million, including
$4.8 million attributable to servicing rights held by Diversified and $4.6
million of goodwill.
 
EMPLOYEES
 
     FirstCity had 163 employees as of December 31, 1995.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     James R. Hawkins, 60, has been Chairman of the Board and Chief Executive
Officer of FirstCity since July 3, 1995, and of J-Hawk since 1976.
 
     C. Ivan Wilson, 68, has been Vice Chairman of FirstCity since July 3, 1995,
and Chairman of the Board and Chief Executive Officer of the Debtor since 1991.
Prior thereto, Mr. Wilson was the Chief Executive Officer of First City,
Texas -- Corpus Christi.
 
     James T. Sartain, 47, has been President and Chief Operating Officer of
FirstCity since July 3, 1995, and of J-Hawk since 1988.
 
     Rick R. Hagelstein, 49, has been Executive Vice President and Chief Credit
Officer of FirstCity since July 3, 1995, and of J-Hawk since 1990. From 1988 to
1990, Mr. Hagelstein was Executive Vice President of ASK Corporation, a
manufacturer of solar energy devices.
 
     Matt A. Landry, Jr., 53, has been Executive Vice President and Chief
Financial Officer of FirstCity since July 3, 1995, and of J-Hawk since 1992.
From 1988 to 1992, Mr. Landry was President and Chief Operating
 
                                        3
<PAGE>   4
 
Officer and a Director of AmWest Savings Association, a Texas savings and loan
association, and served as a director of First American Bank, Bryan, Texas.
 
     Terry R. DeWitt, 38, has been Senior Vice President responsible for Due
Diligence and Investment Evaluation of FirstCity since July 3, 1995, and of
J-Hawk since 1992. From 1991 to 1992, Mr. DeWitt was Senior Vice President of
the First National Bank of Central Texas, a national banking association, and
from 1989 to 1991, he was President of the First National Bank of Goldthwaite, a
national banking association.
 
     Steve Fillip, 44, has been Senior Vice President of FirstCity since July 3,
1995, and of J-Hawk since 1991. Mr. Fillip is currently Manager of
Branch-Serviced Assets of FirstCity; prior thereto, he was Due Diligence Manager
of J-Hawk. From 1989 to 1991, Mr. Fillip was Executive Vice President and Chief
Credit Officer of BancOne, Texas, N.A. (Waco), a national banking association.
 
     Joe S. Greak, 47, has been Senior Vice President, Tax Director and
Secretary of FirstCity since July 3, 1995, and has been the Tax Manager of the
Debtor since 1993. From 1992 to 1993, Mr. Greak was the Tax Manager of New First
City -- Houston, N.A. Prior thereto, he was Senior Vice President and Tax
Director of First City, Texas -- Houston, N.A.
 
     James C. Holmes, 39, has been Senior Vice President and Manager of Finance,
Budget and Information Services of FirstCity since July 3, 1995, and of J-Hawk
since 1991. From 1988 to 1991, Mr. Holmes was a Vice President of MBank, Waco, a
national banking association.
 
     Kathy McNair, 46, has been Senior Vice President of FirstCity since July 3,
1995, and of J-Hawk since 1992. Ms. McNair is currently Manager of Credit
Administration of FirstCity; prior thereto, she was Credit Administration
Manager of a wholly owned subsidiary of J-Hawk. From 1990 to 1992, Ms. McNair
was a Vice President of Investors Savings Bank, a savings and loan association,
and from 1988 to 1990, Ms. McNair was a Vice President of Old Kent Bank
Southwest, a state chartered bank.
 
     Gary H. Miller, 36, has been Senior Vice President and Controller of
FirstCity since July 3, 1995, and of J-Hawk since 1994. From 1990 to 1994, Mr.
Miller was a senior manager of Jaynes, Reitmeier, Boyd & Therrell, P.C., an
independent public accounting firm. From 1988 to 1990, Mr. Miller was a Vice
President of NCNB Texas National Bank, a national banking association.
 
     Jim W. Moore, 45, has been Senior Vice President and Manager of
Waco-Serviced Assets of FirstCity since July 3, 1995, and of J-Hawk since 1992.
From 1990 to 1992, Mr. Moore was a management consultant for MBank, Waco, a
national banking association, and from 1988 to 1990, Mr. Moore was President and
a Director of Central Texas Savings and Loan, a savings and loan association.
 
     Dan R. Owen, 55, has been Senior Vice President and Manager of Consumer
Assets of FirstCity since July 3, 1995, and of J-Hawk since 1992. From 1991 to
1992, Mr. Owen was a Vice President of First Heights Bank, a state chartered
bank, and from 1990 to 1991, Mr. Owen was a Liquidator in Charge for Grant
Thornton, an independent public accounting firm. From 1988 to 1990, Mr. Owen was
a Senior Vice President of First City Bank, Texas, Houston.
 
COMPETITION
 
     In its distressed asset acquisition activities, FirstCity competes with
investment partnerships created for the primary purpose of acquiring distressed
assets, investment banks, private financial services companies generally similar
to FirstCity, and sole proprietorships. Some of these competitors have greater
financial resources and lower required financial rates of return on investments.
FirstCity believes, however, that presently it is one of the largest independent
participants in the distressed asset acquisition business and that it has
competed effectively in its market as a result of its affiliation with Cargill
Financial Services and FirstCity's ongoing funding relationships with several
senior lenders, including commercial banks, investment banks and other financial
services companies. These relationships permit FirstCity to respond quickly to a
prospective seller's requirements and to consummate any acquisition on which it
submits an offer. FirstCity has never failed to consummate an acquisition
because it could not arrange financing or otherwise meet seller-imposed closing
conditions.
 
                                        4
<PAGE>   5
 
ITEM 2. PROPERTIES.
 
     FirstCity maintains offices in Waco, Dallas and Houston, TX, Philadelphia,
PA, Richmond, VA, Hartford, CT, Fort Wayne, IN and Franklin, MA. FirstCity
leases all its offices, and other than its current headquarters in Waco, Texas,
considers all its offices to be temporary. 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
expire prior to December 31, 1998.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     Periodically, FirstCity and the acquisition partnerships are parties to or
otherwise involved in legal proceedings arising in the normal course of
business, such as claims to enforce liens, claims involved in servicing real
property loans and other issues incident to FirstCity business. FirstCity does
not believe that there is any proceeding threatened or pending against FirstCity
or the acquisition partnerships which, if determined adversely, would have a
material adverse effect on the financial position or results of operations of
FirstCity 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, 1995.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     The Debtor's common stock (FBTEQ) was traded over the counter. High and low
stock prices for the periods indicated are displayed in the following table:
 
<TABLE>
<CAPTION>
                                                               1995                1994
                                                          ---------------     ---------------
                                                           MARKET PRICE        MARKET PRICE
    QUARTER ENDED                                         HIGH       LOW      HIGH       LOW
    -------------                                         -----     -----     -----     -----
    <S>                                                   <C>       <C>       <C>       <C>
    March 31............................................. $0.87     $0.25     $3.75     $2.12
    June 30..............................................  0.75      0.37      2.37      0.63
    September 30(1)......................................  0.63      0.25      2.13      0.63
    December 31..........................................    --        --      1.75      0.25
</TABLE>
 
---------------
 
(1) Through July 3, 1995, the date of the Merger.
 
     Certain information concerning the common stock of FirstCity is included
elsewhere herein under the heading "Management's Discussion and
Analysis -- Common and Preferred Stock Data," and under Notes 2 and 7 to the
Consolidated Financial Statements, included elsewhere herein.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     Selected Financial Data is presented elsewhere herein under the heading
"Selected Financial Data" in Item 8 -- Financial Statements and Supplementary
Data. The Selected Financial Data 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.
 
                                        5
<PAGE>   6
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     On July 3, 1995, FirstCity Financial Corporation ("FirstCity") was formed
by the merger of J-Hawk Corporation ("J-Hawk") and First City Bancorporation of
Texas, Inc. ("FCBOT"). For accounting purposes, the merger transaction was
treated as an acquisition of FCBOT by J-Hawk. Accordingly, financial information
prior to the merger date reflects the historical financial position and results
of operations of J-Hawk.
 
INTRODUCTION
 
     FirstCity is a specialized financial services company which evaluates,
acquires, manages, services, and disposes of portfolios of performing loans,
non-performing loans, other real estate and other financial assets
(collectively, "purchased asset pools"). Purchased asset pools are acquired by
FirstCity or its wholly-owned subsidiaries and through partnerships
("acquisition partnerships") in which an affiliate of FirstCity is the general
partner and FirstCity and other investors are limited partners.
 
     In conjunction with the merger, the shareholders of J-Hawk received
approximately 49.9% of FirstCity's common stock and the shareholders of FCBOT
received approximately 50.1% of FirstCity's common stock. FirstCity also issued
$106.7 million in senior subordinated notes, $51.7 million in special preferred
stock and warrants to purchase 500,000 shares of its common stock at an exercise
price of $25 per share. See Note 2 to the consolidated financial statements.
 
     In connection with the merger, substantially all of the assets of FCBOT,
other than $20 million in cash, were transferred to the newly-formed FirstCity
Liquidating Trust (the "Trust"). FirstCity, as the sole holder of the Class "A"
Certificate under the Trust, will receive from the Trust amounts sufficient to
pay certain expenses, to retire the senior subordinated notes and to redeem and
pay dividends on the special preferred stock. The liquidation of the assets
transferred to the Trust will be managed by FirstCity for a servicing fee. See
financial statements of the Trust included elsewhere herein.
 
     J-Hawk merged substantially all of its interests in acquisition
partnerships, all of its servicing operations and its entire management team
into FirstCity. All of J-Hawk's remaining assets and liabilities, principally
purchased asset pools, related notes payable to banks, and receivables and
payables to related parties, were spun out to a company (Combined Financial
Corporation) owned by former J-Hawk shareholders in June 1995.
 
     On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc. ("Diversified")
for $12.9 million in cash and notes. A portion ($2.8 million) of the notes is
contingent upon the future performance of the Diversified portfolios.
Diversified also specializes in the acquisition and disposition of distressed
loans and loan-related assets. The acquisition, accounted for as a purchase,
increased FirstCity's assets by approximately $79 million, including $4.8
million attributable to servicing rights held by Diversified and $4.6 million of
goodwill.
 
                                        6
<PAGE>   7
 
     The following table summarizes FirstCity's performance since 1993.
 
                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                               1995         1994         1993
                                                              -------      -------      -------
                                                                (AMOUNTS IN THOUSANDS, EXCEPT
                                                                       PER SHARE DATA)
<S>                                                           <C>          <C>          <C>
Income:
  Net gain on purchased asset pools.........................  $11,984      $ 7,636      $ 9,495
  Servicing fees............................................   10,903        8,080        5,266
  Interest income on Class "A" Certificate..................    8,597           --           --
  Other interest income.....................................    1,572           69           97
  Rental income on purchased real estate pools..............    1,277           --           --
  Other income..............................................    1,356          921          357
                                                              -------      -------      -------
          Subtotal..........................................   35,689       16,706       15,215
                                                              -------      -------      -------
Expenses:
  Interest on senior subordinated notes payable.............    4,721           --           --
  Interest on other notes payable...........................    4,284        1,812        1,109
  Salaries and benefits.....................................    8,094        7,252        6,995
  Amortization..............................................    1,534           --           --
  Other general and administrative expense..................    5,221        5,991        5,950
                                                              -------      -------      -------
          Subtotal..........................................   23,854       15,055       14,054
                                                              -------      -------      -------
Equity earnings of acquisition partnerships.................    3,834        7,497        8,058
                                                              -------      -------      -------
Earnings before income taxes................................   15,669        9,148        9,219
                                                              -------      -------      -------
Provision for income taxes..................................      936        3,121        3,035
                                                              -------      -------      -------
Net earnings................................................  $14,733      $ 6,027      $ 6,184
                                                              =======      =======      =======
Special preferred dividends.................................    3,876           --           --
                                                              -------      -------      -------
Net earnings to common......................................  $10,857      $ 6,027      $ 6,184
                                                              =======      =======      =======
Net earnings per share......................................  $  2.98      $  2.37      $  2.43
Average shares outstanding..................................    3,642        2,544        2,544
Return on average equity....................................     34.5%        33.7%        51.3%
</TABLE>
 
                                        7
<PAGE>   8
 
                             RESULTS OF OPERATIONS
 
COMPONENTS OF EARNINGS
 
     FirstCity's earnings are generally derived from the following categories:
(1) net gains on the dispositions of purchased asset pools, (2) asset servicing
fees from acquisition partnerships and other affiliated companies, (3) equity
earnings from acquisition partnerships in which FirstCity owns a limited
partnership interest and (4) interest income on the Class "A" Certificate of the
FirstCity Liquidating Trust. From these sources of revenue, expenses for
interest on acquisition and operating debt and administrative costs are deducted
to arrive at net earnings of the company.
 
     Net gains on purchased asset pools are recognized based on the collections
from the assets comprising the purchased asset pools in excess of the cost of
such pools. Upon acquisition of a pool, FirstCity estimates the future
collections of that pool. The percentage of total cost to total estimated
collections is applied to all realized collections to arrive at cost of those
collections. The collections less allocated cost generates the net gain on
purchased asset pools. On a periodic basis, the future estimated collections are
evaluated and changed, and such changes are taken into effect prospectively in
the future calculations of net gains.
 
     Many of the assumptions upon which the future collections from purchased
asset pools are based, and therefore the gross profit recognized upon
collections, are subject to significant uncertainties. Additionally,
unanticipated events and circumstances may occur. Consequently, there may be
differences between current recognized gross profit rates and actual results
achieved over the life of a portfolio. FirstCity believes that financial
institutions and other lenders will continue to offer asset pools as a result of
their continuing consolidation and investor and regulatory pressure to dispose
of non-performing and under-performing assets. However, changes in the
regulatory environment could cause the asset pool sales to decline in the
future. When FirstCity acquires asset pools, cash flows and sale prices are
projected based upon the economic conditions then prevailing and projected in
the United States and in the economic region in which the assets are situated.
If such economic conditions deteriorate, FirstCity's earnings from its then
existing asset portfolios may be adversely affected.
 
     Service fee revenues from serviced assets come from primarily two sources.
First, the acquisition partnerships have contracted with FirstCity to manage and
dispose of assets for fees generally ranging from 3% to 6% of gross collections.
Second, FirstCity has contracted with affiliated parties to manage and dispose
of assets pursuant to fee structures similar to the fee structures for the
acquisition partnerships. The two most significant affiliated parties are the
Trust and Combined Financial Corporation. Levels of service fee revenue from
acquisition partnerships bear a direct relationship to cash collections on
serviced assets and the corresponding fee arrangement with such partnerships.
 
     Equity in earnings of acquisition partnerships represents FirstCity's
earnings derived from ownership in nineteen limited partnerships. Earnings of
the partnerships are a function of the timing and mix of collections received on
the purchased asset pools within each partnership, net of amortization of the
cost of the asset pool and of overhead, which includes asset level expenses and
interest on senior and subordinated debt. Collections from liquidation of the
assets within the purchased asset pools may vary significantly during the year
and during the life of a partnership, with the result being potentially
significant variations in earnings from acquisition partnerships on a
comparative period to period basis. The cost of each purchased asset pool is
amortized based on the relationship of the cost of the pool of assets to
estimated collections. This margin varies by partnership and will fluctuate as
revisions are made to the estimated remaining collections within a particular
purchased asset pool.
 
     Other factors affecting earnings from net gain on purchased asset pools and
equity earnings of acquisition partnerships are the amounts of debt and other
expenses associated with a pool of purchased assets. Generally, in the earlier
stages of the life of a pool, the interest expense is higher due to higher
levels of indebtedness and other expenses are higher due to the start up costs
associated with the acquisition of a pool. As a pool matures, collections are
used to reduce the debt and the other expenses decrease, thus resulting in
increased profits from the pool or partnership during the latter stages of the
partnership's life cycle. Most of the indebtedness incurred by FirstCity and its
acquisition partnerships is floating rate debt, the rates of which change when
 
                                        8
<PAGE>   9
 
certain short term benchmark rates increase. If these benchmark rates increase
beyond what FirstCity had originally projected, the profitability of FirstCity
and the acquisition partnerships will be adversely affected.
 
     FirstCity receives interest income on the outstanding balance of the Class
"A" Certificate of FirstCity Liquidating Trust. This interest income is fully
offset by the interest expense related to the senior subordinated notes and the
accrued but not declared dividends on the special preferred stock, resulting in
no effect to earnings to common shareholders.
 
     The following table analyzes the composition of FirstCity's major revenue
sources:
 
                          ANALYSIS OF REVENUE SOURCES
 
<TABLE>
<CAPTION>
                                                               1995         1994         1993
                                                             --------     --------     --------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                          <C>          <C>          <C>
SERVICE FEE REVENUES
Acquisition partnerships
  $ collected..............................................  $188,934     $206,627     $117,176
  Service fee revenue......................................     6,834        7,940        5,161
  Average service fee %....................................      3.62%        3.84%        4.40%

Trust
  $ collected
     FDIC receivable.......................................  $ 30,000           --           --
     Other trust assets....................................    77,371           --           --
  Service fee revenue......................................     3,110           --           --
  Average service fee %....................................      2.90%          --           --

Other affiliated entities
  $ collected..............................................  $ 18,218     $  3,741     $  1,821
  Service fee revenue......................................       959          140          105
  Average service fee %....................................      5.26%        3.74%        5.77%

Total service fees
  $ collected..............................................  $314,523     $210,368     $118,997
  Service fee revenue......................................    10,903        8,080        5,266
  Average service fee %....................................      3.47%        3.84%        4.43%

EQUITY EARNINGS IN ACQUISITION PARTNERSHIPS
Asset portfolios purchased.................................  $101,626     $202,761     $222,028
Average FirstCity investment...............................    14,429       15,180       13,206
Equity earnings in investments.............................     3,834        7,497        8,058

GAINS ON PURCHASED ASSET POOLS
Asset portfolios purchased.................................  $111,561     $ 27,869     $  6,898
$ collected................................................    44,760       18,341       19,361
Net gain on collections....................................    11,984        7,636        9,495
Profit margin on purchased asset pools.....................     26.77%       41.63%       49.04%
</TABLE>
 
                                        9
<PAGE>   10
 
     The following table analyzes operations of acquisition partnerships:
 
                      ANALYSIS OF ACQUISITION PARTNERSHIPS
 
<TABLE>
<CAPTION>
                                                                1995         1994        1993
                                                              --------     --------     -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>          <C>
GAINS ON DISPOSITION OF ASSET POOLS
Total gain on disposition of asset pools....................  $ 51,370     $ 63,439     $39,543
Variance from previous year due to:
Collection levels...........................................    (5,432)      30,187      27,657
Gross profit margins........................................    (7,258)      (3,567)     (2,002)
Mix.........................................................       621       (2,724)     (3,235)
                                                              --------     --------     -------
          Total variance from previous year.................   (12,069)      23,896      22,420

COST OF BORROWINGS
Interest expense............................................  $ 27,034     $ 22,544     $ 9,577
Average borrowings..........................................   217,886      204,863      72,441
Weighted average rate.......................................     12.41%       11.00%      13.22%

OTHER EXPENSES
Service fee expense.........................................  $  6,834     $  7,940     $ 5,161
Legal.......................................................     2,109        3,864       1,635
Property protection.........................................     3,797        6,523       1,145
Other.......................................................     2,054        3,342       1,279
                                                              --------     --------     -------
          Total other expenses..............................    14,794       21,669       9,220
</TABLE>
 
                             1995 COMPARED TO 1994
 
     Net earnings in 1995 were $14.7 million, up 144% from $6.0 million in 1994.
Net earnings to common in 1995 were $10.9 million, up 80% from $6.0 million in
1994. On a per share basis, earnings attributable to common equity were $2.98
for 1995 compared to $2.37 per share for 1994, a 26% increase. Results for
periods prior to July 3, 1995 reflect the historical net earnings of J-Hawk. The
related earnings per share are restated to reflect the equivalent number of
FirstCity common shares issued to the J-Hawk shareholders in connection with the
merger of J-Hawk and FCBOT.
 
     NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased asset pools
increased 57% to $12.0 million in 1995 from $7.6 million in 1994. The 1995 gain
includes approximately $3 million from the sale of $12 million in loans to a
partnership owned by certain executive officers of J-Hawk, as part of the spin
off transaction completed in conjunction with the merger. Even with the spin off
of $12 million in asset pools in connection with the merger in June 1995, the
average investment in purchased asset pools in 1995 of $47.0 million exceeded
the average investment levels for 1994 of $16.7 million, with the resulting gain
on disposition of purchased asset pools higher in 1995 due to increased levels
of collections and larger asset pools. The profit margin on collections in 1995
was 26.77% as compared to 41.63% in 1994.
 
     SERVICING FEES. Servicing fees grew to $10.9 million in 1995 from $8.1
million in 1994, an increase of 35%. Excluding $3.1 million in fees from
collection of Trust assets, servicing fees were relatively flat, as compared
with 1994 because of similar collection levels achieved in the remaining
serviced asset pools.
 
     INTEREST INCOME AND EXPENSE. As a result of the merger, interest income on
the Class A Certificate was recorded in 1995, representing reimbursement to
FirstCity (by the Trust) of interest expense of $4.7 million on the senior
subordinated notes and accrual of dividends of $3.9 million on special preferred
stock. Other interest income resulted primarily from loans acquired in the
Diversified transaction. Interest expense on other notes payable rose in
proportion to higher volumes of debt associated with purchased asset pools.
 
                                       10
<PAGE>   11
 
     OTHER INCOME. Rental income on purchased real estate pools resulted from a
1995 acquisition of a pool consisting entirely of real estate assets. On such
purchases, the net operating income derived from such assets is recognized as
other income with gains on sales recognized upon disposition of the asset.
 
     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
increased 12%, reflecting higher staffing costs since acquiring Diversified and
amortization of goodwill and servicing rights in 1995 (none in 1994).
 
     EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Equity earnings of
acquisition partnerships in 1995 decreased $3.7 million from 1994. Collections
in the acquisition partnerships decreased $18 million, or 9%, and caused a
reduction in gross profit of $5.4 million. The gross profit margin declined 3.5%
from 30.7% in 1994 to 27.2% in 1995 and reduced gross profit by $7.3 million.
This reduction in gross profit margin is due to collections from lower profit
margin pools that comprised a larger percentage of overall collections of
acquisition partnerships. These lower profit margin pools are pools acquired
more recently and have lower margins as a result of the purchase of higher
quality assets and increased competition for the purchases of such pools.
 
     FEDERAL INCOME TAXES. Federal income taxes are provided at 35% of taxable
income in 1995. FirstCity believes net operating loss carryforwards are
available to FirstCity after July 3, 1995, and are recognized as an offset to
the provision in the period during which the benefit is realized. As discussed
in Note 8 to the consolidated financial statements, the company has established
a valuation allowance equal to its net deferred tax assets. Accordingly, no
deferred tax benefit has been recognized.
 
     Although FirstCity believes that the net operating loss carryforwards are
available to offset future taxable earnings of FirstCity, there is no authority
governing many of the tax aspects of the merger because some determinations
primarily may be questions of fact. Additionally, no ruling has been obtained
from the Internal Revenue Service regarding the availability of the net
operating loss carryforwards to FirstCity; therefore, there can be no assurances
that the availability of the net operating loss carryforwards will not be
successfully challenged by the Internal Revenue Service.
 
                             1994 COMPARED TO 1993
 
     Net earnings were $6.0 million, or $2.37 per share, in 1994 compared to
$6.2 million, or $2.43 per share, in 1993.
 
     NET GAIN ON PURCHASED ASSET POOLS. The net gain on purchased assets
declined $1.9 million in 1994 from the 1993 level, reflecting a lower level of
collections and decline in gross margin on such purchased asset pools from 49.0%
to 41.6%.
 
     SERVICING FEES. Servicing fees increased 53% to $8.1 million in 1994 from
$5.3 million in 1993, primarily because acquisition partnership collections rose
from $117 million to $207 million. The average fee received declined in 1994 to
3.84% from 4.43%, reflecting a larger percentage of collections from
partnerships with lower fee arrangements.
 
     INTEREST EXPENSE. A higher level of interest expense in 1994 was produced
by rising interest rates and increased average volumes of debt associated with
purchased asset pools.
 
     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
were relatively flat year to year, increasing only 2.3% over the 1993 level,
primarily as result of increased staffing.
 
     EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS. Although collections by
acquisition partnerships nearly doubled in 1994, net income as a percentage of
collections declined from 17.7% in 1993 to 9.3% in 1994 because of higher
interest costs (as a percentage of collections) and lower gross margins.
Therefore, equity in earnings of acquisition partnerships was down 7% from 1993
levels.
 
     FEDERAL INCOME TAXES. Federal income taxes approximated the 34% statutory
rate in 1994 and 1993.
 
                                       11
<PAGE>   12
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
     Generally, the liquidity needs of FirstCity are for operations, payment of
debt and acquisitions of asset portfolios, investments in and advances to
acquisition partnerships and other investments by the company. The sources of
liquidity come from funds generated from operations, distributions from the "A"
Certificate of the Trust (FirstCity, as the sole holder of the Class "A"
Certificate under the Trust, will receive from the Trust amounts sufficient to
pay certain expenses, to retire the senior subordinated notes and to redeem and
pay dividends on the special preferred stock), the $20 million in equity as a
result of the merger with FCBOT, equity distributions from acquisition
partnerships and short term borrowings from lines of credit and other specific
purpose short term borrowings.
 
     FirstCity experienced significant asset growth during 1995. Total assets
grew to $309 million reflecting a very active period of portfolio acquisitions.
FirstCity contributed equity and advanced funds to acquisition partnerships
totaling $13.3 million to facilitate the purchase of $102 million in portfolios
of distressed assets during 1995. The company also completed its acquisition of
the Diversified companies in late September. This acquisition combined with
other direct portfolio acquisitions increased FirstCity's asset base by $121
million during 1995.
 
     FirstCity reached an agreement with Cargill Financial Services Corporation
during 1995 which calls for Cargill to provide a $25 million credit facility,
secured by substantially all of the unencumbered assets of FirstCity, to fund
future equity investments in asset acquisitions. At year-end 1995, borrowings
under the facility were $5.2 million.
 
     Since FirstCity's equity investment in acquisition partnerships normally is
2% of the purchase price of the asset pool, FirstCity believes liquidity from
the sources described above should be sufficient for continued growth in
partnership formation. Other sources of liquidity, including the Cargill credit
facility, and funding from senior lenders providing funding for acquisition
partnership formation and direct portfolio acquisitions, should prove adequate
to continue to fund the company's other contemplated investment activities.
 
     FirstCity attributes a significant portion of its recent financial success
to its affiliation with Cargill. Participation by Cargill in a transaction
provides assurances to any potential seller of a portfolio of distressed assets
that FirstCity will have the financial ability to consummate the targeted
portfolio acquisition. In addition, FirstCity believes that Cargill's general
reputation in the financial markets provides FirstCity with more opportunities
to acquire portfolios than FirstCity would otherwise have acting alone.
Discontinuation of this arrangement with Cargill could have a negative economic
impact upon the continued results of operations of FirstCity.
 
     FirstCity's continued success in its distressed asset acquisition business
is dependent upon the availability of senior debt financing for the acquisition
partnerships. Although FirstCity continues to enjoy good relationships with its
current lenders and to develop new sources of senior debt financing, there can
be no assurances that these and other sources of senior debt financing will be
available in the future.
 
     In connection with the merger, FCBOT contributed $20 million in cash to
FirstCity, substantially increasing the capital base and liquidity of the
company to support future investments and acquisition activities. At December
31, 1995, total common equity was $46.3 million and is considered by management
adequate to support the current capital requirements and planned growth of the
company.
 
                                       12
<PAGE>   13
 
                        COMMON AND PREFERRED STOCK DATA
 
     FirstCity's common (FCFC) and special preferred (FCFCP) shares were listed
on the Nasdaq National Market System effective November 3, 1995, and were traded
over the counter beginning July 3, 1995. The high and low common stock prices
through year-end 1995 were $18.50 and $12.00 in the third quarter and $22.38 and
$15.13 in the fourth quarter. The high and low special preferred stock prices
through year-end 1995 were $22.38 and $19.75 in the third quarter and $23.83 and
$21.31 in the fourth quarter. The number of common stockholders of record on
December 31, 1995 was approximately 560.
 
     The company believes that the best use of its available cash is investment
in purchased asset pools or acquisition partnerships; therefore, no dividends
have been paid on common stock and none are expected to be paid in the
foreseeable future. Dividends of $.7875 per share on special preferred stock
were accrued but not declared in each of the third and fourth quarters of 1995.
 
                                 FOURTH QUARTER
 
     Net earnings for the fourth quarter of 1995 were $5.6 million. After
dividends accrued but not declared on the company's special preferred stock,
earnings attributable to common equity were $3.7 million, or $.75 per share.
These results represent an annualized return on average equity of 33.1 percent.
Earnings for the fourth quarter of 1994 were $2.4 million, or $.94 per share,
representing 47.9 percent annualized return on average equity.
 
     The following table presents a summary of operations for the fourth
quarters of 1995 and 1994.
 
                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                             1995        1994
                                                                            FOURTH      FOURTH
                                                                            QUARTER     QUARTER
                                                                            -------     -------
                                                                           (DOLLARS IN THOUSANDS,
                                                                           EXCEPT PER SHARE DATA)
<S>                                                                         <C>         <C>
Income....................................................................  $16,639     $ 5,423
Expenses..................................................................   12,694       6,053
Equity earnings of acquisition partnerships...............................    1,665       4,280
                                                                            -------      ------
Earnings before income taxes..............................................    5,610       3,650
Provision for income taxes................................................       --       1,259
                                                                            -------      ------
Net earnings..............................................................  $ 5,610     $ 2,391
                                                                            =======      ======
Special preferred dividends...............................................    1,938          --
                                                                            -------      ------
Net earnings to common....................................................  $ 3,672     $ 2,391
                                                                            =======      ======
Net earnings per share....................................................  $  0.75     $  0.94
                                                                            =======      ======
</TABLE>
 
     Income more than tripled due to higher volumes of collections on asset
pools and three new revenue sources that did not exist in 1994: servicing fees
from the Trust, interest income on the Class "A" Certificate and rental income
on purchased real estate pools. Expenses were up primarily as a result of
interest expense on senior subordinated notes (none in 1994), interest expense
on higher volumes of notes payable to banks and amortization of intangibles
(none in 1994). Equity earnings of acquisition partnerships did not reach the
level of the 1994 fourth quarter due to reduced collections and lower gross
profit margins in 1995.
 
                       EFFECT OF NEW ACCOUNTING STANDARDS
 
     In 1996 FirstCity will adopt Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", and No. 123, "Accounting for Stock-Based
Compensation". FirstCity does not believe the adoption of these new standards
will have a material impact on the financial condition or results of operations
of the Company.
 
                                       13
<PAGE>   14
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1995        1994
                                                                          --------     -------
                                                                              (DOLLARS IN
                                                                           THOUSANDS, EXCEPT
                                                                            PER SHARE DATA)
<S>                                                                       <C>          <C>
Cash and equivalents....................................................  $  8,370     $ 4,150
Purchased asset pools, net..............................................    95,939      30,262
Equity investments in and advances to acquisition partnerships..........    26,187      14,391
Class "A" Certificate of FirstCity Liquidating Trust....................   162,245          --
Other assets............................................................    16,148       3,479
                                                                          --------     -------
          Total Assets..................................................  $308,889     $52,282
                                                                          ========     =======

                LIABILITIES, SPECIAL PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
  Notes payable, secured................................................  $ 85,518     $25,527
  Senior subordinated notes payable.....................................   106,690          --
  Notes payable to others...............................................     8,988          --
  Payable to stockholders and officers..................................        --       1,571
  Other liabilities.....................................................     5,887       4,017
                                                                          --------     -------
  Total Liabilities.....................................................   207,083      31,115
                                                                          --------     -------
Commitments and contingencies...........................................        --          --
Special preferred stock, including dividends of $3,876 (nominal stated
  value of $21.00 per share; 2,500,000 shares authorized; 2,460,911
  issued and outstanding)...............................................    55,555          --
Shareholders' equity:
  Optional preferred stock (par value $.01 per share; 100,000,000 shares
     authorized; no shares issued or outstanding).......................        --          --
  Common stock (par value $.01 and $10 per share; 100,000,000 and
     2,000,000 shares authorized; issued and outstanding: 4,921,422 and
     157,416 shares, for 1995 and 1994, respectively)...................        49       1,574
  Paid in capital.......................................................    22,916       1,812
  Retained earnings.....................................................    23,286      17,781
                                                                          --------     -------
          Total Shareholders' Equity....................................    46,251      21,167
                                                                          --------     -------
          Total Liabilities, Special Preferred Stock and Shareholders'
             Equity.....................................................  $308,889     $52,282
                                                                          ========     =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       14
<PAGE>   15
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                -------------------------------
                                                                 1995        1994        1993
                                                                -------     -------     -------
                                                                 (AMOUNTS IN THOUSANDS, EXCEPT
                                                                        PER SHARE DATA)
<S>                                                             <C>         <C>         <C>
Proceeds from disposition and payments received on purchased
  asset pools.................................................  $44,760     $18,341     $19,361
Cost of purchased asset pools.................................   32,776      10,705       9,866
                                                                -------     -------     -------
  Net gain on purchased asset pools...........................   11,984       7,636       9,495
Other income:
  Servicing fees..............................................   10,903       8,080       5,266
  Interest income on Class "A" Certificate....................    8,597          --          --
  Rental income on purchased real estate pools................    1,277          --          --
  Other.......................................................    2,928         990         454
                                                                -------     -------     -------
                                                                 35,689      16,706      15,215
                                                                -------     -------     -------
Expenses:
  Interest on senior subordinated notes payable...............    4,721          --          --
  Interest on other notes payable.............................    4,284       1,812       1,109
  Salaries and benefits.......................................    8,094       7,252       6,995
  Amortization................................................    1,534          --          --
  Other general and administrative............................    5,221       5,991       5,950
                                                                -------     -------     -------
                                                                 23,854      15,055      14,054
                                                                -------     -------     -------
Equity in earnings of acquisition partnerships................    3,834       7,497       8,058
                                                                -------     -------     -------
  Earnings from operations before income taxes................   15,669       9,148       9,219
Provision for income taxes....................................      936       3,121       3,035
                                                                -------     -------     -------
          Net earnings........................................  $14,733     $ 6,027     $ 6,184
                                                                =======     =======     =======
Special preferred dividends...................................    3,876          --          --
                                                                -------     -------     -------
Net earnings to common shareholders...........................  $10,857     $ 6,027     $ 6,184
                                                                =======     =======     =======
Net earnings per share........................................  $  2.98     $  2.37     $  2.43
                                                                =======     =======     =======
Weighted average shares outstanding...........................    3,642       2,544       2,544
                                                                =======     =======     =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       15
<PAGE>   16
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                            TOTAL
                                                         COMMON    PAID IN   RETAINED   SHAREHOLDERS'
                                                          STOCK    CAPITAL   EARNINGS      EQUITY
                                                         -------   -------   --------   -------------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                                      <C>       <C>       <C>        <C>
Balances, January 1, 1993..............................  $   393   $ 1,812   $  6,751      $ 8,956
Net earnings for 1993..................................       --        --      6,184        6,184
Stock dividend (39,354 shares).........................      394        --       (394)          --
                                                         -------   -------    -------      -------
Balances, December 31, 1993............................      787     1,812     12,541       15,140
Net earnings for 1994..................................       --        --      6,027        6,027
Stock dividend (78,708 shares).........................      787        --       (787)          --
                                                         -------   -------    -------      -------
Balances, December 31, 1994............................    1,574     1,812     17,781       21,167
Common stock issued (5,935 shares).....................       59       720         --          779
Common stock retired (11,080 shares)...................     (111)   (1,089)        --       (1,200)
Net assets spun off to Combined Financial
  Corporation..........................................       --        --     (5,352)      (5,352)
Merger with First City Bancorporation of Texas, Inc....   (1,473)   21,473         --       20,000
Net earnings for 1995..................................       --        --     14,733       14,733
Preferred stock dividends..............................       --        --     (3,876)      (3,876)
                                                         -------   -------    -------      -------
Balances, December 31, 1995............................  $    49   $22,916   $ 23,286      $46,251
                                                         =======   =======    =======      =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       16
<PAGE>   17
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ---------------------------------
                                                                1995         1994        1993
                                                              --------     --------     -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>          <C>
Cash flows from operating activities:
  Net earnings..............................................  $ 14,733     $  6,027     $ 6,184
  Adjustments to reconcile net earnings to net cash provided
     by (used in) operating activities:
     Cost of collections....................................    32,776       10,705       9,866
     Purchase of asset pools................................   (42,727)     (27,869)     (6,898)
     Equity in earnings of acquisition partnerships.........    (3,834)      (7,497)     (8,058)
     Collections on performing asset pools..................     1,293           --          --
     Deferred income tax expense (benefit)..................       (64)       1,481      (1,916)
     Depreciation and amortization..........................     1,886          299         156
     (Increase) decrease in other assets....................   (10,881)         270       1,324
     Increase (decrease) in other liabilities ..............       (25)         278       3,104
                                                              --------     --------     -------
          Net cash provided by (used in) operating
            activities......................................    (6,843)     (16,306)      3,762
                                                              --------     --------     -------
Cash flows from investing activities:
  Advances to acquisition partnerships......................    (9,755)          --          --
  Payments on advances to acquisition partnerships..........       169           --          --
  Investment in Diversified entities........................    (7,753)          --          --
  Property and equipment, net...............................    (1,385)        (435)       (473)
  Contributions to acquisition partnerships.................    (3,583)      (4,431)     (5,158)
  Distributions from acquisition partnerships ..............     5,206       12,327       3,606
                                                              --------     --------     -------
          Net cash provided by (used in) investing
            activities......................................   (17,101)       7,461      (2,025)
                                                              --------     --------     -------
Cash flows from financing activities:
  Borrowings under notes payable to banks...................    49,224       23,763       7,444
  Payments of notes payable to banks........................   (40,726)     (11,888)     (8,930)
  Additions to notes payable to stockholders and officers...     1,930        1,695       3,193
  Reduction of notes payable to stockholders and officers...    (1,843)      (3,456)     (2,063)
  Capital contribution of First City Bancorporation of
     Texas, Inc.............................................    20,000           --          --
  Proceeds from issuing common stock........................       779           --          --
  Retirement of common stock................................    (1,200)          --          --
                                                              --------     --------     -------
          Net cash provided by (used in) financing
            activities......................................    28,164       10,114        (356)
                                                              --------     --------     -------
Net increase in cash........................................  $  4,220     $  1,269     $ 1,381
Cash, beginning of period...................................     4,150        2,881       1,500
                                                              --------     --------     -------
Cash, end of period.........................................  $  8,370     $  4,150     $ 2,881
                                                              ========     ========     =======
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
     Interest...............................................  $  8,683     $  1,794     $   922
                                                              ========     ========     =======
     Income taxes...........................................  $  1,000     $  4,690     $ 2,000
                                                              ========     ========     =======
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       17
<PAGE>   18
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1994 AND 1993
 
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A) BASIS OF PRESENTATION
 
     As more fully discussed in Note 2, on July 3, 1995, FirstCity Financial
Corporation was formed by the merger of J-Hawk Corporation and First City
Bancorporation of Texas, Inc. Historical financial statements prior to the
merger date reflect the financial position and results of operations of J-Hawk
Corporation and are not necessarily indicative of results expected to be
achieved in the future.
 
     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 asset pools used in the calculation of net gain on
purchased asset pools. Actual results could differ materially from those
estimates.
 
(B) DESCRIPTION OF BUSINESS
 
     FirstCity Financial Corporation is a specialized financial services company
which evaluates, acquires, manages, services and disposes of portfolios of
performing loans, non-performing loans, other real estate and other financial
assets (collectively, purchased asset pools). A significant amount of loans are
secured by real estate located throughout the United States. The Company
purchases these asset pools at substantial discounts from their original legal
principal amounts from financial institutions, other lenders and regulatory
agencies of the United States. Purchased asset pools are acquired in privately
negotiated transactions, in sealed bid sales limited to a small number of
invited participants, and in public sealed bid sales. Purchased asset pools are
acquired on behalf of the Company or its wholly-owned subsidiaries, and on
behalf of legally independent partnerships (acquisition partnerships) in which
an affiliate of the Company is the general partner and the Company and other
investors are limited partners.
 
     The Company also services, manages and disposes of all of the assets it,
its affiliated acquisition partnerships, or other related entities acquire. The
Company services all such assets until they are collected or sold but does not
service or manage assets for non-affiliated third parties. In the ordinary
course of business, the Company sells assets to commercial banks, investment
banks, finance companies and other investment partnerships.
 
(C) PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
FirstCity Financial Corporation, a Delaware corporation, and its subsidiaries
(collectively referred to as "FirstCity"). 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 statement 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, at December 31, 1995 and periodically
throughout the year, has maintained balances in various operating and money
market accounts in excess of federally insured limits.
 
                                       18
<PAGE>   19
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(E) PURCHASED ASSET POOLS
 
     The purchased asset pools consist of consumer loans, commercial and
industrial loans, commercial real estate loans, multi-family residential loans,
single family residential loans and various types of other real estate, all
purchased at substantial discounts from their original legal principal amount or
expected future sales price. Loans are considered performing if debt service
payments are made in accordance with the original or restructured terms of the
notes. At the acquisition date, the aggregate cost of the purchased asset pools
is allocated to individual assets based on their relative values within the
pool. Subsequent to acquisition, the purchased asset pools are periodically
revalued and carried at the lower of cost or fair value. Any allowance to reduce
cost to fair value on purchased asset pools is recorded as a provision for
possible loss on the purchased asset pools during the period determined. No
material allowances or provisions were required to adjust the carrying values of
the purchased asset pools for any of the periods presented.
 
     Gross profit from dispositions and payments received on purchased
non-performing asset pools is recognized as income to the extent that proceeds
collected on the asset pool exceed a pro-rata portion of allocated cost from the
purchased asset pool. Cost allocation is based on a proration of actual
collections divided by total estimated collections of the pool. Interest
collected on loans in the purchased non-performing asset pools is recognized as
part of the proceeds from disposition of purchased asset pools. Interest on
purchased performing asset pools is recognized when earned, including accretion
of related discounts. Servicing fees are accrued when collections are received
on serviced assets. Rental income on purchased real estate pools is recorded
when received.
 
     Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS 118, which is effective
for the fiscal year 1995, 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 loan's effective interest rate, or the fair
value of the collateral, less estimated selling costs, if the loan is collateral
dependent and foreclosure is probable. Because all loans are purchased at
substantial discounts, the adoption of SFAS 114 has had no impact on the
Company's financial condition and results of operations.
 
(F) FORECLOSED ASSETS
 
     Foreclosed assets which are acquired in settlement of notes are recorded at
the lower of allocated cost or fair market value. Costs relating to the
development and improvement of foreclosed assets are capitalized, whereas those
relating to holding foreclosed assets are charged to expense.
 
(G) PROPERTY AND EQUIPMENT
 
     Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided using accelerated methods over the estimated useful
lives of the assets.
 
(H) INTANGIBLES
 
     Intangible assets represent the excess of cost over fair value of assets
acquired in connection with purchase transactions as well as purchase price of
future service fee revenues. These intangible assets, goodwill and servicing
rights, 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.
 
                                       19
<PAGE>   20
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(I) FEDERAL INCOME TAXES
 
     The Company files a consolidated federal income tax return with its wholly
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. 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 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.
 
(J) NET EARNINGS PER SHARE
 
     Net earnings per common share calculations are based upon the weighted
average number of common shares outstanding restated to reflect the equivalent
number of FirstCity common shares which were issued to the J-Hawk shareholders
in connection with the Merger discussed in Note 2. Earnings included in the
earnings per share calculation are reduced by special preferred stock dividends.
All share and per share data have been restated to give effect to stock
dividends in 1994 and 1993. Potentially dilutive common stock equivalents
include warrants and stock options.
 
(K) RECLASSIFICATIONS
 
     Certain amounts in the financial statements for prior years have been
reclassified to conform with current financial statement presentation.
 
(2) MERGER AND ACQUISITION
 
     The Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc. (the "Debtor"), Official Committee of Equity Security Holders, and J-Hawk
Corporation ("J-Hawk"), with the Participation of Cargill Financial Services
Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No.
392-39474-HCA-11 (the "Plan of Reorganization"), was confirmed by the Bankruptcy
Court for the Northern District of Texas, Dallas Division, by an order entered
on May 31, 1995, and became effective on July 3, 1995. Pursuant to the Plan of
Reorganization, and an Agreement and Plan of Merger between the Debtor and
J-Hawk, on July 3, 1995, J-Hawk was merged (the "Merger") with and into First
City Bancorporation of Texas, Inc. Pursuant to the Merger, (i) the former
holders of common stock of J-Hawk received, in the aggregate, approximately
49.9% of the outstanding common stock of the surviving entity, in exchange for
their shares of J-Hawk common stock, (ii) approximately 50.1% of the outstanding
common stock of the surviving entity was distributed among former security
holders of the Debtor pursuant to the Plan, and (iii) the name of the
corporation was changed to FirstCity Financial Corporation. As a result of the
implementation of the Plan and the consummation of the Merger, FirstCity also
issued (i) 9% senior subordinated notes, (ii) warrants to purchase 500,000
shares of its common stock at an exercise price of $25 per share, and (iii)
special preferred stock to certain former security holders of the Debtor.
 
     J-Hawk contributed substantially all of its interests in its acquisition
partnerships, all of its servicing operations, substantially all of its
leasehold improvements and equipment and its entire management team to
FirstCity. All remaining assets and liabilities of J-Hawk were spun out to
Combined Financial Corporation (owned by the former J-Hawk shareholders) in June
1995. The Debtor contributed $20 million in cash to FirstCity. While the
transaction was legally structured as a merger, substantively, the transaction
is treated for
 
                                       20
<PAGE>   21
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
accounting purposes as a purchase of the Debtor by J-Hawk. The net assets of
J-Hawk spun out to Combined Financial Corporation were as follows (dollars in
thousands):
 
<TABLE>
        <S>                                                                  <C>
        Cash and equivalents................................................ $   232
        Purchased asset pools...............................................  12,375
        Other assets........................................................   2,839
        Notes payable.......................................................  (8,187)
        Payable to stockholders and officers................................  (1,669)
        Other liabilities...................................................    (238)
                                                                             -------
          Net assets spun out............................................... $ 5,352
                                                                             =======
</TABLE>
 
     Pursuant to the Plan, substantially all of the legal and beneficial
interest in the assets of the Debtor, other than the above described $20 million
in cash, were transferred to the newly-formed FirstCity Liquidating Trust (the
"Trust"), or to subsidiaries of the Trust. Such assets will be liquidated over
the life of the Trust pursuant to the terms thereof. FirstCity, as the sole
holder of the Class "A" Certificate under the Trust, will receive from the Trust
amounts sufficient to pay certain expenses and its obligations under the 9%
senior subordinated notes and the special preferred stock. Any amounts in excess
of such sums shall be paid to certain of the former security holders of the
Debtor pursuant to the terms of the Class "B" and Class "C" certificates of
beneficial interests in the Trust. The liquidation of the assets transferred to
the Trust will be managed by FirstCity pursuant to an Investment Management
Agreement between the Trust and FirstCity.
 
     On September 21, 1995, FirstCity acquired the capital stock of Diversified
Financial Systems, Inc. and Diversified Performing Assets, Inc. (collectively,
"Diversified") for $12.9 million in cash and notes. Under the terms of the
Diversified purchase agreement, there is additional contingent consideration
payable in the form of "cash flow" notes. This contingent consideration is
represented by a zero face amount note payable at 100% of the cash flows in
excess of a prescribed collection threshold amount on certain loan pools
acquired, and two additional cash flow notes with zero face amount payable at
60% and 50% of the cash flows in excess of the allocated investment on the
performing loan pools and portfolios acquired between the cut-off date of June
30, 1995 and June 30, 1998, respectively. Included in the above described
purchase price is $2.8 million estimated to be payable under the "cash flow"
notes. No additional amounts will be payable on the contingent notes based upon
estimates as of December 31, 1995. Should additional amounts become payable in
the future, such additional consideration will be recorded as goodwill and
amortized accordingly. Diversified also specializes in the acquisition and
disposition of distressed loans and loan-related assets. The acquisition,
accounted for as a purchase, increased FirstCity's assets by approximately $79
million, including $4.8 million assigned to servicing rights held by Diversified
and $4.6 million of goodwill.
 
     The aggregate purchase price was allocated to the net assets of Diversified
based upon fair value at acquisition date as follows (dollars in thousands):
 
<TABLE>
        <S>                                                                 <C>
        Purchased asset pools.............................................  $ 68,834
        Intangibles.......................................................     9,379
        Other assets......................................................       414
        Notes payable.....................................................   (63,515)
        Other liabilities.................................................    (2,196)
                                                                            --------
        Purchase price, net of cash received..............................  $ 12,916
                                                                            ========
</TABLE>
 
     The following table presents the pro forma results of operations of
FirstCity assuming the July 3, 1995 Merger, spin off of assets and liabilities
to Combined Financial Corporation and the acquisition of Diversified occurred on
January 1, 1994. Pro forma adjustments include, among others, increased service
fees attributable to the asset pools spun out to Combined Financial Corporation
and serviced by FirstCity, elimination of
 
                                       21
<PAGE>   22
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
certain non-recurring fees and expenses of Diversified, a reduction in income
taxes to reflect the utilization of net operating loss carryforwards available,
and adjustments to reflect the accounting basis recognized in the Diversified
purchase. These pro forma results of operations do not purport to be indicative
of the results of operations which actually would have resulted had the above
described transactions occurred on January 1, 1994, or of future results of
operations to be achieved by FirstCity.
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED 
                                                                         DECEMBER 31,
                                                                     ---------------------
                                                                      1995          1994
                                                                     -------       -------
                                                                     (DOLLARS IN THOUSANDS,
                                                                     EXCEPT PER SHARE DATA)
    <S>                                                              <C>           <C>
    Revenues (including equity earnings)...........................  $49,479       $38,625
    Net earnings to common.........................................   10,681        13,308
    Net earnings per share.........................................     2.17          2.70
</TABLE>
 
(3) PURCHASED ASSET POOLS
 
     The purchased asset pools are summarized as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                    ----------------------
                                                                      1995          1994
                                                                    --------       -------
    <S>                                                             <C>            <C>
    Non-performing asset pools:
      Loans:
         Borrower's obligation on outstanding balance of:
           Performing loans.......................................  $ 55,337       $33,377
           Non-performing loans...................................   339,465        34,616
                                                                    --------       -------
                                                                     394,802        67,993
      Real estate assets..........................................    10,052         1,218
                                                                    --------       -------
                                                                     404,854        69,211
    Performing asset pools:
      Loans:
         Borrower's obligation on outstanding balance of:
           Performing loans.......................................    16,714            --
           Non-performing loans...................................        --            --
                                                                    --------       -------
                                                                      16,714            --
    Purchased real estate pool (at amortized cost)................    35,179            --
                                                                    --------       -------
    Total purchased asset pools...................................   456,747        69,211
    Discount required to reflect purchased asset pools at
      unamortized cost............................................  (360,808)      (38,949)
                                                                    --------       -------
    Purchased asset pools, net....................................  $ 95,939       $30,262
                                                                    ========       =======
</TABLE>
 
     The purchased asset pools are pledged to secure non-recourse notes payable.
The purchased asset pools held by J-Hawk immediately prior to the Merger were
spun off to Combined Financial Corporation in June, 1995.
 
                                       22
<PAGE>   23
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(4) ACQUISITION PARTNERSHIPS
 
     The Company has investments in partnerships and related general partners
that are accounted for on the equity method. These partnerships invest in asset
pools in a manner similar to the Company, as described in Note 1. The combined
financial position and results of operations of the acquisition partnerships and
general partners are summarized below (dollars in thousands) :
 
                       CONDENSED COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                   -----------------------
                                                                     1995           1994
                                                                   --------       --------
    <S>                                                            <C>            <C>
    Assets.......................................................  $235,820       $272,651
                                                                   ========       ========
    Liabilities..................................................   180,659        221,435
    Net equity...................................................    55,161         51,216
                                                                   --------       --------
                                                                   $235,820       $272,651
                                                                   ========       ========
    Company's equity in acquisition partnerships.................  $ 16,601       $ 14,391
                                                                   ========       ========
    Advances to acquisition partnerships.........................  $  9,586       $     --
                                                                   ========       ========
</TABLE>
 
     At December 31, 1995, advances to acquisition partnerships bear annual
interest rates of Libor plus 6% ($8.4 million) and prime plus 7% ($1.2 million),
and are secured by loan pools.
 
                    CONDENSED COMBINED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                         ----------------------------------
                                                           1995         1994         1993
                                                         --------     --------     --------
    <S>                                                  <C>          <C>          <C>
    Collections........................................  $188,934     $206,627     $117,176
    Gross margin.......................................    51,370       63,439       39,543
    Net income.........................................     9,542       19,226       20,746
                                                         ========     ========     ========
    Company's equity in net income of acquisition
      partnerships.....................................  $  3,834     $  7,497     $  8,058
                                                         ========     ========     ========
</TABLE>
 
(5) CLASS "A" CERTIFICATE OF FIRSTCITY LIQUIDATING TRUST
 
     Pursuant to the terms of the Plan of Reorganization and Merger, FirstCity
is the sole holder of the Class "A" Certificate of the Trust. Redemption by the
Trust of the balance due on the Class "A" Certificate will be used to retire the
senior subordinated notes payable (see Note 6), which are general obligations of
FirstCity, and to redeem the special preferred stock. Under the terms of the
special preferred stock, FirstCity is only required to redeem such stock and to
declare dividends thereon to the extent it receives sufficient funds from the
Trust to make such payments (see Note 7). Interest income on the Class "A"
Certificate consists of reimbursement to FirstCity (by the Trust) of interest
expense on senior subordinated notes and of accrued (but not declared) dividends
on special preferred stock. In the opinion of management, sufficient funds will
be available from the Trust to redeem the special preferred stock at its stated
redemption price, including accrued dividends, on the redemption date of
September 30, 1998.
 
                                       23
<PAGE>   24
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(6) NOTES PAYABLE
 
     Notes payable at December 31, 1995 and 1994 consist of the following
(dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                        1995        1994
                                                                      --------     -------
    <S>                                                               <C>          <C>
    9% senior subordinated notes payable, interest quarterly and
      principal in two equal installments in 1996 and 1997..........  $106,690     $    --
                                                                      ========     =======
    Collateralized loans, secured by acquired asset pools:
      Prime (8.5% at December 31, 1995) and prime plus 2%,
         due 1996-1997..............................................  $ 53,204     $    --
      Libor (6.0% at December 31, 1995) plus 3.25% to 5.25%,
         due 1998...................................................    25,580          --
      Other (amounts existing prior to Merger were assumed by
         Combined Financial Corporation)............................       543      25,527
    Borrowings under revolving line of credit.......................     5,216          --
    Other secured borrowings........................................       975          --
                                                                      --------     -------
      Notes payable, secured........................................  $ 85,518     $25,527
                                                                      ========     =======
    Prime plus 2%, due January 31, 1996 to Trust....................  $  2,000     $    --
    Diversified shareholder debt....................................     6,988          --
                                                                      --------     -------
      Notes payable to others.......................................  $  8,988     $    --
                                                                      ========     =======
</TABLE>
 
     Collateralized loans are typically payable based on proceeds from
disposition and payments received on the purchased asset pools. $44.0 million of
the collateralized loans represent borrowings under two separate master credit
facilities totaling $65.0 million. Such facilities can be used to facilitate the
purchase of new loan portfolios. $9.2 million of the collateralized loans
represents debt assumed in an asset pool acquisition. FirstCity has agreed to
liquidate the assumed debt by April 30, 1996. Should such debt not be
liquidated, the ownership rights in the asset pool and related debt would revert
back to the seller.
 
     FirstCity has obtained from Cargill Financial Services a $25.0 million
revolving line of credit. The line bears interest at Libor plus 5% and expires
on December 31, 1996. The line is also secured by substantially all of
FirstCity's unencumbered assets.
 
     In November 1995, the Trust advanced FirstCity $2 million under a note
payable that was repaid in February 1996.
 
     A portion ($4.2 million) of the Diversified shareholder debt generally
bears interest, payable monthly at 6% per annum with various principal payments
due through February 1999. The remaining Diversified shareholder debt represents
the estimated net present value of the anticipated future contingent
consideration payments (see Note 2).
 
     Under terms of certain of the above 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 Company was in compliance with these covenants at December
31, 1995. At December 31, 1995, cash restricted due to notes payable covenants
totaled $3.8 million. The aggregate maturities of notes payable for the five
years ending December 31, 2000 are as follows (dollars in thousands): $103,894
in 1996, $67,480 in 1997, $28,963 in 1998, $163 in 1999 and $89 in 2000.
 
     On January 25, 1996, the Board of Directors approved, subject to certain
conditions met on February 12, 1996, the early redemption of $53.3 million of
senior subordinated notes payable in March 1996.
 
                                       24
<PAGE>   25
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(7) SPECIAL PREFERRED STOCK AND SHAREHOLDERS' EQUITY
 
     The authorized capital stock of the Company consists of 202.5 million
shares divided into three classes as follows: (1) 2.5 million shares of special
preferred stock, par value $.01 per share, with a nominal stated value of $21.00
per share ; (2) 100 million shares of optional preferred stock, par value $.01
per share; and (3) 100 million shares of common stock, par value $.01 per share.
Additionally, on July 3, 1995, under the Plan, the Company authorized the
issuance of up to 500,000 warrants to purchase common stock to certain of the
Debtor's shareholders. In connection with the Merger, 4,921,422 shares of common
stock, 2,460,911 shares of special preferred stock and 500,000 warrants were
issued and are currently outstanding.
 
     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.
 
     Subject to availability of funds from the Trust after payment of all
obligations senior to the special preferred stock, the holders of special
preferred stock are entitled to receive the nominal stated value on September
30, 1998, and cumulative quarterly cash dividends at the annual rate of $3.15
per share. At December 31, 1995, dividends accrued but not declared totaled $3.9
million, or $1.575 a share. The special preferred stock carries no voting
rights, except in the event of non-payment of declared dividends.
 
     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 could include liquidation preferences, redemption rights, voting
rights and dividends and shares could be issued in multiple series with
different rights and preferences. The Company has no current plans for the
issuance of any shares of optional preferred stock.
 
     Each warrant entitles the holder to purchase one share of common stock at
an exercise price of $25.00 per share, subject to adjustment in certain
circumstances, and expires July 3, 1999. FirstCity may repurchase the warrants
for $1.00 per warrant should the quoted market price of FirstCity common stock
exceed $31.25 for any 10 out of 15 consecutive trading days.
 
     The Company has incentive stock option plans, subject to shareholder
approval, 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 730,000 shares of common stock.
During 1995, options for 229,600 shares were granted at a price range of $20 to
$22 per share (none were exercisable at December 31, 1995).
 
(8) INCOME TAXES
 
     Income tax expense attributable to income from continuing operations
consists of (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1995       1994       1993
                                                              ------     ------     -------
    <S>                                                       <C>        <C>        <C>
    Federal current expense.................................. $1,000     $1,640     $ 4,951
    Federal deferred expense (benefit).......................    (64)     1,481      (1,916)
                                                              ------     ------     -------
              Total.......................................... $  936     $3,121     $ 3,035
                                                              ======     ======     =======
</TABLE>
 
                                       25
<PAGE>   26
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The actual income tax expense attributable to earnings from operations
differs from the expected tax expense (computed by applying the U.S. Federal
corporate tax rate of 35% for 1995 and 34% for 1994 and 1993 to earnings before
income taxes) as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1995        1994       1993
                                                              -------     ------     ------
    <S>                                                       <C>         <C>        <C>
    Computed expected tax expense............................ $ 5,484     $3,110     $3,134
    Increase (reduction) in income taxes resulting from:
    Change in valuation allowance............................  (4,531)        --         --
    Other....................................................     (17)        11        (99)
                                                              -------     ------     ------
                                                              $   936     $3,121     $3,035
                                                              =======     ======     ======
</TABLE>
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994, are as follows (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                                          1995          1994
                                                                        ---------     --------
<S>                                                                     <C>           <C>
Deferred tax assets:
  Investments in partnerships, principally due to differences in basis
     for tax and financial reporting purposes.......................... $   1,103     $     --
  Intangibles, principally due to differences in amortization..........       403           --
  Accrued expenses not deductible for tax purposes.....................       437           --
  U.S. net operating loss carryforward.................................   212,152           --
  Valuation allowance..................................................  (214,095)          --
                                                                        ---------     --------
          Total deferred tax assets....................................        --           --
                                                                        ---------     --------
Deferred tax liabilities:
  Investments in partnerships, principally due to differences in basis
     for tax and financial reporting purposes..........................        --           64
                                                                        ---------     --------
Net deferred tax liabilities........................................... $      --     $     64
                                                                        =========     ========
</TABLE>
 
     As a result of the Merger described in Note 2, the Company has net
operating loss carryforwards for federal income tax purposes of approximately
$606 million available to offset future federal taxable income, if any, through
the year 2010. A valuation allowance is provided to reduce the deferred tax
assets to a level which, more likely than not, will be realized. Given the
relatively short period of time the Company has operated since the Merger and
spin-off of assets and liabilities as described in Note 2, the levels of future
profitability to support the recognition of a deferred tax asset cannot be
predicted with reasonable certainty necessary to record any significant deferred
tax asset attributable to the tax loss carryforwards. Accordingly, a valuation
allowance has been established at December 31, 1995 in an amount equal to the
gross deferred tax assets existing at such date. The change in valuation
allowance represents primarily the utilization of net operating loss
carryforwards since the Merger. The ability of the Company to realize the
deferred tax asset will be periodically reviewed and the valuation allowance
adjusted accordingly.
 
(9) EMPLOYEE BENEFIT PLANS
 
     Prior to 1994, the Company participated with other affiliates in an
employee profit sharing plan covering substantially all employees. Company
contributions were based on various factors, including profitability, and were
made at the sole discretion of the Company. The Company made contributions of
$23,061 to this plan in 1993.
 
                                       26
<PAGE>   27
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Beginning January 1, 1994, the Company initiated a contributory defined
contribution 401(k) employee profit sharing plan in which the Company matches
employee contributions at a stated percentage of employee contributions to a
defined maximum. The Company contributions to the 401(k) plan were $76,866 in
1995 and $44,498 in 1994.
 
(10) LEASES
 
     The Company leases its current headquarters from a related party under a
noncancellable operating lease. The lease calls for monthly payments of $7,500
through its expiration in December, 2001 and includes an option to renew for two
additional five-year periods. Rental expense for 1995, 1994 and 1993 under this
lease was $90,000 each year.
 
     The Company also leases office space and equipment from unrelated parties
under operating leases expiring in various years through 1998. Rental expense
(in thousands) under these leases for 1995, 1994 and 1993 was $328, $202 and
$163, respectively. As of December 31, 1995, the future minimum lease payments
under all noncancellable operating leases are (dollars in thousands): $349 in
1996, $209 in 1997, $144 in 1998, $90 in 1999, $90 in 2000 and $90 in 2001 and
beyond.
 
(11) OTHER RELATED PARTY TRANSACTIONS
 
     At December 31, 1994, the Company had notes payable to stockholders and
members of executive management totaling $1.6 million and bearing interest at an
annual rate of 12%. These notes were assumed by Combined Financial Corporation
in June 1995.
 
     In December, 1994, the Company purchased individual loans from several of
the acquisition partnerships described in Note 4 for $9.6 million. These loans
were spun off to Combined Financial Corporation in June 1995.
 
     In January, 1995, the Company entered into an agreement with a shareholder
to repurchase 11,080 shares of J-Hawk common stock for $1.2 million. The Company
paid the former shareholder $.4 million in cash and issued a $.8 million note,
which was assumed by Combined Financial Corporation in June 1995.
 
     In 1995, the Company sold approximately $12 million (allocated cost) of
loans to a partnership owned by certain executive officers of J-Hawk. The
Company recognized approximately $3 million in gain from the transaction.
Additionally, the Company entered into a servicing arrangement with the
partnership to service the sold assets for a fee based on collections. This
transaction was part of the overall spin out transaction completed prior to the
Merger on July 3, 1995.
 
     The Company has contracted with FirstCity Liquidating Trust, the
acquisition partnerships and related parties as third party loan servicer. All
servicing fees and due diligence fees (included in other income) reflected in
the Consolidated Statements of Income were derived from such affiliates.
 
(12) COMMITMENTS AND CONTINGENCIES
 
     FirstCity has pledged a portion of its interest in the future distributions
of certain acquisition partnerships, after FirstCity's initial investment has
been returned, to the subordinated debt lender under a Residual Share Agreement
(the Agreement). Under the Agreement, this pledge is limited to twice
FirstCity's original investment in the respective partnership. In the opinion of
management, this pledge does not currently represent a material contingent claim
on the future distributions from the acquisition partnerships to FirstCity.
 
     The Company is involved in various legal proceedings in the ordinary course
of business. In the opinion of management, the resolution of such matters should
not have a material adverse impact on the financial condition of the Company.
 
                                       27
<PAGE>   28
 
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
(13) FINANCIAL INSTRUMENTS
 
     Statement of Financial Accounting Standards 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 Equivalents and Class "A" Certificate of FirstCity
     Liquidating Trust. The carrying amount of cash and equivalents and Class
     "A" Certificate of FirstCity Liquidating Trust approximates fair value at
     December 31, 1995.
 
          (b) Purchased Asset Pools. The purchased asset pools 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
     through estimated market discount rates that reflect the credit and
     interest rate risk inherent in the assets. The carrying value of the
     purchased asset pools is $95.9 million at December 31, 1995. The estimated
     fair value of the purchased asset pools is approximately $104 million at
     December 31, 1995.
 
          (c) Notes Payable. Management believes that the repayments terms for a
     similar floating rate financial instrument with similar credit risks and
     the stated interest rate at December 31, 1995 approximates the market terms
     for similar credit instruments. Accordingly, the carrying amount of notes
     payable is believed to approximate fair value.
 
--------------------------------------------------------------------------------
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders
FirstCity Financial Corporation
 
     We have audited the accompanying consolidated balance sheet of FirstCity
Financial Corporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. 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 audit. The accompanying
consolidated balance sheet of FirstCity Financial Corporation and subsidiaries
(successor to J-Hawk Corporation) as of December 31, 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended December 31, 1994 and 1993, were audited by other auditors whose
report thereon dated February 8, 1995, expressed an unqualified opinion on those
statements.
 
     We conducted our audit 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 audit provides a reasonable basis for our opinion.
 
     In our opinion, the 1995 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, 1995, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
 
                                            KPMG Peat Marwick LLP
 
Ft. Worth, Texas
February 13, 1996
 
                                       28
<PAGE>   29
 
                        FIRSTCITY FINANCIAL CORPORATION
 
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                       1995         1994         1993         1992         1991
                                                      -------      -------      -------      -------      -------
                                                             (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>          <C>          <C>          <C>          <C>
Income.............................................   $35,689      $16,706      $15,215      $17,818      $ 9,158
Expenses...........................................    23,854       15,055       14,054       16,686        7,245
Equity earnings of acquisition partnerships........     3,834        7,497        8,058        4,382           --
Earnings before income taxes.......................    15,669        9,148        9,219        5,514        1,913
Net earnings.......................................    14,733        6,027        6,184        3,510        1,878
Special preferred dividends........................     3,876           --           --           --           --
Net earnings to common.............................    10,857        6,027        6,184        3,510        1,878
Net earnings per share.............................      2.98         2.37         2.43         1.38         0.66
Dividends per common share.........................        --           --           --           --           --
At year end:
  Total assets.....................................   308,889       52,282       35,798       27,405       20,764
  Total notes payable..............................   201,196       27,098       16,985       17,370       12,557
  Special preferred stock..........................    55,555           --           --           --           --
  Total common equity..............................    46,251       21,167       15,140        8,956        6,088
</TABLE>
 
                       SELECTED QUARTERLY FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                              1995                                        1994
                                            ----------------------------------------    ----------------------------------------
                                             FIRST     SECOND      THIRD     FOURTH      FIRST     SECOND      THIRD     FOURTH
                                            QUARTER    QUARTER    QUARTER    QUARTER    QUARTER    QUARTER    QUARTER    QUARTER
                                            -------    -------    -------    -------    -------    -------    -------    -------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Income..................................... $ 3,340    $ 6,781    $ 8,929    $16,639    $ 3,380    $ 3,639    $ 4,264    $ 5,423
Expenses...................................   2,529      3,409      5,222     12,694      2,854      2,764      3,384      6,053
Equity earnings of acquisition
  partnerships.............................     628        731        810      1,665      1,013      1,573        631      4,280
Net earnings...............................     949      3,657      4,517      5,610      1,015      1,616      1,005      2,391
Special preferred dividends................      --         --      1,938      1,938         --         --         --         --
Net earnings to common.....................     949      3,657      2,579      3,672      1,015      1,616      1,005      2,391
Net earnings per share.....................    0.42       1.54       0.52       0.75       0.40       0.64       0.40       0.94
</TABLE>
 
                                       29
<PAGE>   30
 
                               WAMCO PARTNERSHIPS
 
                            COMBINED BALANCE SHEETS
                           DECEMBER 31, 1995 AND 1994
                                    (NOTE 1)
 
<TABLE>
<CAPTION>
                                                                      1995             1994
                                                                  ------------     ------------
<S>                                                               <C>              <C>
                             ASSETS
Cash............................................................  $  8,332,117     $  8,944,040
Purchased loan pools, net (notes 3 and 4).......................   221,508,360      255,804,018
Receivable from affiliates (note 5).............................       107,864          157,124
Restricted cash (note 4)........................................     2,750,515        3,515,415
Other assets (note 4)...........................................     2,441,721        3,670,217
                                                                  ------------     ------------
                                                                  $235,140,577     $272,090,814
                                                                  ============     ============
               LIABILITIES AND PARTNERS' CAPITAL
Accounts payable -- affiliates (note 5).........................  $    723,384     $    858,854
Accrued liabilities (note 5)....................................     8,550,677        6,820,216
Long-term debt (including $87,610,708 and $55,930,823 to
  affiliates in 1995 and 1994, respectively) (note 4)...........   171,447,978      213,709,306
                                                                  ------------     ------------
          Total liabilities.....................................   180,722,039      221,388,376
Partners' capital...............................................    54,418,538       50,702,438
                                                                  ------------     ------------
                                                                  $235,140,577     $272,090,814
                                                                  ============     ============
</TABLE>
 
                       COMBINED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                                    (NOTE 1)
 
<TABLE>
<CAPTION>
                                                     1995              1994              1993
                                                 -------------     -------------     ------------
<S>                                              <C>               <C>               <C>
Proceeds from disposition and payments received
  on purchased loan pools (note 5).............  $ 188,934,027     $ 204,056,749     $117,175,781
Cost of purchased loan pools...................   (137,564,159)     (140,778,834)     (77,632,397)
                                                 -------------     -------------     ------------
          Net gain on purchased loan pools
            (note 2(a))........................     51,369,868        63,277,915       39,543,384
Interest expense (including $13,332,960,
  $10,197,325 and $5,329,253 to affiliates in
  1995, 1994 and 1993, respectively) (note
  5)...........................................    (27,033,851)      (22,543,822)      (9,576,819)
General, administrative and operating expenses
  (notes 4 and 5)..............................    (14,870,474)      (20,995,884)      (9,641,849)
Other income (expense), net (note 5)...........        121,378          (427,770)         118,435
                                                 -------------     -------------     ------------
          Net income...........................  $   9,586,921     $  19,310,439     $ 20,443,151
                                                 =============     =============     ============
</TABLE>
 
            See accompanying notes to combined financial statements.
 
                                       30
<PAGE>   31
 
                               WAMCO PARTNERSHIPS
 
              COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                                    (NOTE 1)
 
<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 31,1992....  $ 189,527   $  9,286,824   $ 1,546,087   $     --   $        --   $ 11,022,438
Contributions..................    177,081      8,677,058    17,726,806     12,400       607,600     27,200,945
Distributions..................   (147,196)    (7,212,640)     (964,801)        --            --     (8,324,637)
Net income.....................    321,010     15,729,474     4,201,363      3,826       187,478     20,443,151
                                 ---------   ------------   -----------   --------   -----------   ------------
Balance at December 31,1993....    540,422     26,480,716    22,509,455     16,226       795,078     50,341,897
Contributions..................    168,600      8,261,762            --      5,795       283,955      8,720,112
Distributions..................   (444,250)   (21,768,670)   (3,974,176)   (29,658)   (1,453,256)   (27,670,010)
Net income.....................    269,786     13,219,531     2,633,612     63,750     3,123,760     19,310,439
                                 ---------   ------------   -----------   --------   -----------   ------------
Balance at December 31, 1994...    534,558     26,193,339    21,168,891     56,113     2,749,537     50,702,438
Contributions..................     82,173      4,026,554            --     60,123     2,946,056      7,114,906
Distributions..................   (196,840)    (9,645,064)   (1,585,494)   (31,166)   (1,527,163)   (12,985,727)
Net income.....................    153,294      7,511,355     1,647,907      5,489       268,876      9,586,921
                                 ---------   ------------   -----------   --------   -----------   ------------
Balance at December 31, 1995...  $ 573,185   $ 28,086,184   $21,231,304   $ 90,559   $ 4,437,306   $ 54,418,538
                                 =========   ============   ===========   ========   ===========   ============
</TABLE>
 
            See accompanying notes to combined financial statements.
 
                                       31
<PAGE>   32
 
                               WAMCO PARTNERSHIPS
 
                       COMBINED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
                                    (NOTE 1)
 
<TABLE>
<CAPTION>
                                                    1995              1994              1993
                                                -------------     -------------     -------------
<S>                                             <C>               <C>               <C>
Cash flows from operating activities:
  Net income..................................  $   9,586,921     $  19,310,439     $  20,443,151
  Adjustments to reconcile net income to net
     cash provided by (used in) operating
     activities:
     Amortization of loan origination and
     commitment fees..........................      2,415,018         2,542,441           865,455
     Net gain on purchased loan pools.........    (51,369,868)      (63,277,915)      (39,543,384)
     Purchase of loan pools...................   (101,625,790)     (200,349,911)     (222,028,307)
     Capitalized costs on purchased loan
       pools..................................     (1,642,711)          (98,843)               --
     Proceeds from disposition and payments
       received on purchased loan pools.......    188,934,027       204,056,749       117,175,781
     (Increase) decrease in receivable from
       affiliates.............................         49,260           230,761          (387,885)
     (Increase) decrease in restricted cash...        764,900        (2,166,112)       (1,349,303)
     Increase in other assets.................     (1,186,522)       (3,774,383)       (3,303,730)
     Increase (decrease) in accounts
       payable -- affiliates..................       (135,470)          281,130           418,217
     Increase in accrued liabilities..........      1,730,461         5,325,250         1,168,165
                                                -------------     -------------     -------------
          Net cash provided by (used in)
            operating activities..............     47,520,226       (37,920,394)     (126,541,840)
                                                -------------     -------------     -------------
Cash flows from financing activities:
  Borrowing on acquisition debt...............     12,840,000        10,262,048        21,076,286
  Repayment of acquisition debt...............    (12,840,000)      (10,262,048)      (21,076,286)
  Borrowing on long-term debt.................    112,050,300       251,601,116       226,797,312
  Repayment of long-term debt.................   (154,311,628)     (189,573,709)     (115,355,432)
  Capital contributions.......................      7,114,906         8,720,112        27,200,945
  Capital distributions.......................    (12,985,727)      (27,670,010)       (8,324,637)
                                                -------------     -------------     -------------
          Net cash provided by (used in)
            financing activities..............    (48,132,149)       43,077,509       130,318,188
                                                -------------     -------------     -------------
Net increase (decrease) in cash...............       (611,923)        5,157,115         3,776,348
Cash at beginning of year.....................      8,944,040         3,786,925            10,577
                                                -------------     -------------     -------------
Cash at end of year...........................  $   8,332,117     $   8,944,040     $   3,786,925
                                                =============     =============     =============
</TABLE>
 
Supplemental disclosure of cash flow information:
     Cash paid for interest was approximately $23,074,000, $19,128,000, and
     $9,037,000, for 1995, 1994, and 1993, respectively.
 
            See accompanying notes to combined financial statements.
 
                                       32
<PAGE>   33
 
                               WAMCO PARTNERSHIPS
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1994 AND 1993
 
(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS
 
     The combined financial statements include the accounts of WAMCO III, Ltd.,
WAMCO V, Ltd., WAMCO VI, Ltd., WAMCO VIII, Ltd., WAMCO IX, Ltd., WAMCO XI, Ltd.,
WAMCO XII, Ltd., WAMCO XIV, Ltd., WAMCO XV, Ltd., WAMCO XVI, Ltd., WAMCO XVII,
Ltd., WAMCO XVIII, Ltd., WAMCO XIX, Ltd., WAMCO XX, Ltd., WAMCO XXI, Ltd.,
Whitewater Acquisition Co. One L.P., VOJ Partners, L.P., Imperial Fund I L.P.
and DAP City Partners, L.P., all of which are Texas limited partnerships (WAMCO
Partnerships or Partnerships) of which FirstCity Financial Corporation
(FirstCity) or its wholly owned subsidiary, J-Hawk Corporation (J-Hawk) are
limited partners.
 
     All Partnerships, except for WAMCO XXI, Ltd. and DAP City Partners, L.P.,
were originally formed with J-Hawk Corporation, a Texas corporation (JHC), as a
limited partner. On July 3, 1995, JHC merged with FirstCity, formerly First City
Bancorporation of Texas, Inc., thereby transferring its ownership in and
servicing agreements (note 5) with the Partnerships to FirstCity. FirstCity then
established a wholly owned subsidiary, J-Hawk, which is a limited partner in
WAMCO XXI, Ltd. and DAP City Partners, L.P.
 
     The Partnerships were formed to acquire, hold and dispose of loan pools
purchased 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 invalid legal representations
and warranties. The organization and Partnership Agreements of the Partnerships
are discussed in detail by individual partnership below.
 
     WAMCO III, Ltd., a Texas limited partnership (WAMCO III), was formed on
July 8, 1992 by and between WAMCO III of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC Capital Corp. II, a Delaware corporation (CFSC).
FirstCity (formerly JHC) and CFSC are limited partners.
 
     Effective May 26, 1995, the Partnership Agreement was amended and restated
such that WAMCO X, Ltd., a Texas limited partnership (WAMCO X), which had common
ownership with WAMCO III, was merged into WAMCO III.
 
     Effective June 22, 1994, the Partnership Agreement was amended and restated
such that WAMCO VII, Ltd., a Texas limited partnership, which had common
ownership with WAMCO III, was merged into WAMCO III. The amended and restated
Partnership Agreement established Class A Equity and Class B Equity partners.
The Class B Equity limited partner is allocated 20 percent of cumulative net
income recognized by WAMCO III, exclusive of cumulative net income recognized by
a partnership which was merged into WAMCO III in 1993 (WAMCO II, Ltd.) and prior
to allocation to the Class A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO III's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO III.
Proceeds from disposition and payments received on the purchased loan pools are
allocated in the following order, (1) to pay accrued interest on the note
payable (note 4), (2) to pay principal on the note payable, (3) to pay expenses
on the note payable, (4) to pay a servicing fee to FirstCity (note 5), (5) to
replenish a reserve fund which is reserved for the payment of certain costs
associated with maintaining the collateral supporting the notes receivable in
the purchased loan pools (note 4), (6) to make mandatory principal prepayments
on the note payable and (7) return of partners' capital.
 
     WAMCO V, Ltd., a Texas limited partnership (WAMCO V), was formed on March
1, 1993 by and between WAMCO V of Texas, Inc., a Texas corporation (General
Partner), JHC and Clearwater Investment,
 
                                       33
<PAGE>   34
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
L.P., a Delaware corporation (Clearwater Investment). FirstCity (formerly JHC)
and Clearwater Investment are limited partners.
 
     Effective December 29, 1994, the Partnership Agreement was amended and
restated such that WAMCO IV, Ltd., a Texas limited partnership (WAMCO IV), which
had common ownership with WAMCO V, was merged into WAMCO V. The amended and
restated Partnership Agreement established Class A Equity and Class B Equity
partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by the merged WAMCO V prior to allocation to
the Class A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO V's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO V.
Proceeds from disposition and payments received on the purchased loan pools are
allocated in the following order, (1) to make mandatory principal and interest
payments on the collateralized promissory note payable (note 4), (2) to pay a
servicing fee to FirstCity (note 5), (3) to pay for tax escrow, (4) to fund the
general escrow account as required in the loan agreement, (5) to prepay
principal on the collateralized promissory note and (6) return of partners'
capital.
 
     WAMCO VI, Ltd., a Texas limited partnership (WAMCO VI), was formed on July
23, 1993 by and between WAMCO VI of Texas, Inc., a Texas corporation (General
Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO VI prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO VI's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO VI.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay for certain costs associated with
maintaining the collateral supporting the loans in the purchased loan pool, (2)
to pay accrued interest on the senior collateralized promissory note (note 4),
(3) to replenish interest reserve as required by the loan agreement, (4) to pay
for late charges, fees and expenses, if any, on the senior collateralized
promissory note, (5) to pay a servicing fee to FirstCity (note 5), (6) to pay
accrued interest on the subordinated collateralized promissory note (note 4),
(7) to pay principal on the senior collateralized promissory note, (8) to pay
principal on the subordinated collateralized promissory note and (9) return of
partners' capital.
 
     WAMCO VIII, Ltd., a Texas limited partnership (WAMCO VIII), was formed on
December 20, 1993 by and between WAMCO VIII of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO VIII prior to allocation to the Class
A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO VIII's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO VIII.
Proceeds from disposition and payments received on purchased loan pools are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory notes (note 4), (2) to pay for tax escrow, (3)
to pay accrued interest on the senior collateralized promissory notes, (4) for
payment of projected interest to a cash reserve account, (5) to pay for late
charges, fees and expenses, if any, on the senior collateralized promissory
notes, (6) to pay a servicing fee to FirstCity (note 5), (7) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (8) to pay
for advances, if any, from partners or lenders, (9) to pay prepayments on the
senior collateralized promissory notes, (10) to pay principal on the
subordinated collateralized promissory note and (11) return of partners'
capital.
 
                                       34
<PAGE>   35
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     WAMCO IX, Ltd., a Texas limited partnership (WAMCO IX), was formed on
January 27,1994 by and between WAMCO IX of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
     The partnership and other agreements governing WAMCO IX's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO IX.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay for tax escrow, (2) to pay accrued
interest on the collateralized promissory note (note 4), (3) to pay for late
charges, fees and expenses, if any, on the collateralized promissory note, (4)
to pay a servicing fee to FirstCity (note 5), (4) to pay for advances, if any,
from partners or lenders, (6) to replenish an operating reserve account, (7) to
pay principal on the collateralized promissory note and (8) return of partners'
capital.
 
     WAMCO XI, Ltd., a Texas limited partnership (WAMCO XI), was formed on April
11, 1994 by and between WAMCO XI of Texas, Inc., a Texas corporation (General
Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XI prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XI's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XI.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory note (note 4), (2) to pay a servicing fee to
FirstCity (note 5), (3) to pay for certain costs associated with maintaining the
collateral supporting the loans in the purchased loan pool, (4) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (5) to
make mandatory prepayments on the senior collateralized promissory note, (6) to
pay principal on the subordinated collateralized promissory note and (7) return
of partners' capital.
 
     WAMCO XII, Ltd., a Texas limited partnership (WAMCO XII), was formed on
June 23, 1994 by and between WAMCO XII of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XII prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XII's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XII.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory note (note 4), (2) to pay for tax escrow, (3)
to pay accrued interest on the senior collateralized promissory note, (4) for
payment of projected interest to a cash reserve account, (5) to pay for late
charges, fees and expenses, if any, on the senior collateralized promissory
note, (6) to pay a servicing fee to FirstCity (note 5), (7) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (8) to pay
for advances, if any, from partners or lenders, (9) to pay prepayments on the
senior collateralized promissory note, (10) to pay principal on the subordinated
collateralized promissory note and (11) return of partners' capital.
 
     WAMCO XIV, Ltd., a Texas limited partnership (WAMCO XIV), was formed on
August 22, 1994 by and between WAMCO XIV of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
                                       35
<PAGE>   36
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XIV prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XIV's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XIV.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory note (note 4), (2) to pay for tax escrow, (3)
to pay accrued interest on the senior collateralized promissory note, (4) for
payment of projected interest to a cash reserve account, (5) to pay for late
charges, fees and expenses, if any, on the senior collateralized promissory
note, (6) to pay a servicing fee to FirstCity (note 5), (7) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (8) to pay
for advances, if any, from partners or lenders, (9) to pay prepayments on the
senior collateralized promissory note, (10) to pay principal on the subordinated
collateralized promissory note and (11) return of partners' capital.
 
     WAMCO XV, Ltd., a Texas limited partnership (WAMCO XV), was formed on
August 22, 1994 by and between WAMCO XV of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XV prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XV's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XV.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory note (note 4), (2) to pay a servicing fee to
FirstCity (note 5), (3) to pay for certain costs associated with maintaining the
collateral supporting the loans in the purchased loan pool, (4) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (5) to
make mandatory prepayments on the senior collateralized promissory note, (6) to
pay principal on the subordinated collateralized promissory note and (7) return
of partners' capital.
 
     WAMCO XVI, Ltd., a Texas limited partnership (WAMCO XVI), was formed on
September 9, 1994 by and between WAMCO XVI of Texas, Inc., a Texas corporation
(General Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited
partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XVI prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XVI's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XVI.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay a servicing fee to FirstCity (note
5), (2) to pay accrued interest on the senior collateralized promissory note
(note 4), (3) to pay for certain costs associated with maintaining the
collateral supporting the loans in the purchased loan pool, (4) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (5) to pay
principal on the senior collateralized promissory note, (6) to pay principal on
the subordinated collateralized promissory note and (7) return of partners'
capital.
 
     WAMCO XVII, Ltd., a Texas limited partnership (WAMCO XVII), was formed on
November 3, 1994 by and between WAMCO XVII of Texas, Inc., a Texas corporation
(General Partner), JHC and Clearwater Portfolio II, L.P., a Delaware limited
partnership (Clearwater Portfolio). FirstCity (formerly JHC) and Clearwater
Portfolio are limited partners.
 
                                       36
<PAGE>   37
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XVII prior to allocation to the Class
A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XVII's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XVII.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay scheduled principal payments on the
senior collateralized promissory note (note 4), (2) to pay for certain costs
associated with maintaining the collateral supporting the loans in the purchased
loan pool, (3) to pay a servicing fee to FirstCity (note 5), (4) to pay accrued
interest on the senior collateralized promissory note, (5) to pay accrued
interest on the subordinated collateralized promissory note (note 4), (6) to
make prepayments on the senior collateralized promissory note, (7) to pay
principal on the subordinated collateralized promissory note and (8) return of
partners' capital.
 
     WAMCO XVIII, Ltd., a Texas limited partnership (WAMCO XVIII), was formed on
December 12, 1994 by and between WAMCO XVIII of Texas, Inc., a Texas corporation
(General Partner), JHC and Clearwater Portfolio. FirstCity (formerly JHC) and
Clearwater Portfolio are limited partners.
 
     The Partnership Agreement, as amended, established Class A Equity and Class
B Equity partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XVIII prior to allocation to the Class
A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XVIII's affairs
provide for certain preferences as to the distribution of cash flows from WAMCO
XVIII. Proceeds from disposition and payments received on the purchased loan
pool are allocated in the following order, (1) to pay a servicing fee to
FirstCity (note 5), (2) to pay operating expenses of WAMCO XVIII, (3) to pay for
certain costs associated with maintaining the collateral supporting the loans in
the purchased loan pool, (4) to pay accrued interest on the senior
collateralized promissory note (note 4), (5) to pay estimated tax liabilities,
(6) to replenish a cash reserve account, (7) to replenish an interest reserve
account, (8) to pay accrued interest on the subordinated collateralized
promissory note (note 4), (9) to make mandatory prepayments on the senior
collateralized promissory note, (10) to pay principal on the subordinated
collateralized promissory note and (11) return of partners' capital.
 
     WAMCO XIX, Ltd., a Texas limited partnership (WAMCO XIX), was formed on
March 1, 1995 by and between WAMCO XIX of Texas, Inc., a Texas corporation
(General Partner), JHC and Clearwater Portfolio. FirstCity (formerly JHC) and
Clearwater Portfolio are limited partners.
 
     The Partnership Agreement established Class A Equity and Class B Equity
partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XIX prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XIX's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XIX.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay for tax escrow, (2) to pay a
servicing fee to FirstCity (note 5), (3) to pay operating expenses of WAMCO XIX,
(4) to make protective advances, (5) to pay accrued interest on the senior
collateralized promissory note (note 4), (6) to pay estimated tax liabilities,
(7) to replenish a cash reserve fund, (8) to replenish an interest reserve fund,
(9) to pay accrued interest on the subordinated collateralized promissory note
(note 4), (10) to pay principal on the senior collateralized promissory note,
(11) to pay principal on the subordinated collateralized promissory note and
(12) return of partners' capital.
 
                                       37
<PAGE>   38
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     WAMCO XX, Ltd., a Texas limited partnership (WAMCO XX), was formed on June
19, 1995 by and between WAMCO XX of Texas, Inc., a Texas corporation (General
Partner), JHC and CFSC. FirstCity (formerly JHC) and CFSC are limited partners.
 
     The Partnership Agreement established Class A Equity and Class B Equity
partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XX prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XX's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XX.
Proceeds from disposition and payments received on the purchased loan pools are
allocated in the following order, (1) to pay for tax escrow, (2) to pay accrued
interest on the senior collateralized promissory notes (note 4), (3) to pay for
late charges, fees and expenses, if any, due on the senior collateralized
promissory notes, (4) to pay a servicing fee to FirstCity (note 5), (5) to pay
accrued interest on the subordinated collateralized promissory notes (note 4),
(6) to pay for advances, if any, from partners or lenders, (7) to replenish an
operating reserve account, (8) to pay principal on the senior collateralized
promissory notes, (9) to pay principal on the subordinated collateralized
promissory notes and (10) return of partners' capital.
 
     WAMCO XXI, Ltd., a Texas limited partnership (WAMCO XXI), was formed on
September 25, 1995 by and between WAMCO XXI of Texas, Inc., a Texas corporation
(General Partner), J-Hawk and CFSC. J-Hawk and CFSC are limited partners.
 
     The Partnership Agreement established Class A Equity and Class B Equity
partners. The Class B Equity limited partner is allocated 20 percent of
cumulative net income recognized by WAMCO XXI prior to allocation to the Class A
Equity limited partners and the General Partner.
 
     The partnership and other agreements governing WAMCO XXI's affairs provide
for certain preferences as to the distribution of cash flows from WAMCO XXI.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay for tax escrow, (2) to pay a
servicing fee to FirstCity (note 5), (3) to pay operating expenses of WAMCO XXI,
(4) to make protective advances, (5) to pay accrued interest on the senior
collateralized promissory note (note 4), (6) to pay estimated tax liabilities,
(7) to replenish a cash reserve fund, (8) to replenish an interest reserve fund
(note 4), (9) to pay accrued interest on the subordinated collateralized
promissory note (note 4), (10) to pay principal on the senior collateralized
promissory note, (11) to pay principal on the subordinated collateralized
promissory note and (12) return of partners' capital.
 
     Whitewater Acquisition Co. One L.P., a Texas limited partnership
(Whitewater), was formed on November 2, 1993 by and between Whitewater
Acquisition Corporation, a Texas corporation (General Partner), JHC, CFSC and
Phoehold Mortgage Acquisition Co. L.P., a Delaware limited partnership (PMAC) as
Class A partners (Class A Equity, as defined) and CFSC and PMAC as Class B
partners (Class B Equity, as defined). FirstCity (formerly JHC), CFSC and PMAC
are limited partners.
 
     The Partnership Agreement established Class A Equity and Class B Equity
partners. The Class B Equity limited partners are allocated 20 percent of
cumulative net income recognized by Whitewater prior to allocation to the Class
A Equity limited partners and the General Partner.
 
     The partnership and other agreements governing Whitewater's affairs provide
for certain preferences as to the distribution of cash flows from Whitewater.
Proceeds from disposition and payments received on purchased loan pools are
allocated in the following order, (1) to pay a servicing fee to FirstCity (note
5), (2) to pay for certain costs associated with maintaining the collateral
supporting the loans in the purchased loan pools, (3) to pay accrued interest on
the collateralized promissory note (note 4), (4) to pay principal on the
collateralized promissory note, (5) return of partners' capital, (6)
distribution of Class B Equity interest
 
                                       38
<PAGE>   39
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
and (7) distribution of residual cash flows including payment of accrued profit
participation (interest) to CFSC and PMAC (note 5).
 
     VOJ Partners, L.P., a Texas limited partnership (VOJ), was formed on
December 28, 1994 by and between VOJ Corporation, a Texas corporation (General
Partner), JHC, The Varde Fund, L.P., a Delaware limited partnership (Varde), The
Varde Fund II-A, L.P., a Delaware limited partnership (Varde II-A) and OPCO PSB,
L.P., a Delaware limited partnership (OPCO). FirstCity (formerly JHC), Varde,
Varde II-A and OPCO are limited partners.
 
     The partnership and other agreements governing VOJ's affairs provide for
certain preferences as to the distribution of cash flows from VOJ. Proceeds from
disposition and payments received on the purchased loan pool are allocated in
the following order, (1) to pay accrued interest on the senior collateralized
promissory note (note 4), (2) to pay scheduled principal payments on the senior
collateralized promissory note, (3) to pay a servicing fee to FirstCity (note
5), (4) to pay accrued interest on the subordinated collateralized promissory
notes (note 4), (5) to pay for certain costs associated with maintaining the
collateral supporting the loans in the purchased loan pool, (6) to make
mandatory prepayments on the senior collateralized promissory note, (7) to pay
principal on the subordinated collateralized promissory notes, (8) return of
partners' capital and (9) distribution of residual cash flows including payment
of accrued profit participation to Varde, Varde II-A and OPCO (note 5).
 
     Imperial Fund I L.P., a Texas limited partnership (Imperial), was formed on
November 1, 1993 by and between Imperial Fund Corporation, a Texas corporation
(General Partner), JHC, CFSC and Peoria Mortgage Acquisition Corporation, a
Delaware Corporation (Peoria). FirstCity (formerly JHC), CFSC and Peoria are
limited partners.
 
     The partnership and other agreements governing Imperial's affairs provide
for certain preferences as to the distribution of cash flows from Imperial.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay for certain costs associated with
maintaining the collateral supporting the loans in the purchased loan pool, (2)
to pay a servicing fee to FirstCity (note 5), (3) return of partners' capital
and (4) distribution of residual cash flows including payment of accrued profit
participation to Cargill Financial Services Corporation (Cargill), an affiliate
of CFSC, and Peoria (note 5).
 
     DAP City Partners, L.P., a Texas limited partnership (DAP City), was formed
on November 15, 1995 by and between DAP City Corp., a Texas corporation (General
Partner), J-Hawk and Hotel DAP, Inc., a Texas corporation (HDI). J-Hawk and HDI
are limited partners.
 
     The partnership and other agreements governing DAP City's affairs provide
for certain preferences as to the distribution of cash flows from DAP City.
Proceeds from disposition and payments received on the purchased loan pool are
allocated in the following order, (1) to pay accrued interest on the senior
collateralized promissory note (note 4), (2) to pay a servicing fee to FirstCity
(note 5), (3) to pay accrued interest on the subordinated collateralized
promissory note (note 4), (4) to make mandatory prepayments on the senior
collateralized promissory note, (5) to pay principal on the subordinated
collateralized promissory note and (6) return of partners' capital.
 
     The Partnerships' net income or loss is credited or charged to the Class A
Equity partners' capital accounts in proportion to their respective capital
balances after the 20 percent allocation to the Class B Equity limited partners.
WAMCO IX, VOJ, Imperial and DAP City have no Class B equity allocation.
 
                                       39
<PAGE>   40
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of Partners' capital (deficit) at December 31, 1995, 1994 and
1993 is as follows:
 
<TABLE>
<CAPTION>
                                                     1995            1994            1993
                                                  -----------     -----------     -----------
    <S>                                           <C>             <C>             <C>
    CLASS A -- GENERAL PARTNERS
    WAMCO III of Texas, Inc.....................  $   117,718     $   160,879     $   233,072
    WAMCO V of Texas, Inc.......................      102,195         151,885         261,602
    WAMCO VI of Texas, Inc......................      (13,143)         (1,454)         (3,796)
    WAMCO VIII of Texas, Inc....................       59,341          39,699              --
    WAMCO XI of Texas, Inc......................       48,053          23,437              --
    WAMCO XII of Texas, Inc.....................       16,271           8,963              --
    WAMCO XIV of Texas, Inc.....................       24,950          24,315              --
    WAMCO XV of Texas, Inc......................       15,142          17,112              --
    WAMCO XVI of Texas, Inc.....................       42,265          26,507              --
    WAMCO XVII of Texas, Inc....................        6,464          13,691              --
    WAMCO XVIII of Texas, Inc...................       49,221          12,909              --
    WAMCO XIX of Texas, Inc.....................       61,452              --              --
    WAMCO XX of Texas, Inc......................       23,358              --              --
    WAMCO XXI of Texas, Inc.....................       17,910              --              --
    Whitewater Acquisition Corporation..........        1,988          56,615          49,544
                                                  -----------     -----------     -----------
                                                  $   573,185     $   534,558     $   540,422
                                                  ===========     ===========     ===========
    GENERAL PARTNERS
    WAMCO IX of Texas, Inc......................  $    13,875     $        --     $        --
    Imperial Fund Corporation...................       29,659          51,692          16,226
    VOJ Corporation.............................         (998)          4,421              --
    DAP City Corporation........................       48,023              --              --
                                                  -----------     -----------     -----------
                                                  $    90,559     $    56,113     $    16,226
                                                  ===========     ===========     ===========
    CLASS A -- LIMITED PARTNERS
    CFSC Capital Corp. II.......................  $ 8,648,810     $ 8,345,685     $ 6,500,273
    Clearwater Investment, L.P..................    2,503,781       3,721,197       6,409,261
    Clearwater Portfolio II, L.P................    2,869,936         651,734              --
    FirstCity Financial Corporation.............   13,604,259      13,096,669      13,240,358
    J-Hawk Corporation..........................      438,833              --              --
    Phoehold Mortgage Association Co. L.P.......       20,565         378,054         330,824
                                                  -----------     -----------     -----------
                                                  $28,086,184     $26,193,339     $26,480,716
                                                  ===========     ===========     ===========
    CLASS B -- LIMITED PARTNERS
    CFSC Capital Corp. II.......................  $14,627,048     $14,566,958     $15,549,651
    Clearwater Investment, L.P..................    1,277,439       1,828,441       2,241,664
    Clearwater Portfolio II, L.P................      767,500          31,783              --
    Phoehold Mortgage Association Co. L.P.......    4,559,317       4,741,709       4,718,140
                                                  -----------     -----------     -----------
                                                  $21,231,304     $21,168,891     $22,509,455
                                                  ===========     ===========     ===========
</TABLE>
 
                                       40
<PAGE>   41
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                     1995            1994            1993
                                                  -----------     -----------     -----------
    <S>                                           <C>             <C>             <C>
    LIMITED PARTNERS
    CFSC Capital Corp. II.......................  $   703,256     $   633,231     $   198,769
    FirstCity Financial Corporation.............      678,785         741,537         198,769
    J-Hawk Corporation..........................    1,152,542              --              --
    OPCO PSB, L.P...............................      (12,235)         54,153              --
    Peoria Mortgage Acquisition Corporation.....      726,629       1,266,464         397,540
    The Varde Fund II-A, L.P....................       (6,118)         27,076              --
    The Varde Fund , L.P........................       (6,118)         27,076              --
    Hotel DAP, Inc..............................    1,200,565              --              --
                                                  -----------     -----------     -----------
                                                  $ 4,437,306     $ 2,749,537     $   795,078
                                                  ===========     ===========     ===========
</TABLE>
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A) PURCHASED LOAN POOLS
 
     The purchased loan pools consist primarily of performing and nonperforming
loans purchased at a discount in pools secured by real estate or personal
property and are held for sale. A significant amount of the loans are secured by
real estate located in the Northeastern United States. Loans are considered
performing if debt service payments are made in accordance with the original or
restructured terms of the notes. At the acquisition date, the aggregate cost of
the loans was allocated to individual notes based on their relative values
within the pools. Subsequent to acquisition, these loans are periodically
revalued as a pool and carried at the lower of cost or fair value. Any allowance
to reduce cost to fair value would be recorded as a provision for possible loss
on the purchased loan pools during the period determined. No such allowance or
provision was required to adjust the carrying value of the purchased loan pools
at December 31, 1995, 1994 and 1993.
 
     Interest income on loans in the purchased loan pools is recognized as part
of proceeds from disposition and payments received on the purchased loan pools.
 
     Gains from the disposition of assets in the purchased loan pools are
recognized when title has passed, payment is received and the Partnerships are
relieved of any requirements for continued involvement with the assets.
 
     Gains on payments (partial disposition) of loans in the purchased loan
pools are recognized to the extent that proceeds collected on the loan exceed a
pro rata portion of allocated cost from the purchased loan pools. Cost allocated
is based on a proration of actual collections divided by total estimated
collections of the pools.
 
     Assets are foreclosed through an arrangement with an affiliated entity
whereby titles of the assets are held by the affiliated entity and a note
receivable from the affiliate is held by the Partnerships. Costs relating to the
development and improvement of foreclosed assets are capitalized by the
Partnerships. Costs relating to holding foreclosed assets are charged to
operating expense by the Partnerships. For financial statement presentation, the
affiliated entity note receivable created by the arrangement is included in the
purchased loan pools and is recorded at the lower of allocated cost or fair
value less estimated cost to sell.
 
(B) 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.
 
                                       41
<PAGE>   42
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
(C) 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) PURCHASED LOAN POOLS
 
     The purchased loan pools at December 31, 1995 and 1994 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                                1995              1994
                                                            -------------     -------------
    <S>                                                     <C>               <C>
    Loans:
      Borrowers' obligations on outstanding balance of:
         Performing loans.................................. $ 156,590,107     $ 172,688,606
         Nonperforming loans...............................   213,846,684       274,274,361
                                                            -------------     -------------
                                                              370,436,791       446,962,967
    Foreclosed assets......................................    49,822,467        54,247,597
                                                            -------------     -------------
                                                              420,259,258       501,210,564
    Discount required to reflect the purchased loan pools
      at unamortized cost..................................  (198,750,898)     (245,406,546)
                                                            -------------     -------------
         Purchased loan pools, net......................... $ 221,508,360     $ 255,804,018
                                                            =============     =============
</TABLE>
 
(4) LONG-TERM DEBT
 
     Long-term debt at December 31, 1995 and 1994 consists of the following:
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
WAMCO III:
Note payable to TransAmerica Lender Finance, bearing interest at
  the prime rate of the Wall Street Journal plus 2.5% (11% at
  December 31, 1995) calculated on a daily basis; principal
  payments of $258,000 due monthly; additional mandatory
  principal prepayments due in accordance with the note agreement
  based upon the level of proceeds from disposition and payments
  received on the purchased loan pools; unpaid principal and
  interest due on June 22, 1996; secured by substantially all of
  the purchased loan pools of WAMCO III.......................... $11,833,574     $11,577,848
Senior collateralized promissory note payable to NationsBank of
  Texas, N.A., bearing interest at the prime rate of a bank plus
  2% (10.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on proceeds from disposition and
  payments received on the purchased loan pools or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on March 30, 1996; secured by
  a purchased loan pool of WAMCO III.............................          --       5,477,524
</TABLE>
 
                                       42
<PAGE>   43
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pools after
  payments on the senior collateralized promissory note payable
  described above; unpaid principal and interest due on September
  30, 1996; secured by a purchased loan pool of WAMCO III........          --       4,684,450
WAMCO V:
Collateralized promissory note payable to NationsBank of Texas,
  N.A., bearing interest at the London Interbank Offering Rate
  plus 3.25% (8.96875% at December 31, 1995) calculated on a
  daily basis; principal payments based on proceeds from
  disposition and payments received on the purchased loan pools
  or minimum scheduled payments as provided for in the loan
  agreement; unpaid principal and interest due on December 29,
  1997; secured by the purchased loan pools of
  WAMCO V........................................................  15,490,113      23,500,000
WAMCO VI:
Senior collateralized promissory note payable to Fleet National
  Bank, bearing interest at the prime rate of a bank plus 2%
  (10.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on proceeds from disposition and
  payments received on the purchased loan pool or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on July 31, 1996; secured by
  the purchased loan pool of WAMCO VI............................   5,081,659       8,198,009
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on January 29, 1996;
  secured by the purchased loan pool of WAMCO VI.................   6,970,945       8,011,170
WAMCO VIII:
Senior collateralized promissory note payable to NationsBank of
  Texas, N.A., bearing interest at the London Interbank Offering
  Rate plus 3.75% to 4.25% (9.96875% at December 31, 1995)
  calculated on a daily basis; principal payments based on
  proceeds from disposition and payments received on the
  purchased loan pools or minimum scheduled payments as provided
  for in the loan agreement; unpaid principal and interest due on
  February 7, 1996; secured by the purchased loan pools of
  WAMCO VIII.....................................................   2,471,195       9,111,292
</TABLE>
 
                                       43
<PAGE>   44
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Senior collateralized promissory note payable to Fleet National
  Bank, bearing interest at the London Interbank Offering Rate
  plus 3.75% to 4.25% (9.96875% at December 31, 1995) calculated
  on a daily basis; principal payments based on proceeds from
  disposition and payments received on the purchased loan pools
  or minimum scheduled payments as provided for in the loan
  agreement; unpaid principal and interest due on February 7,
  1996; secured by the purchased loan pools of
  WAMCO VIII.....................................................   2,471,195       9,111,293
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pools after
  payments on the senior collateralized promissory notes payable
  described above; unpaid principal and interest due on August 1,
  1996; secured by the purchased loan pools of
  WAMCO VIII.....................................................   8,446,017      13,342,512
WAMCO IX:
Collateralized promissory note payable to Cargill (note 5),
  bearing interest at the London Interbank Offering Rate plus 5%
  (10.71875% at December 31, 1995) calculated on a daily basis;
  principal payments based on proceeds from disposition and
  payments received on the purchased loan pool or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on August 29, 1997; secured
  by the purchased loan pool of WAMCO IX.........................     852,382              --
WAMCO XI:
Senior collateralized promissory note payable to Berliner
  Handels-UND Frankfurter Bank, bearing interest at the New York
  Interbank Offering Rate, plus 3% (8.875% at December 31, 1994)
  calculated on a daily basis; principal payments based on
  proceeds from disposition and payments received on the
  purchased loan pool or minimum scheduled payments as provided
  for in the loan agreement; unpaid principal and interest due on
  April 14, 1996; secured by the purchased loan pool of WAMCO
  XI.............................................................          --       9,583,251
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1994) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on October 13, 1996;
  secured by the purchased loan pool of WAMCO XI.................          --       3,652,510
</TABLE>
 
                                       44
<PAGE>   45
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
WAMCO XII:
Senior collateralized promissory note payable to Fleet National
  Bank, bearing interest at the London Interbank Offering Rate
  plus 3.25% to 3.5% (9.21875% at December 31, 1995) calculated
  on a daily basis; principal payments based on proceeds from
  disposition and payments received on the purchased loan pool or
  minimum scheduled payments as provided for in the loan
  agreement; unpaid principal and interest due on August 5, 1996;
  secured by the purchased loan pool of WAMCO XII................   3,290,594      13,463,625
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on January 19, 1997;
  secured by the purchased loan pool of WAMCO XII................   2,852,440       4,588,910
WAMCO XIV:
Senior collateralized promissory note payable to TransAmerica
  Lender Finance, bearing interest at the prime rate of a bank
  plus 2% (10.5% at December 31, 1995) calculated on a daily
  basis; principal payments based on proceeds from disposition
  and payments received on the purchased loan pool or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on September 20, 1996;
  secured by the purchased loan pool of WAMCO XIV................   4,380,476      16,390,349
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on March 19, 1997;
  secured by the purchased loan pool of WAMCO XIV................   6,338,934       6,038,541
WAMCO XV:
Senior collateralized promissory note payable to Berliner
  Handels-UND Frankfurter Bank, bearing interest at the New York
  Interbank Offering Rate plus 3% (8.625% at December 31, 1995)
  calculated on a daily basis; principal payments based on
  proceeds from disposition and payments received on the
  purchased loan pool or minimum scheduled payments as provided
  for in the loan agreement; unpaid principal and interest due on
  August 30, 1996; secured by the purchased loan pool of WAMCO
  XV.............................................................   4,647,366       5,826,510
</TABLE>
 
                                       45
<PAGE>   46
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on February 28, 1997;
  secured by the purchased loan pool of WAMCO XV.................   1,823,181       2,205,375
WAMCO XVI:
Senior collateralized promissory note payable to Fleet National
  Bank, bearing interest at the London Interbank Offering Rate
  plus 3.25% to 3.50% (9.21875% at December 31, 1995) calculated
  on a daily basis; principal payments based on proceeds from
  disposition and payments received on the purchased loan pool or
  minimum scheduled payments as provided for in the loan
  agreement; unpaid principal and interest due on November 4,
  1996; secured by the purchased loan pool of
  WAMCO XVI......................................................   4,235,450       9,563,992
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on April 24, 1997;
  secured by the purchased loan pool of
  WAMCO XVI......................................................   3,235,300       4,634,683
WAMCO XVII:
Senior collateralized promissory note payable to NationsBank of
  Texas, N.A., bearing interest at the prime rate of the bank
  plus 2% (10.5% at December 31, 1995) calculated on a daily
  basis; principal payments based on proceeds from disposition
  and payments received on the purchased loan pools or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on December 27, 1995; secured
  by the purchased loan pools of WAMCO XVII......................          --      11,263,593
Senior collateralized promissory note payable to Cargill (note
  5), bearing interest at the prime rate of a bank plus 2% (10.5%
  at December 31, 1995) calculated on a daily basis; principal
  payments based on proceeds from disposition and payments
  received on the purchased loan pools or minimum scheduled
  payments as provided for in the loan agreement; unpaid
  principal and interest due on December 27, 1996; secured by the
  purchased loan pools of WAMCO XVII.............................   5,058,756              --
</TABLE>
 
                                       46
<PAGE>   47
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
Subordinated collateralized promissory note payable to Clearwater
  Portfolio (note 5), bearing interest at the prime rate of a
  bank plus 7% (15.5% at December 31, 1995) calculated on a daily
  basis; principal payments based on excess proceeds from
  disposition and payments received on the purchased loan pools
  after payments on the senior collateralized promissory notes
  payable described above; unpaid principal and interest due on
  June 27, 1997; secured by the purchased loan pools of
  WAMCO XVII.....................................................   5,371,867       5,371,867
WAMCO XVIII:
Senior collateralized promissory note payable to Berliner
  Handels-UND Frankfurter Bank, bearing interest at the New York
  Interbank Offering Rate plus 3% (8.625% at December 31, 1995)
  calculated on a daily basis; principal payments based on
  proceeds from disposition and payments received on the
  purchased loan pool or minimum scheduled payments as provided
  for in the loan agreement; unpaid principal and interest due on
  December 20, 1996; secured by the purchased loan pool of WAMCO
  XVIII..........................................................   2,279,706       9,558,682
Subordinated collateralized promissory note payable to Clearwater
  Portfolio (note 5), bearing interest at the prime rate of a
  bank plus 7% (15.5% at December 31, 1995) calculated on a daily
  basis; principal payments based on excess proceeds from
  disposition and payments received on the purchased loan pool
  after payments on the senior collateralized promissory note
  payable described above; unpaid principal and interest due on
  June 22, 1997; secured by the purchased loan pool of
  WAMCO XVIII....................................................   1,049,776       2,676,431
WAMCO XIX:
Senior collateralized promissory note payable to Berliner
  Handels-UND Frankfurter Bank, bearing interest at the New York
  Interbank Offering Rate plus 3% (8.625% at December 31, 1995)
  calculated on a daily basis; principal payments based on
  proceeds from disposition and payments received on the
  purchased loan pool or minimum scheduled payments as provided
  for in the loan agreement; unpaid principal and interest due on
  March 28, 1997; secured by the purchased loan pool of WAMCO
  XIX............................................................  13,623,266              --
Subordinated collateralized promissory note payable to Clearwater
  Portfolio (note 5), bearing interest at the prime rate of a
  bank plus 7% (15.5% at December 31, 1995) calculated on a daily
  basis; principal payments based on excess proceeds from
  disposition and payments received on the purchased loan pool
  after payments on the senior collateralized promissory note
  payable described above; unpaid principal and interest due on
  September 28, 1997; secured by the purchased loan pool of WAMCO
  XIX............................................................   6,723,884              --
</TABLE>
 
                                       47
<PAGE>   48
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>
WAMCO XX:
Senior collateralized promissory notes payable to Cargill (note
  5), bearing interest at the London Interbank Offering Rate plus
  5% (10.71875% at December 31, 1995) calculated on a daily
  basis; principal payments based on proceeds from disposition
  and payments received on the purchased loan pools or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on December 21, 1997; secured
  by the purchased loan pools of WAMCO XX........................  18,276,059              --
Subordinated collateralized promissory notes payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pools after
  payments on the senior collateralized promissory notes payable
  described above; unpaid principal and interest due on June 21,
  1998; secured by the purchased loan pools of
  WAMCO XX.......................................................   7,442,491              --
WAMCO XXI:
Senior collateralized promissory note payable to BHF-Bank
  Aktiengesellschaft, bearing interest at the New York Interbank
  Offering Rate plus 3% (8.625% at December 31, 1995) calculated
  on a daily basis; principal payments based on proceeds from
  disposition and payments received on the purchased loan pool or
  minimum scheduled payments as provided for in the loan
  agreement; unpaid principal and interest due on November 16,
  1997; secured by the purchased loan pool of WAMCO XXI..........   6,963,103              --
Subordinated collateralized promissory note payable to Cargill
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on May 16, 1998;
  secured by the purchased loan pool of
  WAMCO XXI......................................................   2,858,761              --
Whitewater:
Collateralized promissory note payable to Salomon Brothers Realty
  Corp., bearing interest at the London Interbank Offering Rate
  plus 6.50% (12.21875% at December 31, 1995) calculated on a
  daily basis; principal payments based on excess proceeds from
  disposition and payments received on the purchased loan pools;
  unpaid principal and interest due on March 29, 1996; secured by
  the purchased loan pools of
  Whitewater.....................................................   5,686,544      13,269,142
</TABLE>
 
                                       48
<PAGE>   49
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                     1995            1994
                                                                  -----------     -----------
<S>                                                               <C>             <C>     
VOJ:
Senior collateralized promissory note payable to Central National
  Bank, bearing interest at the prime rate of a bank plus 2%
  (10.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on proceeds from disposition and
  payments received on the purchased loan pool or minimum
  scheduled payments as provided for in the loan agreement;
  unpaid principal and interest due on December 29, 1996; secured
  by the purchased loan pool of VOJ..............................   1,383,029       1,883,373
Subordinated collateralized promissory notes payable to Varde,
  Varde II-A and OPCO (note 5), bearing interest at the prime
  rate of a bank plus 7% (15.5% at December 31, 1995) calculated
  on a daily basis; principal payments based on excess proceeds
  from disposition and payments received on the purchased loan
  pool after payments on the senior collateralized promissory
  note payable described above; unpaid principal and interest due
  on June 29, 1997; secured by the purchased loan pool of VOJ....     724,374         724,374
DAP City:
Senior collateralized promissory note payable to FirstCity (note
  5), bearing interest at the London Interbank Offering Rate plus
  6% (11.71875% at December 31, 1995) calculated on a daily
  basis; principal payments based on proceeds from disposition
  and payments received on the purchased loan pool; unpaid
  principal and interest due on November 15, 1996; secured by the
  purchased loan pool of DAP City................................   8,366,162              --
Subordinated collateralized promissory note payable to J-Hawk
  (note 5), bearing interest at the prime rate of a bank plus 7%
  (15.5% at December 31, 1995) calculated on a daily basis;
  principal payments based on excess proceeds from disposition
  and payments received on the purchased loan pool after payments
  on the senior collateralized promissory note payable described
  above; unpaid principal and interest due on November 15, 1996;
  secured by the purchased loan pool of
  DAP City.......................................................   1,219,379              --
                                                                  ------------    ------------
          Long-term debt......................................... $171,447,978    $213,709,306
                                                                  ============    ============
</TABLE>
 
     Contractual maturities (excluding principal and interest payments payable
from proceeds from disposition and payments received on the purchased loan
pools) of long-term debt are as follows:
 
<TABLE>
    <S>                                                                      <C>
    Year ending December 31:
      1996.................................................................. $ 83,201,658
      1997..................................................................   79,643,743
      1998..................................................................    8,602,577
                                                                             ------------
                                                                             $171,447,978
                                                                             ============
</TABLE>
 
     Additionally, the loan agreements and master note purchase agreements,
under which these notes payable were incurred, contain various covenants
including limitations on incurrence of other indebtedness, maintenance of
service agreements and restrictions on use of proceeds from disposition and
payments received
 
                                       49
<PAGE>   50
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
on the purchased loan pools. As of December 31, 1995, 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 being amortized proportionate to
the principal reduction on the related notes and are included in general,
administrative and operating expenses. At December 31, 1995 and 1994,
approximately $2,048,000, and $3,066,000 of origination and commitment fees are
included in other assets.
 
     WAMCO V paid a premium of $278,000 to enter into an interest rate cap
agreement with NationsBank of North Carolina, N.A. (the Bank). In the event the
London Interbank Offering Rate (the floating rate) exceeds 7.75% (the fixed
rate), the Bank will pay WAMCO V an amount equal to such excess multiplied times
a notional amount which corresponds to the outstanding balance of the
collateralized promissory note payable. Until such time as the floating rate
exceeds the fixed rate, no payments will be made between the parties and WAMCO V
will amortize the premium to general, administrative and operating expenses on a
pro rata basis corresponding to principal reductions on the collateralized
promissory note payable. At December 31, 1995 and 1994, approximately $183,000
and $278,000 of the premium is included in other assets.
 
     Additionally, certain loan agreements contain provisions requiring the
Partnerships to maintain minimum balances in a restricted cash account as
additional security for certain notes. Approximately $2,120,000 and $2,919,000
of restricted cash was held in such accounts as of December 31, 1995 and 1994,
respectively.
 
(5) TRANSACTIONS WITH AFFILIATES
 
     Clearwater Investment, a limited partner, held a subordinated
collateralized promissory note payable of WAMCO V during 1994. Interest expense
on this note payable was $1,672,153 and $1,673,953 in 1994 and 1993,
respectively. This note payable was repaid during 1994.
 
     Clearwater Portfolio, a limited partner, holds subordinated collateralized
promissory notes payable of WAMCO XVII, WAMCO XVIII and WAMCO XIX (note 4).
Interest expense on these notes payable was $2,228,164 and $28,343 in 1995 and
1994, respectively.
 
     Cargill holds a senior collateralized promissory note payable of WAMCO
XVII. This note payable was used to refinance the NationsBank of Texas, N.A.
senior collateralized promissory note payable. Interest expense on the Cargill
note payable was $5,821 in 1995.
 
     Cargill holds subordinated collateralized promissory notes payable of WAMCO
III, WAMCO VI, WAMCO VIII, WAMCO IX, WAMCO XI, WAMCO XII, WAMCO XIV, WAMCO XV,
WAMCO XVI, WAMCO XX, WAMCO XXI and Imperial (note 4). Interest expense on these
notes payable was $7,055,911, $5,602,215 and $3,490,962 in 1995, 1994 and 1993,
respectively. Additionally, WAMCO VIII and WAMCO XXI incurred interest expense
on acquisition debt of $286,492 and $74,649 in 1995 and 1994, respectively,
payable to Cargill.
 
     Peoria, a limited partner, held a subordinated collateralized promissory
note payable of Imperial. Interest expense on this note payable was $199,248 and
$35,153 in 1994 and 1993, respectively. This note payable was repaid during
1994.
 
     Varde, Varde II-A and OPCO, limited partners, hold subordinated
collateralized promissory notes payable of VOJ (note 4). Interest expense on
these notes payable was $114,029 and $1,538 in 1995 and 1994, respectively.
 
     FirstCity holds a senior collateralized promissory note payable of DAP City
(note 4). Interest expense on this note payable was $131,658 in 1995. J-Hawk, a
limited partner, holds a subordinated collateralized promissory note payable of
DAP City (note 4). Interest expense on this note payable was $24,621 in 1995.
 
                                       50
<PAGE>   51
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Under the terms of the various servicing agreements, FirstCity, a limited
partner, receives a servicing fee based on proceeds from disposition and
payments received on the purchased loan pools, for processing transactions on
the purchased loan pools and for conducting settlement and sale negotiations.
Included in general, administrative and operating expenses in the accompanying
combined statements of operations is approximately $6,834,000, $7,940,200 and
$5,161,000 in servicing fees incurred in 1995, 1994 and 1993, respectively.
 
     During December 1994, WAMCO III and WAMCO V sold loans to an affiliate.
Included in proceeds from disposition and payments received on the purchased
loan pools in the accompanying combined statements of operations for 1994 is
approximately $9,616,000 in proceeds received from the affiliated entity.
 
     Under the terms of the Partnership Agreement of Whitewater, the Class B
Equity limited partners are to receive interest on their Class B equity interest
at prime plus 7% (15.5% at December 31, 1995) calculated on a monthly basis.
Whitewater has accrued $6,235,194, $2,748,364 and $129,185 in 1995, 1994 and
1993, respectively, included in accrued liabilities and expensed $3,486,264,
$2,619,179 and $129,185 in 1995, 1994 and 1993, respectively, included in
interest expense in the accompanying combined financial statements, under this
partnership agreement. The interest will be paid to the Class B Equity limited
partners upon final disposition of the purchased loan pools or in accordance
with the Master Note Purchase Agreement.
 
     Under the terms of a Master Note Purchase Agreement with Varde, Varde II-A
and OPCO, Varde, Varde II-A and OPCO are to receive 5 percent, 5 percent and 10
percent, respectively, of cumulative income before recognition of profit
participation expense recognized by VOJ. VOJ has accrued $84,922 and $17,180 in
1995 and 1994, respectively, included in receivable from affiliates and
recognized $67,742 and $17,180 in 1995 and 1994, respectively, included in other
income (expense), net, in the accompanying combined financial statements, under
this profit participation agreement. The profit participation will be paid to
Varde, Varde II-A and OPCO upon final disposition of the purchased loan pool or
in accordance with the Master Note Purchase Agreement.
 
     Under the terms of a Master Note Purchase Agreement with Cargill and
Peoria, Cargill and Peoria are to each receive 10 percent of cumulative income
before recognition of profit participation expense recognized by Imperial.
Imperial has accrued $370,729, $646,152 and $47,825 in 1995, 1994 and 1993,
respectively, included in accounts payable -- affiliates and expensed $114,158,
$813,492 and $47,825 in 1995, 1994 and 1993, respectively, included in other
income (expense), net, in the accompanying combined financial statements, under
this profit participation agreement. The profit participation will be paid to
Cargill and Peoria upon final disposition of the purchased loan pool or in
accordance with the Master Note Purchase Agreement.
 
(6) 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, RESTRICTED CASH, RECEIVABLE FROM AFFILIATES, ACCOUNTS
    PAYABLE-AFFILIATES AND ACCRUED LIABILITIES
 
     The carrying amount of cash, restricted cash, receivable from affiliates,
accounts payable -- affiliates and accrued liabilities approximates fair value
at December 31, 1995 due to the short-term nature of such accounts.
 
(B) PURCHASED LOAN POOLS
 
     The purchased loan pools are carried at the lower of cost or estimated fair
value. The estimated fair value is calculated by discounting projected cash
flows on a loan by loan basis through estimated market discount rates that
reflect the credit and interest rate risk inherent in the loans. The carrying
value of the purchased
 
                                       51
<PAGE>   52
 
                               WAMCO PARTNERSHIPS
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
loan pools is $221,508,360 at December 31, 1995. The estimated fair value of the
purchased loan pools is approximately $282,091,000 at December 31, 1995.
 
(C) LONG-TERM DEBT
 
     Management believes that for a similar floating rate financial instrument
with similar credit risk, that the stated interest rate at December 31, 1995
approximates a market rate. Accordingly, the carrying amount of long-term debt
is believed to approximate fair value.
 
--------------------------------------------------------------------------------
 
                          INDEPENDENT AUDITORS' REPORT
 
The Partners
WAMCO Partnerships:
 
     We have audited the accompanying combined balance sheets of WAMCO
Partnerships as of December 31, 1995 and 1994, 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, 1995. 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 WAMCO Partnerships
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
 
                                            KPMG Peat Marwick LLP
 
Ft. Worth, Texas
February 2, 1996
 
                                       52
<PAGE>   53
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF NET ASSETS
                               DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)
 
                        ASSETS, AT ESTIMATED FAIR VALUE
 
<TABLE>
<S>                                                                                 <C>
Cash and cash equivalents.........................................................  $ 11,260
Note receivable from FirstCity Financial Corporation..............................     2,000
Trust assets, net.................................................................   193,204
                                                                                    --------
          Total assets............................................................   206,464
                                                                                    --------
                        LESS LIABILITIES AT FACE OR ESTIMATED AMOUNT
Estimated administrative claims...................................................     3,486
Payables and accrued liabilities..................................................     1,197
                                                                                    --------
          Total liabilities.......................................................     4,683
                                                                                    --------
Commitments and contingencies.....................................................        --
                           TRUST NET ASSET VALUE ATTRIBUTABLE TO:
Class "A" Certificate, held by FirstCity Financial Corporation....................   162,245
Class "B" Certificate, 2,460,911 units outstanding................................    39,536
Class "C" Certificate, 738,273 units outstanding..................................        --
                                                                                    --------
          Total net asset value...................................................  $201,781
                                                                                    ========
</TABLE>
 
        CONSOLIDATED STATEMENT OF INCOME AND CHANGES IN NET ASSET VALUE
                         INCEPTION TO DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<S>                                                                                 <C>
Changes in fair value of trust assets.............................................  $ 33,548
Interest income on short-term investments.........................................       375
Interest expense..................................................................    (1,741)
Administrative expense............................................................    (8,552)
                                                                                    --------
          Net income..............................................................    23,630
                                                                                    --------
Contribution of net assets by First City Bancorporation of Texas, Inc.............   182,872
Interest distribution on Class "A" Certificate....................................    (4,721)
                                                                                    --------
Net asset value, end of period....................................................  $201,781
                                                                                    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       53
<PAGE>   54
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                         INCEPTION TO DECEMBER 31, 1995
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<S>                                                                                <C>
Cash flows from operating activities:
  Net income.....................................................................  $  23,630
  Adjustments to reconcile net income to net cash used in operating activities:
     Changes in fair value of trust assets.......................................    (33,548)
     Collections on trust assets, net of advances................................    107,371
     Purchase of Loss-Sharing assets.............................................   (205,513)
     Decrease in other liabilities...............................................     (9,319)
                                                                                   ---------
          Net cash used in operating activities..................................   (117,379)
                                                                                   ---------
Cash flows from financing activities:
  Borrowings under notes payable to banks........................................     73,000
  Payments of notes payable to banks.............................................    (73,000)
  Advance from FirstCity Financial Corporation ..................................      4,728
  Repayment of advance from FirstCity Financial Corporation......................     (4,728)
  Advance to FirstCity Financial Corporation.....................................     (2,000)
  Capital contribution of First City Bancorporation of Texas, Inc................    135,360
  Interest distribution on Class "A" Certificate.................................     (4,721)
                                                                                   ---------
          Net cash provided by financing activities..............................    128,639
                                                                                   ---------
Cash, end of period..............................................................  $  11,260
                                                                                   =========
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
     Interest....................................................................  $   1,741
                                                                                   =========
  Non-cash financing activities:
     Non-cash net assets contributed by First City Bancorporation of Texas,
      Inc........................................................................  $  47,512
                                                                                   =========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       54
<PAGE>   55
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(1) DESCRIPTION OF BUSINESS
 
     The Joint Plan of Reorganization by First City Bancorporation of Texas,
Inc. (the "Debtor"), Official Committee of Equity Security Holders, and J-Hawk
Corporation ("J-Hawk"), with the Participation of Cargill Financial Services
Corporation, under Chapter 11 of the United States Bankruptcy Code, Case No.
392-39474-HCA-11 (the "Plan of Reorganization"), was confirmed by the Bankruptcy
Court for the Northern District of Texas, Dallas Division, by an order entered
on May 31, 1995, and became effective on July 3, 1995. Pursuant to the Plan of
Reorganization, and an Agreement and Plan of Merger between the Debtor and
J-Hawk, on July 3, 1995, J-Hawk was merged (the "Merger") with and into First
City Bancorporation of Texas, Inc., and the name of the corporation was changed
to FirstCity Financial Corporation ("FirstCity").
 
     Pursuant to the Plan, substantially all of the legal and beneficial
interests in the assets of the Debtor, other than $20 million in cash
contributed to FirstCity, were transferred to FirstCity Liquidating Trust (the
"Trust"), or to subsidiaries of the Trust. Such assets will be liquidated over
the life of the Trust pursuant to the terms thereof. FirstCity, as the sole
holder of the Class "A" Certificate under the Trust, will receive from the Trust
amounts sufficient to pay certain expenses and FirstCity's obligations under its
9% senior subordinated notes and its special preferred stock. Any amounts in
excess of such sums shall be paid to certain of the former security holders of
the Debtor pursuant to the terms of the Class B and the Class C certificates of
beneficial interests in the Trust. The Trust is administered by a four-person
portfolio committee (the "Portfolio Committee"). The liquidation of the Trust's
assets is managed by FirstCity pursuant to an Investment Management Agreement
between the Trust and FirstCity.
 
     In connection with the sale of the Debtor's banks by the FDIC to
third-party acquirers (the "Loss-Sharing Banks"), the FDIC guaranteed certain
recoveries on loans acquired by the Loss-Sharing Banks. (These agreements are
referred to as "Loss-Sharing Agreements".) On July 12, 1995, in order to reduce
the uncertain effect of the Loss-Sharing Agreements on future distributions to
the Trust by the FDIC, subsidiaries of the Trust purchased assets (the
"Loss-Sharing Settlement") for approximately $206 million from the Loss-Sharing
Banks. With the purchase of these assets, the Loss-Sharing Banks released the
FDIC from its future obligations under the Loss-Sharing Agreements.
 
(2) PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
FirstCity Liquidating Trust and its subsidiaries (collectively referred to as
the "Trust"). All significant intercompany transactions and balances have been
eliminated in consolidation.
 
(3) CASH EQUIVALENTS
 
     For purposes of the statement of cash flows, the Trust considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. The Trust, at December 31, 1995, and periodically throughout
the year, has maintained balances in various operating and money market accounts
in excess of federally insured limits.
 
(4) TRUST ASSETS
 
     The net assets of the Trust are carried at estimated fair values which are
the results of discounting, at appropriate discount rates, the currently
estimated cash flows projected to be realized from the collection, liquidation
and disposition of the non-cash assets held by the Trust. Such assets consist
principally of performing and non-performing loans, income producing real estate
and interests in real estate, and
 
                                       55
<PAGE>   56
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1995
 
miscellaneous other assets and receivables (principally from the FDIC)
transferred to the Trust upon the consummation of the Plan. The estimates of the
future cash flows from which the net asset value of the Trust was derived are
made under the direction of the management of the Trust based upon information
available and believed to be reliable. There can be no assurance, however, that
the estimates resulting from such reviews or the net asset values derived from
such estimates will ultimately be realized due to the highly judgmental
assumptions which were made in developing estimates of the amount and timing of
future cash flows to be realized upon the liquidation of the types of assets
such as those held by the Trust.
 
     In addition to the assets described above, the Trust also holds certain
contingent asset claims, such as claims against the former Directors and
Officers of First City Bancorporation of Texas, Inc., claims under fidelity
bonds, and judgments and deficiencies arising from charged off loans to former
borrowers of the Debtor's banks. The estimated future cash flows from which the
net asset value of the Trust was derived include estimated future collections
which might be realized from such claims only when such amounts are reasonably
certain and estimable. As a result, there can be no assurance that there will
ever be any material collections realized from such contingent asset claims.
 
     Trust assets are periodically revalued and adjustments to estimated fair
values are included in operating results in the period in which they become
known. Loans are considered performing if debt service payments are made in
accordance with the original or restructured terms of the notes. Interest on
loans is recognized as part of the proceeds from disposition of trust assets.
 
     Foreclosed assets acquired in settlement of notes are recorded at estimated
fair market value. Costs relating to the development and improvement of property
and holding costs are considered in the development of estimated fair values.
 
(5) INCOME TAXES
 
     Under current federal and state laws, the Trust shall be treated as a
grantor trust owned by the beneficiaries holding beneficial interest therein.
For tax purposes, any item of income or loss is allocated among the certificate
holders. Therefore, no provision has been made for income taxes in the
accompanying consolidated financial statements.
 
(B) TRUST ASSETS
 
     Trust assets at December 31, 1995, are comprised of the following (dollars
in thousands):
 
<TABLE>
<CAPTION>
                                                                      LEGAL
                                                                      CLAIM       ESTIMATED
                                                                       OR           GROSS
                                                                    ASSIGNED        CASH
    TYPE OF ASSET                                                     VALUE         FLOW
    -------------                                                   ---------     ---------
    <S>                                                             <C>           <C>
    Borrowers' obligation on outstanding balance of:
      Performing loans............................................  $ 139,705     $ 134,381
      Nonperforming loans.........................................    225,921        60,454
    Receivable from the FDIC......................................     33,000        33,000
    Real estate and other assets..................................     60,734        33,305
                                                                    ---------     ---------
      Total.......................................................    459,360       261,140
                                                                    ---------     ---------
    Discount required to reflect trust assets at estimated fair
      value.......................................................   (266,156)      (67,936)
                                                                    ---------     ---------
    Trust assets, net.............................................  $ 193,204     $ 193,204
                                                                    =========     =========
</TABLE>
 
                                       56
<PAGE>   57
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1995
 
(C) SENIOR NOTES PAYABLE TO BANKS
 
     The Trust has a revolving line of credit with two banks for borrowings of
up to $100 million, subject to borrowing base limits. The line matures in June,
1997. In connection with the Loss-Sharing Settlement, $73 million was borrowed
by the Trust and $27 million in letters of credit were issued in favor of the
Loss-Sharing Banks (see note G). Payments reduced the outstanding balance to
zero in November, 1995. Based on an election by the Trust, interest, payable
monthly, on a portion of the borrowings is at prime plus 1%, and interest on the
remaining balance is at one-month LIBOR (as defined) plus 3.25%. Substantially
all trust assets were pledged to secure these borrowings.
 
(D) ESTIMATED CLAIMS
 
     Estimated claims represent unpaid bankruptcy administrative claims and
claims for expense reimbursement of professionals providing services to or for
the benefit of the Debtor as of December 31, 1995; all such claims are subject
to approval of the Bankruptcy Court. The December 31, 1995 balance includes a $2
million claim by FirstCity for reimbursement of expenses. In November 1995, the
Trust advanced FirstCity $2 million under a note, earning prime plus 2%, which
was repaid by FirstCity in February, 1996.
 
(E) DISTRIBUTION PRIORITIES
 
     Pursuant to the Senior Note Loan Agreement and the Liquidating Trust
Agreement, the Trust is required to apply all proceeds from liquidation and
disposition of trust assets first to payment of normal operating expenses,
including a 3% servicing fee to FirstCity , and unpaid administrative claims of
the Debtor. Second, trust proceeds are remitted to the senior lenders for
payment of principal and interest (see Note C). Third, trust proceeds are
distributed to FirstCity, the sole Class A Certificate holder, for payment of
principal, due in two equal installments on September 30, 1996 and 1997, and
interest, at an annual rate of 9%, on $106.7 million senior subordinated notes
payable, an obligation of FirstCity; and cumulative quarterly cash dividends
($3.9 million accrued and undeclared at December 31, 1995) at the annual rate of
$3.15 per share (on 2,460,911 shares) and redemption of the nominal stated value
of $51.7 million of FirstCity special preferred stock on September 30, 1998. On
January 24, 1996, the Portfolio Committee approved, subject to certain
conditions met on February 12, 1996, the distribution of $53.3 million to
FirstCity for the early redemption of senior subordinated notes payable in March
1996.
 
     The fourth order of distribution is payments pursuant to employment
agreements with certain former employees of the Debtor. Fifth, Class B
Certificate holders (and, pursuant to bonus agreements, certain former employees
of the Debtor) are entitled to distributions up to the Pour-Over Level. The
Pour-Over Level (approximately $122 million at December 31, 1995) is the
liquidation preference on July 3, 1995, of the Debtor's Series B and Series E
preferred stock, less the nominal stated value of FirstCity special preferred
stock and the book value of FirstCity common stock issued to the Series B and
Series E holders, plus interest at an annual rate of 6.5% from July 3, 1995.
Lastly, Class C Certificate holders receive distributions, if any, after all
required payments to Class B Certificate holders. No distributions to Class C
Certificate holders are anticipated.
 
     The ultimate amounts to be distributed to the holders of the A, B and C
Certificates will result from the cash flow actually realized from the
liquidation of the non-cash trust assets and contingent asset claims. The
determination of the net asset value of the Trust in the accompanying
consolidated statement of net assets is based upon estimates of future cash
flows. The actual cash flows and the timing of such cash flows may vary
significantly from those estimates, thus affecting the final distributions to
the Certificate holders.
 
                                       57
<PAGE>   58
 
                  FIRSTCITY LIQUIDATING TRUST AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                               DECEMBER 31, 1995
 
(F) INVESTMENT MANAGEMENT AGREEMENT
 
     Pursuant to an investment management agreement, FirstCity manages the
liquidation of trust assets and the Trust will pay FirstCity a 3% servicing fee
on collections (as defined) up to a specified level of collections. Thereafter,
the servicing fee percentage increases with additional levels of collections.
Administrative expenses for the period ending December 31, 1995, include
servicing fees of $3.1 million.
 
(G) CONTINGENCIES
 
     Letters of credit totaling $27 million were issued to the Loss-Sharing
Banks in connection with the Loss-Sharing Settlement. Any draws (none of which
have occurred through December 31, 1995) on the letters of credit will be paid
by making an advance under the revolving line of credit (Note C). In early 1996,
the letters of credit were reduced to $19.5 million. Agreements in principle
have been reached which, if executed, will reduce the remaining $19.5 million in
letters of credit to zero.
 
     The Trust is involved in various legal proceedings in the ordinary course
of business. In the opinion of management of the Trust, the resolution of such
matters should not have a material adverse impact on the financial condition of
the Trust.
--------------------------------------------------------------------------------
 
                          INDEPENDENT AUDITORS' REPORT
 
The Portfolio Committee and Certificate Holders
FirstCity Liquidating Trust:
 
     We have audited the accompanying consolidated statement of net assets of
FirstCity Liquidating Trust and subsidiaries as of December 31, 1995, and the
related consolidated statements of income and changes in net asset value, and
cash flows for the period from July 3, 1995 (effective date of inception)
through December 31, 1995. These consolidated financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
 
     We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
 
     As described in Note 1 to the consolidated financial statements, the Joint
Plan of Reorganization by First City Bancorporation of Texas, Inc. ("Debtor"),
Official Committee of Equity Security Holders, and J-Hawk Corporation, with the
participation of Cargill Financial Services Corporation was confirmed on May 31,
1995 and became effective July 3, 1995. Pursuant to the Joint Plan, assets of
the Debtor transferred to FirstCity Liquidating Trust will be liquidated in
accordance with Joint Plan terms for the benefit of the holders of the
beneficial interest in such assets. Accordingly, the Trust is using a
liquidation basis of accounting.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the net assets of FirstCity
Liquidating Trust and subsidiaries as of December 31, 1995, and the income and
changes in net asset values and cash flows for the period from July 3, 1995
(effective date of inception) to December 31, 1995 in conformity with generally
accepted accounting principles.
 
                                                   KPMG Peat Marwick LLP
 
Ft. Worth, Texas
February 13, 1996
 
                                       58
<PAGE>   59
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.
 
     On October 27, 1995, FirstCity engaged KPMG Peat Marwick LLP ("KPMG") to
serve as its independent accountants, such engagement to be effective as of and
for the year ending December 31, 1995. The engagement of KPMG was recommended by
the Audit Committee of FirstCity's Board of Directors and was approved by such
Board on October 27, 1995.
 
     During the Debtor's two most recent fiscal years prior to the Merger, no
audited financial statements of the Debtor were prepared, and therefore no
report on such financial statements was prepared. Prior thereto, Arthur Andersen
& Co. LLP served as the Debtor's independent accountants.
 
     Prior to the Merger, Jaynes, Reitmeier, Boyd & Therrell, P.C. ("Jaynes
Reitmeier") served as J-Hawk's independent accountants. Jaynes Reitmeier's
accountant's report with respect to the annual financial statements for the last
two years did not contain an adverse opinion, disclaimer or qualification.
During such period, Jaynes Reitmeier and J-Hawk had no disagreements regarding
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure of the type referred to in items 304(a)(1)(iv) of
Regulation S-K, and no reportable event described in Item 304(a)(1)(v) of
Regulation S-K occurred.
 
     In connection with the Merger, representatives of J-Hawk consulted with
KPMG regarding the appropriate financial statement and accounting disclosure
with respect to the Merger and for FirstCity following the Merger. After
discussions with KPMG and the Securities and Exchange Commission, FirstCity
determined that its historical financial statements prior to the date of the
Merger should reflect the financial position and results of operations of
J-Hawk.
 
                                    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 with respect to reporting persons under Section 16 of the
Securities Exchange Act of 1934, as amended, is incorporated by reference from
the Company's definitive proxy statement pertaining to the 1996 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A. Information with respect
to the Company's executive officers is set forth in Part I of this Annual Report
on Form 10-K under the caption "Executive Officers of the Registrant."
 
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 1996 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 1996 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 1996 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A.
 
                                       59
<PAGE>   60
 
                                    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 FirstCity
              Liquidating Trust, and combined financial statements of WAMCO
              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 Registrant's 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
                        Registrant's 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 Registrant
                        (incorporated herein by reference to Exhibit 3.1 of the Registrant's
                        Form 8-K dated July 3, 1995 filed with the Commission on July 18,
                        1995).
         3.2         -- Bylaws of the Registrant (incorporated herein by reference to Exhibit
                        3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the
                        Commission on July 18, 1995).
         4.1         -- Indenture, dated July 3, 1995, by and between the Registrant and
                        Shawmut Bank, N.A., as Trustee (incorporated herein by reference to
                        Exhibit 4.1 of the Registrant's Form 8-K dated July 3, 1995 filed
                        with the Commission on July 18, 1995).
         4.2         -- Warrant Agreement, dated July 3, 1995, by and between the Registrant
                        and American Stock Transfer & Trust Company, as Warrant Agent
                        (incorporated herein by reference to Exhibit 4.2 of the Registrant's
                        Form 8-K dated July 3, 1995 filed with the Commission on July 18,
                        1995).
        10.1         -- Trust Agreement of FirstCity Liquidating Trust, dated July 3, 1995
                        (incorporated herein by reference to Exhibit 10.1 of the Registrant's
                        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
                        Registrant and FirstCity Liquidating Trust (incorporated herein by
                        reference to Exhibit 10.2 of the Registrant's Form 8-K dated July 3,
                        1995 filed with the Commission on July 18, 1995).
</TABLE>
 
                                       60
<PAGE>   61
 
<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                                      DESCRIPTION
-------------------- ------------------------------------------------------------------------
<C>                  <S>
        10.3         -- Lock-Box Agreement dated July 11, 1995 among the Registrant,
                        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 Registrant'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 Registrant (incorporated herein by
                        reference to Exhibit 10.4 of the Registrant'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 Registrant,
                        as custodian, Fleet National Bank, as agent, FCLT Loans, L.P.,
                        FirstCity Liquidating Trust, and the Registrant, as servicer
                        (incorporated herein by reference to Exhibit 10.5 of the Registrant's
                        Form 8-A/A dated August 25, 1995 filed with the Commission on August
                        25, 1995).
        23.1         -- Consent of independent auditors.*
        27.1         -- Financial Data Schedule. (Exhibit 27.1 is being submitted as an
                        exhibit only in the electronic format of this Annual 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, as amended, Section 18 of the Securities
                        Exchange 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>
 
---------------
 
* Filed herewith
 
     (b) During the fourth quarter of 1995, a Form 8-K/A was filed, amending a
         previously filed Form 8-K dated September 21, 1995, related to the
         acquisition of Diversified Financial Systems, Inc. and Diversified
         Performing Assets, Inc. Financial statements filed included FirstCity
         Financial Corporation and Subsidiaries Pro Forma Condensed Consolidated
         Financial Statements, Diversified Financial Systems, Inc., Diversified
         Performing Assets, Inc., and Diversified Financial Systems, L.P.
 
         A Form 8-K was filed, dated October 27, 1995, regarding the change in
         FirstCity's certifying accountant to KPMG Peat Marwick LLP.
 
         A Form 8-K/A was filed, dated October 27, 1995, regarding the change in
         FirstCity's certifying accountant to KPMG Peat Marwick LLP. A letter
         from the prior certifying accountant was attached as an exhibit.
 
                                       61
<PAGE>   62
 
                                   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
 
March 25, 1996
 
     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, Chief    March 25, 1996
---------------------------------------------     Executive Officer and
              James R. Hawkins                    Director (Principle
                                                  Executive Officer)

          /s/  C. IVAN WILSON                   Vice Chairman and Director      March 25, 1996
---------------------------------------------
               C. Ivan Wilson

         /s/  JAMES T. SARTAIN                  President, Chief Operating      March 25, 1996
---------------------------------------------     Officer and Director
              James T. Sartain                    

        /s/  MATT A. LANDRY, JR.                Executive Vice President,       March 25, 1996
---------------------------------------------     Chief Financial Officer 
             Matt A. Landry, Jr.                  and Director (Principal  
                                                  Financial and Accounting
                                                  Officer)

        /s/  RICK R. HAGELSTEIN                 Executive Vice President,       March 25, 1996
---------------------------------------------     Chief Credit Officer and
             Rick R. Hagelstein                   Director
                                                  

          /s/  RICHARD E. BEAN                  Director                        March 25, 1996
---------------------------------------------
               Richard E. Bean
</TABLE>
 
                                       62
<PAGE>   63
                                 EXHIBIT INDEX
                                 -------------


Exhibit No.        Exhibit                                 
-----------        -------
   23.1            Consent of Independent Auditors             

   27.1            Financial Data Schedule


                                 63