<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                       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
             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
             THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE TRANSITION PERIOD FROM           TO



</Table>

                        COMMISSION FILE NUMBER 033-19694
                        FIRSTCITY FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

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

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

                                 (254) 751-1750
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                              TITLE OF EACH CLASS
                          COMMON STOCK, PAR VALUE $.01
                 ADJUSTING RATE PREFERRED STOCK, PAR VALUE $.01

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

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

     The number of shares of common stock outstanding at March 22, 2002 was
8,376,500. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based upon the closing price of
the common stock on the Nasdaq National Market System, was approximately
$6,564,345.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                        FIRSTCITY FINANCIAL CORPORATION

                               TABLE OF CONTENTS

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
Item 1    Business....................................................    2
Item 2    Properties..................................................   11
Item 3    Legal Proceedings...........................................   12
Item 4    Submission of Matters to a Vote of Security Holders.........   13

                                  PART II
Item 5    Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................   13
Item 6    Selected Financial Data.....................................   14
Item 7    Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   15
Item 7A   Quantitative and Qualitative Disclosures About Market
          Risk........................................................   44
Item 8    Financial Statements and Supplementary Data.................   47
Item 9    Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................  116

                                  PART III
Item 10   Directors and Executive Officers of the Registrant..........  116
Item 11   Executive Compensation......................................  119
Item 12   Security Ownership of Certain Beneficial Owners and
          Management..................................................  125
Item 13   Certain Relationships and Related Transactions..............  126

                                  PART IV
Item 14   Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................  127
</Table>

                                        1
<PAGE>

                          FORWARD LOOKING INFORMATION

     This Annual Report on Form 10-K may contain forward-looking statements. The
factors identified under "Risk Factors" contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, FirstCity Financial Corporation (the
"Company" or "FirstCity").

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

                                     PART I

ITEM 1.  BUSINESS.

GENERAL

     FirstCity, a Delaware corporation, is a financial services company
headquartered in Waco, Texas with offices throughout the United States and
Mexico and a presence in France. The Company began operating in 1986 as a
specialty financial services company focused on acquiring and resolving
distressed loans and other assets purchased at a discount relative to the
aggregate unpaid principal balance of the loans or the appraised value of the
other assets ("Face Value"). To date the Company has acquired, for its own
account and through various affiliated partnerships, pools of assets or single
assets (collectively referred to as "Portfolio Assets" or "Portfolios") with a
Face Value of approximately $6.4 billion. The Company's servicing expertise,
which it has developed largely through the resolution of distressed assets, is a
cornerstone of its growth strategy. Today the Company is engaged in two
principal businesses: (i) Portfolio Asset acquisition and resolution and (ii)
consumer lending through the Company's minority investment in Drive Financial
Services LP ("Drive"). See Note 8 of the Company's Consolidated Financial
Statements for certain financial information about these two segments of the
Company.

BUSINESS STRATEGY

     The Company's core business is the acquisition, management, servicing and
resolution of Portfolio Assets. Key elements of the Company's overall business
strategy include:

     - Increasing the Company's investments in Portfolio Assets acquired from
       financial institutions and government agencies, both for its own account
       or through investment entities formed with Cargill Financial Services
       Corporation ("Cargill" or "Cargill Financial") or one or more other
       co-investors, thereby capitalizing on the expertise of partners whose
       skills complement those of the Company.

     - Identifying and acquiring, through non-traditional niche sources,
       distressed assets that meet the Company's investment criteria, which may
       involve the utilization of special acquisition structures.

     - Acquiring, managing, servicing and resolving Portfolio Assets in certain
       international markets, either separately or in partnership with others,
       including Cargill.

     - Capitalizing on the Company's servicing expertise to enter into new
       markets with servicing agreements that provide for reimbursement of costs
       of entry and operations plus an incentive servicing fee after certain
       thresholds are met without requiring substantial equity investments.

                                        2
<PAGE>

     - Retaining a minority interest investment in Drive.

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

BACKGROUND

     The Company began operating in the financial service business in 1986 as a
purchaser of distressed assets from the Federal Deposit Insurance Corporation
("FDIC") and the Resolution Trust Corporation ("RTC"). From its original office
in Waco, Texas, with a staff of four professionals, the Company's asset
acquisition and resolution business grew to become a significant participant in
an industry fueled by the problems experienced by banks and thrifts throughout
the United States. In the late 1980s, the Company also began acquiring assets
from healthy financial institutions interested in eliminating nonperforming
assets from their portfolios. The Company began its relationship with Cargill in
1991. Since that time, the Company and Cargill have formed a series of
Acquisition Partnerships through which they have jointly acquired over $5.5
billion in Face Value of Portfolio Assets.

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

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

     Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Mortgage Corp. and Capital
Corp. These entities comprise the operations that were previously reported as
the Company's mortgage banking operations. Because the Company formally adopted
plans to discontinue the operations of Mortgage Corp. and Capital Corp., and
operations at each such entity have ceased, the results of historical operations
have been reflected as discontinued operations.

     On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had stated assets of approximately $95 million and stated
liabilities of approximately $98 million. The Company has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy.

     As a result of the liquidity constraints created by the discontinued
operations of Mortgage Corp. and Capital Corp., in the third quarter of 2000,
Consumer Corp. completed the sale of a 49% equity interest in its automobile
finance operation to IFA Drive GP Holdings LLC ("IFA-GP") and IFA Drive LP
Holdings LLC ("IFA-LP"), wholly-owned subsidiaries of BoS(USA), Inc. (formerly
known as IFA Incorporated) ("BoS(USA)"), a wholly-owned subsidiary of Bank of
Scotland, for a purchase price of $15 million cash, pursuant to the terms of a
Securities Purchase Agreement dated as of August 18, 2000 (the "Securities
Purchase Agreement"), by and among the Company, Consumer Corp., FirstCity
Funding, LP ("Funding LP"), FirstCity Funding GP Corp. ("Funding GP"), IFA-GP
and IFA-LP. The transaction generated $75 million in cash and resulted in a net
gain of $8.1 million. Simultaneously, the Bank of Scotland and the

                                        3
<PAGE>

Company completed a debt restructure whereby the Company reduced the outstanding
debt under its senior and subordinate facilities from $113 million to
approximately $44 million. The Company also retired approximately $6.4 million
of debt owed to other lenders.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     The Company engages in the Portfolio Asset acquisition and resolution
business through its wholly owned subsidiary, FirstCity Commercial Corporation,
and its subsidiaries ("Commercial Corp."). In the Portfolio Asset acquisition
and resolution business Commercial Corp. acquires and resolves portfolios of
performing and nonperforming commercial and consumer loans and other assets that
are generally acquired at a discount to Face Value. Purchases may be in the form
of pools of assets or single assets. Performing assets are those as to which
debt service payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are those as to which
debt service payments are not being made in accordance with the original or
restructured terms of such assets, or as to which no debt service payments are
being made. Portfolios are designated as nonperforming unless substantially all
of the assets comprising the Portfolio are performing. Once a Portfolio has been
designated as either performing or nonperforming, such designation is generally
not changed for accounting purposes regardless of the performance of the assets
comprising the Portfolio. Portfolios are either acquired for Commercial Corp.'s
own account or through investment entities formed with Cargill or one or more
other co-investors (each such entity, an "Acquisition Partnership"). See
"Portfolio Asset Acquisition and Resolution Business -- Relationship with
Cargill". To date, Commercial Corp. and the Acquisition Partnerships have
acquired over $6.4 billion in Face Value of assets, with FirstCity's net
acquisition of $219 million.

  SOURCES OF ASSETS ACQUIRED

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

 PORTFOLIO ASSETS

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

     To date, a substantial majority of the Portfolio Assets acquired by
Commercial Corp. has been designated as nonperforming. Commercial Corp. seeks to
resolve nonperforming Portfolio Assets through (i) a negotiated settlement with
the borrower in which the borrower pays all or a discounted amount of the loan,
(ii) conversion of the loan into a performing asset through extensive servicing
efforts followed by either a sale of the loan to a third party or retention of
the loan by Commercial Corp. or the Acquisition Partnership or (iii) foreclosure
of the loan and sale of the collateral securing the loan.
                                        4
<PAGE>

     Commercial Corp. has substantial experience acquiring, managing and
resolving a wide variety of asset types and classes. As a result, it does not
limit itself as to the types of Portfolios it will evaluate and purchase.
Commercial Corp.'s willingness to acquire Portfolio Assets is generally
determined by factors including the information that is available regarding the
assets in a Portfolio, the price at which the Portfolio can be acquired and the
expected net cash flows from the resolution of such assets. Commercial Corp. has
acquired Portfolio Assets in virtually all 50 states, the Virgin Islands, Puerto
Rico, France, Japan and Mexico. Commercial Corp. believes that its willingness
to acquire nonhomogeneous Portfolio Assets without regard to geographic location
provides it with an advantage over certain competitors that limit their
activities to either a specific asset type or geographic location.

     Commercial Corp. also seeks to capitalize on emerging opportunities in
foreign countries in which the market for nonperforming loans of the type
generally purchased by Commercial Corp. is less efficient than the market for
such assets in the United States. Through December 31, 2001, Commercial Corp.
has acquired, with Cargill and a local French partner, 12 Portfolios in France,
consisting of approximately 22,576 assets, for an aggregate purchase price of
approximately $276 million. Such assets had a Face Value of approximately $1.1
billion. Commercial Corp.'s share of the equity interest in the Portfolios
acquired in France ranges from 10% to 33.33% and Commercial Corp. has made a
total equity investment in these Portfolios of approximately $24 million.
Commercial Corp. owns a 10% interest in MCS et Associates ("MCS"), a French
asset servicing company, and Commercial Corp. and is, in conjunction with MCS
and Cargill, actively pursuing opportunities to purchase additional pools of
Portfolio Assets in France and other areas of Western Europe. In addition,
Commercial Corp. has formed a Mexican asset servicing company, which has offices
in Guadalajara and Mexico City, Mexico, that facilitates Commercial Corp.'s
participation in acquisition of Portfolios in Mexico.
Through December 31, 2001 Commercial Corp. and its various partners have
acquired eight Portfolios in Mexico consisting of an aggregate of approximately
44,497 assets with a Face Value of approximately $2.0 billion for a total
purchase price of approximately $415 million. Commercial Corp.'s share of the
equity interest in the Portfolios acquired in Mexico ranges from 3.2% to 20%,
and Commercial Corp. has made a total investment therein of approximately $27
million.

     The following table presents selected data for the Portfolio Assets
acquired by Commercial Corp.

                                PORTFOLIO ASSETS

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                        2001        2000        1999
                                                      --------   ----------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                   <C>        <C>          <C>
Face Value..........................................  $766,904   $1,578,932   $516,518
Total purchase price................................  $224,927   $  394,927   $210,799
Total equity invested(1)............................  $139,273   $  341,736   $ 63,260
Commercial Corp. equity invested....................  $ 24,319   $   22,140   $ 11,203
Total number of Portfolio Assets....................     8,099       47,320      5,769
</Table>

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

(1) Includes investments made in the form of equity and notes receivable from
    affiliates of the investor group to the Acquisition Partnerships.

  SOURCES OF PORTFOLIO ASSETS

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

                                        5
<PAGE>

     Commercial Corp. identifies investment opportunities in foreign markets in
much the same manner as in the United States. In varying degrees of volume and
efficiency, the markets of Europe, Asia, and Latin America all include sellers
of nonperforming assets. In some countries, such as Mexico, the government has
taken a very active role in the management and orderly disposition of these
types of assets. Commercial Corp.'s established presence in Mexico and France
provides a strong base for the identification, valuation, and acquisition of
assets in those countries, as well as in adjacent markets. Commercial Corp.
continues to identify partners who have contacts within various foreign markets
and can bring Portfolio Asset opportunities to Commercial Corp.

  ASSET ANALYSIS AND UNDERWRITING

     Prior to making an offer to acquire any Portfolio, Commercial Corp.
performs an extensive evaluation of the assets that comprise the Portfolio. If,
as is often the case, the Portfolio Assets are nonhomogeneous, Commercial Corp.
will evaluate all individual assets determined to be significant to the total of
the proposed purchase. If the Portfolio Assets are homogenous in nature, a
sample of the assets comprising the Portfolio is selected for evaluation. The
evaluation of individual assets generally includes analyzing the credit and
collateral file or other due diligence information supplied by the seller. Based
upon such seller-provided information, Commercial Corp. will undertake
additional evaluations of the asset, that will, to the extent permitted by the
seller, will include site visits to, and environmental reviews of the property
securing the loan or the asset proposed to be purchased. Commercial Corp. will
also analyze relevant local economic and market conditions based on information
obtained from its prior experience in the market or from other sources, such as
local appraisers, real estate principals, realtors and brokers.

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

     The analysis and underwriting procedure in foreign markets follows the same
extensive diligence philosophy as that employed by the Company domestically.
Additional risks are evaluated in foreign markets, including currency strength,
short and long-term market stability and political concerns. These risks are
appropriately priced into the cost of the acquisition.

  SERVICING

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

     Commercial Corp. services all of the Portfolio Assets owned for its own
account, all of the Portfolio Assets owned by the Acquisition Partnerships and,
to a very limited extent, certain Portfolio Assets owned by third parties. In
connection with the Acquisition Partnerships in the United States, Commercial
Corp.

                                        6
<PAGE>

generally earns a servicing fee, which is a percentage of gross cash collections
generated rather than a management fee based on the Face Value of the asset
being serviced. The rate of servicing fee charged is generally a function of the
average Face Value of the assets within each pool being serviced (the larger the
average Face Value of the assets in a Portfolio, the lower the fee percentage
within the prescribed range), the type of assets and the level of servicing
required on each assets. For the Mexican Acquisition Partnerships, Commercial
Corp. earns a servicing fee based on costs of servicing plus a profit margin.
The Company also has certain consulting contracts with its Mexican investment
entities pursuant to which the Company is entitled to additional compensation
for servicing once a specified return to the investors has been achieved. The
Acquisition Partnerships in France are serviced by MCS in which the Company
maintains a 10% equity interest.

  STRUCTURE AND FINANCING OF PORTFOLIO ASSET PURCHASES

     Portfolio Assets are either acquired for the account of a subsidiary of
Commercial Corp. or through the Acquisition Partnerships. Portfolio Assets owned
directly by a subsidiary of Commercial Corp. may be funded with cash contributed
by Commercial Corp., equity financing provided by an affiliate of Cargill, and
secured senior debt that is recourse only to such subsidiary.

     Each Acquisition Partnership is a separate legal entity, (generally a
limited partnership, but may instead be a limited liability company, trust,
corporation or other type of entity). Commercial Corp. and an investor typically
form a corporation to serve as the corporate general partner of each Acquisition
Partnership. Generally, for domestic Acquisition Partnerships, Commercial Corp.
and another investor each own 50% of the general partner and a 49.5% limited
partnership interest in the domestic Acquisition Partnership (the general
partner owns the other 1% interest). Cargill or its affiliates are the investor
in the vast majority of the Acquisition Partnerships currently in existence. See
"-- Relationship with Cargill." Certain institutional investors have also held
limited partnership interests in the Acquisition Partnerships and may hold
interests in the related corporate general partners.

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

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

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

     In foreign markets, Commercial Corp. conducts cautious analysis with
respect to the establishment of ownership structures. Prior to investment,
Commercial Corp., in conjunction with its co-investors, performs significant due
diligence and planning on the tax, licensing, and other ownership issues of the
particular country. As in the United States, each foreign Acquisition
Partnership is a separate legal entity, generally formed as the equivalent of a
limited liability company or a liquidating trust. Over the year, Commercial
Corp. has cultivated successful relationships with several investors in its
international acquisitions.

                                        7
<PAGE>

  RELATIONSHIP WITH CARGILL

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

     Under a Right of First Refusal Agreement and Due Diligence Reimbursement
Agreement effective as of January 1, 1998, as amended (the "Right of First
Refusal Agreement") among the Company, FirstCity Servicing Corporation, Cargill
and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), if the Company
receives an invitation to bid on or otherwise obtains an opportunity to acquire
interests in loans, receivables, real estate or other assets located in the
United States, Canada, Mexico, or the Caribbean in which the aggregate amount to
be bid exceeds $4 million, the Company is required to follow a prescribed notice
procedure pursuant to which CFSC has the option to participate in the proposed
purchase by requiring that such purchase or acquisition be effected through an
Acquisition Partnership formed by the Company and Cargill (or an affiliate). The
Right of First Refusal Agreement does not prohibit the Company from holding
discussions with entities other than CFSC regarding potential joint purchases of
interests in loans, receivables, real estate or other assets, provided that any
such purchase is subject to CFSC's right to participate in the Company's share
of the investment. The Right of First Refusal Agreement further provides that,
subject to certain conditions, CFSC will bear $20,000 per month plus 50% of the
third party due diligence expenses incurred by the Company in connection with
proposed asset purchases. The Right of First Refusal Agreement is a restatement
and extension of a similar agreement entered into among the Company, certain
members of the Company's management and Cargill in 1992. The Right of First
Refusal Agreement has a termination date of February 1, 2004.

     Future increases in the Company's investments in Portfolio Assets acquired
from institutions and government agencies will come through investment entities
formed with Cargill or one or more other co-investors, thereby capitalizing on
the expertise of partners whose skills complement those of the Company.

  BUSINESS STRATEGY

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

     - Traditional markets.  Commercial Corp. believes it will continue to
       invest in Portfolio Assets acquired from financial institutions and
       government agencies, both for its own account or through investment
       entities formed with Cargill or one or more other co-investors.

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

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

                                        8
<PAGE>

CONSUMER LENDING

     The Company historically conducted all of its consumer receivable
origination activities through Consumer Corp. Consumer Corp.'s focus had been on
the origination and servicing of sub-prime consumer loans. Such loans are
extended to borrowers who evidence an ability and willingness to repay credit,
but have experienced an adverse event, such as a job loss, illness or divorce,
or have had past credit problems, such as delinquency, bankruptcy, repossession
or charge-offs. In the third quarter of 2000, Consumer Corp. formed Drive and
transferred the entire operations of its automobile finance platform to Drive.
Consumer Corp. sold a 49% equity interest in Drive to IFA-GP and IFA-LP,
subsidiaries of BoS(USA), a wholly owned subsidiary of Bank of Scotland. See
"Background" for additional information related to formation and structure of
Drive. As a result of the sale, the majority of Consumer Corp.'s operations have
been accounted for under the equity method since August 1, 2000.

     Drive is a specialized consumer finance company engaged in the purchase,
securitization, and servicing of retail installment contracts originated by
automobile dealers. Drive acquires retail installment contracts principally from
manufacturer-franchised dealers in connection with their sale of used and new
automobiles and light duty trucks to "sub-prime" customers with limited credit
histories or past credit problems. At the present, Drive does not extend credit
directly to consumers, nor does it purchase retail installment contracts from
other financial institutions.

     Ownership of Drive is allocated as follows: 49% of Drive is owned (directly
and indirectly) by IFA-GP and IFA-LP, 31% of Drive is owned (directly and
indirectly) by Consumer Corp., and 20% of Drive (directly and indirectly) by
certain members of Drive's executive management (the "Auto Finance Management
Group"). The partners of Drive have no obligation to make additional capital
contributions to Drive. In connection with the sale of the interest in Drive to
IFA-GP and IFA-LP, BoS(USA) provided a term financing of $60 million to Drive
and its subsidiary, Drive ABS LP, which was used to repay indebtedness owed to
the Company by Consumer Corp. The Company provided a guaranty limited to a
maximum of up to $4 million of the $60 million loan by BoS(USA). The balance of
this term loan was $28 million at December 31, 2001. The Company, Consumer Corp.
and Funding L.P. secured the guaranty with security interests in their
respective ownership interests in Consumer Corp., Funding L.P. and Drive.
BoS(USA) also provided a warehouse line to Drive through a $100 million
Receivables Financing Agreement (the "Receivables Financing Agreement"). The
Receivables Financing Agreement was in addition to the $100 million warehouse
line provided to Drive by Enterprise Funding Corporation, an affiliate of Bank
of America.

     On February 16, 2001, BoS(USA) and Drive entered into an amendment to the
Receivables Financing Agreement providing for an increase in the maximum
commitment under the facility to $150 million. On February 16, 2001, Drive
entered into a subordinate capital loan agreement with BoS(USA) that provides
for working capital loans in the maximum aggregate principal amount of $40
million to be made available to Drive. Draws of $32 million made under this
facility have been applied to pay down on the $60 million term facility provided
by BoS(USA).

     In June, 2001, Drive terminated its prior warehouse facility with
Enterprise Funding Corporation. Effective September 6, 2001, Drive entered into
a warehouse line of credit agreement with Variable Funding Capital Corporation,
a subsidiary of First Union National Bank, which provided borrowings up to $100
million. Drive's obligation under the arrangement at December 31, 2001 was zero
and bears interest at a commercial paper rate (2.03% at December 31, 2001 plus
associated fees). The debt will be secured by Drive's retail installment
contracts and terminates on September 5, 2002.

     During the fourth quarter of 2000, Drive completed a securitization of $100
million of face value of automobile receivables. In connection with that
securitization, BoS(USA) was required to enter into agreements to pay certain
fees and expenses, and to repurchase contracts under certain circumstances and
to indemnify other parties to the securitization from certain liabilities
pursuant to the securitization documents. BoS(USA) required the Company to
provide an indemnity to BoS(USA) for 31% (the ownership interest held directly
and indirectly by Consumer Corp. in Drive) of any and all losses suffered by
BoS(USA) under those agreements. The Company believes that additional funding
provided by BoS(USA) and Variable
                                        9
<PAGE>

Capital Funding Corporation along with improved capital markets execution should
provide the liquidity needed by Drive to allow this business model to mature
with planned, controlled growth.

GOVERNMENT REGULATION

     Portfolio Asset Acquisition and Resolution -- Certain aspects of the
Company's Portfolio Asset acquisition and resolution business are subject to
regulation under various federal, state and local statutes and regulations that
impose requirements and restrictions affecting, among other things, disclosures
to obligors, the terms of secured transactions, collection, repossession and
claims handling procedures, multiple qualification and licensing requirements
for doing business in various jurisdictions, and other trade practices.

     Consumer Lending -- Numerous federal and state consumer protection laws and
related regulations impose substantial requirements upon lenders and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B and Z, state adaptations
of the National Consumer Act and of the Uniform Consumer Credit Code, and state
motor vehicle retail installment sales acts, retail installment sales acts and
other similar laws. Also, state laws impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liabilities upon creditors who fail to comply with their provisions.

     In addition, as an affiliate of BoS (USA), Drive is subject to regulatory
oversight by the Federal Reserve Bank and the Office of the Comptroller of
Currency, who may periodically review the operations of Drive when examining the
safety and soundness of BoS (USA)'s and Bank of Scotland's operations in the
United States.

COMPETITION

     Portfolio Asset Acquisition and Resolution -- The Portfolio Asset
acquisition business is highly competitive. Some of the Company's principal
competitors are substantially larger and better capitalized than the Company.
Because of these resources, these companies may be better able than the Company
to acquire Portfolio Assets, to pursue new business opportunities or to survive
periods of industry consolidation. Generally, there are three aspects of the
distressed asset business: due diligence, Portfolio management, and servicing.
The Company is a major participant in all three areas. In comparison, certain of
its competitors (including certain securities and banking firms) have
historically competed primarily as portfolio purchasers and have customarily
engaged other parties to conduct due diligence on potential Portfolio purchases
and to service acquired assets, and certain other competitors (including certain
banking and other firms) have historically competed primarily as servicing
companies.

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

     Consumer Lending -- The automobile finance industry is the second largest
consumer finance market in the United States. The vast majority of automobile
financing is provided by captive finance subsidiaries of major auto
manufacturers, banks, and credit unions for vehicles purchased by "A" credit
consumers or "prime" consumers. Primary lenders tend to avoid or do not
consistently serve the sub-prime market, in which predominantly used automobiles
are purchased by borrowers with "B," "C," or "D" credit. The sub-prime consumer
market estimated at approximately $60 billion per year is served mainly by
independent finance companies such as Drive

     The Company believes that the sub-prime, consumer automobile market is
growing because of a number of factors including (i) economic trends, (ii) the
extension of the average useful life of automobiles, and

                                        10
<PAGE>

(iii) the increasing number of late model used automobiles being offered for
sale including former rental cars and off-lease vehicles.

     The Company believes Drive is well positioned to maximize on this
opportunity due to its talented management team, strong financial partner in
BoS(USA), growth of market saturation, consistent record of success of its
business model and an attractive net margin environment, assisted by the low
wholesale interest market.

     Drive is currently represented in 21 states with concentrations in the
Texas, California and Georgia markets, which represent 42%, 13% and 8%
respectively of business written in the last year. Drive purchased $413 million
in receivable contracts in 2001, which represents a fraction of 1% of the
potential market. The Company believes there is ample room to grow both in
current markets and in new markets not yet serviced. Sub-prime competition
varies from market to market, but the largest competitors seen in most markets
include Americredit Corporation, Household Finance, WFS Finance and Capital One.
Each of these competes in a different credit sector within Drive's market and
all are currently moving upwards in the credit cycle as the economy changes.
Drive believes it has opportunities to grow its market share, at the lowest end
of the credit spectrum, through controlled use of its business model.

EMPLOYEES

     The Company had 185 employees as of December 31, 2001. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are good.

RELATIONSHIP WITH THE BANK OF SCOTLAND

     The Company has had a significant relationship with the Bank of Scotland or
its subsidiaries since September 1997. The Company has entered into loan
agreements from time to time since 1997, including the current loan agreement
related to the Company's revolving line of credit and Term Loans A and B.
Additionally, the Company through its subsidiary Consumer Corp. is a 31% owner
of Drive, and IFA-GP and IFA-LP, subsidiaries of BoS(USA), own an aggregate 49%
interest in Drive. BoS(USA) is a wholly owned subsidiary of the Bank of
Scotland.

     BoS(USA) has an option to acquire a warrant for 1,975,000 shares of the
Company's non-voting Common Stock; the option can be exercised after June 30,
2002 if the Company's $12 million Term Loan B owed to BoS(USA) and The Bank of
Scotland remains outstanding, but not prior to that date. The strike price is
$2.3125 per share. In the event that prior to June 30, 2002 the Company either
(a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays
off the balance of Term Loan B from proceeds of an equity offering, then the
option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will
terminate. BoS(USA) and the Company extended the initial exercise date for this
option to acquire a warrant for 1,975,000 shares from August 31, 2001 to June
30, 2002. BoS(USA) and the Company extended the exercise date to allow the
Company additional time to pursue possible restructure alternatives which would
otherwise be limited due to change of control issues related to its substantial
NOLs.

     BoS(USA) also has a warrant to purchase 425,000 shares of the Company's
voting Common Stock at $2.3125 per share. In the event that Term Loan B is
terminated prior to June 30, 2002 through a transaction involving the issuance
of warrants, BoS(USA) is entitled to additional warrants in connection with this
existing warrant for 425,000 shares to retain its ability to acquire
approximately 4.86% of the Company's voting Common Stock. BoS(USA) and the
Company amended the warrant to extend the date from August 31, 2001 to June 30,
2002 to correspond to the extension of the initial exercise date of the option
described in the preceding paragraph.

ITEM 2.  PROPERTIES.

     The Company leases all its office locations. The Company leases its current
headquarters building from a related party under a noncancellable operating
lease, which expires December 31, 2006. All leases of the other

                                        11
<PAGE>

offices of the Company and subsidiaries expire prior to 2005. The following is a
list of the Company's principal physical properties leased as of December 31,
2001.

<Table>
<Caption>
LOCATION                                   FUNCTION                   BUSINESS SEGMENT
--------                                   --------                   ----------------
<S>                           <C>                                   <C>
Waco, Texas.................  Executive Offices                     Corporate/Commercial
Philadelphia,                 Servicing Offices                     Commercial
  Pennsylvania..............
Richmond, Virginia..........  Servicing Offices                     Commercial
Guadalajara, Mexico.........  Servicing Offices                     Commercial
Mexico City, Mexico.........  Servicing Offices                     Commercial
Dallas, Texas...............  Drive Executive & Servicing Offices   Consumer
Cypress, California.........  Drive Servicing Offices               Consumer
</Table>

ITEM 3.  LEGAL PROCEEDINGS.

     On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor
Financial Mortgage Corporation ("HFMC") and four subsidiaries of HMFC filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code before
the United States Bankruptcy Court for the Northern District of Texas, Dallas
Division. On December 14, 1999, the bankruptcy proceedings were converted to
liquidations under Chapter 7 of the United States Bankruptcy Code. John H.
Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"),
initiated adversary proceedings on May 25, 2001 against FirstCity and various
current and former directors and officers of FirstCity and Harbor alleging
breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and
Harbor directors and officers, and improper transfer of funds from the Harbor
related entities to FirstCity. The claims also include fraudulent and
preferential transfer of assets of the Harbor entities, fraud and conspiracy.
The Trustee, FirstCity and the other defendants have reached terms of an
agreement to compromise the claims brought in the adversary proceedings, subject
to the approval of the Bankruptcy Court and the consent of all necessary
insurers of FirstCity and its subsidiaries and affiliates. Under the proposed
settlement, if approved, the Trustee will release the defendants, their
affiliates and subsidiaries from any and all claims which were brought or could
have been brought by the Trustee against any of the defendants, any past and
present officers and directors of FirstCity or any affiliates or subsidiaries of
FirstCity in consideration of the payment of $3.8 million cash and the release
of any and all claims of FirstCity and its affiliates and subsidiaries and of
the individual defendants in the bankruptcy proceedings against the Trustee,
including administrative and expense claims. Neither the consent of the
necessary insurers nor the approval of the Bankruptcy Court of the proposed
terms of settlement has been obtained, and there can be no assurance that such
consent and approval will be secured. In the event that carrier consent or
bankruptcy court approval is not obtained, FirstCity intends to vigorously
contest the claims of the Trustee, as the Company believes that the claims are
without merit and that it has valid defenses to these claims.

     The Company and Harbor Parent filed suit in the Federal District Court for
the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A.
and Chase Securities, Inc. in September 1999 seeking injunctive relief and
damages resulting from alleged violations by the defendants of the Bank Holding
Company Act and from civil conspiracy engaged in by the defendants, arising from
an engagement letter entered into between the Company and Chase Securities, Inc.
relating to the sale of assets or securities of Harbor Parent, HFMC and their
subsidiaries (collectively "Harbor"). The Company and Harbor Parent alleged that
the conditioning by Chase Bank Texas, N.A. of the extension of credit to Harbor
on the retention of Chase Securities, Inc. by the Company and Harbor violated
the Bank Holding Company Act. The Company additionally sought a judicial
declaration that the plaintiffs were not obligated to pay any commission to
Chase Securities, Inc. under the engagement letter. The Company and Harbor
Parent also sought recovery of treble damages pursuant to the Bank Holding
Company Act and recovery of costs of court, including reasonable attorneys fees.
A motion to dismiss the Texas suit was granted based upon a provision in the
engagement letter that provided that any suit arising from the engagement letter
would be pursued in the State of New York. The Company has been granted leave by
the Supreme Court for the State of New York to

                                        12
<PAGE>

amend its answer in that proceeding to include the claims asserted in the Texas
suit as a counterclaim to the suit brought by Chase Securities, Inc. and to
assert certain affirmative defenses.

     On October 4, 1999, Chase Securities, Inc. filed suit against the Company
before the Supreme Court for the State of New York, County of New York:
Commercial Part seeking recovery of $2.4 million as the balance of a transaction
fee allegedly due it under the terms of the engagement letter discussed above
and other relief. The Company denies that it has any liability to Chase
Securities, Inc. The Company has asserted as a defense to this action the
violations of the Bank Holding Company Act and other claims asserted in the
litigation filed in the Federal District Court for the Western District of
Texas. The Company was granted leave to amend its answer in the suit to include
a counterclaim against Chase Securities, Inc. asserting breach of contract based
upon the matters that were asserted in the Texas suit.

     John H. Litzler, in his capacity as the duly appointed trustee of the
bankruptcy estates of the Harbor Parent and HFMC (the "Trustee"), filed an
action pending in the United States District Court for the Southern District of
New York against Chase Manhattan Bank, formerly Chase Bank of Texas, N.A. and
Chase Securities, Inc. seeking recovery of damages arising from or relating to
various agreements by and between Harbor Parent and HFMC and Chase Manhattan
Bank and Chase Securities, Inc., including the alleged violations of the
Anti-Tying provision of the Bank Holding Company Act as had been asserted by the
Company and Harbor Financial Group, Inc. in the Texas suit.

     The Trustee and the Company and Chase Manhattan Bank and Chase Securities,
Inc. are currently finalizing settlement documents to settle the claims brought
in the suits pending in the New York courts described above, subject to the
approval of the Bankruptcy Court in the proceedings related to Harbor. There can
be no assurance that the parties can resolve outstanding issues related to the
terms of the settlement documentation or that approval of the Bankruptcy Court
of the proposed terms of settlement can be obtained. In the event that the
settlement is not completed or the Bankruptcy Court does not approve the
settlement, the Company intends to vigorously defend the claim of Chase
Securities, Inc. for payment of the fee and to pursue its claims for damages
against Chase Manhattan Bank and Chase Securities, Inc.

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

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

     No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2001.

                                    PART II

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

                        COMMON AND PREFERRED STOCK DATA

     The Company's common stock, $.01 par value per share ("Common Stock"), and
redeemable preferred stock, par value $.01 per share ("New Preferred Stock") are
listed on the Nasdaq National Market System under the symbols FCFC and FCFCO,
respectively. The number of holders of record of Common Stock on

                                        13
<PAGE>

February 28, 2002 was approximately 503. High and low stock prices for the
Common Stock and New Preferred Stock in 2001 and 2000 are displayed in the
following table:

<Table>
<Caption>
                                                            2001             2000
                                                       --------------   --------------
                                                        MARKET PRICE     MARKET PRICE
                                                       --------------   --------------
QUARTER ENDED                                           HIGH     LOW     HIGH     LOW
-------------                                          ------   -----   ------   -----
<S>                                                    <C>      <C>     <C>      <C>
Common Stock:
  March 31...........................................  $ 2.00   $1.03   $ 3.89   $2.13
  June 30............................................    1.74    1.05     2.38    1.58
  September 30.......................................    1.84    1.35     2.88    1.50
  December 31........................................    1.80    1.04     2.19    1.25
New Preferred Stock:
  March 31...........................................  $10.31   $7.06   $11.00   $7.00
  June 30............................................    8.45    7.50     9.25    4.38
  September 30.......................................    8.50    6.50    11.88    8.25
  December 31........................................    8.63    7.00    11.00    9.06
</Table>

     The Company has never declared or paid a dividend on the Common Stock. The
Company currently intends to retain future earnings to finance its growth and
development and therefore does not anticipate that it will declare or pay any
dividends on the Common Stock in the foreseeable future. Any future
determination as to payment of dividends will be made at the discretion of the
Board of Directors of the Company and will depend upon the Company's operating
results, financial condition, capital requirements, general business conditions
and such other factors that the Board of Directors deems relevant. The Company's
Senior Facility and certain other credit facilities to which the Company and its
subsidiaries are parties contain restrictions relating to the payment of
dividends and other distributions. In the third quarter of 1999, dividends on
the New Preferred Stock were suspended. Given the continued high debt levels of
the Company, and management's priority of assuring adequate levels of liquidity,
the Company does not anticipate that dividends on shares of New Preferred Stock
will be paid in 2002.

ITEM 6.  SELECTED FINANCIAL DATA.

     In the third quarter of 2000, Consumer Corp. completed a sale of a 49%
equity interest in its automobile finance operation to IFA-GP and IFA-LP. As a
result of this sale, the Company no longer consolidates the financial statements
of its automobile finance operation since August 1, 2000, but instead records
its investment under the equity method of accounting.

     Effective during the third quarter of 1999, management of the Company
adopted formal plans to discontinue the operations of Mortgage Corp and Capital
Corp. These entities comprise the operations that were previously reported as
the Company's residential and commercial mortgage banking business. Because the
Company formally adopted plans to discontinue the operations of Mortgage Corp.
and Capital Corp., and operations at each such entity have ceased, the results
of historical operations have been reflected as discontinued operations.

     On October 14, 1999, Mortgage Corp. filed for protection under Chapter 11
of the Bankruptcy Code. Mortgage Corp.'s filings with the bankruptcy court
reflected that it had stated assets of approximately $95 million and stated
liabilities of approximately $98 million. FirstCity has not guaranteed the
indebtedness of Mortgage Corp. and has previously reached agreement with its
corporate revolving lenders to permanently waive any events of default related
to Mortgage Corp., including bankruptcy. The Chapter 11 bankruptcy proceeding
was subsequently converted to a Chapter 7 bankruptcy proceeding to liquidate
Mortgage Corp. and certain of its subsidiaries.

     The Selected Financial Data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and with the related

                                        14
<PAGE>

Consolidated Financial Statements and Notes thereto under Item 8 of this Annual
Report on Form 10-K, respectively.

                            SELECTED FINANCIAL DATA

<Table>
<Caption>
                                   2001       2000       1999        1998       1997
                                 --------   --------   ---------   --------   --------
                                     (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>        <C>        <C>         <C>        <C>
Revenues.......................  $ 37,765   $ 52,176   $  58,928   $ 51,544   $ 63,896
Expenses.......................    33,214     56,288      58,197     51,719     49,482
Earnings (loss) from continuing
  operations...................     2,171    (11,733)     (5,819)       785     27,623
Earnings (loss) from
  discontinued operations......    (5,200)    (5,000)   (102,337)   (20,977)     8,005
Net earnings (loss)............    (3,029)   (15,900)   (108,156)   (20,192)    35,628
Redeemable preferred
  dividends....................     2,568      2,568       2,568      5,186      6,203
Net earnings (loss) to common
  stockholders(1)..............    (5,597)   (18,468)   (110,724)   (25,378)    29,425
Net earnings (loss) from
  continuing operations before
  accounting change per common
  share --
  Basic(1).....................     (0.01)     (1.71)      (0.92)     (0.58)      3.28
  Diluted(1)...................     (0.01)     (1.71)      (0.92)     (0.58)      3.25
Net earnings (loss) change per
  common share --
  Basic(1).....................     (0.67)     (2.21)     (13.33)     (3.35)      4.51
  Diluted(1)...................     (0.67)     (2.21)     (13.33)     (3.35)      4.46
Dividends per common share.....        --         --          --         --         --
At year end:
  Total assets.................   138,893    140,991     230,622    336,643    317,146
  Total notes payable..........    91,209     93,764     169,792    165,922    152,216
  Preferred stock..............    32,101     29,533      26,965     26,323     41,908
Total common equity............     3,877      8,478      26,587    136,955    112,758
</Table>

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

(1) Includes $1.2 million and $13.6 million, respectively, of deferred tax
    benefits related to the recognition of benefits to be realized from net
    operating loss carryforwards (NOLs) in 1998 and 1997, and deferred tax
    provisions of $7.0 million and $4.9 million, respectively, in 2000 and 1999.

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

OVERVIEW

     The Company is a financial services company engaged in Portfolio Asset
acquisition and resolution, conducted through Commercial Corp., and in consumer
lending, through its investment in Drive.

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

                                        15
<PAGE>

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

     For the year 2001, the Company reported a net loss to common stockholders
of $5.6 million or $.67 per share on a diluted basis. Components of net loss for
2001 compared to 2000 are as follows:

<Table>
<Caption>
                                                               2001       2000
                                                              -------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
Portfolio Asset Acquisition and Resolution..................  $ 7,713   $  3,354
Consumer....................................................    4,448     10,362
Corporate interest..........................................   (4,649)   (12,175)
Corporate overhead..........................................   (5,341)    (6,274)
Accrued preferred dividends.................................   (2,568)    (2,568)
Loss from discontinued operations...........................   (5,200)    (5,000)
Deferred tax valuation allowance............................       --     (7,000)
Extraordinary gain (early extinguishment of debt)...........       --        833
                                                              -------   --------
  Net loss to common stockholders...........................  $(5,597)  $(18,468)
                                                              =======   ========
</Table>

ANALYSIS OF REVENUES AND EXPENSES

     The Company reported a net loss to common stockholders for 2001 of $5.6
million. As a result of the sale of interest in the automobile finance
operation, the net operations of Drive have been recorded (since August 1, 2000)
as equity in earnings of investments.

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

                       ANALYSIS OF REVENUES AND EXPENSES

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2001         2000           1999
                                                              ----------   -----------   ------------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>           <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Servicing fees.........................................   $ 9,580      $  7,555      $   3,850
     Gain on resolution of Portfolio Assets.................     1,049         3,120          4,054
     Gain on sale of interest in equity investments.........     3,316            --          2,163
     Equity in earnings of investments......................    10,771         7,369         11,318
     Interest income........................................     5,847         2,143          2,610
     Other..................................................     1,190         1,129          1,502
                                                               -------      --------      ---------
          Total.............................................    31,753        21,316         25,497
  Expenses:
     Interest and fees on notes payable.....................     4,128         3,266          4,308
     Salaries and benefits..................................     7,679         5,531          5,542
     Provision for loan and impairment losses...............     3,277         1,971             --
     Occupancy, data processing and other...................     8,857         7,083          5,818
                                                               -------      --------      ---------
          Total.............................................    23,941        17,851         15,668
                                                               -------      --------      ---------
</Table>

                                        16
<PAGE>

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2001         2000           1999
                                                              ----------   -----------   ------------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>           <C>
  Operating contribution before direct taxes................   $ 7,812      $  3,465      $   9,829
                                                               =======      ========      =========
  Operating contribution, net of direct taxes...............   $ 7,713      $  3,354      $   9,743
                                                               =======      ========      =========
CONSUMER LENDING:
  Revenues:
     Servicing fees.........................................   $    --      $  3,887      $   5,086
     Equity in earnings of investments......................     5,923         2,223             --
     Interest income........................................         5        12,882         17,787
     Gain on sale of automobile loans.......................        --         2,836         10,280
     Gain on sale of interest in subsidiary.................        --         8,091             --
     Other..................................................         9            71            171
                                                               -------      --------      ---------
          Total.............................................     5,937        29,990         33,324
                                                               -------      --------      ---------
  Expenses:
     Interest and fees on notes payable.....................        --         3,217          4,730
     Salaries and benefits..................................        --         7,277          8,053
     Provision for loan and impairment losses...............        --         2,420          4,302
     Occupancy, data processing and other...................     1,473         6,706         10,539
                                                               -------      --------      ---------
          Total.............................................     1,473        19,620         27,624
                                                               -------      --------      ---------
  Operating contribution before direct taxes................   $ 4,464      $ 10,370      $   5,700
                                                               =======      ========      =========
  Operating contribution, net of direct taxes...............   $ 4,448      $ 10,362      $   5,635
                                                               =======      ========      =========
  Total operating contribution, net of direct taxes.........   $12,161      $ 13,716      $  15,378
                                                               =======      ========      =========
CORPORATE OVERHEAD:
  Other revenue.............................................   $    75      $    870      $     107
  Corporate interest expense................................    (4,649)      (12,175)        (9,716)
  Salaries and benefits, occupancy, professional and other
     expenses...............................................    (5,416)       (7,144)        (6,688)
  Deferred tax valuation allowance..........................        --        (7,000)        (4,900)
                                                               -------      --------      ---------
  Earnings (loss) from continuing operations................     2,171       (11,733)        (5,819)
  Loss from discontinued operations.........................    (5,200)       (5,000)      (102,337)
  Extraordinary gain........................................        --           833             --
                                                               -------      --------      ---------
  Net loss..................................................    (3,029)      (15,900)      (108,156)
  Preferred dividends.......................................    (2,568)       (2,568)        (2,568)
                                                               -------      --------      ---------
  Net loss to common stockholders...........................   $(5,597)     $(18,468)     $(110,724)
                                                               =======      ========      =========
SHARE DATA:
  Basic and diluted earnings (loss) per common share are as
     follows:
     Loss from continuing operations before accounting
       change per common share..............................   $ (0.01)     $  (1.71)     $   (0.92)
     Discontinued operations per common share...............     (0.62)        (0.60)        (12.32)
     Cumulative effect of accounting change.................     (0.04)           --          (0.09)
     Extraordinary gain.....................................        --          0.10             --
</Table>

                                        17
<PAGE>

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2001         2000           1999
                                                              ----------   -----------   ------------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>           <C>
     Net loss per common share..............................   $ (0.67)     $  (2.21)     $  (13.33)
     Weighted average common shares outstanding.............     8,374         8,351          8,307
</Table>

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     In 2001 the Company invested in excess of $24 million in portfolios
acquired through Acquisition Partnerships. Acquisitions by the Company over the
last five years are summarized as follows:

<Table>
<Caption>
                                                                         FIRSTCITY
                                                              PURCHASE   INVESTED
                                                               PRICE      EQUITY
                                                              --------   ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>        <C>
1st Quarter.................................................  $ 87,407    $ 8,418
2nd Quarter.................................................    33,013      4,885
3rd Quarter.................................................    52,478      5,248
4th Quarter.................................................    52,029      5,768
                                                              --------    -------
          Total 2001........................................  $224,927    $24,319
          Total 2000........................................  $394,927    $22,140
          Total 1999........................................  $210,799    $11,203
          Total 1998........................................  $139,691    $28,478
          Total 1997........................................  $183,229    $37,109
</Table>

     As shown above, portfolio acquisitions were 43% less this year than in
2000. Due to improved liquidity and funding available to this business line,
however, the Company was able to invest more equity in the Portfolios. The
Company's profit contribution increased from $3.4 million in 2000 to $7.7
million in 2001.

     The Company believes that prospects for investment in distressed assets in
2002 continue to be positive. The current economic conditions have caused the
level of non-performing assets on the balance sheets of U.S. lenders to increase
dramatically. In the foreign markets, the availability of distressed assets in
France and Mexico remains strong. The Company is looking to expand its franchise
base into Central and South America as well as other parts of Europe. To
capitalize on these opportunities FirstCity has recently implemented a new
marketing program, with staff dedicated to identification of new opportunities
to explore, both on a bid and negotiated basis.

     Revenues with respect to the Company's Portfolio Asset Acquisition and
Resolution segment consist primarily of (i) servicing fees from Acquisition
Partnerships for the servicing activities performed related to the assets held
in the Acquisition Partnerships, (ii) equity in earnings of affiliated
Acquisition Partnerships and servicing entities, (iii) interest income on
performing Portfolio Assets and loans receivable, and (iv) gains

                                        18
<PAGE>

on disposition of assets. The following table presents selected information
regarding the revenues and expenses of the Company's Portfolio Asset acquisition
and resolution business.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                   PORTFOLIO ASSET ACQUISITION AND RESOLUTION

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
INCOME FROM PORTFOLIO ASSETS AND LOANS RECEIVABLE:
  Average investment in Portfolio Assets and loans
     receivable:
     Domestic........................................  $ 23,674   $ 34,498   $ 52,453
     Mexico..........................................    17,207      4,898        947
     France..........................................        --         --      1,193
                                                       --------   --------   --------
          Total......................................  $ 40,881   $ 39,396   $ 54,593
                                                       ========   ========   ========
  Income from Portfolio Assets and loans receivable:
     Domestic........................................  $  2,856   $  3,817   $  6,171
     Mexico..........................................     3,820      1,088        179
     France..........................................        --         --        101
                                                       --------   --------   --------
          Total......................................  $  6,676   $  4,905   $  6,451
                                                       ========   ========   ========
  Average return:
     Domestic........................................      12.1%      11.1%      11.8%
     Mexico..........................................      22.2%      22.2%      18.9%
     France..........................................        --         --        8.5%
          Total......................................      16.3%      12.5%      11.8%
SERVICING FEE REVENUES:
  Domestic partnerships:
     $ Collected.....................................  $126,591   $ 83,689   $ 99,136
     Servicing fee revenue...........................     3,207      2,712      2,725
     Average servicing fee %.........................       2.5%       3.2%       2.7%
  Mexico partnerships:
     $ Collected.....................................  $147,540   $ 83,931   $ 10,909
     Servicing fee revenue...........................     5,965      2,923        735
     Average servicing fee %.........................       4.0%       3.5%       6.7%
  Incentive service fees.............................  $    408   $  1,920   $    390
  Total Service Fees:
     $ Collected.....................................  $274,131   $167,620   $110,045
     Servicing fee revenue...........................     9,580      7,555      3,850
     Average servicing fee %.........................       3.5%       4.5%       3.5%
PERSONNEL:
Personnel expenses...................................  $  7,679   $  5,531   $  5,542
  Number of personnel (at period end):
     Production......................................        23         23         12
     Servicing.......................................       127         82         60
</Table>

                                        19
<PAGE>

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
INTEREST EXPENSE:
  Average debt.......................................  $ 42,310   $ 32,878   $ 49,078
  Interest expense...................................     4,128      3,266      4,308
  Average cost.......................................       9.8%       9.9%       8.8%
</Table>

     The following table presents selected information regarding the revenues
and expenses of the Acquisition Partnerships.

                   ANALYSIS OF SELECTED REVENUES AND EXPENSES
                            ACQUISITION PARTNERSHIPS

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
REVENUES:
  Gain on resolution of Portfolio Assets.............  $103,599   $ 75,788   $ 51,498
  Gross profit percentage on resolution of Portfolio
     Assets..........................................      41.6%      46.4%      40.4%
  Interest income....................................  $ 24,473   $ 18,049   $ 16,409
  Other income.......................................     2,929      2,195      2,953
INTEREST EXPENSE(1):
  Interest expense...................................    72,151     38,289     15,675
  Average debt.......................................   321,521    292,707    159,827
  Average cost (annualized)..........................      22.4%      13.1%       9.8%
OTHER EXPENSES:
  Service fees.......................................  $ 13,735   $  8,034   $  6,391
  Other operating costs..............................    22,203      8,639     10,971
  Income taxes.......................................    12,139      2,225         81
  Foreign currency transaction.......................    (3,399)     2,079         --
                                                       --------   --------   --------
          Total other expenses.......................    44,678     20,977     17,443
                                                       --------   --------   --------
          Net earnings...............................  $ 14,172   $ 36,766   $ 37,742
                                                       ========   ========   ========
Equity in earnings of Acquisition Partnerships.......  $  9,742   $  7,203   $ 11,444
Equity in earnings (loss) of servicing entities......     1,029        166       (126)
                                                       --------   --------   --------
                                                       $ 10,771   $  7,369   $ 11,318
                                                       ========   ========   ========
</Table>

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

(1) Interest expense for 2001, 2000 and 1999 includes interest on loans to the
    Acquisition Partnerships located in Mexico from affiliates of the investor
    groups. The rates on these loans range between 19% and 20%. The average cost
    on debt excluding the Mexican Acquisition Partnerships was 7.5%, 9.4% and
    9.2% for 2001, 2000 and 1999, respectively.

CONSUMER LENDING

     As previously noted, the Company sold a 49% equity interest in the
automobile finance operation (conducted through Drive) effective August 1, 2000.
Subsequent to the sale, operating activity is recorded using the equity method
of accounting. As a result, the majority of operations reported in the Consumer
Lending segment are for activity prior to August 1, 2000. Therefore,
period-to-period comparisons of Consumer Corp.'s results of operations may not
be meaningful.

                                        20
<PAGE>

     During 2001, Drive completed securitizations of $372 million of face value
of automobile receivables. FirstCity's portion of the earnings from Drive was
$5.7 million. Earnings from this entity correlate closely with the timing, size
and execution of securitizations of originated automobile receivables.
Therefore, earnings from Drive will fluctuate on a quarterly basis. Management
is encouraged with the results to date.

                           ANALYSIS OF SELECTED DATA
                                CONSUMER LENDING

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                       ----------------------------------
                                                          2001         2000        1999
                                                       ----------   ----------   --------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                    <C>          <C>          <C>
Retail installment contracts acquired $..............   $412,760     $238,437    $186,162
Origination characteristics
  Face value to wholesale value......................     100.10%      100.79%     100.33%
  Weighted average coupon............................      20.65%       20.42%      19.16%
  Purchase discount (% of face value)................      15.19%       15.18%      14.33%
Servicing portfolio
  Owned $............................................   $ 82,798     $103,719    $ 31,571
  Securitized $......................................    472,381      253,569     227,864
  Other..............................................         --           --         475
                                                        --------     --------    --------
  Total $............................................   $555,179     $357,288    $259,910
                                                        ========     ========    ========
  Owned -- number of contracts.......................      7,416        8,096       2,360
  Securitized -- number of contracts.................     40,862       24,015      20,864
  Other -- number of contracts.......................         --           --          74
                                                        --------     --------    --------
  Total number of contracts..........................     48,278       32,111      23,298
                                                        ========     ========    ========
Defaults (% of total loans acquired).................      18.05%       15.40%      11.95%
Loss on defaults (% of original loan balance at time
  of default)........................................       8.91%        6.69%       5.18%
Delinquencies (% of total serviced portfolio)........       8.43%        9.05%       5.97%
</Table>

RESULTS OF OPERATIONS

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

2001 COMPARED TO 2000

     The Company reported earnings from continuing operations of $2.2 million in
2001 compared to a loss from continuing operations of $11.7 million in 2000.
Loss from discontinued operations was $5.2 million in 2001 and $5.0 million in
2000. Net loss to common stockholders was $5.6 million in 2001 compared to a
loss of $18.5 million in 2000. On a per share basis, basic and diluted net loss
attributable to common stockholders was $.67 in 2001 compared to a loss of $2.21
in 2000.

  PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     The operating contribution of $7.7 million in 2001 increased by $4.4
million, or 130%, compared with 2000. Commercial Corp. purchased $225 million of
Portfolio Assets during 2001 through the Acquisition Partnerships compared to
$395 million in acquisitions in 2000. Commercial Corp.'s investment in Portfolio

                                        21
<PAGE>

Assets decreased to $14.2 million in 2001 from $30.0 million in 2000. Commercial
Corp. invested $24.3 million in equity in Portfolio Assets in 2001 compared to
$22.1 million in 2000.

     Servicing fee revenues.  Servicing fees increased by 27% to $9.6 million in
2001 from $7.6 million in 2000 primarily as a result of increased operations
from Acquisition Partnerships in Mexico formed during 2000 and 1999. The
servicing fees for the Mexico Acquisition Partnerships are based on operating
expenses, unlike the Acquisition Partnerships in the United States and France,
which are primarily based on collections.

     Gain on resolution of Portfolio Assets.  Proceeds from the resolution of
Portfolio Assets decreased by 39% to $8.8 million in 2001 from $14.4 million in
2000. The net gain on resolution of Portfolio Assets decreased 66% or $2.1
million, primarily as a result of the decreased proceeds and lower gross profit.
The weighted average gross profit percentage on the resolution of Portfolio
Assets in 2001 was 11.9% as compared to 21.7% in 2000.

     Equity in earnings of investments.  Commercial Corp.'s equity in earnings
of Acquisition Partnerships increased 35% to $9.7 million in 2001 compared to
$7.2 million in 2000. Net earnings in the combined Acquisition Partnerships
declined 61% to $14.2 million in 2001 compared to $36.8 million in 2000 due to
significant losses in Mexico, in which the Company has smaller equity
investments compared to investments in the United States and France. See Note 6
of the Company's consolidated financial statements for a comparison of earnings
of the Acquisition Partnerships and equity in earnings of those entities
summarized by geographic region. Equity in earnings of Servicing Entities were
$1.0 million in 2001 due to earnings recorded by one French entity, in which the
Company has a 10% ownership.

     Interest income.  Interest income increased $3.7 million as a result of
increased balances of investment loans receivable from the Mexico Acquisition
Partnerships.

     Gain on sale of interest in equity investments.  During the period, the
Company sold equity investments in domestic Acquisition Partnerships for $7.6
million resulting in a gain of $3.3 million.

     Operating expenses.  Operating expenses increased $6.1 million or 34%
primarily as a result of increased debt costs, the write-down of a Portfolio
Asset, and increased operating costs in Mexico.

     Interest and fees on notes payable increased $.9 million or 26% due to
average debt for 2001 increasing to $42.3 million from $32.9 million in 2000.

     Salaries and benefits increased $2.1 million or 39% primarily due to
increased servicing personnel in Mexico. Total personnel within the Portfolio
Asset acquisition and resolution segment increased from 105 at year end 2000 to
150 at year end 2001, with the personnel in Mexico increasing from 31 at year
end 2000 to 81 at year end 2001.

     The provision for loan and impairment losses totaled $3.3 million in 2001
and is primarily attributed to write-downs of $1.6 million and $.6 million in
estimated future collections of four nonperforming Portfolios and two performing
Portfolios, respectively. Also, the Company recorded permanent valuation
impairments of $1.1 million on one real estate Portfolio. In 2000, the provision
of $2.0 million was related to an impairment valuation on one real estate
Portfolio.

     Occupancy, data processing and other expenses increased $1.8 million or 25%
during the period due to increased operations in Mexico.

  CONSUMER LENDING

     The operating contribution for 2001 was $4.4 million (net of a $.3 million
cumulative effect of accounting change) compared to $10.4 million during 2000.
In 2001, the contribution resulted primarily from equity in earnings of $5.7
million from Drive. The automobile finance operations were consolidated with the
Company until the Company's sale of a 49% interest in Drive on August 1, 2000.

     Excluding equity in earnings of investment, revenues decreased due to the
sale of 49% of the Company's equity interest in the automobile finance
operation.

                                        22
<PAGE>

     Equity in earnings of investment.  As a result of the sale of 49% of the
equity interest in the Company's automobile finance operation, the Company's
interest in the net operations of Drive has been recorded (since August 1, 2000)
as equity in earnings of investments.

     Operating expenses.  Total operating expenses declined primarily as a
result of the sale of 49% of the Company's equity interest in its automobile
finance operation.

  OTHER ITEMS AFFECTING OPERATIONS

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

     Corporate overhead.  Company level interest expense decreased by 62% to
$4.6 million in 2001 from $12.2 million in 2000 as a result of lower levels of
debt. Other corporate overhead expenses declined $1.7 million.

     Income taxes.  Federal income taxes are provided at a 35% rate applied to
taxable income or loss and are offset by NOLs that the Company believes are
available. The tax benefit of the NOLs is recorded in the period during which
the benefit is realized. The Company recorded no deferred tax provision in 2001
and a $7.0 million deferred tax provision in 2000.

2000 COMPARED TO 1999

     The Company reported a loss from continuing operations of $11.7 million in
2000 (including a gain of $8.1 million on sale of the Company's interest in
Consumer Corp. pursuant to the Drive transaction) compared to a loss of $5.8
million in 1999. The loss from discontinued operations totaled $5.0 million in
2000 and $102.3 million in 1999. Net loss to common stockholders was $18.5
million in 2000 compared to $110.7 million in 1999. The Company recorded an
extraordinary gain of $.8 million, or $.10 per share, in 2000 in connection with
the forgiveness of loan fees by the Bank of Scotland with respect to the
Company's restructuring of its outstanding loans. On a per share basis, basic
and diluted net loss attributable to common stockholders was $2.21 in 2000
compared to $13.33 in 1999. An accounting change related to SOP 98-5 resulted in
a loss of $.8 million in the first quarter of 1999 or $0.09 per share.

  PORTFOLIO ASSET ACQUISITION AND RESOLUTION

     The operating contribution of $3.4 million in 2000 declined by $6.4
million, or 66%, compared with 1999. Commercial Corp. purchased $395 million of
Portfolio Assets during 2000 through the Acquisition Partnerships compared to
$211 million in acquisitions in 1999. Commercial Corp.'s year end investment in
Portfolio Assets decreased to $30 million in 2000 from $39.4 million in 1999.
Commercial Corp. invested $22.1 million in equity in Portfolio Assets in 2000
compared to $11.2 million in 1999.

     Servicing fee revenues.  Servicing fees increased by 96% to $7.6 million in
2000 from $3.9 million in 1999 primarily as a result of increased operations
from Acquisition Partnerships in Mexico formed during 2000 and 1999. The service
fees for the Mexico Acquisition Partnerships are based on operating expenses,
unlike the Acquisition Partnerships in the United States and France, which are
based on collections.

     Gain on resolution of Portfolio Assets.  Proceeds from the resolution of
Portfolio Assets decreased by 27% to $14.4 million in 2000 from $19.6 million in
1999. The net gain on resolution of Portfolio Assets decreased by 23% to $3.1
million in 2000 from $4.1 million in 1999 as the result of decreased proceeds.
The weighted average gross profit percentage on the resolution of Portfolio
Assets in 2000 was 21.7% as compared to 20.7% in 1999.

     Gain on sale of interest in equity investments.  During 1999, the Company
sold equity investments in Acquisition Partnerships located in Japan and France
for $12.3 million resulting in a gain of $2.2 million.

     Equity in earnings of Investments.  Net earnings in the combined
Acquisition Partnerships declined 3% to $36.8 million in 2000 compared to $37.7
million in 1999. However, Commercial Corp.'s equity earnings from Acquisition
Partnerships declined 37% to $7.4 million in 2000 from $11.3 million in 1999 due
to smaller
                                        23
<PAGE>

equity investments in recent partnership acquisitions. Equity in earnings of
servicing entities was not significant.

     Interest Income.  Interest income decreased by 18% to $2.1 million in 2000
compared to $2.6 million in 1999 principally as a result of lower balances of
performing portfolios throughout 2000.

     Other revenues.  Other revenues decreased by 25% to $1.1 million in 2000
compared to $1.5 million in 1999 primarily due to reduced reimbursements
received from co-investors in Acquisition Partnerships for due diligence costs
incurred.

     Operating expenses.  Operating expenses increased 14% to $17.9 million in
2000 from $15.7 million in 1999 primarily as a result of a provision for loan
and impairment losses.

     Interest and fees on notes payable declined $1.0 million or 24% due to
average debt declining to $32.9 million in 2000 from $49.1 million in 1999. The
decline in average debt was partially offset by increased interest rates, which
were 9.9% in 2000 compared to 8.8% in 1999.

     Salaries and benefits were consistent from year to year.

     The provision for loan and impairment losses totaled $2.0 million and can
be attributed to a permanent impairment valuation of one real estate Portfolio.

     Occupancy, data processing and other expenses increased $1.3 million or 22%
from year to year due to increased operations in Mexico.

  CONSUMER LENDING

     The operating contribution of $10.4 million in 2000 increased by $4.7
million or 84% compared with 1999 due principally to the sale of 49% of the
Company's equity interest in its automobile finance operation.

     Service fees.  Service fee income declined $1.2 million or 22% due to the
sale of 49% of the Company's equity interest in the automobile finance
operation.

     Equity in earnings of investments.  As a result of the sale of interest in
the automobile finance operation, the Company's interest in the net operations
of Drive was recorded (since August 1, 2000) as equity in earnings of
investments of $2.2 million. First City's share of earnings from a $100 million
securitization by Drive was $1.8 million.

     Interest income.  Interest income on consumer loans declined $4.9 million
or 28% due to the sale of 49% of the Company's equity interest in its automobile
finance operation.

     Gain on sale of automobile loans.  A gain of $2.8 million or 6.9% resulted
from the securitization of automobile loans totaling $41 million in 2000 as
compared to $10.3 million or 6.6% on the sale of $156 million in automobile
loans in 1999.

     Gain on sale of interest in subsidiary.  A gain of $8.1 million was
recorded in the third quarter of 2000 as a result of the sale of 49% of the
Company's equity interest in its automobile finance operation.

     Operating expenses.  Operating expenses decreased $8.0 million or 29% due
to the sale of 49% of the Company's equity interest in its automobile finance
operation.

  OTHER ITEMS AFFECTING OPERATIONS

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

     Corporate overhead.  Company level interest expense increased by 25% to
$12.2 million in 2000 from $9.7 million in 1999 as a result of higher volumes of
debt associated with the equity required to purchase Portfolio Assets, equity
interests in Acquisition Partnerships and capital support to operating
subsidiaries and discontinued operations. Other corporate overhead increased
$0.5 million or 7% due primarily to increased amortization of certain intangible
assets.
                                        24
<PAGE>

     Income taxes.  The Company recorded a deferred tax provision of $7.0
million in 2000 and $4.9 million in 1999 due to revisions of projections of
future taxable income.

LIQUIDITY AND CAPITAL RESOURCES

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

     BoS(USA) has an option to acquire a warrant for 1,975,000 shares of the
Company's non-voting Common Stock; the option can be exercised after June 30,
2002 if the Company's $12 million Term Loan B owed to BoS(USA) and Bank of
Scotland remains outstanding, but not prior to that date. The strike price is
$2.3125 per share. In the event that prior to June 30, 2002 the Company either
(a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays
off the balance of Term Loan B from proceeds of an equity offering, then the
option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will
terminate. BoS(USA) and the Company extended the initial exercise date for this
option to acquire a warrant for 1,975,000 shares from August 31, 2001 to June
30, 2002 to allow the Company additional time to pursue possible restructure
alternatives which would otherwise be limited due to change of control issues
related to its substantial NOLs.

     BoS(USA) also has a warrant to purchase 425,000 shares of the Company's
voting Common Stock at $2.3125 per share. In the event that Term Loan B is
terminated prior to June 30, 2002 through a transaction involving the issuance
of warrants, BoS(USA) is entitled to additional warrants in connection with this
existing warrant for 425,000 shares to retain its ability to acquire
approximately 4.86% of the Company's voting Common Stock. BoS(USA) and the
Company amended the warrant to extend the date from August 31, 2001 to June 30,
2002 to correspond to the extension of the initial exercise date of the option
described in the preceding paragraph.

     Currently, the Company has approximately 1.2 million shares of New
Preferred Stock outstanding with accrued and unpaid dividends of approximately
$6.4 million. The Company's Term Loan B, which resulted from the corporate debt
restructure completed in August 2000, restricts the payment of dividends on
these shares until it is repaid in full. Given the continued high debt levels of
the Company, and management's priority of assuring adequate levels of liquidity,
the Company does not anticipate that dividends on shares of New Preferred Stock
will be paid in 2002. The board of directors and the management of the Company
are currently evaluating various alternatives to address its outstanding shares
of New Preferred Stock and the corresponding accrued dividends and redemption
obligation, in addition to the option of BoS(USA) to acquire a warrant to
purchase 1,975,000 shares.

     During the second quarter of 2000, the Portfolio Asset acquisition and
resolution group of the Company entered into a $17 million loan facility with
CFSC Capital Corp. XXX, a subsidiary of Cargill. In January 2001, the maximum
principal balance under the revolving facility (the "Cargill Facility") was
increased to $30 million. This facility is being used exclusively to provide
equity in new Portfolio acquisitions in partnerships with Cargill and its
affiliates. At December 31, 2001, approximately $3 million was available under
this facility.

     Drive has a warehouse line of credit with BoS(USA), which provides
borrowings up to $150 million. Drive's obligation under this arrangement at
December 31, 2001 includes $30 million, which bears interest at LIBOR plus 1%
(3% at December 31, 2001) and $37.2 million, which bears interest at Prime minus
1.5% (3.25% at December 31, 2001). The debt is secured by $70 million of the
Drive's retail installment contracts and has been extended to June 30, 2002.
Additionally, the note payable contains various covenants, which Drive was in
compliance with at December 31, 2001.

                                        25
<PAGE>

     Drive had a warehouse line of credit with Enterprise Funding Corporation,
which provided borrowings up to $100 million. The agreement was terminated in
June 2001.

     In September 2001, Drive entered into a warehouse line of credit agreement
with Variable Funding Capital Corporation, a subsidiary of First Union National
Bank, which provided borrowings up to $100 million. Drive's obligation under the
arrangement at December 31, 2001 was zero and bears interest at a commercial
paper rate (2.03% at December 31, 2001 plus associated fees). The debt will be
secured by Drive's retail installment contracts and terminates on September 5,
2002.

     The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance their respective operations. Each of
the operating subsidiary credit facilities is nonrecourse to the Company. The
Company has agreed to indemnify BoS(USA) for 31% of losses which might arise as
a result of agreements BoS(USA) executed as a sponsor in connection with the
securitizations completed by Drive. The Company also agreed to provide support
in connection with securitizations by Consumer Corp. and Drive prior to the
acquisition by BoS(USA) of the interest in Drive in August 2000. The Company has
also provided a guaranty limited to a maximum amount of up to $4 million of a
$60 million term loan from BoS(USA) to Drive ($28 million outstanding balance as
of December 31, 2001).

     Excluding the term acquisition facilities of the unconsolidated Acquisition
Partnerships and the term and warehouse facilities of Drive, as of December 31,
2001, the Company and its subsidiaries had credit facilities providing for
borrowings in an aggregate principal amount of $98 million and outstanding
borrowings of $91 million.

     Management believes that the BoS(USA) loan facilities, along with the
liquidity from the Cargill Facility, the related fees generated from the
servicing of assets, equity distributions from existing Acquisition Partnerships
and wholly-owned portfolios, as well as sales of interests in equity
investments, will allow the Company to meet its obligations as they come due
during the next twelve months.

     The following table summarizes the material terms of the credit facilities
to which the Company, its major operating subsidiaries and the Acquisition
Partnerships were parties to as of February 28, 2002 and the outstanding
borrowings under such facilities as of December 31, 2001.

                               CREDIT FACILITIES

<Table>
<Caption>
                                    FUNDED AND
                                     UNFUNDED     OUTSTANDING
                                    COMMITMENT     BORROWINGS
                                   AMOUNT AS OF      AS OF
                                   FEBRUARY 28,   DECEMBER 31,
                                       2002           2001       INTEREST RATE     OTHER TERMS AND CONDITIONS
                                   ------------   ------------   --------------   ----------------------------
                                      (DOLLARS IN MILLIONS)
<S>                                <C>            <C>            <C>              <C>
FIRSTCITY
Company Senior Facility:
  Revolving Line of Credit.......      $ 10           $  6       LIBOR + 2.5%     Secured by the assets of
  Term Loan A....................        31             31       LIBOR + 2.5%     the Company, matures
  Term Loan B....................        12             12       Prime            December 2003
Term credit facility.............         4              4       LIBOR + 5.0%     Secured by ownership
                                                                                  interests in certain
                                                                                  Acquisition partnerships
                                                                                  Matures January 2003
COMMERCIAL CORP.
Acquisition facility.............         4              4       LIBOR + 4.0%     Secured by existing
                                                                                  Portfolio Assets, matures
                                                                                  January 2003
Term facilities..................         7              7       Fixed at         Secured by Portfolio
                                                                 7.00% to 7.66%   Assets, matures June
                                                                                  2002 and November 2002
</Table>

                                        26
<PAGE>

<Table>
<Caption>
                                    FUNDED AND
                                     UNFUNDED     OUTSTANDING
                                    COMMITMENT     BORROWINGS
                                   AMOUNT AS OF      AS OF
                                   FEBRUARY 28,   DECEMBER 31,
                                       2002           2001       INTEREST RATE     OTHER TERMS AND CONDITIONS
                                   ------------   ------------   --------------   ----------------------------
                                      (DOLLARS IN MILLIONS)
<S>                                <C>            <C>            <C>              <C>
Equity investment facility.......        30             27
                                   --------       --------       LIBOR + 4.5%     Acquisition facility for
                                                                                  the investment in future
                                                                                  Acquisition partnerships,
                                                                                  matures March 2003
                                       $ 98           $ 91
    Total........................
                                       ====           ====
UNCONSOLIDATED ACQUISITION
PARTNERSHIPS TERM                      $170           $170
FACILITIES(1)....................                                Fixed at 10%,    Secured by Portfolio
                                       ====           ====
                                                                 LIBOR + 2.25%    Assets, various Maturities
                                                                 to 5% and
                                                                 Prime + 1%
                                                                 to 7%
UNCONSOLIDATED DRIVE
                                       $150           $ 67
Warehouse Facility...............                                LIBOR + 1%;      Secured by warehouse
                                                                 Prime -- 1.5%    inventory, matures June 2002
                                        100             --
Warehouse Facility...............                                Rate based on    Secured by warehouse
                                                                 Commercial       inventory, matures September
                                                                 paper rates      2002
                                                                 combined with
                                                                 certain
                                                                 facility fees
                                         40             32
Subordinate capital Facility.....                                Fixed at 14%     Secured by all assets of
                                                                                  Drive, matures February 2006
Term Facility....................        28             28
                                   --------       --------       LIBOR + 1%;      Secured by residual
                                                                 Prime -- 1.5%    interests, matures August
                                                                                  2003
                                       $318           $127
                                       ====           ====
</Table>

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

(1) In addition to the term acquisition facilities of the unconsolidated
    Acquisition Partnerships, the Mexican Acquisition Partnerships also have
    term debt of approximately $285 million outstanding as of December 31, 2001
    owed to affiliates of the investor groups. Of this amount, the Company has
    recorded approximately $18.6 million as Loans Receivable on the Consolidated
    Balance Sheets.

FOURTH QUARTER

     Net loss for the fourth quarter of 2001 was $1.9 million, including a $2.2
million loss from discontinued operations. After deducting the accrual of
dividends on the New Preferred Stock, net loss to common equity was $2.6
million, or $0.05 per basic and diluted share. Net loss for the fourth quarter
of 2000 was $.5 million. After deducting accrual of dividends on New Preferred
Stock, net loss attributable to common equity was

                                        27
<PAGE>

$1.2 million in 2000, or $0.14 per basic and diluted share. The following table
presents a summary of operations for the fourth quarters of 2001 and 2000.

                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

<Table>
<Caption>
                                                                  FOURTH QUARTER
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
Revenues....................................................   $ 8,664      $ 7,924
Expenses....................................................     7,739        8,025
Earnings (loss) from continuing operations..................       287         (511)
Loss from discontinued operations...........................    (2,200)          --
                                                               -------      -------
Net loss....................................................    (1,913)        (511)
                                                               -------      -------
Preferred dividends.........................................       642          642
                                                               -------      -------
Net loss to common shareholders.............................   $(2,555)     $(1,153)
                                                               =======      =======
Net loss from continuing operations per common share --basic
  and diluted...............................................   $ (0.05)     $ (0.14)
</Table>

DISCUSSION OF CRITICAL ACCOUNTING POLICIES

     In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America. Actual results could differ significantly from those estimates under
different assumptions and conditions. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which are
those that are most important to the portrayal of the Company's consolidated
financial condition and results and require management's most difficult,
subjective and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.

  REVENUE RECOGNITION: PERFORMING, NON-PERFORMING AND REAL ESTATE POOLS.

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

  Non-Performing Portfolio Assets

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

     All non-performing Portfolio Assets are purchased at substantial discounts
from their outstanding legal principal amount, the total of the aggregate of
expected future sales prices and the total payments to be received from
obligors. Subsequent to acquisition, the amortized cost of non-performing
Portfolio Assets is

                                        28
<PAGE>

evaluated for impairment on a quarterly basis. The evaluation of impairment is
determined based on the review of the estimated future cash receipts, which
represents the net realizable value of the non-performing pool. Once it is
determined that there is impairment, a valuation allowance is established for
any impairment identified through provisions charged to operations in the period
the impairment is identified. The Company recorded an allowance for impairment
of $1.6 million in 2001. No allowance was required in either 2000 or 1999.

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

     The actual future proceeds of the pool could vary materially from the
estimated proceeds of the pool due to changes in economic conditions,
deterioration of collateral values, deterioration in the borrowers financial
condition and other conditions described in the risk factors discussed later in
this document. In the event that the actual future proceeds of the pool exceed
the current estimates the reported future results of the Company could be higher
than anticipated and would result in a higher net gain on resolution of
non-performing Portfolio Assets. In the event that actual future proceeds of the
pool are less than current estimates the reported future results of the Company
could be lower than anticipated and would result in lower net gain on resolution
of non-performing Portfolio Assets or possibly require the Company to recognize
impairment in the value of the pool.

  Performing Portfolio Assets

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

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

     Gains are recognized on the performing Portfolio Assets when sufficient
funds are received to fully satisfy the obligation on loans included in the
pool, either from funds from the borrower or sale of the loan. The gain
recognized represents the difference between the proceeds received and the
allocated carrying value of the individual loan in the pool.

     Impairment on each performing Portfolio is measured based on the present
value of the expected future cash flows in the aggregate discounted at the
loans' risk adjusted rate, which approximates the effective interest rates, or
the fair value of the collateral, less estimated selling costs, if any loans are
collateral dependent and foreclosure is probable. The Company recorded an
allowance for impairment of $.6 million in 2001. No allowance was required in
either 2000 or 1999.

     The actual future cash flows of the pool could vary materially from the
expected future cash flows of the pool due to changes in economic conditions,
changes in collateral values, deterioration in the borrowers financial
condition, restructure or renewal of individual loans in the pool, sale of loans
within the pool and other conditions described in the risk factors discussed
later in this document. In the event that the actual future cash flows of the
pool exceed the current estimates, the reported future results of the Company
could be higher than anticipated and would result in a higher level of interest
income due to greater amounts of discount accretion being included in revenue
derived from the performing Portfolio Assets as well as higher gains recognized
on the sale of individual loans from a pool. In the event that actual future
cash flows of the

                                        29
<PAGE>

pool are less than current estimates, the reported future results of the Company
could be lower than anticipated and would result in a lower level of interest
income and reduced gains from the sale of assets from a pool, lower levels of
interest income as a result of lower amounts of discount accretion being
included in revenue derived from performing Portfolio Assets or possibly require
the Company to recognize impairment in the value of the pool due to a decline in
the present value of the expected future cash flows.

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate for its intended use are capitalized, whereas those
relating to holding assets are charged to expense. Income or loss is recognized
upon the disposal of the real estate. Rental income, net of expenses, on real
estate Portfolios is recognized when received. Accounting for the Portfolios is
on an individual asset-by-asset basis as opposed to a pool basis. Subsequent to
acquisition, the amortized cost of real estate Portfolios is evaluated for
impairment on a quarterly basis. The evaluation of impairment is determined
based on the review of the estimated future cash receipts, which represents the
net realizable value of the real estate Portfolio. A valuation allowance is
established for any impairment identified through provisions charged to
operations in the period the impairment is identified. The Company recorded an
allowance for impairment of $1.1 million in 2001 and $2.0 million in 2000. No
valuation allowance was required in 1999.

  DEFERRED TAX ASSET

     As a part of the process of preparing our consolidated financial
statements, the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. This process involves estimating the
Company's actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax asset and liabilities.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effects
of future changes in tax laws or changes in tax rates are not anticipated. The
measurement of deferred tax assets, if any, is reduced by the amount of any tax
benefits that, based on available evidence, are not expected to be realized.

     As a result of the Merger, the Company has substantial federal NOLs that
can be used to offset the tax liability associated with the Company's pre-tax
earnings until the earlier of the expiration or utilization of such NOLs. The
Company accounts for the benefit of the NOLs by recording the benefit as an
asset and then establishing an allowance to value the net deferred tax asset at
a value commensurate with the Company's expectation of being able to utilize the
recognized benefit in the foreseeable future. Such estimates are reevaluated on
a quarterly basis with the adjustment to the allowance recorded as an adjustment
to the income tax expense generated by the quarterly operating results.
Significant events that change the Company's view of its currently estimated
ability to utilize the tax benefits, such as the acquisition of Harbor in the
third quarter of 1997, result in substantial changes to the estimated allowance
required to value the deferred tax benefits recognized in the Company's periodic
consolidated financial statements. The Company's analysis resulted in no change
in 2001 and an increase to the valuation allowance of $7.0 million in 2000. Due
to the evaluation of the recoverability of the deferred tax asset recognized
related to the mortgage banking operations, the Company increased its valuation
allowance by $5.1 million in 1999. Similar events could occur in the future, and
would impact the recognition of the Company's estimate of the required valuation
allowance associated with its NOLs. If there are changes in the estimated level
of the required reserve, operating results will be affected accordingly.

                                        30
<PAGE>

     The Company has recorded a net deferred tax asset of $20 million on the
consolidated balance sheet, which is composed of a gross deferred tax asset of
$205 million net of a valuation allowance of $185 million. Realization is
dependent on generating sufficient taxable income in a look forward period over
the next four years. Although realization is not assured, management believes it
is more likely than not that all of the net deferred tax asset will be realized.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the look
forward period are reduced. In the event that actual results differ from these
estimates or the Company adjusts these estimates in future periods, the Company
may need to establish an additional valuation allowance which could materially
impact its consolidated financial position and results of operations.

  EQUITY INVESTMENT IN DRIVE

     The Company has an equity investment in Drive from which it records 31% of
the results of Drive using the equity method of accounting. The following
discussion addresses the critical accounting policies associated with Drive.

     Retail Installment Contracts, Net -- Retail installment contracts consist
of sub-prime automobile finance receivables, which are acquired from third party
dealers, purchased at a nonrefundable discount from the contractual principal
amount. All retail installment contracts at Drive are held for sale and stated
at the lower of cost or fair value in the aggregate. Drive does not hedge its
retail installment contracts while held for sale. Management of Drive does not
believe Drive is exposed to material interest rate risk during the period
contracts are held for sale.

     Interest is accrued when earned in accordance with the contractual terms of
the retail installment contract. The accrual of interest is discontinued once a
retail installment contract becomes past due 60 days or more.

     Gain on Sale of Retail Installment Contracts -- Drive accounts for sales of
retail installment contracts from securitizations in accordance with Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB Statement No. 125 ("SFAS 140"). In applying SFAS 140 to
Drive's securitized retail installment contract sales, Drive recognizes revenue
(gain on sales of retail installment contracts) and allocates the total cost of
the loans sold to financial components based on their relative fair values.
During the year ended December 31, 2001, Drive sold $402 million of auto retail
installment contracts in securitization transactions and recognized pre-tax
gains of $39 million. Drive retained servicing responsibilities and interests in
the receivables in the form of residual certificates. As of December 31, 2001,
Drive was servicing $472 million of auto receivables that have been sold to
certain special purpose financing trusts (the "Trusts"). In connection with the
sales of retail installment contracts from securitizations, Drive receives
certain residual certificates associated with the securitizations as described
below. Drive and certain of its subsidiaries have entered into an agreement
whereby Drive receives all the economic benefits associated with the residual
certificates and conversely assumes all the risks.

     Under the above agreement, Drive has retained unrated interests in retail
installment contracts sold which are subordinate to senior investors and
certificated interest only strips for the benefit of Drive which represents the
present value of the right to the excess cash flows generated by the securitized
contracts which represents the difference between (a) interest at the stated
rate paid by borrowers and (b) the sum of (i) pass-through interest paid to
third-party investors, (ii) trustee fees, (iii) third-party credit enhancement
fees (if applicable), (iv) stipulated servicing fees, and (v) estimated contract
portfolio credit losses. Drive's right to receive the cash flows begins after
certain over-collateralization requirements have been met, which are specific to
each securitization and used as a means of credit enhancement.

     Valuation of Residual Interests at Drive -- Fair value of the residual
interests at Drive is determined by calculating the present value of the
anticipated cash flows at the time each securitization transaction closes,
utilizing valuation assumptions appropriate for each particular transaction. The
significant valuation assumptions are related to the anticipated average lives
of the retail installment contracts sold, including the effect of anticipated
prepayment speeds and anticipated credit losses.
                                        31
<PAGE>

     The residual interests are accounted for under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Because such assets can be contractually prepaid or otherwise
settled in such a way that the holder would not receive all of the recorded
investment, the assets are classified as available-for-sale investments and are
carried at estimated fair value with any accompanying increases or decreases in
estimated fair value being recorded as unrealized gains or losses in other
comprehensive income (loss). The determination of fair value is based on the
present value of the anticipated excess cash flows utilizing various discount
rates, prepayment speeds and cumulative loss rates. Drive assesses the carrying
value of its securitization related securities for impairment in accordance with
the provisions of EITF 99-20 as discussed below under "Effect of New Accounting
Standards." There can be no assurance that the estimates used to determine the
fair value of the residual certificates will remain appropriate for the life of
each asset and it is reasonably possible that circumstances could change in
future periods which could result in a material change in the estimates used to
prepare the accompanying financial statements. If actual retail installment
contract prepayments or credit losses exceed the Company's current estimates,
other than temporary impairment may be required to be recognized.

  EQUITY INVESTMENTS IN ACQUISITION PARTNERSHIPS

     Commercial Corp. accounts for its investments in Acquisition Partnerships
using the equity method of accounting. This accounting method generally results
in the pass-through of its pro rata share of earnings from the Acquisition
Partnerships' activities as if it had a direct investment in the underlying
Portfolio Assets held by the Acquisition Partnership. The revenues and earnings
of the Acquisition Partnerships are determined on a basis consistent with the
accounting methodology applied to non-performing, performing and real estate
Portfolios described in the preceding paragraphs. Commercial Corp. has ownership
interests in the various partnerships that range from 3% to 50%. During 1999,
the Company also acquired investments in servicing entities that are accounted
for on the equity method.

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

  DISCONTINUED OPERATIONS

     The Company recorded a provision of $5.2 million in 2001 and $5.0 million
in 2000 for additional losses from discontinued operations. Effective during the
third quarter of 1999, management of the Company adopted formal plans to
discontinue the operations of Harbor Financial Group, Inc. (formerly known as
FirstCity Financial Mortgage Corp.) and its subsidiaries (collectively referred
to as "Mortgage Corp."), and FC Capital Corp. ("Capital Corp."). These entities
comprise the operations that were previously reported as the Company's
residential and commercial mortgage banking business. As formal termination
plans were adopted and historical business operations at each entity have
ceased, the results of operations for 1999 have been reflected as discontinued
operations in the accompanying consolidated statements of operations.
Additionally, the net assets related to the resolution of activity from the
discontinued operations have been reflected in the accompanying consolidated
balance sheets. The results of operations from discontinued operations for 1999
were composed of an operating loss of $39.1 million, the Company's write-off of
its investment of $50.5 million in Mortgage Corp. and the write down of its net
investment in Capital Corp. by $12.7 million. Revenues from discontinued
operations were zero in 2001 and 2000, and $56.3 million in 1999.

     The only assets remaining from discontinued operations are the investment
securities resulting from the retention of residual interests in securitization
transactions. These residual interests are classified as Discontinued operations
even though the liquidation or run-off of the securitized assets extends longer
than one year because the Company is contractually obligated to service the
securitized assets as master servicer. The Company has considered the estimated
future gross cash receipts for such investment securities in the computation of
the loss from discontinued operations. The cash flows are collected over a
period of time and
                                        32
<PAGE>

are valued using prepayment assumptions of 25% for fixed rate loans and 40% for
variable rate loans. Overall loss rates are estimated from 1.0% to 4.7% of
collateral. The Company uses modeling techniques to estimate future results from
discontinued operations that consider the contractual terms of the
securitization structures and using the assumptions stated above. The actual
cash flows received from the residual interests in the future could differ
materially positively or negatively due the factors such as economic conditions,
changes in collateral values, fluctuating interest rates, differences between
actual prepayments and actual losses, which differ from the assumptions used in
the estimating process.

  ESTIMATES OF FUTURE CASH RECEIPTS

     The Company uses estimates to determine future cash receipts from Portfolio
Assets. These estimates of future cash receipts from acquired portfolio asset
pools are utilized in four primary ways:

     (i)  to calculate the amortization of the cost of non-performing
          Portfolios;

     (ii)  to determine the effective yield of performing Portfolios;

     (iii)  to determine the reasonableness of settlement offers received in the
            liquidation of the Portfolio Assets; and

     (iv)  to determine whether or not there is impairment in a pool of
           Portfolio Assets

  Calculation of the estimates of future cash receipts:

     The Company uses a proprietary asset management software program to manage
the Portfolio Assets it owns and services. Each asset within a pool is analyzed
by an account manager who is responsible for analyzing the characteristics of
each asset within a pool. The account manager projects future cash receipts and
expenses related to each asset and the sum of which provides the total estimated
future cash receipts related to a particular purchased asset pool. These
estimates are routinely monitored by the Company to determine reasonableness of
the estimates provided.

  Risks associated with these estimates:

     The Company has in the past been able to establish with reasonable accuracy
the estimated future cash receipts over the life of a purchased asset pool.
Changes in economic conditions, fluctuations in interest rates, deterioration of
collateral values, and other factors described in the risk factors section could
cause the estimates of future cash flows to be materially different than actual
cash receipts.

     The effects of an increase in the estimated future cash receipts would
generally increase revenues from Portfolio Assets by increasing gross profit on
a non-performing or real estate pool and increasing the effective yield on a
performing Portfolio while a decrease in future cash receipts would generally
have the effect of reducing revenues by reducing gross profit on a
non-performing or real estate pool and decreasing the effective yield on a
performing Portfolio. In some cases a reduction in the total future cash
receipts by collecting those cash receipts sooner than expected could have a
positive impact on the Company's revenues from portfolio assets due to reduced
interest expense and other carrying costs associated with the Portfolio Assets.
Likewise an increase in future cash receipts, although generally a positive
trend, could have a negative impact on future revenues of the Company due to
higher levels of interest expense and other carrying costs of the Portfolios
negating any potentially positive effects.

  CONSOLIDATION POLICY

     The accompanying consolidated financial statements include the accounts of
all of the majority owned subsidiaries of the Company. Investments in 20% to 50%
owned affiliates are accounted for on the equity method since the Company has
the ability to exercise significant influence over operating and financial
policies of those affiliates. For domestic Acquisition Partnerships, the Company
owns a limited partner interest and generally shares in a general partner
interest. Regarding the foreign investments, the Company participates as a
limited partner. In all cases the Company's direct and indirect equity interest
never exceeds 50%.

                                        33
<PAGE>

     Investments in less than 20% owned affiliates are also accounted for on the
equity method. These investments are considered to be corporate joint ventures
formed to share in the risks and rewards in developing new markets as well as to
pool resources. Also, the Company has the ability to exercise significant
influence over operating and financial policies, despite its comparatively
smaller equity percentage, due to its leading role in the formation of these
joint ventures as well as its involvement in the day-to-day management
activities. All significant intercompany transactions and balances have been
eliminated in consolidation.

  RELATIONSHIP WITH CARGILL

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

     Under a Right of First Refusal Agreement and Due Diligence Reimbursement
Agreement effective as of January 1, 1998, as amended (the "Right of First
Refusal Agreement") among the Company, FirstCity Servicing Corporation, Cargill
and its wholly owned subsidiary CFSC Capital Corp. II ("CFSC"), if the Company
receives an invitation to bid on or otherwise obtains an opportunity to acquire
interests in loans, receivables, real estate or other assets located in the
United States, Canada, Mexico, or the Caribbean in which the aggregate amount to
be bid exceeds $4 million, the Company is required to follow a prescribed notice
procedure pursuant to which CFSC has the option to participate in the proposed
purchase by requiring that such purchase or acquisition be effected through an
Acquisition Partnership formed by the Company and Cargill (or an affiliate). The
Right of First Refusal Agreement does not prohibit the Company from holding
discussions with entities other than CFSC regarding potential joint purchases of
interests in loans, receivables, real estate or other assets, provided that any
such purchase is subject to CFSC's right to participate in the Company's share
of the investment. The Right of First Refusal Agreement further provides that,
subject to certain conditions, CFSC will bear 50% of the due diligence expenses
incurred by the Company in connection with proposed asset purchases. The Right
of First Refusal Agreement is a restatement and extension of a similar agreement
entered into among the Company, certain members of the Company's management and
Cargill in 1992. The Right of First Refusal Agreement has a termination date of
January 1, 2003.

     Future increases in the Company's investments in Portfolio Assets acquired
from institutions and government agencies will come through investment entities
formed with Cargill Financial Services Corporation ("Cargill" or "Cargill
Financial"), whereby Cargill shares a general partner interest, or one or more
other co-investors, thereby capitalizing on the expertise of partners whose
skills complement those of the Company.

                                        34
<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

     The following tables present contractual cash obligations and commercial
commitments of the Company as of December 31, 2001. See Notes 7, 9, 12 and 14 of
the Notes to Consolidated Financial Statements (dollars in thousands).

<Table>
<Caption>
                                                        PAYMENTS DUE BY PERIOD
                                            -----------------------------------------------
                                                       LESS THAN     ONE TO       FOUR TO
                                             TOTAL     ONE YEAR    THREE YEARS   FIVE YEARS
                                            --------   ---------   -----------   ----------
<S>                                         <C>        <C>         <C>           <C>
CONTRACTUAL CASH OBLIGATIONS
Notes payable secured by Portfolio Assets,
  loans receivable and equity in
  Acquisition Partnerships................  $ 42,253    $7,181       $35,072      $    --
Unsecured notes...........................       356       356            --           --
Company credit facility...................    48,600        --        48,600           --
Operating leases..........................     1,028       335           418          275
New Preferred Stock(1)....................    41,731        --            --       41,731
                                            --------    ------       -------      -------
                                            $133,968    $7,872       $84,090      $42,006
                                            ========    ======       =======      =======
</Table>

<Table>
<Caption>
                                                      AMOUNT OF COMMITMENT EXPIRATION PERIOD
                                                     ----------------------------------------
                                                       UNFUNDED     LESS THAN       ONE TO
                                                     COMMITMENTS     ONE YEAR    THREE YEARS
                                                     ------------   ----------   ------------
<S>                                                  <C>            <C>          <C>
COMMERCIAL COMMITMENTS
Lines of credit....................................      $ 7          $  --           $7
Guarantees.........................................        4              4           --
                                                         ---          -----           --
                                                         $11          $   4           $7
                                                         ===          =====           ==
</Table>

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

(1) New Preferred Stock as shown above includes $32.1 million payable at
    December 31, 2001 plus $9.6 million of unaccrued dividends through September
    2005.

EFFECT OF NEW ACCOUNTING STANDARDS

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations
("SFAS 141") and SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. There have been no business
combinations in 2001. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead be tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with the SFAS 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed of. SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, supercedes SFAS 121 and is
effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS 142 did not have a material impact on the Company's consolidated financial
statements. Unamortized goodwill at December 31, 2001 was $.1 million.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"). SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. It also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. Additionally, discontinued operations that are not
disposed of within one year must be reclassified as assets held and used unless
the

                                        35
<PAGE>

discontinued segment (1) will be abandoned through the liquidation or run-off of
operations because the entity is obligated by regulation or contract to provide
services after it ceases accepting all new business and (2) is being reported as
a discontinued operation when SFAS 144 is initially applied. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on January 1, 2002. The only
assets remaining from discontinued operations are the investment securities
resulting from the retention of residual interests in securitization
transactions. Since the Company is contractually obligated to service the
securitized assets, the adoption of SFAS 144 had no impact on the Company's
consolidated financial statements.

                                  RISK FACTORS

RISKS ASSOCIATED WITH DISCONTINUED OPERATIONS

     During the third quarter of 1999, management of the Company adopted formal
plans to discontinue the operations of Mortgage Corp. and Capital Corp. On
October 14, 1999, Mortgage Corp. filed for protection under Chapter 11 of the
Bankruptcy Code, which was subsequently converted to liquidation under Chapter
7. Currently, the Company and various current and former directors and officers
of the Company and Mortgage Corp. are parties to certain adversary proceedings
initiated by the Chapter 7 Trustee in the bankruptcy proceedings. See "Item 3.
Legal Proceedings." Potential liability of the Company could arise in regard to
the bankruptcy filing of Mortgage Corp. Another risk is that the value of
Capital Corp.'s retained interests in the securitizations could be adversely
affected by the level and fluctuation of interest rates, delinquency rates and
property values, resulting in reduced cash flows. The above items could have a
material adverse impact on the formal plans of termination and the future
operations of the Company.

CONTINUING NEED FOR FINANCING

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

     Each of the Company and its major operating subsidiaries has its own source
of debt financing. In certain circumstances, a default by the Company or any of
its major operating subsidiaries in respect of indebtedness owed to a third
party constitutes a default under the Company's credit facility. Although the
Company intends to segregate the debt obligations of each such subsidiary, there
can be no assurance that its existing financing sources will continue to agree
to such arrangements or that alternative financing sources that would accept
such arrangements would be available. In the event the Company's major operating
subsidiaries are compelled to accept cross-guarantees, or cross-default or
cross-acceleration provisions in connection with their respective
                                        36
<PAGE>

credit facilities, financial difficulties experienced by one of the Company's
subsidiaries could adversely impact the Company's other subsidiaries.

     Dependence on Warehouse Financing at Drive.  As is customary in the
consumer lending businesses, Drive depends upon warehouse credit facilities with
financial institutions or institutional lenders to finance the origination and
purchase of loans on a short-term basis pending sale or securitization.
Implementation of the Drive's business strategy requires the continued
availability of warehouse credit facilities, and may require increases in the
permitted borrowing levels under such facilities. There can be no assurance that
such financing will be available on terms satisfactory to Drive. The inability
of Drive or its subsidiaries to arrange additional warehouse credit facilities,
to extend or replace existing facilities when they expire or to increase the
capacity of such facilities may have a material adverse effect on the Company's
consolidated condition, results of operations and business prospects.

RISKS OF SECURITIZATION BY DRIVE

     Significance of Securitization.  The Company continues to believe that
Drive's ability to securitize sub-prime automobile loans is necessary to
efficiently finance the volume of assets expected to be generated. Accordingly,
adverse changes in the secondary market for such loans could impair Drive's
ability to purchase and sell loans on a favorable or timely basis. Any such
impairment could have a material adverse effect upon Drive's consolidated
condition, results of operations and business prospects. Proceeds from the
securitization of acquired loans are required to be used to repay borrowings
under warehouse credit facilities, which makes such facilities available to
finance the purchase of additional loan assets. There can be no assurance that,
as Drive's volume of loans purchased increases, Drive will be able to securitize
its loan production efficiently. An inability of Drive to efficiently securitize
its loan production could have a material adverse effect on the Company's
consolidated condition, results of operations and business prospects.

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

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

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

     Performance Assumptions.  Securitization gains realized on the sale of
loans will be an important part of Drive's future operations. Such gains will be
dependent largely upon the estimated fair value of the subordinated interests
expected to be derived from the transactions and retained by Drive. Also, the
timing
                                        37
<PAGE>

and size of the securitizations could have a material effect on the results of
Drive's operations. Management of Drive makes a number of assumptions in
determining the estimated fair value for the subordinated interests. These
assumptions include, but are not limited to, prepayment speeds, default rates
and subsequent losses on the underlying loans, and the discount rates used to
present value the future cash flows. All of the assumptions are subjective.
Varying the assumptions can have a material effect on the present value
determination in one securitization as compared to any other. Subsequent events
will cause the actual occurrences of prepayments, losses and interest rates to
be different from the assumptions used for such factors at the time of the
recognition of the sale of the loans. The effect of the subsequently occurring
events could cause a re-evaluation of the carrying values of the previously
estimated values of the subordinated interests and excess spreads and such
adjustment could be material. Delinquencies, defaults and losses on defaults
increased in 2001 due to recession related factors. Of major importance was the
reduction in used car values caused by the events of September 11, 2001, when,
facing significant slowdowns in travel, the car rental agencies reduced their
fleets dramatically. This, compounded by the zero percent financing offered on
new cars, flooded the used car market creating downward pressure on used car
values.

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

IMPACT OF CHANGING INTEREST RATES

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

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

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

CREDIT IMPAIRED BORROWERS AT DRIVE

     Drive's sub-prime borrowers generally are unable to obtain credit from
traditional financial institutions due to factors such as an impaired or poor
credit history, low income or other adverse credit events. Drive is subject to
various risks associated with these borrowers, including, but not limited to,
the risk that the borrowers will not satisfy their debt service obligations and
that the realizable value of the assets securing their loans will not be
sufficient to repay the borrowers' debt. While the Company believes that the
underwriting criteria and collection methods Drive employs enable it to identify
and control the higher risks inherent in loans made to such borrowers, and that
the interest rates charged compensate Drive for the risks inherent in such
loans, no assurance can be given that such criteria or methods, or such interest
rates, will afford adequate protection against, or compensation for, higher than
anticipated delinquencies, foreclosures or losses. The actual rate of
delinquencies, foreclosures or losses could be significantly accelerated by an
economic downturn

                                        38
<PAGE>

or recession. Consequently, the Company's consolidated financial condition,
results of operations (primarily Consumer Corp.'s 31% equity earnings in Drive)
and business prospects could be materially adversely affected. Retail
installment contracts at Drive are held for sale and stated at the lower of cost
or fair value in the aggregate. Drive does not hedge its retail installment
contracts while held for sale. While management of Drive does not believe Drive
is exposed to material interest rate risk during the period contracts are held
for sale, there can be no assurance that future material valuation impairments
will not be required.

AVAILABILITY OF PORTFOLIO ASSETS

     The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. The Company cannot predict its future
annual acquisition volume of Portfolio Assets. Moreover, future Portfolio Asset
purchases will depend on the availability of Portfolios offered for sale, the
availability of capital and the Company's ability to submit successful bids to
purchase Portfolio Assets. The acquisition of Portfolio Assets has become highly
competitive in the United States. This may require the Company to acquire
Portfolio Assets at higher prices thereby lowering profit margins on the
resolution of such Portfolios. To offset these changes in the domestic arena,
the Company continues to develop its presence in other markets. Under certain
circumstances, the Company may choose not to bid for Portfolio Assets that it
believes cannot be acquired at attractive prices. As a result of all the above
factors, Portfolio Asset purchases, and the revenue derived from the resolution
of Portfolio Assets, may vary significantly from quarter to quarter.

AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS

     The Company believes that, as a result of the Merger, approximately $596
million of NOLs were available to the Company to offset future taxable income as
of December 31, 1995. Since December 31, 1995, the Company has generated an
additional $124 million in tax operating losses. Accordingly, as of December 31,
2001, the Company believes that it has approximately $728 million of NOLs
available to offset future taxable income. Out of the total $728 million of
NOLs, the Company estimates it will be able to utilize $57.4 million, which
equates to a $20.1 million deferred tax asset on the Company's books and
records. However, because the Company's position in respect of its $596 million
NOLs resulting from the Merger is based upon factual determinations and upon
legal issues with respect to which there is uncertainty and because no ruling
has been obtained from the Internal Revenue Service (the "IRS") regarding the
availability of the NOLs to the Company, there can be no assurance that the IRS
will not challenge the availability of such NOLs and, if challenged, that the
IRS will not be successful in disallowing this portion of the Company's NOLs,
with the result that the Company's $20.1 million deferred tax asset would be
reduced or eliminated.

     The NOLs may be carried forward to offset future federal taxable income of
the Company through the year 2021; however, the availability of these NOLs
begins to expire beginning in 2005. The ability of the Company to utilize such
NOLs will be severely limited if there is a more than 50% ownership change of
the Company during a three-year testing period within the meaning of section 382
of the Internal Revenue Code of 1986, as amended (the "Tax Code").

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

ASSUMPTIONS REGARDING RECOGNITION OF DEFERRED TAX ASSET

     As noted above, the Company has NOLs available for federal income tax
purposes to offset future federal taxable income, if any, through the year 2021.
A valuation allowance is provided to reduce the deferred tax assets to a level,
which, more likely than not, will be realized. Realization is determined based
on management's expectation of generating sufficient taxable income in a look
forward period over the next four years. The ultimate realization of the
resulting net deferred tax asset is dependent upon generating sufficient

                                        39
<PAGE>

taxable income prior to expiration of the net operating loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the recorded deferred tax asset, net of the allowance, will be
realized. The amount of the deferred tax asset considered realizable, however,
could be adjusted in the future if estimates of future taxable income during the
carryforward period change. The change in valuation allowance represents a
change in the estimate of the future taxable income during the carryforward
period since the prior year-end and utilization of net operating loss
carryforwards since the Merger. The ability of the Company to realize the
deferred tax asset is periodically reviewed and the valuation allowance is
adjusted accordingly. See "Discussion of Critical Accounting
Policies -- Deferred Tax Asset."

ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE

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

GENERAL ECONOMIC CONDITIONS

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

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

RISK OF DECLINING VALUE OF COLLATERAL

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

GOVERNMENT REGULATION

     Some aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, credit activities, maximum interest rates, finance and other charges,
disclosures to

                                        40
<PAGE>

obligors, the terms of secured transactions, collection, repossession and claims
handling procedures, multiple qualification and licensing requirements for doing
business in various jurisdictions, and other trade practices. The Company
believes it is currently in compliance in all material respects with applicable
regulations, but there can be no assurance that the Company will be able to
maintain such compliance. Failure to comply with, or changes in, these laws or
regulations, or the expansion of the Company's business into jurisdictions that
have adopted more stringent regulatory requirements than those in which the
Company currently conducts business, could have an adverse effect on the Company
by, among other things, limiting the income the Company may generate on existing
and additional loans, limiting the states in which the Company may operate or
restricting the Company's ability to realize on the collateral securing its
loans. See "Business -- Government Regulation."

ENVIRONMENTAL LIABILITIES

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

COMPETITION

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

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

RISK ASSOCIATED WITH FOREIGN OPERATIONS

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

                                        41
<PAGE>

DEPENDENCE ON AUTOMOBILE DEALERSHIP RELATIONSHIPS

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

RISK OF MINORITY INVESTMENT IN DRIVE

     Although the Company continues to have some influence on Drive and its
operations, due to the sale of 49% of its interest, the Company now maintains a
minority interest in Drive. There can be no guarantee that Drive's future
operations will be consistent with the Company's goals.

LITIGATION

     On October 14, 1999, Harbor Parent, HFMC and four subsidiaries of HMFC
filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code
before the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division. On December 14, 1999, the bankruptcy proceedings were converted
to liquidations under Chapter 7 of the United States Bankruptcy Code. The
Trustee in these proceedings initiated adversary proceedings on May 25, 2001
against FirstCity and various current and former directors and officers of
FirstCity and Harbor alleging breach of fiduciary duties, mismanagement, and
self-dealing by FirstCity and Harbor directors and officers, and improper
transfer of funds from the Harbor related entities to FirstCity. There can be no
assurance that these proceedings will not adversely affect the Company's
consolidated financial condition, results of operations and business prospects.
See "Item 3. Legal Proceedings."

     Periodically, the Company, its subsidiaries, its affiliates and the
Acquisition Partnerships are parties to or otherwise involved in legal
proceedings arising in the normal course of business. Except as described in
this Annual Report on Form 10-K, the Company does not believe that there is any
proceeding threatened or pending against it, its subsidiaries, its affiliates or
the Acquisition Partnerships which, if determined adversely, would have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company, its subsidiaries, its affiliates or the
Acquisition Partnerships.

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

RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL

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

                                        42
<PAGE>

DEPENDENCE ON KEY PERSONNEL

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

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

INFLUENCE OF CERTAIN STOCKHOLDERS

     The directors and executive officers of the Company collectively
beneficially own 23.4% of the Common Stock. Although there are no agreements or
arrangements with respect to voting such Common Stock among such persons except
as described below, such persons, if acting together, may effectively be able to
control any vote of stockholders of the Company and thereby exert considerable
influence over the affairs of the Company. James R. Hawkins, the Chairman of the
Board, is the beneficial owner of 13.6% of the Common Stock. James T. Sartain,
President and Chief Executive Officer of the Company, is the beneficial owner of
5.1% of the Common Stock. ATARA I, Ltd. ("ATARA"), an entity associated with
Rick R. Hagelstein, former Executive Vice President of the Company and former
Chief Executive Officer of Mortgage Corp., beneficially owns 4.1% of the
outstanding Common Stock. In addition, Cargill owns approximately 2.7% of the
Common Stock. Mr. Hawkins, Mr. Sartain, Cargill and ATARA are parties to a
shareholder voting agreement (the "Stockholder Voting Agreement"). Under the
Stockholder Voting Agreement, Mr. Hawkins, Mr. Sartain and ATARA are required to
vote their shares in favor of Cargill's designee for director of the Company,
and Cargill is required to vote its shares in favor of one or more of the
designees of Messrs. Hawkins and Sartain and ATARA. There can be no assurance
that the interests of management or the other entities and individuals named
above will be aligned with the Company's other stockholders.

SHARES ELIGIBLE FOR FUTURE SALE

     The utilization of the Company's $596 million in NOLs resulting from the
Merger may be limited or prohibited under the Tax Code in the event of certain
ownership changes. The Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") contains provisions
restricting the transfer of its securities that are designed to avoid the
possibility of such changes. Such restrictions may prevent certain holders of
Common Stock of the Company from transferring such stock even if such holders
are permitted to sell such stock without restriction under the Securities Act of
1933, as amended, and may limit the Company's ability to sell Common Stock to
certain existing holders of Common Stock at an advantageous time or at a time
when capital may be required but unavailable from any other source.

ANTI-TAKEOVER CONSIDERATIONS

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

                                        43
<PAGE>

PERIOD TO PERIOD VARIANCES

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

TAX, MONETARY AND FISCAL POLICY CHANGES

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

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

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

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

     Loans receivable consist of investment loans made to Acquisition
Partnerships located in Mexico and bear interest at predominately fixed rates.
The collectibility of these loans is directly related to the underlying
Portfolio Assets of those Acquisition Partnerships, which are non-performing in
nature. Therefore, changes in benchmark rates would have minimal effect on the
collectibility of these loans.

     The Company's equity investment in Drive is materially impacted by net
gains realized on securitization transactions and net interest margins. The
sub-prime loans that Drive sells are included in asset-backed securities the
investor or purchaser issues. These securities are priced at spreads over the
LIBOR or an equivalent term treasury security. These spreads are determined by
demand for the security. Demand is affected by the perception of credit quality
and prepayment risk associated with the loans Drive originates and sells. The
timing and size of the securitizations could also have a material effect on the
net income of Drive. Interest rates offered to customers also affect prices paid
for loans. These rates are determined by review of competitors' rate offerings
to the public and current prices being paid to Drive for the products. Drive
does not hedge these price risks.

     Drive's residual interests in securitizations represent the present value
of the excess cash flows Drive expects to receive over the life of the
underlying sub-prime automobile loans. The sub-prime automobile

                                        44
<PAGE>

residual interests are affected less by prepayment speeds due to the shorter
term of the underlying assets and the fact that the loans are fixed rate,
generally at the highest rate allowable by law.

     Additionally the Company has various sources of financing which have been
previously described in the Liquidity and Capital Resources section of Item 7.

     In summary, the Company would be negatively impacted by rising interest
rates and declining prices for its sub-prime loans. Rising interest rates would
negatively impact the value of residual interests in securitizations and costs
of borrowings. Declining prices for the Company's sub-prime loans would
adversely affect the levels of gains achieved upon the sale of those loans. The
Company has not entered into any instruments to minimize this market risk of
adverse changes in interest rates or declining prices.

     The following table is a summary of the interest earning assets and
interest bearing liabilities, as of December 31, 2001, segregated by asset type
as described in the previous paragraphs, with expected maturity or sales dates
as indicated (dollars in thousands):

<Table>
<Caption>
                                                                                  GREATER
                              WEIGHTED                                             THAN
                               AVERAGE      0-3       3-6       6-9      9-12       12
                                RATE      MONTHS    MONTHS    MONTHS    MONTHS    MONTHS      TOTAL
                              ---------   -------   -------   -------   ------   ---------   -------
<S>                           <C>         <C>       <C>       <C>       <C>      <C>         <C>
INTEREST BEARING ASSETS
Portfolio assets(1).........      N/A     $ 2,099   $ 3,207   $ 2,796   $1,369    $ 4,747    $14,218
Loans receivable(2).........    19.79%      1,049     2,392     1,160    1,588     13,710     19,899
Equity investments(3)
  Acquisition
  Partnerships..............      N/A       6,456     4,951     8,254    6,114     18,809     44,584
  Drive.....................      N/A          --        --        --       --     10,071     10,071
                                          -------   -------   -------   ------    -------    -------
                                          $ 9,604   $10,550   $12,210   $9,071    $47,337    $88,772
                                          =======   =======   =======   ======    =======    =======
INTEREST BEARING LIABILITIES
Notes payable secured by
  Portfolio Assets, loans
  receivable and equity in
  Acquisition
  Partnerships(4)...........     6.18%    $    --   $ 7,181   $    --   $   --    $35,072    $42,253
Unsecured notes.............     7.14%         --        72        --      284         --        356
Company credit facility.....     4.50%         --        --        --       --     48,600     48,600
                                          -------   -------   -------   ------    -------    -------
                                          $    --   $ 7,253   $    --   $  284    $83,672    $91,209
                                          =======   =======   =======   ======    =======    =======
</Table>

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

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

(2) Loans receivable are shown in the table based upon the expected date of sale
    or repayment.

(3) Equity investments are shown based on anticipated equity disbursements,
    which could occur much faster or slower than anticipated.

(4) Notes payable mature in the periods indicated. This does not necessarily
    indicate when the outstanding balances would be paid. Notes payable secured
    by Portfolio Assets fund up to 100% of the corresponding asset class. If the
    asset balance declines whether through a sale or a payment from the
    borrower, the corresponding liability must be paid.

     The Company currently has equity investments in Mexico and France. The
Company does not believe that foreign currency exchange rate risks associated
with fluctuations in the Mexican peso are material to the Company's financial
condition and results of operations because approximately 95% of the Company's
investments in Mexico are made through U.S. dollar denominated loans made to the
Partnerships located in Mexico. These loans receivable are required to be repaid
in U.S. dollars.

     The equity investments in France represent a significant portion of the
Company's total equity investments. As of December 31, 2001, one U.S. dollar
equaled 1.14 Euros. A sharp appreciation of the Euro

                                        45
<PAGE>

relative to the U.S. dollar could materially adversely affect the financial
condition and results of operations of the Company. The Company has not entered
into any instruments to minimize this market risk of adverse changes in currency
rates. A 5% and 10% incremental appreciation of the Euro would result in an
estimated decline in the valuation of the Company's equity investments in France
of approximately $.5 million and $1.0 million, respectively. These amounts are
estimates of the financial impact of an appreciation of the Euro relative to the
U.S. dollar. Consequently, these amounts are not necessarily indicative of the
actual effect of such changes with respect to the Company's consolidated
financial condition or results of operations.

                                        46
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2001         2000
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS,
                                                              EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>
                                       ASSETS
Cash and cash equivalents...................................   $  5,583     $  8,043
Portfolio Assets, net.......................................     14,218       30,018
Loans receivable, net.......................................     19,899       14,539
Equity investments..........................................     54,655       39,022
Deferred tax benefit, net...................................     20,101       20,101
Other assets, net...........................................      7,780        8,824
Net assets of discontinued operations.......................     16,657       20,444
                                                               --------     --------
          Total Assets......................................   $138,893     $140,991
                                                               ========     ========
          LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
  Notes payable.............................................   $ 91,209     $ 93,764
  Other liabilities.........................................     11,706        9,216
                                                               --------     --------
          Total Liabilities.................................    102,915      102,980
Commitments and contingencies (Notes 2, 3, 7, 9, 10, 12 and
  14).......................................................         --           --
Redeemable preferred stock, including accumulated dividends
  in arrears of $6,420 and $3,852, respectively (par value
  $.01, redemption value of $21 per share; 2,000,000 shares
  authorized; 1,222,901 shares issued and outstanding)......     32,101       29,533
Stockholders' equity:
  Optional preferred stock (par value $.01 per share;
     98,000,000 shares authorized; no shares issued or
     outstanding)...........................................         --           --
  Common stock (par value $.01 per share; 100,000,000 shares
     authorized; issued and outstanding: 8,376,500 and
     8,368,344 shares, respectively)........................         84           84
Paid in capital.............................................     79,645       79,634
Accumulated deficit.........................................    (76,728)     (71,131)
Accumulated other comprehensive income (loss)...............        876         (109)
                                                               --------     --------
          Total Shareholders' Equity........................      3,877        8,478
                                                               --------     --------
          Total Liabilities, Redeemable Preferred Stock and
           Stockholders' Equity.............................   $138,893     $140,991
                                                               ========     ========
</Table>

                                        47
<PAGE>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 2001         2000           1999
                                                              ----------   -----------   ------------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>          <C>           <C>
Revenues:
  Servicing fees............................................   $ 9,580      $ 11,442      $   8,936
  Gain on resolution of Portfolio Assets....................     1,049         3,120          4,054
  Equity in earnings of investments.........................    16,694         9,592         11,318
  Interest income...........................................     5,885        15,094         20,502
  Gain on sale of interest in equity investments............     3,316            --          2,163
  Gain on sale of automobile loans..........................        --         2,836         10,280
  Gain on sale of interest in subsidiary....................        --         8,091             --
  Other income..............................................     1,241         2,001          1,675
                                                               -------      --------      ---------
          Total revenues....................................    37,765        52,176         58,928
Expenses:
  Interest and fees on notes payable........................     8,777        18,658         18,754
  Salaries and benefits.....................................    10,606        16,329         17,199
  Provision for loan and impairment losses..................     3,277         4,391          4,302
  Occupancy, data processing, communication and other.......    10,554        16,910         17,942
                                                               -------      --------      ---------
          Total expenses....................................    33,214        56,288         58,197
                                                               -------      --------      ---------
Earnings (loss) from continuing operations before income
  taxes, minority interest and accounting change............     4,551        (4,112)           731
Provision for income taxes..................................       (15)       (7,414)        (5,051)
                                                               -------      --------      ---------
Earnings (loss) from continuing operations before minority
  interest and accounting change............................     4,536       (11,526)        (4,320)
Minority interest...........................................    (2,061)         (207)          (734)
Cumulative effect of accounting change......................      (304)           --           (765)
                                                               -------      --------      ---------
Earnings (loss) from continuing operations..................     2,171       (11,733)        (5,819)
Loss from discontinued operations...........................    (5,200)       (5,000)      (102,337)
Extraordinary gain, net of zero income taxes................        --           833             --
                                                               -------      --------      ---------
Net loss....................................................    (3,029)      (15,900)      (108,156)
Preferred dividends (Includes accumulated dividends in
  arrears after June 30, 1999)..............................    (2,568)       (2,568)        (2,568)
                                                               -------      --------      ---------
Net loss to common stockholders.............................   $(5,597)     $(18,468)     $(110,724)
                                                               =======      ========      =========
Basic and diluted loss per common share are as follows:
  Loss from continuing operations before accounting
     change.................................................   $ (0.01)     $  (1.71)     $   (0.92)
  Discontinued operations...................................     (0.62)        (0.60)        (12.32)
  Cumulative effect of accounting change....................     (0.04)           --          (0.09)
  Extraordinary gain........................................        --          0.10             --
  Net loss..................................................   $ (0.67)     $  (2.21)     $  (13.33)
  Weighted average common shares outstanding................     8,374         8,351          8,307
</Table>

          See accompanying notes to consolidated financial statements.
                                        48
<PAGE>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             AND COMPREHENSIVE LOSS

<Table>
<Caption>
                                                                               ACCUMULATED
                                                                 RETAINED         OTHER
                                NUMBER OF                        EARNINGS     COMPREHENSIVE       TOTAL
                                 COMMON     COMMON   PAID IN   (ACCUMULATED      INCOME       STOCKHOLDERS'
                                 SHARES     STOCK    CAPITAL     DEFICIT)        (LOSS)          EQUITY
                                ---------   ------   -------   ------------   -------------   -------------
                                                          (DOLLARS IN THOUSANDS)
<S>                             <C>         <C>      <C>       <C>            <C>             <C>
BALANCES, DECEMBER 31, 1998...  8,287,959    $83     $78,456    $  58,061        $  355         $ 136,955
Purchase of shares through
  employee stock purchase
  plan........................     45,341     --         231           --            --               231
Issuance of common stock
  warrant.....................         --     --         875           --            --               875
Comprehensive loss:
  Net loss for 1999...........         --     --          --     (108,156)           --          (108,156)
  Foreign currency items......         --     --          --           --          (750)             (750)
                                                                                                ---------
Total comprehensive loss......                                                                   (108,906)
                                                                                                ---------
Preferred dividends...........         --     --          --       (2,568)           --            (2,568)
                                ---------    ---     -------    ---------        ------         ---------
BALANCES, DECEMBER 31, 1999...  8,333,300     83      79,562      (52,663)         (395)           26,587
Purchase of shares through
  employee stock purchase
  plan........................     35,044      1          72           --            --                73
Comprehensive loss:
  Net loss for 2000...........         --     --          --      (15,900)           --           (15,900)
  Foreign currency items......         --     --          --           --           286               286
                                                                                                ---------
Total comprehensive loss......                                                                    (15,614)
                                                                                                ---------
Preferred dividends...........         --     --          --       (2,568)           --            (2,568)
                                ---------    ---     -------    ---------        ------         ---------
BALANCES, DECEMBER 31, 2000...  8,368,344     84      79,634      (71,131)         (109)            8,478
Purchase of shares through
  employee stock purchase
  plan........................      8,156     --          11           --            --                11
Comprehensive loss:
  Net loss for 2001...........         --     --          --       (3,029)           --            (3,029)
  Foreign currency items......         --     --          --           --          (218)             (218)
  Unrealized net gain on
     securitization...........         --     --          --           --         1,203             1,203
                                                                                                ---------
Total comprehensive loss......                                                                     (2,044)
                                                                                                ---------
Preferred dividends...........         --     --          --       (2,568)           --            (2,568)
                                ---------    ---     -------    ---------        ------         ---------
BALANCES, DECEMBER 31, 2001...  8,376,500    $84     $79,645    $ (76,728)       $  876         $   3,877
                                =========    ===     =======    =========        ======         =========
</Table>

          See accompanying notes to consolidated financial statements.
                                        49
<PAGE>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001       2000        1999
                                                              --------   ---------   ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $ (3,029)  $ (15,900)  $(108,156)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Loss from discontinued operations......................     5,200       5,000     102,337
     Proceeds from resolution of Portfolio Assets...........     8,801      14,398      19,610
     Gain on resolution of Portfolio Assets.................    (1,049)     (3,120)     (4,054)
     Purchase of Portfolio Assets and loans receivable,
       net..................................................   (11,119)    (26,161)       (307)
     Origination of automobile receivables, net of purchase
       discount.............................................        --    (106,311)   (166,476)
     Provision for loan and impairment losses...............     3,277       4,391       4,302
     Equity in earnings of investments......................   (16,694)     (9,592)    (11,318)
     Proceeds from performing Portfolio Assets and loans
       receivable, net......................................    10,572      54,172     150,043
     Decrease in net deferred tax asset.....................        --       7,000       5,061
     Depreciation and amortization..........................       899       1,994       2,912
     (Increase) decrease in other assets....................       724        (974)        895
     Deferred gain from sale of interest in subsidiary......        --      (4,000)         --
     Gain on sale of interest in equity investments or
       subsidiary...........................................    (3,316)     (8,091)     (2,163)
     Increase in other liabilities..........................     3,695       2,296       1,198
                                                              --------   ---------   ---------
       Net cash used in operating activities................    (2,039)    (84,898)     (6,116)
                                                              --------   ---------   ---------
Cash flows from investing activities:
  Proceeds from sale of interest in equity investments or
     subsidiary.............................................     7,567      15,000      12,335
  Proceeds on notes receivable from sale of interest in
     subsidiary.............................................        --      60,000          --
  Property and equipment, net...............................      (983)        210      (5,321)
  Contributions to Acquisition Partnerships and Servicing
     entities...............................................   (14,088)     (6,715)    (15,500)
  Distributions from Acquisition Partnerships and Servicing
     entities...............................................    11,259      10,313      25,873
                                                              --------   ---------   ---------
       Net cash provided by investing activities............     3,755      78,808      17,387
                                                              --------   ---------   ---------
Cash flows from financing activities:
  Borrowings under notes payable............................    30,870     148,310     237,702
  Payments of notes payable.................................   (33,644)   (140,195)   (235,598)
  Proceeds from issuance of common stock....................        11          73         231
  Preferred dividends paid..................................        --          --      (1,926)
                                                              --------   ---------   ---------
       Net cash provided by (used in) financing
          activities........................................    (2,763)      8,188         409
                                                              --------   ---------   ---------
  Net cash provided by (used in) continuing operations......  $ (1,047)  $   2,098   $  11,680
  Net cash used by discontinued operations..................    (1,413)     (5,318)     (6,372)
                                                              --------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........  $ (2,460)  $  (3,220)  $   5,308
Cash and cash equivalents, beginning of year................     8,043      11,263       5,955
                                                              --------   ---------   ---------
Cash and cash equivalents, end of year......................  $  5,583   $   8,043   $  11,263
                                                              ========   =========   =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for:
     Interest...............................................  $  7,700   $  15,932   $  16,097
                                                              ========   =========   =========
     Income taxes...........................................  $     13   $     637   $     235
                                                              ========   =========   =========
  Non-cash investing activities:
     Residual interests received as a result of sales of
       loans through securitizations........................  $     --   $   5,713   $  27,306
                                                              ========   =========   =========
  Non-cash financing activities:
     Dividends accumulated and not paid on preferred
       stock................................................  $  2,568   $   2,568   $   1,284
     Issuance of common stock warrant.......................        --          --         875
                                                              --------   ---------   ---------
                                                              $  2,568   $   2,568   $   2,159
                                                              ========   =========   =========
</Table>

          See accompanying notes to consolidated financial statements.
                                        50
<PAGE>

                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999
                             (DOLLARS IN THOUSANDS)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (A) BASIS OF PRESENTATION

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

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

  (B) DESCRIPTION OF BUSINESS

     The Company is a financial services company with offices throughout the
United States and Mexico, with a presence in France. At December 31, 2001, the
Company was engaged in two principal reportable segments: (i) portfolio asset
acquisition and resolution and (ii) consumer lending through the Company's
minority investment in Drive Financial Services LP ("Drive"). Refer to Note 8
for operational information related to each of these principal segments.
Effective in the third quarter of 1999, the Company adopted formal plans to
discontinue its mortgage banking operations (refer to Note 3), which had
previously also been reported as a segment. Activities related to the mortgage
banking operations have been reclassified in the accompanying consolidated
financial statements to discontinued operations.

     In the third quarter of 2000, FirstCity Consumer Lending Corporation
("Consumer Corp."), a wholly-owned subsidiary of FirstCity, completed a sale of
a 49% equity interest in its automobile finance operation to IFA Drive GP
Holdings LLC ("IFA-GP") and IFA Drive LP Holdings LLC ("IFA-LP"), wholly-owned
subsidiaries of BoS(USA), Inc. (formerly known as IFA Incorporated)
("BoS(USA)"), a wholly-owned subsidiary of Bank of Scotland, for a purchase
price of $15 million cash pursuant to the terms of a Securities Purchase
Agreement dated as of August 18, 2000 (the "Securities Purchase Agreement"), by
and among the Company, Consumer Corp., FirstCity Funding LP ("Funding LP"), and
FirstCity Funding GP Corp. ("Funding GP"), IFA-GP and IFA-LP (see Note 2 for
further discussion). As a result of this sale, the Company no longer
consolidates the financial statements of its automobile finance operation since
August 1, 2000, but instead records its investment under the equity method of
accounting. Also, in relation to the sale, Bank of Scotland forgave a loan fee
in the amount of $2.5 million, which resulted in accrued loan fees of $.8
million owed to the senior lender being recorded as an extraordinary gain in the
consolidated financial statements.

     In the portfolio asset acquisition and resolution business the Company
acquires and resolves portfolios of performing and nonperforming commercial and
consumer loans and other assets (collectively, "Portfolio Assets" or
"Portfolios"), which are generally acquired at a discount to their legal
principal balance or appraised value. Purchases may be in the form of pools of
assets or single assets. The Portfolio Assets are generally aggregated,
including loans of varying qualities that are secured or unsecured by diverse
collateral types and foreclosed properties. Some Portfolio Assets are loans for
which resolution is tied primarily to the real estate securing the loan, while
others may be collateralized business loans, the resolution of which may be

                                        51
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

based either on business or real estate or other collateral cash flow. Portfolio
Assets are acquired on behalf of the Company or its wholly owned subsidiaries,
and on behalf of legally independent domestic and foreign partnerships and other
entities ("Acquisition Partnerships" or "WAMCO Partnerships") in which a
partially owned affiliate of the Company is the general partner and the Company
and other investors (including but not limited to Cargill) are limited partners.

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

  (C) PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
all of the majority owned subsidiaries of the Company. Investments in 20 to 50
percent owned affiliates are accounted for on the equity method since the
Company has the ability to exercise significant influence over operating and
financial policies of those affiliates. For domestic Acquisition Partnerships,
the Company owns a limited partner interest and generally shares in a general
partner interest. Regarding the foreign investments, the Company participates as
a limited partner. In all cases the Company's direct and indirect equity
interest never exceeds 50%.

     Investments in less than 20 percent owned affiliates are also accounted for
on the equity method. These investments are considered to be corporate joint
ventures formed to share in the risks and rewards in developing new markets as
well as to pool resources. Also, the Company has the ability to exercise
significant influence over operating and financial policies, despite its
comparatively smaller equity percentage, due to its leading role in the
formation of these joint ventures as well as its involvement in the day-to-day
management activities. All significant intercompany transactions and balances
have been eliminated in consolidation.

  (D) CASH EQUIVALENTS

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

  (E) PORTFOLIO ASSETS

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

  Non-Performing Portfolio Assets

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

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

                                        52
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded an allowance for impairment of $1.6 million in 2001. No allowance was
required in either 2000 or 1999.

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

  Performing Portfolio Assets

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

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

     Gains are recognized on the performing Portfolio Assets when sufficient
funds are received to fully satisfy the obligation on loans included in the
pool, either from funds from the borrower or sale of the loan. The gain
recognized represents the difference between the proceeds received and the
allocated carrying value of the individual loan in the pool.

     Impairment on each Portfolio is measured based on the present value of the
expected future cash flows in the aggregate discounted at the loans' risk
adjusted rates, which approximates the effective interest rates, or the fair
value of the collateral, less estimated selling costs, if any loans are
collateral dependent and foreclosure is probable. The Company recorded an
allowance for impairment of $.6 million in 2001. No allowance was required in
either 2000 or 1999.

  Real Estate Portfolios

     Real estate Portfolios consist of real estate assets acquired from a
variety of sellers. Such Portfolios are carried at the lower of cost or fair
value less estimated costs to sell. Costs relating to the development and
improvement of real estate for its intended use are capitalized, whereas those
relating to holding assets are charged to expense. Income or loss is recognized
upon the disposal of the real estate. Rental income, net of expenses, on real
estate Portfolios is recognized when received. Accounting for the Portfolios is
on an individual asset-by-asset basis as opposed to a pool basis. A valuation
allowance is established for any impairment identified through provisions
charged to operations in the period the impairment is identified. The Company
recorded an allowance for impairment of $1.1 million in 2001 and $2.0 million in
2000. No valuation allowance was required in 1999.

  (F) LOANS RECEIVABLE

     Loans receivable consist primarily of loans made to Acquisition
Partnerships located in Mexico at fixed rates ranging between 19% and 20%, the
repayment of which is generally dependent upon future cash flows and
distributions made from those Acquisition Partnerships. Interest is accrued when
earned in accordance with the contractual terms of the loans. If there is not
sufficient cash flow to pay interest, default provisions in the loan agreement
increase the interest rate to between 23% and 30% until the interest owed in
arrears is paid

                                        53
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in full. Impairment is measured based on the present value of the expected
future cash flows discounted at the loans' contractual rates. The Company
recorded no allowance for impairment 2001, 2000 and 1999.

     A small portion of loans receivable relate to student loan receivables,
which were acquired from third party originators, purchased at a non-refundable
discount from the contractual principal amount. Accounting for these student
loans is on a pool basis as opposed to an individual asset-by-asset basis.
Interest is not accrued, and all payments received are recorded to reduce the
carrying amount of the pool. Impairment is measured based on the present value
of the expected future cash flows discounted at the loans' risk adjusted rates,
which approximates the effective interest rates. The Company recorded an
allowance for impairment of $0.1 million 2000 (none in 2001 and 1999).

  (G) PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost, less accumulated depreciation
and are included in other assets. Depreciation is provided using straight-line
method 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 (goodwill) as well as the
purchase price of future service fee revenues and are included in other assets.
These intangible assets are amortized over periods estimated to coincide with
the expected life of the underlying asset pool owned or serviced by the acquired
subsidiary. The Company periodically evaluates the existence of intangible asset
impairment on the basis of whether such intangibles are fully recoverable from
the projected, undiscounted net cash flows of the related assets acquired (see
note 1(p)).

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

  (I) REVENUE RECOGNITION ON CONTINGENT FEES

     The Company currently has certain servicing contracts with its Mexican
investment entities whereby the Company is entitled to additional compensation
for servicing once a specified return to the investors has been achieved. The
Company will not recognize any revenue related to these contracts until the
investors have received the required level of returns specified in the contracts
and the Mexican investment entity has received cash in an amount greater than
the required returns. There is no guarantee that the required level of returns
to the investors will be achieved or that any additional compensation to the
Company related to the contracts will be realized. The amount of these fees
recognized by the Company was $409 in 2001 and $763 in 2000. No related income
was recognized in 1999.

     The Mexican investment entities, on the other hand, record an accrued
expense for these contingent fees provided that these fees are probable and
reasonably estimable.

                                        54
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (J) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

     Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"), established standards for reporting and
displaying comprehensive income (loss) and its components in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 also requires the accumulated balance of other
comprehensive income (loss) to be displayed separately in the equity section of
the consolidated balance sheet. The Company's other comprehensive income (loss)
consists of foreign currency transactions and unrealized gains on investments.

  (K) FOREIGN CURRENCY TRANSLATIONS

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

  (L) UNREALIZED GAINS ON SECURITIZATION TRANSACTIONS

     The Company has equity investments in certain entities which have retained
unrated interests in securitization transactions, which represent the present
value of the right to the excess cash flow generated by the securitized
contracts. The residual certificates are accounted for under Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Because such assets can be contractually prepaid or
otherwise settled in such a way that the holder would not receive all of the
recorded investment, the assets are classified as available-for-sale investments
and are carried at estimated fair value with any accompanying increases or
decreases in estimated fair value being recorded as unrealized gains or losses
in other comprehensive income (loss) in the accompanying statements of
stockholders' equity and comprehensive loss. The determination of fair value is
based on the present value of the anticipated excess cash flows utilizing the
valuation assumptions discussed above. The carrying value of each retained
certificate is assessed for impairment in accordance with the provisions of EITF
99-20 as discussed in note 1(p). There can be no assurance that the estimates
used to determine the fair value of the residual certificates will remain
appropriate for the life of each asset and it is reasonably possible that
circumstances could change in future periods which could result in a material
change in the estimates used to prepare the accompanying consolidated financial
statements. If actual prepayments or credit losses exceed the current estimates,
other than temporary impairment may be required to be recognized.

  (M) INCOME TAXES

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

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

                                        55
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (N) NET LOSS PER COMMON SHARE

     Basic net loss per common share calculations are based upon the weighted
average number of common shares outstanding. Losses included in the loss per
common share calculation are reduced by minority interest and increased for
preferred stock dividends. Potentially dilutive common share equivalents include
warrants and stock options in the diluted loss per common share calculations.

     The effects of any common stock equivalents are antidilutive for 2001, 2000
and 1999 due to the net loss for the periods; therefore, diluted loss per common
share is reported the same as basic loss per common share.

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

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

  (P) EFFECT OF NEW ACCOUNTING STANDARDS

     SFAS 133 and 138, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133 and 138") require companies to recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. SFAS 133 and 138 require that changes in fair value
of a derivative be recognized currently in operations unless specific hedge
accounting criteria are met. The Company adopted SFAS 133 and 138 on January 1,
2001, and there was no direct impact on the consolidated financial statements,
as the Company had no derivatives. However, the Company has equity investments
in two Acquisition Partnerships, which have recorded liabilities associated with
investments in interest rate swap contracts, which are not accounted for has
hedges of other assets and liabilities. Through December 31, 2001, these
Acquisition Partnerships have recorded $1.7 million of expenses to adjust these
liabilities to fair value, of which the Company has reflected $.5 million as a
reduction in equity in earnings of investments in the consolidated financial
statements.

     In December 2000, the Company adopted SFAS 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB Statement No. 125 ("SFAS 140"). SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. In
connection with its discontinued operations, the Company has investment
securities resulting from the retention of residual interests in securitization
transactions. See note 3 for required disclosures relating to these residual
interests.

     Drive accounts for sales of retail installment contracts from
securitizations in accordance with SFAS 140. In applying SFAS 140 to Drive's
securitized retail installment contract sales, Drive recognizes revenue (gain on
sales of retail installment contracts) and allocates the total cost of the loans
sold to financial components based on their relative fair values. During the
year ended December 31, 2001, Drive sold $402 million of auto retail installment
contracts in securitization transactions and recognized pre-tax gains of $39
million. Drive retained servicing responsibilities and interests in the
receivables in the form of residual certificates. As of December 31, 2001, Drive
was servicing $472 million of auto receivables that have been sold to certain
special

                                        56
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purpose financing trusts (the Trusts). In connection with the sales of retail
installment contracts from securitizations, Drive receives certain residual
certificates associated with the securitizations as described below. Drive and
certain of its subsidiaries have entered into an agreement whereby Drive
receives all the economic benefits associated with the residual certificates and
conversely assumes all the risks.

     Under the above agreement, Drive has retained unrated interests in retail
installment contracts sold which are subordinate to senior investors and
certificated interest only strips for the benefit of Drive which represents the
present value of the right to the excess cash flows generated by the securitized
contracts which represents the difference between (a) interest at the stated
rate paid by borrowers and (b) the sum of (i) pass-through interest paid to
third-party investors, (ii) trustee fees, (iii) third-party credit enhancement
fees (if applicable), (iv) stipulated servicing fees, and (v) estimated contract
portfolio credit losses. Drive's right to receive the cash flows begins after
certain over-collateralization requirements have been met, which are specific to
each securitization and used as a means of credit enhancement.

     Fair value of the residual certificates is determined by calculating the
present value of the anticipated cash flows at the time each securitization
transaction closes, utilizing valuation assumptions appropriate for each
particular transaction. The significant valuation assumptions are related to the
anticipated average lives of the retail installment contracts sold, including
the effect of anticipated prepayment speeds and anticipated credit losses.

     The residual certificates are accounted for under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Because such assets can be contractually prepaid or otherwise
settled in such a way that the holder would not receive all of the recorded
investment, the assets are classified as available-for-sale investments and are
carried at estimated fair value with any accompanying increases or decreases in
estimated fair value being recorded as unrealized gains or losses in other
comprehensive income as a part of Drive's partners' equity. The determination of
fair value is based on the present value of the anticipated excess cash flows
utilizing the valuation assumptions discussed above. Drive assesses the carrying
value of its securitization related securities for impairment in accordance with
the provisions of EITF 99-20 as discussed below. There can be no assurance that
Drive's estimates used to determine the fair value of the residual certificates
will remain appropriate for the life of each asset and it is reasonably possible
that circumstances could change in future periods which could result in a
material change in the estimates used to prepare Drive's financial statements.
If actual retail installment contract prepayments or credit losses exceed
Drive's current estimates, other than temporary impairment may be required to be
recognized.

     In March 2001, the Company adopted the provisions of EITF 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets ("EITF 99-20"), which
requires that other-than-temporary impairments in beneficial interests be
written down to fair value with the resulting charge being included in
operations. The implementation of EITF 99-20 required Drive to record a charge
to operations for other-than-temporary impairments on retained beneficial
interests in certain securitized assets, which had previously been recorded as
unrealized losses. As a result, in the second quarter of 2001, the Company
recognized a charge for the cumulative effect of a change in accounting
principle of $.3 million relating to the Company's equity investment in Drive.

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 141, Business
Combinations("SFAS 141") and SFAS 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. There have been no
business combinations in 2001. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized but instead be tested
for impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with the SFAS 121,

                                        57
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, supercedes SFAS
121 and is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 142 did not have a material impact on the Company's
consolidated financial statements. Unamortized goodwill at December 31, 2001 was
$.1 million.

     In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS 144"). SFAS No. 144 addresses the
accounting model for long-lived assets to be disposed of by sale and resulting
implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. It also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. Additionally, discontinued operations that are not
disposed of within one year must be reclassified as assets held and used unless
the discontinued segment will be (1) abandoned through the liquidation or
run-off of operations because the entity is obligated by regulation or contract
to provide services after it ceases accepting all new business and (2) is being
reported as a discontinued operation when SFAS 144 is initially applied. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 144 on January 1,
2002. The only assets remaining from discontinued operations are the investment
securities resulting from the retention of residual interests in securitization
transactions. Since the Company is contractually obligated to service the
securitized assets, the adoption of SFAS 144 had no impact on the Company's
consolidated financial statements.

  (Q) RECLASSIFICATIONS

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

(2) RESTRUCTURE, LIQUIDITY AND CAPITAL RESOURCES

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

     As stated in Note 1, in the third quarter of 2000, Consumer Corp. completed
the sale of a 49% equity interest in its automobile finance operation to IFA-GP
and IFA-LP. The transaction generated $75 million in cash as described below and
resulted in a gain of $12.1 million. Simultaneously, Bank of Scotland and the
Company completed a debt restructure, which resulted in reduced interest rates
and fees, increased liquidity, and an extended maturity. Additionally, this
transaction brought FirstCity into compliance under its lending covenants and
cured any defaults that may have existed prior to the restructure.

     The new entity formed to facilitate the transaction is Drive Financial
Services LP ("Drive"). BoS(USA), through wholly owned subsidiaries formed for
the purpose of the acquisition, purchased 49% of this newly formed entity for
$15 million and BoS(USA) provided $60 million in term financing to Drive and its
subsidiary, Drive ABS LP, which was used to repay indebtedness owed to FirstCity
by its automobile finance operation. After taking into effect the sale of the
49% interest to IFA-GP and IFA-LP, the ownership of Drive is allocated as
follows: 49% of Drive is owned (directly and indirectly) by IFA-GP and IFA-LP,
31% of Drive is owned (directly and indirectly) by Consumer Corp., and 20% of
Drive is owned (directly and indirectly) by Thomas R. Brower, Scot A. Foith,
Thomas G. Dundon, R. Tyler Whann, Bradley C. Reeves,

                                        58
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stephen H. Trent and Blake P. Bozman (the "Auto Finance Management Group"). The
Auto Finance Management Group consists of officers and shareholders of Funding
GP and limited partners of Funding LP who indirectly and directly owned the
remaining 20% equity interest in Funding LP. The Company has reflected the Auto
Finance Management Group's 20% equity interest in Funding LP as a minority
interest in the consolidated financial statements.

     The Company provided a guaranty limited to a maximum amount of up to $4
million of the $60 million term loan by BoS(USA) ($28 million outstanding
balance as of December 31, 2001). The Company, Consumer Corp. and Funding LP
secured the guaranty with a security interest in their respective ownership
interests in Consumer Corp., Funding LP and Drive. The $4 million guaranty by
the Company resulted in a $4 million deferral of the $12.1 million gain. As a
result of this transaction, the net operations of Drive have been recorded
(since August 1, 2000) as equity in earnings of investments.

     As a result of the sale of the 49% interest in the automobile finance
operation, the Company reduced the outstanding debt under its senior and
subordinate facilities from $113 million to approximately $44 million. The
Company also retired approximately $6.4 million of debt owed to other lenders.
The Company, Bank of Scotland, as agent, The Governor and Company of Bank of
Scotland and BoS(USA) (collectively, the "Lenders"), entered into a Second
Amendment to Amended and Restated Loan Agreement dated as of August 18, 2000
(the "Second Amendment") pursuant to which the remaining debt under the
Company's senior and subordinate debt facilities was restructured into a new
loan facility that provides for a maximum aggregate loan amount of $53 million.
The restructured facility is comprised of a $10 million Revolving Line of
Credit, a $31 million Term Loan A and a $12 million Term Loan B. The loans under
the restructured loan facility mature December 31, 2003, and carry pricing of
LIBOR plus 2.5% for the Revolving Line of Credit and Term Loan A and prime rate
for Term Loan B. In the restructure, the Bank of Scotland forgave a fee in the
amount of $2.5 million, which resulted in accrued loan fees of $.8 million owed
to the senior lender being recorded as an extraordinary gain in the consolidated
financial statements. The Second Amendment provides for a facility fee of $.5
million and a prepayment fee of $.5 million. The restructured loan facility
requires the consent of the Lenders prior to payment of any common and preferred
dividends.

     The Company obtained waivers or modifications under the Second Amendment
that brought the Company into compliance under the facility and cured defaults
that existed prior to the restructure.

     BoS(USA) has an option to acquire a warrant for 1,975,000 shares of the
Company's non-voting Common Stock; the option can be exercised after June 30,
2002 if the Company's $12 million Term Loan B owed to BoS(USA) and Bank of
Scotland remains outstanding, but not prior to that date. The strike price is
$2.3125 per share. In the event that prior to June 30, 2002 the Company either
(a) refinances the $12 million Term Loan B with subordinated debt, or (b) pays
off the balance of Term Loan B from proceeds of an equity offering, then the
option to acquire a warrant for 1,975,000 shares of non-voting Common Stock will
terminate. BoS(USA) and the Company extended the initial exercise date for this
option to acquire a warrant for 1,975,000 shares from August 31, 2001 to June
30, 2002 to allow the Company additional time to pursue possible restructure
alternatives which would otherwise be limited due to change of control issues
related to its substantial NOLs.

     BoS(USA) also has a warrant to purchase 425,000 shares of the Company's
voting Common Stock at $2.3125 per share. In the event that Term Loan B is
terminated prior to June 30, 2002 through a transaction involving the issuance
of warrants, BoS(USA) is entitled to additional warrants in connection with this
existing warrant for 425,000 shares to retain its ability to acquire
approximately 4.86% of the Company's voting Common Stock. BoS(USA) and the
Company amended the warrant to extend the date from August 31, 2001 to June 30,
2002 to correspond to the extension of the initial exercise date of the option
described in the preceding paragraph.

                                        59
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In the third quarter of 1999, dividends on the Company's redeemable
preferred stock ("New Preferred Stock") were suspended. At December 31, 2001,
accumulated dividends in arrears on New Preferred Stock totaled $6.4 million, or
$5.25 per share. Since the Company failed to pay quarterly dividends for six
consecutive quarters, the holders of New Preferred Stock are entitled to elect
two directors to the Company's Board until cumulative dividends have been paid
in full. Dividends on outstanding shares of New Preferred Stock of FirstCity
will be restricted until Term Loan B is paid in full. Given the continued high
debt levels of the Company, and management's priority of assuring adequate
levels of liquidity, the Company does not anticipate that dividends on New
Preferred Stock will be paid in the foreseeable future. The board of directors
and the management of the Company are currently evaluating various alternatives
to address its outstanding shares of New Preferred Stock and the corresponding
accrued dividends and redemption obligation, in addition to the option of
BoS(USA) to acquire a warrant to purchase 1,975,000 shares.

     During the second quarter of 2000, the Portfolio Asset acquisition and
resolution group of the Company entered into a $17 million loan facility with
Cargill Financial Services Corporation ("Cargill"). In January 2001, the maximum
principal balance under this revolving facility was increased to $30 million.
This facility is being used exclusively to provide equity in new Portfolio
acquisitions in partnerships with Cargill.

     Management believes that the BoS(USA) loan facilities along with the
liquidity from the Cargill line, the related fees generated from the servicing
of assets and equity distributions from existing Acquisition Partnerships and
wholly owned portfolios will allow the Company to meet its obligations as they
come due during the next twelve months.

(3) DISCONTINUED OPERATIONS

     The Company recorded a provision of $5.2 million in 2001 and $5.0 million
in 2000 for additional losses from discontinued operations. Effective during the
third quarter of 1999, management of the Company adopted formal plans to
discontinue the operations of Harbor Financial Group, Inc. (formerly known as
FirstCity Financial Mortgage Corp.) and its subsidiaries (collectively referred
to as "Mortgage Corp."), and FC Capital Corp. ("Capital Corp."). These entities
comprise the operations that were previously reported as the Company's
residential and commercial mortgage banking business. As formal termination
plans were adopted and historical business operations at each entity have
ceased, the results of operations for 1999 have been reflected as discontinued
operations in the accompanying consolidated statements of operations.
Additionally, the net assets related to the resolution of activity from the
discontinued operations have been reflected in the accompanying consolidated
balance sheets. The results of operations from discontinued operations for 1999
were composed of an operating loss of $39.1 million, the Company's write-off of
its investment of $50.5 million in Mortgage Corp. and the write down of its net
investment in Capital Corp. by $12.7 million. Revenues from discontinued
operations were zero in 2001 and 2000, and $56.3 million in 1999.

     The net assets from discontinued operations consist of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Estimated future gross cash receipts on residual interests
  in securitizations........................................  $18,775   $24,652
Accrual for loss on operations and disposal of discontinued
  operations, net...........................................   (2,118)   (4,208)
                                                              -------   -------
     Net assets of discontinued operations..................  $16,657   $20,444
                                                              =======   =======
</Table>

     The only assets remaining from discontinued operations are the investment
securities resulting from the retention of residual interests in securitization
transactions. Although the liquidation or run-off of these investment securities
will last longer than one year, the Company is contractually obligated to
service the securitized assets. The Company has considered the estimated future
gross cash receipts for such investment securities in the computation of the
loss from discontinued operations. The cash flows are collected over a

                                        60
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period of time and are valued using prepayment assumptions of 25% for fixed rate
loans and 40% for variable rate loans. Overall loss rates are estimated from
1.0% to 4.7% of collateral. If the prepayment speeds were to increase by 10% and
20%, the estimated future gross cash receipts would decrease by $1.0 million and
$1.8 million, respectively.

(4) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Non-performing Portfolio Assets.............................  $ 45,123   $ 55,807
Performing Portfolio Assets.................................    10,227     15,162
Real estate Portfolios......................................     1,766      3,075
                                                              --------   --------
     Total Portfolio Assets.................................    57,116     74,044
Adjusted purchase discount required to reflect Portfolio
  Assets
  at carrying value.........................................   (42,898)   (44,026)
                                                              --------   --------
     Portfolio Assets, net..................................  $ 14,218   $ 30,018
                                                              ========   ========
</Table>

     The Company recorded an allowance for impairment on Portfolio Assets of
approximately $3.3 million in 2001 and $2.0 million in 2000. No provision was
recorded in 1999. Portfolio Assets are pledged to secure non-recourse notes
payable.

(5) LOANS RECEIVABLE

     Loans receivable consist primarily loans from certain Acquisition
Partnerships located in Mexico. Loans receivable are summarized as follows:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Loans to Acquisition Partnerships held for investment.......  $19,765   $14,207
Student loan receivables....................................      134       332
                                                              -------   -------
     Loans receivable.......................................  $19,899   $14,539
                                                              =======   =======
</Table>

     In 2000 and 1999, the Company recorded an allowance for impairment on loans
receivable of approximately $.8 million and $.4 million, respectively, relating
to automobile finance receivables generated by the Company's automobile
platform, which was sold to Drive in August 2000. There were no provisions
recorded on loans receivable during 2001. In addition, provisions of $1.6
million and $3.9 million during 2000 and 1999, respectively, were recorded for
permanent impairment of value in residual interests in automobile finance
securitizations, which were also sold to Drive in August 2000.

(6) EQUITY INVESTMENTS

     The Company has investments in Acquisition Partnerships and their general
partners that are accounted for under the equity method. During 1999, the
Company also acquired investments in servicing entities that are accounted for
on the equity method. The condensed combined financial position and results of
operations

                                        61
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Acquisition Partnerships (excluding servicing entities), which include
the domestic and foreign Acquisition Partnerships and their general partners,
are summarized as follows:

                       CONDENSED COMBINED BALANCE SHEETS

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Assets......................................................  $654,883   $603,353
                                                              ========   ========
Liabilities.................................................   498,361    471,336
Net equity..................................................   156,522    132,017
                                                              --------   --------
                                                              $654,883   $603,353
                                                              ========   ========
Equity investment in Acquisition Partnerships...............  $ 42,660   $ 33,862
Equity investment in servicing entities.....................     2,118      1,422
                                                              --------   --------
                                                              $ 44,778   $ 35,284
                                                              ========   ========
</Table>

                     CONDENSED COMBINED SUMMARY OF EARNINGS

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Proceeds from resolution of Portfolio Assets.........  $249,219   $163,386   $127,475
Gain on resolution of Portfolio Assets...............   103,599     75,788     51,498
Interest income on performing Portfolio Assets.......    24,473     18,049     16,409
Net earnings.........................................  $ 14,172   $ 36,766   $ 37,742
                                                       ========   ========   ========
Equity in earnings of Acquisition Partnerships.......  $  9,742   $  7,203   $ 11,444
Equity in earnings (loss) of servicing entities......     1,029        166       (126)
                                                       --------   --------   --------
                                                       $ 10,771   $  7,369   $ 11,318
                                                       ========   ========   ========
</Table>

     The assets and equity of the Acquisition Partnerships and equity
investments in those entities are summarized by geographic region below. The
WAMCO Partnerships represent domestic Texas limited partnerships and limited
liability companies in which the Company has a common ownership with Cargill.

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Assets:
  Domestic:
     WAMCO Partnerships.....................................  $259,617   $213,772
     Other..................................................    15,607     14,956
  Mexico....................................................   305,324    300,036
  France....................................................    74,335     74,589
                                                              --------   --------
                                                              $654,883   $603,353
                                                              ========   ========
</Table>

                                        62
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Equity:
  Domestic:
     WAMCO Partnerships.....................................  $ 90,249   $ 61,604
     Other..................................................     3,207      1,689
  Mexico....................................................     2,546     30,703
  France....................................................    60,520     38,021
                                                              --------   --------
                                                              $156,522   $132,017
                                                              ========   ========
Equity investment in Acquisition Partnerships:
  Domestic:
     WAMCO Partnerships.....................................  $ 30,806   $ 23,192
     Other..................................................     2,313      1,876
  Mexico....................................................       292      1,388
  France....................................................     9,249      7,406
                                                              --------   --------
                                                              $ 42,660   $ 33,862
                                                              ========   ========
</Table>

     Revenues and earnings (loss) of the Acquisition Partnerships and equity in
earnings of those entities are summarized by geographic region below.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           2001      2000      1999
                                                         --------   -------   -------
<S>                                                      <C>        <C>       <C>
Revenues:
  Domestic:
     WAMCO Partnerships................................  $ 45,603   $33,778   $33,663
     Other.............................................     1,512       235     1,275
  Mexico...............................................    63,687    44,084     8,889
  France...............................................    20,199    17,934    26,473
  Japan................................................        --        --       560
                                                         --------   -------   -------
                                                         $131,001   $96,031   $70,860
                                                         ========   =======   =======
Net Earnings:
  Domestic:
     WAMCO Partnerships................................  $ 21,128   $12,357   $15,847
     Other.............................................     1,190      (147)      252
  Mexico...............................................   (21,816)   12,857     5,005
  France...............................................    13,670    11,699    16,188
  Japan................................................        --        --       450
                                                         --------   -------   -------
                                                         $ 14,172   $36,766   $37,742
                                                         ========   =======   =======
</Table>

                                        63
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                           2001      2000      1999
                                                         --------   -------   -------
<S>                                                      <C>        <C>       <C>
Equity in earnings of Acquisition Partnerships:
  Domestic:
     WAMCO Partnerships................................  $  7,363   $ 4,667   $ 7,085
     Other.............................................       798       123       183
  Mexico...............................................    (1,153)      210       557
  France...............................................     2,734     2,203     3,497
  Japan................................................        --        --       122
                                                         --------   -------   -------
                                                         $  9,742   $ 7,203   $11,444
                                                         ========   =======   =======
</Table>

     The Company recorded a $.5 million addition to equity in 2001 as a result
of unrealized gains on residual interests in securitization transactions held by
one Acquisition Partnership. Also, the Company recorded $.2 million in foreign
currency translation adjustments in 2001 relating to equity investments in
foreign Acquisition Partnerships and servicing entities.

     As discussed in Note 2, in the third quarter of 2000, the Company completed
the sale of a 49% equity interest in its automobile finance operation to certain
subsidiaries of BoS(USA). As a result of the sale, the net operations of Drive
have been recorded (since August 1, 2000) as equity investments. The Company's
investment in Drive is accounted for under the equity method. As of December 31,
2001, Drive's fiscal year end changed from February 28 to December 31. The
condensed consolidated financial position and results of operations of Drive are
summarized below:

                     CONDENSED CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                  DECEMBER 31,   FEBRUARY 28,   DECEMBER 31,
                                                      2001           2001           2000
                                                  ------------   ------------   ------------
<S>                                               <C>            <C>            <C>
Cash............................................    $  7,303       $  7,589       $ 10,567
Loans held for sale.............................      70,447        139,377         90,652
Residual interests in securitizations...........      77,407         55,739         56,190
Other assets....................................      10,321         10,158          6,799
                                                    --------       --------       --------
  Total assets..................................    $165,478       $212,863       $164,208
                                                    ========       ========       ========
Notes payable...................................    $126,665       $187,365       $143,923
Other liabilities...............................      13,323         17,473         10,638
                                                    --------       --------       --------
  Total liabilities.............................     139,988        204,838        154,561
Net equity......................................      25,490          8,025          9,647
                                                    --------       --------       --------
                                                    $165,478       $212,863       $164,208
                                                    ========       ========       ========
Equity investment in Drive......................    $  9,877       $  3,110       $  3,738
  Minority interest.............................      (1,975)          (622)          (748)
                                                    --------       --------       --------
     Net investment in Drive....................    $  7,902       $  2,488       $  2,990
                                                    ========       ========       ========
</Table>

                                        64
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS

<Table>
<Caption>
                                                     MARCH 1, 2001      AUGUST 1, 2000      AUGUST 1, 2000
                                  YEAR ENDED            THROUGH             THROUGH             THROUGH
                               DECEMBER 31, 2001   DECEMBER 31, 2001   FEBRUARY 28, 2001   DECEMBER 31, 2000
                               -----------------   -----------------   -----------------   -----------------
<S>                            <C>                 <C>                 <C>                 <C>
Interest income..............       $45,224             $37,506             $22,031             $14,313
Gain on sale of loans........        39,033              39,033               9,434               9,434
Service fees and other.......        12,376              10,391               4,256               2,271
                                    -------             -------             -------             -------
  Revenues...................        96,633              86,930              35,721              26,018
                                    -------             -------             -------             -------
Interest expense.............        11,744               9,329               8,165               5,750
Salaries and benefits........        33,185              28,706              13,674               9,195
Provision for loan and
  impairment losses..........        12,688              10,425                4129               1,866
Other expenses...............        24,516              19,207               8,777               3,468
                                    -------             -------             -------             -------
  Expenses...................        82,133              67,667              34,745              20,279
                                    -------             -------             -------             -------
Net earnings.................       $14,500             $19,263             $   976             $ 5,739
                                    =======             =======             =======             =======
Equity in earnings of
  Drive......................       $ 5,923             $ 7,768             $   378             $ 2,223
Cumulative effect of
  accounting change..........          (304)               (304)                 --                  --
Minority interest............        (1,124)             (1,493)                (75)               (444)
                                    -------             -------             -------             -------
  Net equity in earnings of
     Drive...................       $ 4,495             $ 5,971             $   303             $ 1,779
                                    =======             =======             =======             =======
</Table>

     The Company recorded a $.7 million addition to equity in 2001 as a result
of unrealized gains on residual interests in securitization transactions held by
Drive.

(7) NOTES PAYABLE

     Notes payable consisted of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
<S>                                                           <C>       <C>
Collateralized loans, secured by Portfolio Assets:
  Fixed rate (7.66% at December 31, 2001), due 2002.........  $ 7,181   $13,251
  LIBOR (1.9% at December 31, 2001) plus 4% to 5%, due at
     various dates through 2003.............................    7,650    16,190
Senior Credit Facility, secured and with recourse to the
  Company:
  LIBOR (1.9% at December 31, 2001) plus 2.5%; Prime (4.75%
     at December 31, 2001), due 2003........................   48,600    47,778
Acquisition Facility, secured by certain equity interests of
  the Company:
  LIBOR (1.9% at December 31, 2001) plus 4.50%, due 2003....   27,422    15,623
                                                              -------   -------
  Notes payable, secured....................................   90,853    92,842
  Notes payable to others at various fixed rates between
     7.00% and 8.56%, due at various dates through 2002.....      356       922
                                                              -------   -------
                                                              $91,209   $93,764
                                                              =======   =======
</Table>

                                        65
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Refer to Note 2 for a description of terms related to the Company's Senior
Credit Facility at December 31, 2001 and other matters concerning the Company's
liquidity.

     Under terms of certain borrowings, the Company and its subsidiaries are
required to maintain certain tangible net worth levels and debt to equity and
debt service coverage ratios. The terms also restrict future levels of debt. At
December 31, 2001, the Company was in compliance with the aforementioned
covenants. The aggregate maturities of notes payable for the two years ending
December 31, 2003 are as follows: $7,537 in 2002 and $83,672 in 2003.

(8) SEGMENT REPORTING

     The Company is engaged in two reportable segments (i) Portfolio Asset
acquisition and resolution and (ii) consumer lending through the Company's
minority investment in Drive. These segments have been segregated based on
products and services offered by each. As a result of the sale of a 49% equity
interest in the Company's automobile finance operation, the net operations of
Drive have been recorded (since August 1, 2000) as equity in earnings of
investments. Prior to June 30, 1999, the Company also reflected operations from
its mortgage banking segment. As described in Note 3, the Company has
discontinued operations in the mortgage banking segment effective in the third
quarter of 1999. Accordingly, all activity related to the mortgage banking
segment has been reclassified as discontinued operations in the consolidated
financial statements. The following is a summary of results of operations for
each of the two remaining segments and a reconciliation to earnings (loss) from
continuing operations.

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2001       2000      1999
                                                         -------   --------   -------
<S>                                                      <C>       <C>        <C>
PORTFOLIO ASSET ACQUISITION AND RESOLUTION:
  Revenues:
     Servicing fees....................................  $ 9,580   $  7,555   $ 3,850
     Gain on resolution of Portfolio Assets............    1,049      3,120     4,054
     Gain on the sale of interest in investments.......    3,316         --     2,163
     Equity in earnings of investments.................   10,771      7,369    11,318
     Interest income...................................    5,847      2,143     2,610
     Other.............................................    1,190      1,129     1,502
                                                         -------   --------   -------
       Total...........................................   31,753     21,316    25,497
  Expenses:
     Interest and fees on notes payable................    4,128      3,266     4,308
     Salaries and benefits.............................    7,679      5,531     5,542
     Provision for loan and impairment losses..........    3,277      1,971        --
     Occupancy, data processing and other..............    8,857      7,083     5,818
                                                         -------   --------   -------
       Total...........................................   23,941     17,851    15,668
                                                         -------   --------   -------
  Operating contribution before direct taxes...........  $ 7,812   $  3,465   $ 9,829
                                                         =======   ========   =======
  Operating contribution, net of direct taxes..........  $ 7,713   $  3,354   $ 9,743
                                                         =======   ========   =======
</Table>

                                        66
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          2001       2000      1999
                                                         -------   --------   -------
<S>                                                      <C>       <C>        <C>
CONSUMER LENDING:
  Revenues:
     Servicing fees....................................  $    --   $  3,887   $ 5,086
     Equity in earnings of investments.................    5,923      2,223        --
     Gain on sale of automobile loans..................        5      2,836    10,280
     Interest income...................................       --     12,882    17,787
     Gain on sale of interest in subsidiary............       --      8,091        --
     Other.............................................        9         71       171
                                                         -------   --------   -------
       Total...........................................    5,937     29,990    33,324
  Expenses:
     Interest and fees on notes payable................       --      3,217     4,730
     Salaries and benefits.............................       --      7,277     8,053
     Provision for loan and impairment losses..........       --      2,420     4,302
     Occupancy, data processing and other..............    1,473      6,706    10,539
                                                         -------   --------   -------
       Total...........................................    1,473     19,620    27,624
                                                         -------   --------   -------
  Operating contribution before direct taxes...........  $ 4,464   $ 10,370   $ 5,700
                                                         =======   ========   =======
  Operating contribution, net of direct taxes..........  $ 4,448   $ 10,362   $ 5,635
                                                         =======   ========   =======
       Total operating income, net of direct taxes.....  $12,161   $ 13,716   $15,378
                                                         =======   ========   =======
CORPORATE OVERHEAD:
  Other revenue........................................  $    75   $    870   $   107
  Corporate interest expense...........................   (4,649)   (12,175)   (9,716)
  Salaries and benefits, occupancy, professional and
     other Expenses....................................   (5,416)    (7,144)   (6,688)
  Deferred tax valuation allowance.....................       --     (7,000)   (4,900)
                                                         -------   --------   -------
  Earnings (loss) from continuing operations...........  $ 2,171   $(11,733)  $(5,819)
                                                         =======   ========   =======
</Table>

     Revenues from the Consumer Lending segment are all attributable to domestic
operations. Revenues from the Portfolio Asset acquisition and resolution segment
attributable to domestic and foreign operations are summarized as follows:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Domestic................................................  $18,332   $13,527   $20,468
Mexico..................................................    9,460     5,237     1,502
France..................................................    3,941     2,552     3,527
Other foreign...........................................       20        --        --
                                                          -------   -------   -------
     Total..............................................  $31,753   $21,316   $25,497
                                                          =======   =======   =======
</Table>

                                        67
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Portfolio acquisition and resolution assets.................  $ 79,335   $ 79,567
Consumer assets.............................................    10,205      4,069
Deferred tax benefit, net...................................    20,101     20,101
Other assets, net...........................................    12,595     16,810
Net assets of discontinued operations.......................    16,657     20,444
                                                              --------   --------
     Total assets...........................................  $138,893   $140,991
                                                              ========   ========
</Table>

(9) PREFERRED STOCK, STOCKHOLDERS' EQUITY AND LOSS PER SHARE

     On July 17, 1998 the Company filed a shelf registration statement with the
Securities and Exchange Commission, which allows the Company to issue up to $250
million in debt and equity securities from time to time in the future. The
registration statement became effective July 28, 1998. As of December 31, 2001,
there have been no securities issued under this registration statement.

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

     The Company also issued an option to the holder of the senior subordinated
notes allowing it to acquire a warrant for 1,975,000 shares of the Company's
non-voting Common Stock. As discussed in Note 2, in the third quarter of 2000,
the Company restructured its remaining debt into a new facility provided solely
by Bank of Scotland and BoS(USA). BoS(USA) will retain its option to acquire
warrants for 1,975,000 shares of the Company's Common Stock. The strike price of
$2.3125 will remain the same, but the initial date upon which the option can be
exercised has been extended to June 30, 2002. The option can be exercised after
June 30, 2002 if Term Loan B remains outstanding, but not prior to such date. In
the event that prior to June 30, 2002 the Company either (a) refinances the $12
million Term Loan B with subordinated debt, or (b) pays off the balance of Term
Loan B from proceeds of an equity offering, then the option to acquire a warrant
for 1,975,000 shares of non-voting Common Stock will terminate. In the event
that Term Loan B is terminated prior to June 30, 2002 through a transaction
involving the issuance of warrants, BoS(USA) is entitled to additional warrants
in connection with its existing warrant for 425,000 shares to retain its ability
to acquire approximately 4.86% of the Company's Common Stock.

     The holders of shares of Common Stock are entitled to one vote for each
share on all matters submitted to a vote of common stockholders. In order to
preserve certain tax benefits available to the Company, transactions involving
stockholders 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.

     The redeemable preferred stock ("New Preferred Stock") has a redemption
value of $21.00 per share and cumulative quarterly cash dividends at the annual
rate of $2.10 per share through the redemption date of September 30, 2005. The
Company may redeem the New Preferred Stock after September 30, 2003 for $21 per
share plus accrued dividends. The New Preferred Stock carries no voting rights
except in the event of non-payment of dividends, in which case, the holders of
New Preferred Stock have the right to elect two directors to the Company's
Board. Dividends of $1.9 million, or $1.575 per share, were paid in 1999. In the
third quarter of 1999, dividends on the Company's New Preferred Stock were
suspended. At December 31, 2001, accumulated dividends in arrears on such New
Preferred Stock totaled $6.4 million, or $5.25 per share. Since the Company
failed to pay quarterly dividends for six consecutive quarters, the holders of
New Preferred

                                        68
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock are entitled to elect two directors to the Company's Board until
cumulative dividends have been paid in full.

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

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

     The per share weighted-average fair value of stock options granted during
2001 and 2000 was $0.99 and $1.84, respectively, on the grant date using the
Black-Scholes option pricing model with the following assumptions: $0 expected
dividend yield, risk-free interest rate of 6.0%, expected volatility of 30%, and
an expected life of 10 years.

     The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option and award plans and, accordingly, no
compensation cost has been recognized for its stock options in the consolidated
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net loss to common
stockholders and net loss per common share would have been reflected as the pro
forma amounts indicated below:

<Table>
<Caption>
                                                        2001       2000       1999
                                                       -------   --------   ---------
<S>                                                    <C>       <C>        <C>
Net loss to common stockholders:
  As reported........................................  $(5,597)  $(18,468)  $(110,724)
  Pro forma..........................................   (5,682)   (19,130)   (111,502)
Net loss per common share -- diluted:
  As reported........................................  $  (.67)  $  (2.21)  $  (13.33)
  Pro forma..........................................     (.68)     (2.29)     (13.42)
</Table>

     Stock option activity during the periods indicated is as follows:

<Table>
<Caption>
                                     2001                 2000                 1999
                              ------------------   ------------------   ------------------
                                        WEIGHTED             WEIGHTED             WEIGHTED
                                        AVERAGE              AVERAGE              AVERAGE
                                        EXERCISE             EXERCISE             EXERCISE
                              SHARES     PRICE     SHARES     PRICE     SHARES     PRICE
                              -------   --------   -------   --------   -------   --------
<S>                           <C>       <C>        <C>       <C>        <C>       <C>
Outstanding at beginning of
  Year......................  347,750    $12.03    236,650    $22.96    284,950    $23.06
Granted.....................  275,500      3.06    183,000      2.00         --        --
Exercised...................       --        --         --        --         --        --
Cancelled...................       --        --    (22,500)    22.00         --        --
Forfeited...................       --        --    (49,400)    23.60    (48,300)    23.54
                              -------    ------    -------    ------    -------    ------
Outstanding at end of
  year......................  623,250    $ 8.07    347,750    $12.03    236,650    $22.96
                              =======    ======    =======    ======    =======    ======
</Table>

                                        69
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table summarizes stock options granted by grant date.

<Table>
<Caption>
                                                                     SHARES
                                                                 OUTSTANDING AT
                                                       SHARES     DECEMBER 31,    EXERCISE
DATE OF GRANT                                          GRANTED        2001         PRICE
-------------                                          -------   --------------   --------
<S>                                                    <C>       <C>              <C>
October 27, 1995.....................................  229,600       97,000        $20.00
October 26, 1996.....................................   18,000        4,000         30.75
February 27, 1997....................................   95,200       56,250         27.25
May 21, 1998.........................................   15,000        7,500         29.69
December 1, 2000.....................................  183,000      183,000          2.00
December 20, 2001....................................  275,500      275,500          3.06
                                                       -------      -------
                                                       816,300      623,250
                                                       =======      =======
</Table>

     In December 2001, the Company granted 275,500 stock options with an
exercise price of $3.06 (greater than the fair market value of the Company's
common stock on the date of grant). At December 31, 2001, the range of exercise
prices and weighted-average remaining contractual life of outstanding options
was $2.00 to $30.75 and 8.19 years, respectively. In addition, 346,375 options
were exercisable with a weighted-average exercise price of $12.34.

     The Company has an employee stock purchase plan, which allows employees to
acquire approximately 157,000 shares of Common Stock of the Company at 85% of
the fair value at the end of each quarterly plan period. The value of the shares
purchased under the plan is limited to the lesser of 10% of compensation or
$25,000 per year. Under the plan, 8,156 shares were issued in 2001, 35,044
shares were issued in 2000 and 45,341 shares were issued in 1999. At December
31, 2001, approximately 21,000 shares of Common Stock are available for issuance
pursuant to the plan.

     No effect was given to dilutive securities in the 2001, 2000 and 1999 loss
per share calculations as such had an anti-dilutive effect. However, during
2001, an average of 356,808 options were outstanding that could have a
potentially dilutive per share calculation effect in the future.

(10) INCOME TAXES

     Income tax expense from continuing operations consists of:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                             2001    2000      1999
                                                             ----   -------   -------
<S>                                                          <C>    <C>       <C>
Federal and state current benefit (expense)................  $(15)  $  (414)  $    10
Federal deferred expense...................................    --    (7,000)   (5,061)
                                                             ----   -------   -------
     Total.................................................  $(15)  $(7,414)  $(5,051)
                                                             ====   =======   =======
</Table>

     The actual income tax benefit (expense) attributable to earnings (loss)
from continuing operations differs from the expected tax benefit (expense)
(computed by applying the federal corporate tax rate of 35% to

                                        70
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings (loss) from continuing operations before income taxes, minority
interest and accounting change) as follows:

<Table>
<Caption>
                                                           2001      2000      1999
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Computed expected tax benefit (expense).................  $(1,593)  $ 1,439   $  (256)
(Increase) reduction in income taxes resulting from:
  Change in valuation allowance.........................    1,593    (8,439)   (4,253)
  Alternative minimum tax and state income tax..........      (15)     (414)       --
  Other.................................................       --        --      (542)
                                                          -------   -------   -------
                                                          $   (15)  $(7,414)  $(5,051)
                                                          =======   =======   =======
</Table>

     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2001 and 2000 are as
follows:

<Table>
<Caption>
                                                                2001        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
Deferred tax assets:
  Investments in Acquisition Partnerships, principally due
     to differences in basis for tax and financial reporting
     purposes...............................................  $   4,453   $   1,902
  Intangibles, principally due to differences in
     amortization...........................................        214         269
  Tax basis in fixed assets less than book..................       (165)       (581)
  Other.....................................................       (583)      2,133
  Federal net operating loss carryforwards..................    201,639     203,428
                                                              ---------   ---------
       Total gross deferred tax assets......................    205,558     207,151
  Valuation allowance.......................................   (185,457)   (187,050)
                                                              ---------   ---------
       Net deferred tax assets..............................  $  20,101   $  20,101
                                                              =========   =========
</Table>

     The Company has net operating loss carryforwards for federal income tax
purposes of approximately $576 million from continuing operations and $152
million from discontinued operations at December 31, 2001, available to offset
future federal taxable income, if any, through the year 2021. A valuation
allowance is provided to reduce the deferred tax assets to a level, which, more
likely than not, will be realized. During 2001, 2000 and 1999, the Company
adjusted the previously established valuation allowance to recognize a deferred
tax benefit (expense) of $1.6 million, $(8.4) million and $(4.3) million,
respectively. Realization is determined based on management's expectation of
generating sufficient taxable income in a look forward period over the next four
years. The ultimate realization of the resulting net deferred tax asset is
dependent upon generating sufficient taxable income from its continuing
operations prior to expiration of the net operating loss carryforwards. The
expense recognized in 2000 is attributed to a reduction in anticipated taxable
income. The expense recognized in 1999 is attributed to a revaluation of the
realization of the deferred tax asset for the effects of the discontinuance of
the mortgage operations. Although realization is not assured, management
believes it is more likely than not that all of the recorded deferred tax asset,
net of the allowance, will be realized. The amount of the deferred tax asset
considered realizable, however, could be adjusted in the future if estimates of
future taxable income during the carryforward period change. The ability of the
Company to realize the deferred tax asset is periodically reviewed and the
valuation allowance is adjusted accordingly.

(11) EMPLOYEE BENEFIT PLAN

     The Company has a defined contribution 401(k) employee profit sharing plan
pursuant to which the Company matches employee contributions at a stated
percentage of employee contributions to a defined

                                        71
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maximum. The Company's contributions to the 401(k) plan were $152 in 2001, $263
in 2000 and $238 in 1999.

(12) LEASES

     The Company leases its current headquarters from a related party under a
noncancellable operating lease. The lease calls for monthly payments of $10
through its expiration in December 2006 and includes an option to renew for an
additional five-year period. Rental expense for 2001, 2000 and 1999 under this
lease was $90 each year. The Company also leases office space and equipment from
unrelated parties under operating leases expiring in various years through 2005.
Rental expense under these leases for 2001, 2000 and 1999 was $.6 million, $1.7
million and $2.1 million, respectively. As of December 31, 2001, the future
minimum lease payments under all noncancellable operating leases are: $335 in
2002, $257 in 2003, $161 in 2004, $155 in 2005, and $120 in 2006.

(13) OTHER RELATED PARTY TRANSACTIONS

     The Company has contracted with the Acquisition Partnerships and related
parties as a third party loan servicer. Servicing fees totaling $9.6 million,
$11.4 million and $8.9 million, for 2001, 2000 and 1999, respectively, and due
diligence fees (included in other income) were derived from such affiliates.

(14) COMMITMENTS AND CONTINGENCIES

     On October 14, 1999, Harbor Financial Group, Inc. ("Harbor Parent"), Harbor
Financial Mortgage Corporation ("HFMC") and four subsidiaries of HMFC filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code before
the United States Bankruptcy Court for the Northern District of Texas, Dallas
Division. On December 14, 1999, the bankruptcy proceedings were converted to
liquidations under Chapter 7 of the United States Bankruptcy Code. John H.
Litzler, the Chapter 7 Trustee in the bankruptcy proceedings (the "Trustee"),
initiated adversary proceedings on May 25, 2001 against FirstCity and various
current and former directors and officers of FirstCity and Harbor alleging
breach of fiduciary duties, mismanagement, and self-dealing by FirstCity and
Harbor directors and officers, and improper transfer of funds from the Harbor
related entities to FirstCity. The claims also include fraudulent and
preferential transfer of assets of the Harbor entities, fraud and conspiracy.
The Trustee, FirstCity and the other defendants have reached terms of an
agreement to compromise the claims brought in the adversary proceedings, subject
to the approval of the Bankruptcy Court and the consent of all necessary
insurers of FirstCity and its subsidiaries and affiliates. Under the proposed
settlement, if approved, the Trustee will release the defendants, their
affiliates and subsidiaries from any and all claims which were brought or could
have been brought by the Trustee against any of the defendants, any past and
present officers and directors of FirstCity or any affiliates or subsidiaries of
FirstCity in consideration of the payment of $3.8 million cash and the release
of any and all claims of FirstCity and its affiliates and subsidiaries and of
the individual defendants in the bankruptcy proceedings against the Trustee,
including administrative and expense claims. Neither the consent of the
necessary insurers nor the approval of the Bankruptcy Court of the proposed
terms of settlement has been obtained, and there can be no assurance that such
consent and approval will be secured. In the event that carrier consent or
bankruptcy court approval is not obtained, FirstCity intends to vigorously
contest the claims of the Trustee, as the Company believes that the claims are
without merit and that it has valid defenses to these claims.

     The Company and Harbor Parent filed suit in the Federal District Court for
the Western District of Texas, Waco Division, against Chase Bank of Texas, N.A.
and Chase Securities, Inc. in September 1999 seeking injunctive relief and
damages resulting from alleged violations by the defendants of the Bank Holding
Company Act and from civil conspiracy engaged in by the defendants, arising from
an engagement letter entered into between the Company and Chase Securities, Inc.
relating to the sale of assets or securities of

                                        72
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Harbor Parent, HFMC and their subsidiaries (collectively "Harbor"). The Company
and Harbor Parent alleged that the conditioning by Chase Bank Texas, N.A. of the
extension of credit to Harbor on the retention of Chase Securities, Inc. by the
Company and Harbor violated the Bank Holding Company Act. The Company
additionally sought a judicial declaration that the plaintiffs were not
obligated to pay any commission to Chase Securities, Inc. under the engagement
letter. The Company and Harbor Parent also sought recovery of treble damages
pursuant to the Bank Holding Company Act and recovery of costs of court,
including reasonable attorneys fees. A motion to dismiss the Texas suit was
granted based upon a provision in the engagement letter that provided that any
suit arising from the engagement letter would be pursued in the State of New
York. The Company has been granted leave by the Supreme Court for the State of
New York to amend its answer in that proceeding to include the claims asserted
in the Texas suit as a counterclaim to the suit brought by Chase Securities,
Inc. and to assert certain affirmative defenses.

     On October 4, 1999, Chase Securities, Inc. filed suit against the Company
before the Supreme Court for the State of New York, County of New York:
Commercial Part seeking recovery of $2.4 million as the balance of a transaction
fee allegedly due it under the terms of the engagement letter discussed above
and other relief. The Company denies that it has any liability to Chase
Securities, Inc. The Company has asserted as a defense to this action the
violations of the Bank Holding Company Act and other claims asserted in the
litigation filed in the Federal District Court for the Western District of
Texas. The Company was granted leave to amend its answer in the suit to include
a counterclaim against Chase Securities, Inc. asserting breach of contract based
upon the matters that were asserted in the Texas suit.

     John H. Litzler, in his capacity as the duly appointed trustee of the
bankruptcy estates of the Harbor Parent and HFMC (the "Trustee"), filed an
action pending in the United States District Court for the Southern District of
New York against Chase Manhattan Bank, formerly Chase Bank of Texas, N.A. and
Chase Securities, Inc. seeking recovery of damages arising from or relating to
various agreements by and between Harbor Parent and HFMC and Chase Manhattan
Bank and Chase Securities, Inc., including the alleged violations of the
Anti-Tying provision of the Bank Holding Company Act as had been asserted by the
Company and Harbor Financial Group, Inc. in the Texas suit.

     The Trustee and the Company and Chase Manhattan Bank and Chase Securities,
Inc. are currently finalizing settlement documents to settle the claims brought
in the suits pending in the New York courts described above, subject to the
approval of the Bankruptcy Court in the proceedings related to Harbor. There can
be no assurance that the parties can resolve outstanding issues related to the
terms of the settlement documentation or that approval of the Bankruptcy Court
of the proposed terms of settlement can be obtained. In the event that the
settlement is not completed or the Bankruptcy Court does not approve the
settlement, the Company intends to vigorously defend the claim of Chase
Securities, Inc. for payment of the fee and to pursue its claims for damages
against Chase Manhattan Bank and Chase Securities, Inc.

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

     The Company is a 50% owner in an entity that is obligated to advance up to
$2.5 million toward the acquisition of Portfolio Assets from financial
institutions in California. At December 31, 2001, advances of $2.4 million had
been made under the obligation.

                                        73
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In connection with the transactions contemplated by the Securities Purchase
Agreement, effective August 1, 2000, Consumer Corp. and Funding LP contributed
all of the assets utilized in the operations of the automobile finance operation
to Drive pursuant to the terms of a Contribution and Assumption Agreement by and
between Consumer Corp. and Drive, and a Contribution and Assumption Agreement by
and between Funding LP and Drive (collectively, the "Contribution Agreements").
Drive assumed substantially all of the liabilities of the automobile finance
operation as set forth in the Contribution Agreements.

     In addition, in the Securities Purchase Agreement, the Company, Consumer
Corp., Funding LP and Funding GP made various representations and warranties
concerning (i) their respective organizations, (ii) the automobile finance
operation conducted by Consumer Corp. and Funding LP, and (iii) the assets
transferred by Consumer Corp. and Funding LP to Drive. The Company, Consumer
Corp., Funding LP and Funding GP also agreed to indemnify BoS(USA), IFA-GP and
IFA-LP from damages resulting from a breach of any representation or warranty
contained in the Securities Purchase Agreement or otherwise made by the Company,
Consumer Corp. or Funding LP in connection with the transaction. The indemnity
obligation under the Securities Purchase Agreement survives for a period of
seven (7) years from August 25, 2000 (the "Closing Date") with respect to
tax-related representations and warranties and for thirty months from the
Closing Date with respect to all other representations and warranties. Neither
the Company, Consumer Corp., Funding LP, or Funding GP is required to make any
payments as a result of the indemnity provided under the Securities Purchase
Agreement until the aggregate amount payable exceeds $.25 million, and then only
for the amount in excess of $.25 million in the aggregate; however certain
representations and warranties are not subject to this $.25 million threshold.
Pursuant to the terms of the Contribution Agreements, Consumer Corp. and Funding
LP have agreed to indemnify Drive from any damages resulting in a material
adverse effect on Drive resulting from breaches of representations or
warranties, failure to perform, pay or discharge liabilities other than the
assumed liabilities, or claims, lawsuits or proceedings resulting from the
transactions contemplated by the Contribution Agreements. Pursuant to the terms
of the Contribution Agreements, Drive has agreed to indemnify Consumer Corp. and
Funding LP for any breach of any representation or warranty by Drive, the
failure of Drive to discharge any assumed liability, or any claims arising out
of any failure by Drive to properly service receivables after August 1, 2000.
Liability for indemnification pursuant to the terms of the Contribution
Agreements will not arise until the total of all losses with respect to such
matters exceeds $.25 million and then only for the amount by which such losses
exceed $.25 million; however this limitation will not apply to any breach of
which the party had knowledge at the time of the Closing Date or any intentional
breach by a party of any covenant or obligation under the Contribution
Agreements.

     The Company also provided a guaranty limited to a maximum of up to $4
million of a $60 million loan to Drive by BoS(USA) The Company, Consumer Corp.
and Funding L.P. secured the guaranty with security interests in their
respective ownership interest in Consumer Corp., Funding L.P. and Drive.

(15) FINANCIAL INSTRUMENTS

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

  (A) CASH AND CASH EQUIVALENTS

     The carrying amount of cash and cash equivalents approximated fair value at
December 31, 2001 and 2000.

                                        74
<PAGE>
                FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (B) PORTFOLIO ASSETS AND LOANS RECEIVABLE

     The Portfolio Assets and loans receivable are carried at the lower of cost
or estimated fair value. The estimated fair value is calculated by discounting
projected cash flows on an asset-by-asset basis using estimated market discount
rates that reflect the credit and interest rate risks inherent in the assets.
The carrying value of the Portfolio Assets and loans receivable was $34.1
million and $44.6 million, respectively, at December 31, 2001 and 2000. The
estimated fair value of the Portfolio Assets and loans receivable was
approximately $35.5 million and $47.2 million, respectively, at December 31,
2001 and 2000.

  (C) RESIDUAL INTERESTS IN SECURITIZATIONS

     Residual interests in securitizations included in discontinued operations
are carried at estimated future gross cash receipts. The estimated fair value is
calculated using various assumptions regarding prepayment speeds and credit
losses. The carrying value of the residual interests was $18.8 million and $24.7
million at December 31, 2001 and 2000, respectively. The estimated fair value of
the residual interests was $11.4 million and $14.6 million at December 31, 2001
and 2000, respectively.

  (D) NOTES PAYABLE

     Management believes that the repayment terms for similar rate financial
instruments with similar credit risks and the stated interest rates at December
31, 2001 and 2000 approximate the market terms for similar credit instruments.
Accordingly, the carrying amount of notes payable is believed to approximate
fair value.

  (E) NEW PREFERRED STOCK

     New Preferred Stock is carried at redemption value plus accrued but unpaid
dividends. Carrying values were $32,101 and $29,533 at December 31, 2001 and
2000, respectively. Fair market values based on quoted market rates were $9,049
and $11,618 at December 31, 2001 and 2000, respectively.

                                        75
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS AND STOCKHOLDERS
FIRSTCITY FINANCIAL CORPORATION:

     We have audited the accompanying consolidated balance sheets of FirstCity
Financial Corporation and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstCity
Financial Corporation and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United Sates of America.

     As discussed in Note 1 to the consolidated financial statements, in 2001
the Company changed its method of accounting for residual interests in
securitized financial assets in accordance with the Financial Accounting
Standards Board's EITF 99-20, Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets.
Also, in 1999 the Company changed its method of accounting for organizational
costs in accordance with the American Institute of Certified Public Accountants
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities.

                                          KPMG LLP

Dallas, Texas
February 13, 2002

                                        76
<PAGE>

                        FIRSTCITY FINANCIAL CORPORATION

                       SELECTED QUARTERLY FINANCIAL DATA

<Table>
<Caption>
                                             2001                                     2000
                             -------------------------------------   --------------------------------------
                              FIRST    SECOND     THIRD    FOURTH     FIRST     SECOND     THIRD    FOURTH
                             QUARTER   QUARTER   QUARTER   QUARTER   QUARTER   QUARTER    QUARTER   QUARTER
                             -------   -------   -------   -------   -------   --------   -------   -------
                                             (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                              (UNAUDITED)
<S>                          <C>       <C>       <C>       <C>       <C>       <C>        <C>       <C>
Revenues...................  $9,237    $15,685   $ 4,179   $ 8,664   $15,676   $ 12,390   $16,186   $ 7,924
Expenses...................   7,828      9,513     8,134     7,739    15,546     19,493    13,224     8,025
Earnings (loss) from
  continuing operations
  before accounting
  change(1)................   1,625      4,168    (3,605)      287      (129)   (13,978)    2,885      (511)
Accounting change..........      --       (304)       --        --        --         --        --        --
Extraordinary gain.........      --         --        --        --        --         --       833        --
Loss from discontinued
  operations...............      --     (1,000)   (2,000)   (2,200)       --     (5,000)       --        --
Net earnings (loss)........   1,625      2,864    (5,605)   (1,913)     (129)   (18,978)    3,718      (511)
Preferred dividends........     642        642       642       642       642        642       642       642
Net earnings (loss) to
  common stockholders......  $  983    $ 2,222   $(6,247)  $(2,555)  $  (771)  $(19,620)  $ 3,076   $(1,153)
Net earnings (loss) from
  continuing operations
  before accounting change
  per common share -- Basic
  and diluted..............  $ 0.12    $  0.43   $ (0.51)  $ (0.05)  $ (0.09)  $  (1.75)  $  0.27   $ (0.14)
</Table>

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

(1) Significant losses from continuing operations during the third quarter of
    2001 related to $1.0 million in provisions for loan and impairment losses
    and $1.7 million in equity in loss of Drive. Significant losses from
    continuing operations during the second quarter of 2000 related to a $7.0
    million increase in the valuation allowance of the deferred tax asset and
    $2.7 million of provisions for loan and impairment losses.

                                        77
<PAGE>

                               WAMCO PARTNERSHIPS
                         COMBINED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000 AND 1999
                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)

                                        78
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

THE PARTNERS
WAMCO PARTNERSHIPS:

     We have audited the accompanying combined balance sheets of the WAMCO
Partnerships as of December 31, 2001 and 2000, 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, 2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the WAMCO
Partnerships as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

                                          KPMG LLP

Dallas, Texas
February 13, 2002

                                        79
<PAGE>

                               WAMCO PARTNERSHIPS

                            COMBINED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
                                       ASSETS
Cash........................................................   $ 13,397     $  6,083
Portfolio Assets, net.......................................    218,731      180,655
Investments in partnerships.................................      2,302        2,254
Investments in trust certificates...........................      8,223        6,908
Deferred profit sharing.....................................     15,506       16,174
Other assets, net...........................................      1,458        1,698
                                                               --------     --------
                                                               $259,617     $213,772
                                                               ========     ========
                          LIABILITIES AND PARTNERS' CAPITAL

Notes payable (including $101,178 and $120,936 to affiliates
  in 2001 and 2000, respectively)...........................    140,411      123,198
Deferred compensation.......................................     20,552       22,356
Other liabilities (including $558 and $788 to affiliates in
  2001 and 2000, respectively)..............................      3,800        3,058
                                                               --------     --------
          Total liabilities.................................    164,763      148,612
Commitments and contingencies...............................         --           --
Preferred equity............................................      4,605        3,556
Partners' capital...........................................     90,249       61,604
                                                               --------     --------
                                                               $259,617     $213,772
                                                               ========     ========
</Table>

            See accompanying notes to combined financial statements.

                                        80
<PAGE>

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<Table>
<Caption>
                                                                2001       2000       1999
                                                              --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Proceeds from resolution of Portfolio Assets................  $ 69,188   $ 44,182   $ 48,163
Cost of Portfolio Assets resolved...........................    44,916     30,115     31,904
                                                              --------   --------   --------
Gain on resolution of Portfolio Assets......................    24,272     14,067     16,259
Interest income on performing Portfolio Assets..............    19,543     18,049     15,599
Interest and fees on notes payable (including $11,268,
  $14,594, and $10,697 to affiliates in 2001, 2000, and
  1999, respectively).......................................   (13,338)   (14,776)   (11,014)
Provision for loan losses...................................    (1,254)       (58)        --
General, administrative and operating expenses..............    (9,883)    (6,587)    (6,802)
Other income, net...........................................     1,788      1,662      1,805
                                                              --------   --------   --------
Net earnings................................................  $ 21,128   $ 12,357   $ 15,847
                                                              ========   ========   ========
</Table>

            See accompanying notes to combined financial statements.

                                        81
<PAGE>

                               WAMCO PARTNERSHIPS

              COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                 YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<Table>
<Caption>
                                                            CLASS B
                                        CLASS A EQUITY       EQUITY
                                      -------------------   --------
                                      GENERAL    LIMITED    LIMITED    GENERAL    LIMITED
                                      PARTNERS   PARTNERS   PARTNERS   PARTNERS   PARTNERS    TOTAL
                                      --------   --------   --------   --------   --------   --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>
BALANCE AT DECEMBER 31, 1998........    $166     $ 8,123     $1,945     $  685    $ 44,651   $ 55,570
  Contributions.....................       1          40         --        540      27,558     28,139
  Distributions.....................     (48)     (2,355)      (440)      (527)    (33,167)   (36,537)
  Net earnings......................      10         476        (81)       247      15,195     15,847
  Unrealized net gain on
     securitization.................      --          --         --         --          --         --
                                        ----     -------     ------     ------    --------   --------
  Total comprehensive income........      10         476        (81)       247      15,195     15,847
                                        ----     -------     ------     ------    --------   --------
BALANCE AT DECEMBER 31, 1999........     129       6,284      1,424        945      54,237     63,019
  Contributions.....................       6         325         --         60       5,742      6,133
  Distributions.....................     (36)     (1,778)      (283)      (341)    (17,467)   (19,905)
  Net earnings......................      18         884          6        206      11,243     12,357
  Unrealized net gain on
     securitization.................      --          --         --         --          --         --
                                        ----     -------     ------     ------    --------   --------
  Total comprehensive income........      18         884          6        206      11,243     12,357
                                        ----     -------     ------     ------    --------   --------
BALANCE AT DECEMBER 31, 2000........     117       5,715      1,147        870      53,755     61,604
  Contributions.....................      --          --         --        265      26,265     26,530
  Distributions.....................     (26)     (1,271)      (145)      (311)    (18,194)   (19,947)
  Comprehensive income:
  Net earnings......................      26       1,291        106        253      19,452     21,128
  Unrealized net gain on
     securitization.................      14         667         --          5         248        934
                                        ----     -------     ------     ------    --------   --------
  Total comprehensive income........      40       1,958        106        258      19,700     22,062
                                        ----     -------     ------     ------    --------   --------
BALANCE AT DECEMBER 31, 2001........    $131     $ 6,402     $1,108     $1,082    $ 81,526   $ 90,249
                                        ====     =======     ======     ======    ========   ========
</Table>

            See accompanying notes to combined financial statements.

                                        82
<PAGE>

                               WAMCO PARTNERSHIPS

                       COMBINED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<Table>
<Caption>
                                                                2001       2000       1999
                                                              ---------   -------   ---------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>       <C>
Cash flows from operating activities:
  Net earnings..............................................  $  21,128   $12,357   $  15,847
  Adjustments to reconcile net earnings to net cash provided
     by (used in) operating activities:
     Amortization of loan origination and commitment fees...      1,880       376       1,334
     Provision for loan losses..............................      1,254        58          --
     Gain on resolution of Portfolio Assets.................    (24,272)  (14,067)    (16,259)
     Purchase of Portfolio Assets...........................   (118,147)  (17,852)   (124,619)
     Capitalized costs on Portfolio Assets..................     (1,764)   (1,497)     (5,292)
     Proceeds from resolution of Portfolio Assets...........     69,188    44,182      48,163
     Proceeds from sell back of Portfolio Assets............      1,594        --          --
     Principal payments on Performing Portfolio Assets......     34,071    27,791      23,371
     Increase in deferred profit sharing....................       (668)   (8,292)     (3,336)
     Decrease in other assets...............................        180       595         976
     Increase (decrease) in deferred compensation...........     (1,804)    9,499       3,437
     Increase (decrease) in other liabilities...............        258     1,170        (815)
                                                              ---------   -------   ---------
       Net cash provided by (used in) operating
          activities........................................    (17,102)   54,320     (57,193)
Cash flows from investing activities:
  Contribution to subsidiaries..............................        (48)     (573)     (1,090)
  Change of trust certificates..............................       (381)     (420)       (330)
                                                              ---------   -------   ---------
       Net cash used in operating activities................       (429)     (993)     (1,420)
Cash flows from financing activities:
  Borrowing of debt.........................................    139,470    22,057     154,788
  Repayment of debt.........................................   (122,257)  (61,927)    (97,015)
  Change in preferred equity................................      1,049        --       3,556
  Capital contributions.....................................     26,530     6,133      28,139
  Capital distributions.....................................    (19,947)  (19,905)    (36,537)
                                                              ---------   -------   ---------
       Net cash provided by (used in) financing
          activities........................................     24,845   (53,642)     52,931
                                                              ---------   -------   ---------
Net increase (decrease) in cash.............................      7,314      (315)     (5,682)
Cash at beginning of year...................................      6,083     6,398      12,080
                                                              ---------   -------   ---------
Cash at end of year.........................................  $  13,397   $ 6,083   $   6,398
                                                              =========   =======   =========
</Table>

     Supplemental disclosure of cash flow information (note 7):

     Cash paid for interest was approximately $12,533, $14,643, and $10,886 for
2001, 2000, and 1999, respectively.

            See accompanying notes to combined financial statements.
                                        83
<PAGE>

                               WAMCO PARTNERSHIPS

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                       DECEMBER 31, 2001, 2000, AND 1999
                             (DOLLARS IN THOUSANDS)

(1) ORGANIZATION AND PARTNERSHIP AGREEMENTS

     The combined financial statements represents domestic Texas limited
partnerships and limited liability companies ("Acquisition Partnerships" or
"Partnerships") and include the accounts of WAMCO III, Ltd. ("WAMCO III"); WAMCO
V, Ltd. ("WAMCO V"); WAMCO IX, Ltd. ("WAMCO IX"); WAMCO XVII, Ltd. ("WAMCO
XVII"); WAMCO XXIV, Ltd. ("WAMCO XXIV"); WAMCO XXV, Ltd. ("WAMCO XXV"); WAMCO
XXVI Ltd.; WAMCO XXVII Ltd.; WAMCO XXVIII Ltd. ("WAMCO XXVIII"); WAMCO XXIX,
Ltd.; Calibat Fund, LLC; First B Realty, Ltd.; First Paradee, Ltd.; FirstStreet
Investments LLC ("FirstStreet"); FC Properties; Ltd. ("FC Properties"); Imperial
Fund I, Ltd.; Community Development Investment, LLC; and VOJ Partners, Ltd.
FirstCity Financial Corporation or its subsidiaries, FirstCity Commercial
Corporation and FirstCity Holdings Corporation (together "FirstCity"), own
limited and general partnership interests in common with Cargill Financial
Services, Inc. in all of the Partnerships. FC Properties, WAMCO XXIV, WAMCO XXV
and WAMCO XXVIII are considered to be significant subsidiaries of FirstCity.

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

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

     The partnership agreement for WAMCO III provides for Class A and Class B
Equity partners. The Class A Equity partners are WAMCO III of Texas, Inc.,
FirstCity Commercial Corporation and CFSC Capital Corp. II, and the Class B
Equity partner is CFSC Capital Corp. II. The Class B Equity limited partner is
allocated 20 percent net income or loss, excluding equity earnings in
FirstStreet, recognized by the partnership prior to allocation of net income or
loss to the Class A Equity partners. Net earnings in FirstStreet are allocated
to the Class A Equity partners in proportion to their respective ownership
percentages. Net income or loss is credited or charged to the Class A Equity
partners' capital accounts in proportion to their respective capital account
balances after the 20% allocation to the Class B Equity limited partner.
Distributions are allocated using the same methodology as net income or loss.
The Class B Equity limited partner is not required to make capital
contributions.

     During June 2001, First Paradee, Ltd. was merged with and into WAMCO XXV
with WAMCO XXV being the surviving entity. Also during June 2001, WAMCO IX sold,
at cost, its remaining Portfolio Assets that had projected estimated remaining
collections to WAMCO XXV. During November 2000, WAMCO V and WAMCO XVII were
merged with and into WAMCO III, with WAMCO III being the surviving entity. The
mergers of the acquisition partnerships have no effect on the comparability of
the combined financial statements. The sale of assets between acquisition
partnerships and all significant intercompany balances has been eliminated.

                                        84
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  (A) PORTFOLIO ASSETS

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

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

  Non-Performing Portfolio Assets

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

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

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

  Performing Portfolio Assets

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

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

                                        85
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     Impairment on each Performing Portfolio is measured based on the present
value of the expected future cash flows in the aggregate discounted at the
loans' effective interest rates, or the fair value of the collateral, less
estimated selling costs, if any loans are collateral dependent and foreclosure
is probable.

  Real Estate Portfolios

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

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

  (B) INVESTMENT IN TRUST CERTIFICATES

     The Partnerships hold an investment in trust certificates, representing a
residual interest in a REMIC created by the sale of certain Partnership assets.
This residual interest is subordinate to the senior tranches of the certificate
and represents the present value of the right to the excess cash flows generated
by the securitized assets. The residual certificates are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Because such assets can be
contractually prepaid or otherwise settled in such a way that the holder would
not receive all of the recorded investment, the assets are classified as
available-for-sale investments and are carried at estimated fair value with any
accompanying increases or decreases in estimated fair value being recorded as
unrealized gains or losses in other comprehensive income in the accompanying
combined statements of changes in partners' capital. The determination of fair
value is based on the present value of the anticipated excess cash flows
utilizing the certain valuation assumptions. The significant valuation
assumptions include expected credit losses and timing of cash collected.

     The Partnerships assess the carrying value of this investment for
impairment in accordance with the provisions of EITF 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets, which requires that other-than-temporary
impairments in beneficial interests be written down to fair value with the
resulting change being included in operations. As of December 31, 2001, no
impairments have been recorded relating to the investment in trust certificate.
There can be no assurance that the Partnerships' estimates used to determine the
fair value of the investment in trust certificate will remain appropriate for
the life of each asset and it is reasonably possible that circumstances could
change in future periods which could result in a material change in the
estimates used to prepare the accompanying combined financial statements. If
actual credit losses or timing of cash collected exceed the Company's current
estimates, other than temporary impairment may be required to be recognized.

                                        86
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

  (C) INCOME TAXES

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

  (D) USE OF ESTIMATES

     The preparation of combined financial statements in conformity with
accounting principles generally accepted in the United States of America
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 combined financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

(3) COMBINING FINANCIAL STATEMENTS

     FC Properties, WAMCO XXIV, WAMCO XXV and WAMCO XXVIII are considered to be
significant subsidiaries of FirstCity. The following tables summarize the
combining balance sheets of the WAMCO Partnerships as of December 31, 2001 and
2000, and the related combining statements of operations, changes in partners'
capital, and cash flows for each of the years' in the three-year period ended
December 31, 2001.

                                        87
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                            COMBINING BALANCE SHEETS
                               DECEMBER 31, 2001

<Table>
<Caption>
                                           FC        WAMCO     WAMCO     WAMCO       OTHER
                                       PROPERTIES    XXIV       XXV     XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                       ----------   -------   -------   -------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>       <C>       <C>       <C>            <C>            <C>
ASSETS
Cash.................................   $ 1,942     $ 1,108   $ 1,928   $ 3,510     $ 4,909        $    --      $ 13,397
Portfolio Assets, net................    15,566      27,625    30,023    70,283      75,234             --       218,731
Investments in partnerships..........        --          --        --        --       2,302             --         2,302
Investments in trust certificates....        --          --        --        --       8,223             --         8,223
Notes receivable from affiliates.....        --          --     1,752        --          --         (1,752)           --
Deferred profit sharing..............    15,506          --        --        --          --             --        15,506
Other assets, net....................         5         241       378       143       1,316           (625)        1,458
                                        -------     -------   -------   -------     -------        -------      --------
                                        $33,019     $28,974   $34,081   $73,936     $91,984        $(2,377)     $259,617
                                        =======     =======   =======   =======     =======        =======      ========

LIABILITIES AND
PARTNERS' CAPITAL
Notes payable........................   $    --     $16,081   $20,571   $47,964     $57,547        $(1,752)     $140,411
Deferred compensation................    20,552                    --        --          --             --        20,552
Other liabilities....................       443         130     1,396     1,162       1,294           (625)        3,800
                                        -------     -------   -------   -------     -------        -------      --------
         Total liabilities...........    20,995      16,211    21,967    49,126      58,841         (2,377)      164,763
Commitments and contingencies........        --          --        --        --          --             --            --
Preferred equity.....................        --       4,605        --        --          --             --         4,605
Partners' capital....................    12,024       8,158    12,114    24,810      33,143             --        90,249
                                        -------     -------   -------   -------     -------        -------      --------
                                        $33,019     $28,974   $34,081   $73,936     $91,984        $(2,377)     $259,617
                                        =======     =======   =======   =======     =======        =======      ========
Notes payable owed to affiliates
  included in above balances.........   $    --     $14,539   $    --   $47,964     $40,427        $(1,752)     $101,178
Other liabilities owed to affiliates
  included in above balances.........         1          40       948        95          99           (625)          558
</Table>

                                        88
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                            COMBINING BALANCE SHEETS
                               DECEMBER 31, 2000

<Table>
<Caption>
                                           FC        WAMCO     WAMCO     WAMCO       OTHER
                                       PROPERTIES    XXIV       XXV     XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                       ----------   -------   -------   -------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>       <C>       <C>       <C>            <C>            <C>
ASSETS
Cash.................................   $ 1,270     $   608   $   574   $   873     $ 2,758        $    --      $  6,083
Portfolio Assets, net................    17,306      35,092    38,801    15,625      73,831             --       180,655
Investments in partnerships..........        --          --        --        --       2,254             --         2,254
Investments in trust certificates....        --          --        --        --       6,908             --         6,908
Notes receivable from affiliates.....        --          --     2,725        --          --         (2,725)           --
Deferred profit sharing..............    16,174          --        --        --          --             --        16,174
Other assets, net....................       149         479       456        17         623            (26)        1,698
                                        -------     -------   -------   -------     -------        -------      --------
                                        $34,899     $36,179   $42,556   $16,515     $86,374        $(2,751)     $213,772
                                        =======     =======   =======   =======     =======        =======      ========

LIABILITIES AND
  PARTNERS' CAPITAL
Notes payable........................   $ 3,124     $21,736   $29,399   $11,968     $59,696        $(2,725)     $123,198
Deferred compensation................    22,356          --        --        --          --             --        22,356
Other liabilities....................       573       1,040       681       331         459            (26)        3,058
                                        -------     -------   -------   -------     -------        -------      --------
         Total liabilities...........    26,053      22,776    30,080    12,299      60,155         (2,751)      148,612
Commitments and contingencies........        --          --        --        --          --             --            --
Preferred equity.....................        --       3,556        --        --          --             --         3,556
Partners' capital....................     8,846       9,847    12,476     4,216      26,219             --        61,604
                                        -------     -------   -------   -------     -------        -------      --------
                                        $34,899     $36,179   $42,556   $16,515     $86,374        $(2,751)     $213,772
                                        =======     =======   =======   =======     =======        =======      ========
Notes payable owed to affiliates
  included in above balances.........   $ 3,124     $19,474   $29,399   $11,968     $59,696        $(2,725)     $120,936
Other liabilities owed to affiliates
  included in above balances.........       (11)         72       503       161          89            (26)          788
</Table>

                                        89
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                       COMBINING STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 2001

<Table>
<Caption>
                                           FC        WAMCO     WAMCO     WAMCO       OTHER
                                       PROPERTIES    XXIV       XXV     XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                       ----------   -------   -------   -------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>       <C>       <C>       <C>            <C>            <C>
Proceeds from resolution of Portfolio
  Assets.............................   $ 9,509     $ 6,121   $ 9,951   $32,142     $12,671        $(1,206)     $ 69,188
Cost of Portfolio Assets resolved....     2,115       5,050     7,468    23,513       7,976         (1,206)       44,916
                                        -------     -------   -------   -------     -------        -------      --------
Gain on resolution of Portfolio
  Assets.............................     7,394       1,071     2,483     8,629       4,695             --        24,272
Interest income on performing
  Portfolio Assets...................        --       4,163     3,101     3,047       9,410           (178)       19,543
Interest and fees on notes payable...      (160)     (2,199)   (2,296)   (3,507)     (5,354)           178       (13,338)
Provision for loan losses............        --          --      (757)       --        (497)            --        (1,254)
General, administrative and operating
  expenses...........................    (2,995)       (558)     (717)   (2,397)     (3,216)            --        (9,883)
Other income, net....................        32          35        56        64       1,601             --         1,788
                                        -------     -------   -------   -------     -------        -------      --------
         Net earnings................   $ 4,271     $ 2,512   $ 1,870   $ 5,836     $ 6,639        $    --      $ 21,128
                                        =======     =======   =======   =======     =======        =======      ========
Interest expense to affiliates
  included in above balances.........   $   160     $ 2,072   $ 1,584   $ 3,103     $ 4,527        $  (178)     $ 11,268
</Table>

                       COMBINING STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 2000

<Table>
<Caption>
                                           FC        WAMCO     WAMCO    WAMCO       OTHER
                                       PROPERTIES    XXIV       XXV     XXVIII   PARTNERSHIPS   ELIMINATIONS   COMBINED
                                       ----------   -------   -------   ------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>       <C>       <C>      <C>            <C>            <C>
Proceeds from resolution of Portfolio
  Assets.............................   $ 8,500     $ 3,805   $11,196   $2,532     $18,149         $  --       $ 44,182
Cost of Portfolio Assets resolved....     4,346       2,717     9,090   1,854       12,108            --         30,115
                                        -------     -------   -------   ------     -------         -----       --------
Gain on resolution of Portfolio
  Assets.............................     4,154       1,088     2,106     678        6,041            --         14,067
Interest income on performing
  Portfolio Assets...................        --       7,187     4,714     286        6,190          (328)        18,049
Interest and fees on notes payable...      (580)     (2,903)   (4,094)   (573)      (6,954)          328        (14,776)
Provision for loan losses............        --          --       (58)     --           --            --            (58)
General, administrative and operating
  expenses...........................    (2,495)       (535)   (1,290)   (161)      (2,106)           --         (6,587)
Other income, net....................        58          37        85       8        1,474            --          1,662
                                        -------     -------   -------   ------     -------         -----       --------
         Net earnings................   $ 1,137     $ 4,874   $ 1,463   $ 238      $ 4,645         $  --       $ 12,357
                                        =======     =======   =======   ======     =======         =====       ========
Interest expense to affiliates
  included in above balances.........   $   580     $ 2,721   $ 4,094   $ 573      $ 6,954         $(328)      $ 14,594
</Table>

                                        90
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                       COMBINING STATEMENTS OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1999

<Table>
<Caption>
                                           FC        WAMCO     WAMCO    WAMCO       OTHER
                                       PROPERTIES    XXIV       XXV     XXVIII   PARTNERSHIPS   ELIMINATIONS   COMBINED
                                       ----------   -------   -------   ------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>       <C>       <C>      <C>            <C>            <C>
Proceeds from resolution of Portfolio
  Assets.............................   $10,813     $ 1,723   $19,669    $ --      $15,958         $  --       $ 48,163
Cost of Portfolio Assets resolved....     3,891         711    16,042      --       11,260            --         31,904
                                        -------     -------   -------    ----      -------         -----       --------
Gain on resolution of Portfolio
  Assets.............................     6,922       1,012     3,627      --        4,698            --         16,259
Interest income on performing
  Portfolio Assets...................        --       7,219     5,725      --        2,996          (341)        15,599
Interest and fees on notes payable...      (891)     (2,993)   (4,020)     --       (3,451)          341        (11,014)
Provision for loan losses............        --          --        --      --           --            --             --
General, administrative and operating
  expenses...........................    (2,208)       (685)   (1,655)     --       (2,254)           --         (6,802)
Other income, net....................        46          59        93      --        1,607            --          1,805
                                        -------     -------   -------    ----      -------         -----       --------
         Net earnings................   $ 3,869     $ 4,612   $ 3,770    $ --      $ 3,596         $  --       $ 15,847
                                        =======     =======   =======    ====      =======         =====       ========
Interest expense to affiliates
  included in above balances.........   $   891     $ 2,906   $ 4,020    $ --      $ 1,917         $(341)      $ 10,697
</Table>

            See accompanying notes to combined financial statements.

                                        91
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

              COMBINING STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                 YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<Table>
<Caption>
                                          FC        WAMCO     WAMCO      WAMCO       OTHER
                                      PROPERTIES    XXIV       XXV      XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                      ----------   -------   --------   -------   ------------   ------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                   <C>          <C>       <C>        <C>       <C>            <C>            <C>
BALANCE AT DECEMBER 31, 1998........   $12,746     $ 8,859   $ 20,182   $    --     $ 13,783         $          $ 55,570
  Contributions.....................        --       1,880      6,401        --       19,858           --         28,139
  Distributions.....................    (8,610)     (6,556)   (15,660)       --       (5,711)          --        (36,537)
  Net earnings......................     3,869       4,612      3,770        --        3,596           --         15,847
                                       -------     -------   --------   -------     --------         ----       --------
  Total comprehensive income........     3,869       4,612      3,770        --        3,596           --         15,847
                                       -------     -------   --------   -------     --------         ----       --------
BALANCE AT DECEMBER 31, 1999........     8,005       8,795     14,693        --       31,526           --         63,019
  Contributions.....................        --          --         --     4,421        1,712           --          6,133
  Distributions.....................      (296)     (3,822)    (3,680)     (443)     (11,664)          --        (19,905)
  Net earnings......................     1,137       4,874      1,463       238        4,645           --         12,357
                                       -------     -------   --------   -------     --------         ----       --------
  Total comprehensive income........     1,137       4,874      1,463       238        4,645           --         12,357
                                       -------     -------   --------   -------     --------         ----       --------
BALANCE AT DECEMBER 31, 2000........     8,846       9,847     12,476     4,216       26,219           --         61,604
  Contributions.....................        --          --         --    18,890        7,640           --         26,530
  Distributions.....................    (1,093)     (4,201)    (2,232)   (4,132)      (8,289)          --        (19,947)
  Net earnings......................     4,271       2,512      1,870     5,836        6,639           --         21,128
  Unrealized net gain on
    securitization..................        --          --         --        --          934           --            934
                                       -------     -------   --------   -------     --------         ----       --------
  Total comprehensive income........     4,271       2,512      1,870     5,836        7,573           --         22,062
                                       -------     -------   --------   -------     --------         ----       --------
BALANCE AT DECEMBER 31, 2001........   $12,024     $ 8,158   $ 12,114   $24,810     $ 33,143         $ --       $ 90,249
                                       =======     =======   ========   =======     ========         ====       ========
</Table>

                                        92
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                       COMBINING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2001

<Table>
<Caption>
                                        FC        WAMCO     WAMCO      WAMCO        OTHER
                                    PROPERTIES    XXIV       XXV       XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                    ----------   -------   --------   --------   ------------   ------------   ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                 <C>          <C>       <C>        <C>        <C>            <C>            <C>
Cash flows from operating
  activities:
  Net earnings....................   $ 4,271     $ 2,512   $  1,870   $  5,836     $  6,639       $    --      $  21,128
  Adjustments to reconcile net
    earnings to net cash provided
    by (used in) operating
    activities:
    Amortization of loan
      origination and commitment
      fees........................     1,112          28        437         --          303            --          1,880
    Provision for loan losses.....        --          --        757         --          497            --          1,254
    Gain on resolution of
      Portfolio Assets............    (7,394)     (1,071)    (2,483)    (8,629)      (4,695)           --        (24,272)
    Purchase of Portfolio
      Assets......................        --          --     (1,206)   (82,951)     (35,196)        1,206       (118,147)
    Capitalized costs on Portfolio
      Assets......................      (374)       (479)      (670)      (156)         (85)           --         (1,764)
    Proceeds from resolution of
      Portfolio Assets............     9,509       6,121      9,951     32,142       12,671        (1,206)        69,188
    Proceeds from sell back of
      Portfolio Assets............        --          --         --         --        1,594            --          1,594
    Principal payments on
      Performing Portfolio
      Assets......................        --       2,897      2,429      4,936       23,809            --         34,071
    Increase in deferred profit
      sharing.....................      (668)         --         --         --           --            --           (668)
    (Increase) decrease in other
      assets......................       379         209      1,241       (252)        (424)         (973)           180
    Decrease in deferred
      compensation................    (1,804)         --         --         --           --            --         (1,804)
    Increase (decrease) in other
      liabilities.................      (142)       (910)        87        957          266            --            258
                                     -------     -------   --------   --------     --------       -------      ---------
      Net cash provided by (used
         in) operating
         activities...............     4,889       9,307     12,413    (48,117)       5,379          (973)       (17,102)
Cash flows from investing
  activities:
  Contribution to subsidiaries....        --          --         --         --          (48)           --            (48)
  Change of trust certificates....        --          --         --         --         (381)           --           (381)
                                     -------     -------   --------   --------     --------       -------      ---------
      Net cash used in operating
         activities...............        --          --         --         --         (429)           --           (429)
Cash flows from financing
  activities:
  Borrowing of debt...............        41          --     26,021     64,187       49,352          (131)       139,470
  Repayment of debt...............    (3,165)     (5,655)   (34,848)   (28,191)     (51,502)        1,104       (122,257)
  Change in preferred equity......        --       1,049         --         --           --            --          1,049
  Capital contributions...........        --          --         --     18,890        7,640            --         26,530
  Capital distributions...........    (1,093)     (4,201)    (2,232)    (4,132)      (8,289)           --        (19,947)
                                     -------     -------   --------   --------     --------       -------      ---------
      Net cash provided by (used
         in) financing
         activities...............    (4,217)     (8,807)   (11,059)    50,754       (2,799)          973         24,845
                                     -------     -------   --------   --------     --------       -------      ---------
Net increase in cash..............       672         500      1,354      2,637        2,151            --          7,314
Cash at beginning of year.........     1,270         608        574        873        2,758            --          6,083
                                     -------     -------   --------   --------     --------       -------      ---------
Cash at end of year...............   $ 1,942     $ 1,108   $  1,928   $  3,510     $  4,909       $    --      $  13,397
                                     =======     =======   ========   ========     ========       =======      =========
Supplemental disclosure of cash
  flow information (note 7):
Approximate cash paid for
  interest........................   $   107     $ 1,963   $  2,009   $  3,365     $  5,273       $  (184)     $  12,533
</Table>

                                        93
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                       COMBINING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 2000

<Table>
<Caption>
                                              FC        WAMCO     WAMCO      WAMCO        OTHER
                                          PROPERTIES    XXIV       XXV       XXVIII    PARTNERSHIPS   ELIMINATIONS   COMBINED
                                          ----------   -------   --------   --------   ------------   ------------   --------
                                                                        (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>       <C>        <C>        <C>            <C>            <C>
Cash flows from operating activities:
  Net earnings..........................   $ 1,137     $ 4,874   $  1,463   $    238     $  4,645        $   --      $ 12,357
  Adjustments to reconcile net earnings
    to net cash provided by (used in)
    operating activities:
    Amortization of loan origination and
      commitment fees...................        --          24        169         --          183            --           376
    Provision for loan losses...........        --          --         58         --           --            --            58
    Gain on resolution of Portfolio
      Assets............................    (4,154)     (1,088)    (2,106)      (678)      (6,041)           --       (14,067)
    Purchase of Portfolio Assets........        --          --         --    (17,852)          --            --       (17,852)
    Capitalized costs on Portfolio
      Assets............................      (610)        133       (482)      (287)        (251)           --        (1,497)
    Proceeds from resolution of
      Portfolio Assets..................     8,500       3,805     11,196      2,532       18,149            --        44,182
    Principal payments on Performing
      Portfolio Assets..................        --       1,047      7,684        660       18,400            --        27,791
    Increase in deferred profit
      sharing...........................    (8,292)         --         --         --           --            --        (8,292)
    (Increase) decrease in other
      assets............................      (144)        (48)       675        (17)       1,099          (970)          595
    Increase in deferred compensation...     9,499          --         --         --           --            --         9,499
    Increase (decrease) in other
      liabilities.......................       335         565        169        331         (230)           --         1,170
                                           -------     -------   --------   --------     --------        ------      --------
      Net cash provided by (used in)
         operating activities...........     6,271       9,312     18,826    (15,073)      35,954          (970)       54,320
Cash flows from investing activities:
  Contribution to subsidiaries..........        --          --         --         --         (573)           --          (573)
  Change of trust certificates..........        --          --         --         --         (420)           --          (420)
                                           -------     -------   --------   --------     --------        ------      --------
      Net cash used in operating
         activities.....................        --          --         --         --         (993)           --          (993)
Cash flows from financing activities:
  Borrowing of debt.....................       171          11        643     13,265        8,122          (155)       22,057
  Repayment of debt.....................    (5,939)     (5,952)   (16,785)    (1,297)     (33,079)        1,125       (61,927)
  Change in preferred equity............        --          --         --         --           --            --            --
  Capital contributions.................        --          --         --      4,421        1,712            --         6,133
  Capital distributions.................      (296)     (3,822)    (3,680)      (443)     (11,664)           --       (19,905)
                                           -------     -------   --------   --------     --------        ------      --------
      Net cash provided by (used in)
         financing activities...........    (6,064)     (9,763)   (19,822)    15,946      (34,909)          970       (53,642)
                                           -------     -------   --------   --------     --------        ------      --------
  Net increase (decrease) in cash.......       207        (451)      (996)       873           52            --          (315)
  Cash at beginning of year.............     1,063       1,059      1,570         --        2,706            --         6,398
                                           -------     -------   --------   --------     --------        ------      --------
  Cash at end of year...................   $ 1,270     $   608   $    574   $    873     $  2,758        $   --      $  6,083
                                           =======     =======   ========   ========     ========        ======      ========
Supplemental disclosure of cash flow
  information (note 7):
  Approximate cash paid for interest....   $   521     $ 2,292   $  3,742   $    511        7,895        $ (318)     $ 14,643
</Table>

                                        94
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                       COMBINING STATEMENTS OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1999

<Table>
<Caption>
                                             FC        WAMCO     WAMCO     WAMCO       OTHER
                                         PROPERTIES    XXIV       XXV      XXVIII   PARTNERSHIPS   ELIMINATIONS   COMBINED
                                         ----------   -------   --------   ------   ------------   ------------   ---------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                      <C>          <C>       <C>        <C>      <C>            <C>            <C>
Cash flows from operating activities:
  Net earnings.........................   $  3,869    $ 4,612   $  3,770     $--      $  3,596       $    --      $  15,847
  Adjustments to reconcile net earnings
    to net cash provided by (used in)
    operating activities:
    Amortization of loan origination
      and commitment fees..............        761         31         75     --            467            --          1,334
    Provision for loan losses..........         --         --         --     --             --            --             --
    Gain on resolution of Portfolio
      Assets...........................     (6,922)    (1,012)    (3,627)    --         (4,698)           --        (16,259)
    Purchase of Portfolio Assets.......         --     (9,612)   (25,568)    --        (89,439)           --       (124,619)
    Capitalized costs on Portfolio
      Assets...........................       (596)        --       (715)    --         (3,981)           --         (5,292)
    Proceeds from resolution of
      Portfolio Assets.................     10,813      1,723     19,669     --         15,958            --         48,163
    Principal payments on Performing
      Portfolio Assets.................         --      7,984      8,601     --          6,786            --         23,371
    Increase in deferred profit
      sharing..........................     (3,336)        --         --     --             --            --         (3,336)
    (Increase) decrease in other
      assets...........................        205         63      1,356     --            708        (1,356)           976
    Increase in deferred
      compensation.....................      3,437         --         --     --             --            --          3,437
    Increase (decrease) in other
      liabilities......................       (568)       (59)       216     --           (404)           --           (815)
                                          --------    -------   --------     --       --------       -------      ---------
      Net cash provided by (used in)
         operating activities..........      7,663      3,730      3,777     --        (71,007)       (1,356)       (57,193)
Cash flows from investing activities:
  Contribution to subsidiaries.........         --         --         --     --         (1,090)           --         (1,090)
  Change of trust certificates.........         --         --         --     --           (330)           --           (330)
                                          --------    -------   --------     --       --------       -------      ---------
      Net cash used in operating
         activities....................         --         --         --     --         (1,420)           --         (1,420)
Cash flows from financing activities:
  Borrowing of debt....................     12,088      3,500     64,233     --         75,023           (56)       154,788
  Repayment of debt....................    (15,427)    (6,944)   (58,475)    --        (17,581)        1,412        (97,015)
  Change in preferred equity...........         --      3,556         --     --             --            --          3,556
  Capital contributions................         --      1,880      6,401     --         19,858            --         28,139
  Capital distributions................     (8,610)    (6,556)   (15,660)    --         (5,711)           --        (36,537)
                                          --------    -------   --------     --       --------       -------      ---------
      Net cash provided by (used in)
         financing activities..........    (11,949)    (4,564)    (3,501)    --         71,589         1,356         52,931
                                          --------    -------   --------     --       --------       -------      ---------
  Net increase (decrease) in cash......     (4,286)      (834)       276     --           (838)           --         (5,682)
  Cash at beginning of year............      5,349      1,893      1,294     --          3,544            --         12,080
                                          --------    -------   --------     --       --------       -------      ---------
  Cash at end of year..................   $  1,063    $ 1,059   $  1,570     $--      $  2,706       $    --      $   6,398
                                          ========    =======   ========     ==       ========       =======      =========
Supplemental disclosure of cash flow
  information (note 7):
  Approximate cash paid for interest...   $    967    $ 3,057   $  3,704     $--      $  3,497       $  (339)     $  10,886
</Table>

                                        95
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(4) PORTFOLIO ASSETS

     Portfolio Assets are summarized as follows:

<Table>
<Caption>
                                                                 DECEMBER 31, 2001
                                       ----------------------------------------------------------------------
                                           FC        WAMCO      WAMCO      WAMCO        OTHER
                                       PROPERTIES     XXIV       XXV       XXVIII    PARTNERSHIPS   COMBINED
                                       ----------   --------   --------   --------   ------------   ---------
<S>                                    <C>          <C>        <C>        <C>        <C>            <C>
Non-performing Portfolio Assets......   $    --     $     --   $ 13,604   $104,735     $ 48,944     $ 167,283
Performing Portfolio Assets..........        --       38,337     27,283     39,762       82,687       188,069
Real estate Portfolios...............    15,566           --         --         --        1,526        17,092
                                        -------     --------   --------   --------     --------     ---------
         Total Portfolio Assets......    15,566       38,337     40,887    144,497      133,157       372,444
Discount required to reflect
  Portfolio Assets at carrying
  value..............................        --      (10,712)   (10,864)   (74,214)     (57,923)     (153,713)
                                        -------     --------   --------   --------     --------     ---------
         Portfolio Assets, net.......   $15,566     $ 27,625   $ 30,023   $ 70,283     $ 75,234     $ 218,731
                                        =======     ========   ========   ========     ========     =========
</Table>

<Table>
<Caption>
                                                                 DECEMBER 31, 2000
                                       ---------------------------------------------------------------------
                                           FC        WAMCO      WAMCO      WAMCO        OTHER
                                       PROPERTIES     XXIV       XXV       XXVIII    PARTNERSHIPS   COMBINED
                                       ----------   --------   --------   --------   ------------   --------
<S>                                    <C>          <C>        <C>        <C>        <C>            <C>
Non-performing Portfolio Assets......   $    --     $     --   $ 19,817   $  9,511     $ 68,810     $ 98,138
Performing Portfolio Assets..........        --       49,650     32,320     16,062       60,602      158,634
Real estate Portfolios...............    17,306           --         --         --        2,543       19,849
                                        -------     --------   --------   --------     --------     --------
         Total Portfolio Assets......    17,306       49,650     52,137     25,573      131,955      276,621
Discount required to reflect
  Portfolio Assets at carrying
  value..............................        --      (14,558)   (13,336)    (9,948)     (58,124)     (95,966)
                                        -------     --------   --------   --------     --------     --------
         Portfolio Assets, net.......   $17,306     $ 35,092   $ 38,801   $ 15,625     $ 73,831     $180,655
                                        =======     ========   ========   ========     ========     ========
</Table>

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

(5) INTEREST RELATED TO RESIDUAL INTEREST IN TRUST CERTIFICATES

     Residual certificates held by the Partnerships to which the Partnerships
receives all the economic benefits and risks consist of retained interests in
the amount of $8,223 and $6,908 at December 31, 2001 and 2000, respectively. The
Partnerships recognized interest income on these certificates utilizing a yield
of 19.63% and 20.23% for the years ended December 31, 2001 and 2000,
respectively.

     SFAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125
requires that the effect on the fair value of the retained interests of two
adverse changes in each key assumption be independently calculated.

     At December 31, 2001 key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:

<Table>
<S>                                                           <C>
Balance sheet carrying value of retained interests -- fair
  value.....................................................  $ 8,223
Expected credit losses......................................
Impact on fair value of 10% adverse change..................     (822)
Impact on fair value of 20% adverse change..................   (1,644)
Timing of cash collected....................................
Impact on fair value of 10% adverse change..................       (6)
Impact on fair value of 20% adverse change..................     (687)
</Table>

                                        96
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     These sensitivities are hypothetical and should be used with caution. As
the amounts indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increase in market interest rates may result in increased credit
losses), which might magnify or counteract the sensitivities.

(6) DEFERRED PROFIT SHARING AND DEFERRED COMPENSATION

     In connection with the formation of FC Properties, an agreement was entered
into which provided for potential payments to the project manager based on a
percentage of total estimated sales. An equal amount of deferred profit
participation and deferred compensation is recorded based on such estimates with
the deferred profit participation being amortized into expense in proportion to
actual sales realized. No profit participation was paid until the limited
partners recognized a 20% return on their investment. This return threshold was
met in 2001. At December 31, 2001 and 2000, the estimated liability for this
profit participation was $20,552 and $21,175, respectively, and was included in
deferred compensation in the accompanying combined balance sheets. Additionally,
amortization of $1,228 and $1,118 was recognized during 2001 and 2000,
respectively, and has been included in general, administrative and operating
expenses in the accompanying combined statements of operations.

     Other deferred compensation at December 31, 2001 and 2000 of $0 and $1,181,
respectively, represent commissions owed to the project manager of FC Properties
Ltd. These commissions are based on sales incurred to date and were paid out
after the limited partners recognized a 20% return on their investment. As noted
above, this return was met in 2001. The achievement of the 20% return on
investment resulted in payments of $2,417 in deferred profit sharing and
commissions during 2001.

(7) NOTES PAYABLE

     Notes payable at December 31, 2001 and 2000 consist of the following:

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
LIBOR (1.9% at December 31, 2001) based:
  FC Properties (LIBOR plus 4%).............................        --      3,124
  WAMCO XXIV (LIBOR plus 2.25% to 4%).......................     4,660      6,747
  WAMCO XXV (LIBOR plus 1.5%)...............................    20,571     29,399
  WAMCO XXVIII (LIBOR plus 2.31% to 4%).....................    47,964     11,968
  Other Partnerships (LIBOR plus 1.9% to 4%)................    55,795     56,971
                                                              --------   --------
     Total LIBOR............................................   128,990    108,209
Fixed rate:
  WAMCO XXIV (6.5% to 10.17%)...............................    11,421     14,989
                                                              --------   --------
                                                              $140,411   $123,198
                                                              ========   ========
</Table>

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

                                        97
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                             WAMCO     WAMCO     WAMCO       OTHER
                                             XXIV       XXV     XXVIII    PARTNERSHIPS   COMBINED
                                            -------   -------   -------   ------------   --------
<S>                                         <C>       <C>       <C>       <C>            <C>
YEAR ENDING DECEMBER 31:
2002......................................  $   --    $7,271    $    --     $    --      $  7,271
2003......................................  12,081    10,000     27,548      38,676        88,305
2004......................................      --     3,300     20,416          --        23,716
2005......................................      --                   --          --            --
2006......................................      --                   --      17,119        17,119
Thereafter................................   4,000                   --          --         4,000
                                            -------   -------   -------     -------      --------
                                            $16,081   $20,571   $47,964     $55,795      $140,411
                                            =======   =======   =======     =======      ========
</Table>

     It is anticipated that the notes payable maturing in 2002 will be renewed
or refinanced into financing arrangements with terms similar to current
facilities.

     The loan agreements and master note purchase agreements, under which notes
payable were incurred, contain various covenants including limitations on other
indebtedness, maintenance of service agreements and restrictions on use of
proceeds from disposition of and payments received on the Portfolio Assets. As
of December 31, 2001, the Partnerships were in compliance with the
aforementioned covenants.

     In connection with notes payable, the Partnerships incurred origination and
commitment fees. These fees are amortized over the stated maturity of the
related notes and are included in interest and fees on notes payable. At
December 31, 2001 and 2000, approximately $603 and $696, respectively, of
origination and commitment fees are included in other assets, net.

(8) TRANSACTIONS WITH AFFILIATES

     Under the terms of the various servicing agreements between the
Partnerships and FirstCity, FirstCity receives a servicing fee based on proceeds
from resolution of the Portfolio Assets for processing transactions on the
Portfolio Assets and for conducting settlement, collection and other resolution
activities. Included in general, administrative and operating expenses in the
accompanying combined statements of operations is approximately $3,131, $2,576,
and $2,752 in servicing fees incurred by the Partnerships in 2001, 2000 and
1999, respectively.

     In March 2001, FirstCity sold 35% of its equity interest in FC Properties,
Ltd. to CFSC Capital Corp. II.

     During 2001, WAMCO IX sold its portfolio assets that had projected
estimated remaining collections to WAMCO XXV. The assets were sold for their
historical cost book value of $1,206. The sale resulted in no gain or goodwill
being recorded. This transaction was eliminated in the combining statements of
operations for 2001.

     During 2000, WAMCO V merged with WAMCO III, with WAMCO III being the
surviving entity. As a result of the merger, WAMCO V contributed $3,370 in
assets and $1,461 in liabilities to WAMCO III. The contributed assets and
liabilities were recorded at historical cost on WAMCO III. The partners in WAMCO
V received interests in WAMCO III reflecting the net contribution from WAMCO V
to WAMCO III.

     During 2000, WAMCO XVII merged with WAMCO III, with WAMCO III being the
surviving entity. As a result of the merger, WAMCO XVII contributed $4,024 in
assets and $2,275 in liabilities to WAMCO III. The contributed assets and
liabilities were recorded at historical cost on WAMCO III. The

                                        98
<PAGE>
                               WAMCO PARTNERSHIPS

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

partners in WAMCO XVII received interests in WAMCO III reflecting the net
contribution from WAMCO XVII to WAMCO III.

(9) 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, OTHER ASSETS AND OTHER LIABILITIES

     The carrying amount of cash, other assets and other liabilities
approximates fair value at December 31, 2001 and 2000 due to the short-term
nature of such accounts.

  (B) PORTFOLIO ASSETS

     Portfolio Assets are carried at the lower of cost or estimated fair value.
The estimated fair value is calculated by discounting projected cash flows on an
asset-by-asset basis using estimated market discount rates that reflect the
credit and interest rate risk inherent in the assets. The carrying value of
Portfolio Assets was $218,731 and $180,655 at December 31, 2001 and 2000,
respectively. The estimated fair value of the Portfolio Assets was approximately
$287,302 and $231,875 at December 31, 2001 and 2000, respectively.

  (C) INVESTMENTS IN TRUST CERTIFICATES

     Investments in trust certificates are carried at estimated fair value. The
determination of fair value is based on the present value of the anticipated
excess cash flows utilizing the certain valuation assumptions. The carrying
value of Investments in Trust Certificates was $8,223 and $6,908 at December 31,
2001 and 2000, respectively. The estimated fair value of the Investments in
Trust Certificates was approximately $8,223 and $6,908 at December 31, 2001 and
2000, respectively.

  (D) NOTES PAYABLE

     Management believes that for similar financial instruments with comparable
credit risks, the stated interest rates at December 31, 2001 and 2000
approximate market rates. Accordingly, the carrying amount of notes payable is
believed to approximate fair value. Additional, the majority of the
partnerships' debt is at variable rates of interest.

(10) PREFERRED EQUITY

     In 1999, CFSC Capital Corp. XXX contributed $3,556 as preferred equity in
Community Development Investment, LLC. The preferred equity agreement requires
interest to be paid at a rate equal to the London Interbank Offering Rate (1.9%
at December 31, 2001) plus 5%. Interest in the amount of $18 and $610 has been
accrued at December 31, 2001 and 2000, respectively. Interest expense on the
preferred equity total $458, $411 and $199 during 2002, 2001 and 1999,
respectively.

(11) COMMITMENTS AND CONTINGENCIES

     Calibat Fund, LLC has committed to make additional investments in
partnerships up to $89 at December 31, 2001.

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

                                        99
<PAGE>

                          DRIVE FINANCIAL SERVICES LP
                                AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                    DECEMBER 31, 2001 AND FEBRUARY 28, 2001

                  (WITH INDEPENDENT AUDITORS' REPORT THEREON)

                                       100
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Partners
Drive Financial Services LP:

     We have audited the accompanying consolidated balance sheets of Drive
Financial Services LP (a Texas Limited Partnership) and subsidiaries (the
Company) as of December 31, 2001 and February 28, 2001, and the related
consolidated statements of operations, partners' equity, and cash flows for the
periods March 1, 2001 through December 31, 2001 and August 1, 2000 through
February 28, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drive
Financial Services LP and subsidiaries as of December 31, 2001 and February 28,
2001, and the results of their operations and their cash flows for the periods
March 1, 2001 through December 31, 2001 and August 1, 2000 through February 28,
2001 in conformity with accounting principles generally accepted in the United
States of America.

     As discussed in note 2(i) to the consolidated financial statements, the
Company changed its method of accounting for residual interests in
securitizations in 2001 as a result of the adoption of EITF 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets.

                                          KPMG LLP

Dallas, Texas
February 15, 2002

                                       101
<PAGE>

                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                    DECEMBER 31, 2001 AND FEBRUARY 28, 2001

<Table>
<Caption>
                                                              DECEMBER 31,   FEBRUARY 28,
                                                                  2001           2001
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
ASSETS
Cash and cash equivalents...................................    $  7,303       $  7,589
Retail installment contracts, net...........................      70,447        139,377
Residual interests in securitizations.......................      77,407         55,739
Accrued interest receivable.................................       1,089          1,760
Other receivables...........................................       1,190            638
Prepaid expenses............................................         600            479
Furniture and equipment, net of accumulated depreciation of
  $2,796 and $859, respectively.............................       6,201          4,185
Other assets................................................       1,241          3,096
                                                                --------       --------
          Total assets......................................    $165,478       $212,863
                                                                ========       ========
LIABILITIES, SUBORDINATED CAPITAL NOTE, AND PARTNERS' EQUITY
Notes payable...............................................    $ 94,665       $167,365
Capital lease obligations...................................         830          1,281
Accrued interest............................................         539          1,103
Accounts payable and accrued expenses.......................      11,954         15,089
                                                                --------       --------
          Total liabilities.................................     107,988        184,838
                                                                --------       --------
Subordinated capital note...................................      32,000         20,000
Partners' equity............................................      25,490          8,025
Commitments and contingencies (notes 9 and 10)..............          --             --
                                                                --------       --------
          Total liabilities, subordinated capital note, and
            partners' equity................................    $165,478       $212,863
                                                                ========       ========
</Table>

          See accompanying notes to consolidated financial statements.

                                       102
<PAGE>

                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
           FOR THE PERIOD MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND
            FOR THE PERIOD AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001

<Table>
<Caption>
                                                              DECEMBER 31,   FEBRUARY 28,
                                                                  2001           2001
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Revenues:
  Gain on sale of retail installment contracts..............    $39,033        $ 9,434
  Interest income -- retail installment contracts...........     25,298         18,223
  Interest income -- residual interests in
     securitizations........................................     12,020          3,657
  Interest income -- other..................................        188            151
  Servicing income..........................................      9,952          4,083
  Other income..............................................        439            173
                                                                -------        -------
          Total revenues....................................     86,930         35,721
                                                                -------        -------
Expenses:
  Interest on notes payable and subordinated debt...........      9,329          8,165
  Salaries and benefits.....................................     28,706         13,674
  Net losses on retail installment contracts................      5,377          4,129
  Servicing expense.........................................      4,434          2,211
  Impairment of residual interests in securitizations,
     including servicing asset..............................      5,048             --
  Occupancy, data processing, communication, and other......     13,990          6,566
                                                                -------        -------
          Total expenses....................................     66,884         34,745
                                                                -------        -------
          Income before cumulative effect of change in
            accounting principle............................     20,046            976
Cumulative effect of change in accounting principle.........       (783)            --
                                                                -------        -------
          Net income........................................    $19,263        $   976
                                                                =======        =======
</Table>

          See accompanying notes to consolidated financial statements.

                                       103
<PAGE>

                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
           FOR THE PERIOD MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND
            FOR THE PERIOD AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001

<Table>
<Caption>
                                                                            ACCUMULATED
                                                                               OTHER         TOTAL
                                                      GENERAL   LIMITED    COMPREHENSIVE   PARTNERS'
                                                      PARTNER   PARTNERS      INCOME        EQUITY
                                                      -------   --------   -------------   ---------
                                                                      (IN THOUSANDS)
<S>                                                   <C>       <C>        <C>             <C>
Contribution of net assets (note 1).................    $ 3     $ 2,889       $ 1,106       $ 3,998
Comprehensive income:
  Net income........................................      1         975            --           976
  Net change in unrealized gains (losses) on
     residual interests in securitizations..........     --          --         3,051         3,051
                                                                                            -------
          Comprehensive income......................                                          4,027
                                                        ---     -------       -------       -------
Partners' equity at February 28, 2001...............      4       3,864         4,157         8,025
Comprehensive income:
  Net income........................................     19      19,244            --        19,263
  Net change in unrealized gains (losses) on
     residual interests in securitizations..........     --          --        (1,798)       (1,798)
                                                                                            -------
          Comprehensive income......................                                         17,465
                                                        ---     -------       -------       -------
Partners' equity at December 31, 2001...............    $23     $23,108       $ 2,359       $25,490
                                                        ===     =======       =======       =======
</Table>

          See accompanying notes to consolidated financial statements.

                                       104
<PAGE>

                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
           FOR THE PERIOD MARCH 1, 2001 THROUGH DECEMBER 31, 2001 AND
            FOR THE PERIOD AUGUST 1, 2000 THROUGH FEBRUARY 28, 2001

<Table>
<Caption>
                                                              DECEMBER 31,   FEBRUARY 28,
                                                                  2001           2001
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Cash flows from operating activities:
  Net income................................................    $ 19,263       $    976
  Adjustments to reconcile net income to net cash provided
     by (used in) operating activities:
     Depreciation and amortization..........................       1,951            859
     Gain on sale of retail installment contracts...........     (39,033)        (9,434)
     (Increase) decrease in retail installment contracts,
      net of securitization activity........................      62,258        (52,302)
     Accretion of interest related to residual interests in
      securitizations.......................................     (12,020)        (3,126)
     Impairment of residual interests in securitizations,
      including servicing asset.............................       5,048             --
     Cumulative effect of change in accounting
      principle -- permanent impairment of residual
      interests.............................................         783             --
     Changes in assets and liabilities:
       Accrued interest receivable..........................         672           (635)
       Other receivables....................................        (552)           570
       Prepaid expenses.....................................        (121)          (439)
       Other assets.........................................         814            138
       Accrued interest payable.............................        (564)           923
       Other liabilities....................................      (3,133)        11,138
                                                                --------       --------
          Net cash provided by (used in) operating
            activities......................................      35,366        (51,332)
                                                                --------       --------
Cash flows from investing activities:
  Purchases of furniture and equipment......................      (3,956)        (1,614)
  Collections on residual interests in securitizations......      29,455         10,640
                                                                --------       --------
          Net cash provided by investing activities.........      25,499          9,026
                                                                --------       --------
Cash flows from financing activities:
  Net decrease in warehouse line of credit with affiliate...     (56,725)       (18,879)
  Proceeds from term notes payable..........................          --         60,000
  Payments on term notes payable............................     (15,975)       (16,525)
  Payments on capital leases................................        (451)          (312)
  Proceeds from subordinated capital note...................      12,000         20,000
                                                                --------       --------
          Net cash provided by (used in) financing
            activities......................................     (61,151)        44,284
                                                                --------       --------
          Net increase (decrease) in cash...................        (286)         1,978
Cash at beginning of period.................................       7,589          5,611
                                                                --------       --------
Cash at end of period.......................................    $  7,303       $  7,589
                                                                ========       ========
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest..................    $  9,894       $  7,216
                                                                ========       ========
</Table>

          See accompanying notes to consolidated financial statements.

                                       105
<PAGE>

                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER 31, 2001 AND FEBRUARY 28, 2001
                             (DOLLARS IN THOUSANDS)

(1) ORGANIZATION AND BUSINESS

     Drive Financial Services LP (Drive FS), a Texas Limited Partnership, was
formed on August 1, 2000. Pursuant to the terms of various Contribution and
Assumption Agreements, Drive FS assumed substantially all the assets and the
business of the former auto finance group of First City Funding and First City
Consumer Lending, including the origination and servicing platforms, all rights
and obligations under asset backed securities and 100% of the stock of all
special purpose entities formed to be "sellers" in securitization transactions.
Drive FS contributed the assets and liabilities and business of First City
Servicing to Drive Servicing LLC and the asset backed securities to Drive ABS LP
both wholly owned and consolidated entities. The assets and liabilities were
contributed at their historical net book value of $3,998.

     Summarized balance sheet information as of August 1, 2000 was as follows:

<Table>
<S>                                                           <C>
Cash........................................................  $  5,611
Retail installment contracts, net...........................    90,764
Residual interests in securitizations.......................    48,344
Other.......................................................     7,772
                                                              --------
     Total assets...........................................  $152,491
                                                              ========
Note payable................................................  $142,769
Capital leases..............................................     1,593
Other liabilities...........................................     4,131
                                                              --------
     Total liabilities......................................   148,493
                                                              --------
Partners' equity............................................     2,892
Accumulated other comprehensive income......................     1,106
                                                              --------
     Total partners' equity.................................     3,998
                                                              --------
     Total liabilities and partners' equity.................  $152,491
                                                              ========
</Table>

     Drive FS is a specialized consumer finance company engaged in the purchase,
securitization, and servicing of retail installment contracts originated by
automobile dealers. Drive FS acquires retail installment contracts principally
from manufacturer-franchised dealers in connection with their sale of used and
new automobiles and light duty trucks to "sub-prime" customers with limited
credit histories or past credit problems. At the present, Drive FS does not
extend credit directly to consumers, nor does it purchase retail installment
contracts from other financial institutions.

     The accompanying consolidated financial statements include the accounts of
Drive Financial Services LP, Drive ABS LP, Drive ABS GP, FCAR Receivables Corp.
(FCAR), Drive Servicing LLC, Drive BOS GP, Drive BOS LP, and Drive VFC LP
(collectively referred to as the Company). Significant intercompany transactions
have been eliminated in the preparation of the consolidated financial
statements.

     The Company owns 100% of the membership interests of FCAR, Drive BOS LP,
and Drive VFC LP, special purpose entities formed to acquire retail installment
contracts, which are pledged as collateral on warehouse lines of credit.

     Drive GP LLC (Drive GP) is the sole general partner of Drive FS and owns
0.1% of Drive FS. First City Consumer Lending owns 31% of the membership
interests of Drive GP. Management Group LP, a Texas limited partnership which is
owned by members of management of the Company, owns 20% of the membership
interests of Drive GP. IFA Drive GP Holdings LLC, a Delaware limited liability
company and a

                                       106
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

wholly owned subsidiary of BoS (USA), owns the remaining 49% of the membership
interests of Drive GP. BoS (USA) formerly known as IFA Incorporated is a wholly
owned subsidiary of Bank of Scotland. Ownership in the Company is effectively
held in the same proportions as Drive GP. On September 10, 2001, Bank of
Scotland merged with Halifax Group plc, a personal and commercial lending
institution, to form HBOS plc. As a result of the merger, the Company's fiscal
year end changed from February 28 to December 31.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

  (A) RETAIL INSTALLMENT CONTRACTS, NET

     Retail installment contracts consist of sub-prime automobile finance
receivables, which are acquired from third party dealers, purchased at a
nonrefundable discount from the contractual principal amount. All retail
installment contracts are held for sale and stated at the lower of cost or fair
value in the aggregate. The Company does not hedge its retail installment
contracts while held for sale. Management of the Company does not believe the
Company is exposed to material interest rate risk during the period contracts
are held for sale.

     Interest is accrued when earned in accordance with the contractual terms of
the retail installment contract. The accrual of interest is discontinued once a
retail installment contract becomes past due 60 days or more.

  (B) SALES OF RETAIL INSTALLMENT CONTRACT FROM SECURITIZATION AND INTEREST
RELATED TO RESIDUAL CERTIFICATES

     In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of FASB Statement No. 125 (SFAS 140). This statement revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. SFAS 140 is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000. See
note 4 for required disclosures.

     The Company accounts for sales of retail installment contracts from
securitizations in accordance with SFAS 140. SFAS 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes between
transfers of financial assets that are sales from transfers that are secured
borrowings. In applying SFAS 140 to the Company's securitized retail installment
contract sales, the Company recognizes revenue (gain on sales of retail
installment contracts) and allocates the total cost of the loans sold to
financial components based on their relative fair values. During the periods
ended December 31, 2001 and February 28, 2001, the Company sold $401,973 and
$99,999, respectively of auto retail installment contracts in securitization
transactions and recognized gains of $39,033 and $9,434, respectively. The
Company retained servicing responsibilities and interests in the receivables in
the form of residual certificates. As of December 31, 2001 and February 28,
2001, the Company was servicing $472,381 and $395,786, respectively, of auto
receivables that have been sold to certain special purpose financing trusts (the
Trusts). In connection with the sales by FCAR, VFC LP, and Drive BOS of retail
installment contracts from securitizations, Drive ABS receives certain residual
certificates associated with the securitizations as described below. Drive LP
and Drive ABS have entered into an agreement whereby Drive LP receives all the
economic benefits associated with the residual certificates and conversely
assumes all the risks.

                                       107
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Under the above agreement, Drive ABS has retained unrated interests in
retail installment contracts sold which are subordinate to senior investors and
certificated interest only strips for the benefit of the Company which
represents the present value of the right to the excess cash flows generated by
the securitized contracts which represents the difference between (a) interest
at the stated rate paid by borrowers and (b) the sum of (i) pass-through
interest paid to third-party investors, (ii) trustee fees, (iii) third-party
credit enhancement fees (if applicable), (iv) stipulated servicing fees, and (v)
estimated contract portfolio credit losses. The Company's right to receive the
cash flows begins after certain over-collateralization requirements have been
met, which are specific to each securitization and used as a means of credit
enhancement.

     Fair value of the residual certificates is determined by calculating the
present value of the anticipated cash flows at the time each securitization
transaction closes, utilizing valuation assumptions appropriate for each
particular transaction. The significant valuation assumptions are related to the
anticipated average lives of the retail installment contracts sold, including
the effect of anticipated prepayment speeds and anticipated credit losses.

     The residual certificates are accounted for under Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Because such assets can be contractually prepaid or otherwise
settled in such a way that the holder would not receive all of the recorded
investment, the assets are classified as available-for-sale investments and are
carried at estimated fair value with any accompanying increases or decreases in
estimated fair value being recorded as unrealized gains or losses in other
comprehensive income in the accompanying consolidated statement of partners'
equity. The determination of fair value is based on the present value of the
anticipated excess cash flows utilizing the valuation assumptions discussed
above. At December 31, 2001, the Company assessed the carrying value of its
securitization related securities for impairment in accordance with the
provisions of EITF 99-20 as discussed in note 2(i). There can be no assurance
that the Company's estimates used to determine the fair value of the residual
certificates will remain appropriate for the life of each asset and it is
reasonably possible that circumstances could change in future periods which
could result in a material change in the estimates used to prepare the
accompanying consolidated financial statements. If actual retail installment
contract prepayments or credit losses exceed the Company's current estimates,
other than temporary impairment may be required to be recognized.

  (C) FURNITURE AND EQUIPMENT

     Furniture and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets, which range from three to
ten years. Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful lives of the improvements. Expenditures for major
renewals and betterments are capitalized. Repairs and maintenance expenditures
are charged to income as incurred.

  (D) CASH AND CASH EQUIVALENTS

     For purposes of the consolidated 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 has maintained balances in
various operating and money market accounts in excess of federally insured
limits. At December 31, 2001 and February 28, 2001, cash and cash equivalents,
which consist of money market accounts and cash, were $7,303 and $7,589,
respectively.

  (E) INCOME TAXES

     No provision is made in the consolidated financial statements for income
taxes because the Company's results of operations are allocated to its partners.

                                       108
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  (F) INVENTORY OF REPOSSESSED VEHICLES

     Inventory of repossessed vehicles included in other assets represent
vehicles the Company has repossessed due to the borrowers' default on the
payment terms of the contracts. The Company records the vehicles at estimated
fair value, net of costs to sell.

  (G) USE OF ESTIMATES

     Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses, and
the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.

  (H) ACCUMULATED OTHER COMPREHENSIVE INCOME

     Statement of Financial Standards No. 130 (SFAS 130), Reporting
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 also
requires the accumulated balance of other comprehensive income to be displayed
separately in the equity section. The Company's other comprehensive income
consists of net unrealized gains on residual interests in securitizations and
had an accumulated balance of $2,359 and $4,157 at December 31, 2001 and
February 28, 2001, respectively.

  (I) RECENT ACCOUNTING DEVELOPMENTS

     The Company adopted the provisions of EITF 99-20, Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets (EITF 99-20), which sets forth the rules (effective
in the second quarter of the calendar year 2001) for (1) recognizing interest
income on (a) all credit-sensitive asset-backed securities and (b) certain
prepayment-sensitive securities including agency interest only strips and (2)
determining when these securities must be written down to fair value due to
other than temporary impairment.

     EITF 99-20 requires the use of the prospective method for adjusting the
level yield used to recognize interest income when estimates of future cash
flows on the security either increase or decrease since the date of the last
evaluation. The Company adopted the use of prospective method to recognize
interest income as of the adoption date of April 1, 2001.

     Prior to the adoption of EITF 99-20, the Company recognized interest income
using the discount rate based on the carrying value of the securities.

     The impairment provisions of EITF 99-20 follow a method that evaluates
whether there is (1) a decrease in expected future cash flows since the last
evaluation, resulting from other than an interest rate reset, and (2) the fair
value of the security is less than the carrying value. This method has
similarities to a lower-of amortized cost or fair value approach, because upon
meeting both conditions an impairment adjustment to reduce the security to its
fair value is required. The impairment is recorded as a reduction in the basis
of the underlying security in the current period through a charge to earnings.

     The cumulative affect of the change in accounting principle at the time of
adoption of EITF 99-20 is $783. During the period ended December 31, 2001, the
Company recorded additional impairment of $4,017, as a result of EITF 99-20.

     In June 2001, the FASB issued Statement No. 141, Business Combinations
(SFAS 141), Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142).
SFAS 141 requires the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. The adoption of SFAS 141 as
of July 1, 2001, had no

                                       109
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

impact on the Company's consolidated financial statements, as there were no
acquisitions during the period ended December 31, 2001. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, or FASB Statement
No. 144, Accounting for the Impairment on Disposal of Long-Lived Assets, which
is required to be adopted as of January 1, 2002. The adoption of SFAS 142 on
January 1, 2002, did not have any impact on the Company's consolidated financial
statements as the Company does not have any goodwill or intangible assets.

(3) RETAIL INSTALLMENT CONTRACTS, NET

     Retail installment contracts are comprised of the following:

<Table>
<Caption>
                                                       DECEMBER 31, 2001   FEBRUARY 28, 2001
                                                       -----------------   -----------------
<S>                                                    <C>                 <C>
Retail installment contracts.........................      $ 81,650             161,489
Capitalized origination costs........................         1,628               2,789
Discounts............................................       (12,831)            (24,901)
                                                           --------             -------
                                                           $ 70,447             139,377
                                                           ========             =======
</Table>

     The retail installment contracts are collateralized by vehicle titles and
the Company has the right to repossess the vehicle in the event the borrower
defaults on the payment terms of the contract.

     Borrowers on the Company's retail installment contracts are located
primarily in Texas, Georgia, California, North Carolina, Florida, Oklahoma,
Missouri, and Illinois.

     The accrual of interest income has been suspended on $1,043 and $4,277 of
delinquent retail installment contracts as of December 31, 2001 and February 28,
2001, respectively.

(4) INTEREST RELATED TO RESIDUAL CERTIFICATES IN SECURITIZATIONS

     Residual certificates held by Drive ABS to which the Company receives all
the economic benefits and risks (see note 2(b)) consist of the following:

<Table>
<Caption>
                                                       DECEMBER 31, 2001   FEBRUARY 28, 2001
                                                       -----------------   -----------------
<S>                                                    <C>                 <C>
Retained interests...................................       $75,205             52,927
Interest only strips.................................         2,202              2,812
                                                            -------             ------
                                                            $77,407             55,739
                                                            =======             ======
</Table>

     The residual certificates at December 31, 2001 and February 28, 2001 were
valued at fair value using the following key assumptions.

<Table>
<Caption>
                                                       DECEMBER 31, 2001   FEBRUARY 28, 2001
                                                       -----------------   -----------------
<S>                                                    <C>                 <C>
Discount rates.......................................       12% to 15%       7.4% to 13.5%
Prepayment rates.....................................        9% to 30%          15% to 25%
CPR & cumulative loss rates..........................   10.1% to 21.9%      10.2% to 19.5%
</Table>

     SFAS 140 requires that the effect on the fair value of the retained
interests of two adverse changes in each key assumption be independently
calculated. At December 31, 2001, key economic assumptions and the

                                       110
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

sensitivity of the current fair value of residual cash flows to immediate 10%
and 20% adverse changes in those assumptions are as follows:

<Table>
<Caption>

<S>                                                           <C>
Balance sheet carrying value of retained interests:
     Fair value.............................................  $ 77,407
PREPAYMENT SPEED ASSUMPTION
Impact on fair value of 10% adverse change..................    (1,250)
Impact on fair value of 20% adverse change..................    (2,471)
EXPECTED CREDIT LOSSES
Impact on fair value of 10% adverse change..................    (9,486)
Impact on fair value of 20% adverse change..................   (18,922)
RESIDUAL CASH FLOWS DISCOUNT RATE
Impact on fair value of 10% adverse change..................    (1,667)
Impact on fair value of 20% adverse change..................    (3,280)
</Table>

     These sensitivities are hypothetical and should be used with caution. As
the amounts indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.

     Expected static pool credit losses at December 31, 2001 are as follows:

<Table>
<Caption>
                                                     AUTO RETAIL INSTALLMENT CONTRACTS SECURITIZED
ACTUAL AND PROJECTED                         --------------------------------------------------------------
CREDIT LOSSES (%)                            1998-3   1999-1   1999-2   F2000-1   D2000-1   2001-1   2001-2
--------------------                         ------   ------   ------   -------   -------   ------   ------
<S>                                          <C>      <C>      <C>      <C>       <C>       <C>      <C>
December 31, 2001
Actual to date.............................   9.54%   11.58%    9.58%    12.66%     7.31%    6.93%    0.06%
Projected..................................  10.75%   12.72%   11.54%    16.58%    15.21%   17.10%   16.65%
</Table>

     A servicing asset in the amount of $998 was written off in December 2001.
During 2001, the securitized pool to which the asset is attached, did not meet
the required performance level, resulting in a withholding of the incentive
servicers' fee upon which the asset is based. During the period ended December
31, 2001, the asset had been deemed fully impaired.

                                       111
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) ACCUMULATED OTHER COMPREHENSIVE INCOME

     The accumulated balance of other comprehensive income is as follows:

<Table>
<Caption>
                                              ACCUMULATED OTHER              ACCUMULATED OTHER
                                         COMPREHENSIVE INCOME -- NET    COMPREHENSIVE INCOME -- NET
                                         UNREALIZED GAINS (LOSSES) ON   UNREALIZED GAINS (LOSSES) ON
                                            RESIDUAL INTERESTS IN          RESIDUAL INTERESTS IN
                                              SECURITIZATIONS AT             SECURITIZATIONS AT
                                              DECEMBER 31, 2001              FEBRUARY 28, 2001
                                         ----------------------------   ----------------------------
<S>                                      <C>                            <C>
Beginning balance......................            $ 4,157                         $1,106
Unrealized gains related to 2001 and
  2000 securitizations.................              6,163                          1,538
Current period change..................             (4,727)                         1,513
Reclassification adjustments for
  unrealized losses reclassified into
  income due to permanent impairment...             (4,017)                            --
Reclassification adjustment for
  unrealized losses reclassified into
  income due to the cumulative effect
  of change in accounting principle....                783                             --
                                                   -------                         ------
Ending balance.........................            $ 2,359                         $4,157
                                                   =======                         ======
</Table>

     Accumulated other comprehensive income has not been allocated between the
general and limited partners on the statements of partners' equity.

(6) NOTES PAYABLE

     The Company has a warehouse line of credit with BoS (USA), which provides
borrowings up to $150,000. The Company's obligation under this arrangement at
December 31, 2001 and February 28, 2001 includes $30,000 and $70,000,
respectively, which bears interest at LIBOR plus 1% (3% and 6.57% at December
31, 2001 and February 28, 2001, respectively) and $37,165 and $12,546,
respectively, which bears interest at Prime minus 1.5% (3.25% and 7% at December
31, 2001 and February 28, 2001, respectively). The debt is secured by the
Company's retail installment contracts and has been extended to June 30, 2002.
Additionally, the note payable contains various covenants, which the Company was
in compliance with at December 31, 2001 and February 28, 2001.

     The Company had a warehouse line of credit with Enterprise Funding
Corporation, a subsidiary of Bank of America, which provided borrowings up to
$100,000. The Company's obligation under this arrangement at February 28, 2001
was $41,344 and bears interest at a commercial paper rate (ranging from 5.47% to
5.5% at February 28, 2001 plus associated fees). The agreement was terminated in
June 2001.

     Effective September 6, 2001, the Company entered into a warehouse line of
credit agreement with Variable Funding Capital Corporation, a subsidiary of
First Union National Bank, which provided borrowings up to $100,000. The
Company's obligation under the arrangement at December 31, 2001 was zero and
bears interest at a commercial paper rate (2.03% at December 31, 2001 plus
associated fees). The debt will be secured by the Company's retail installment
contracts and terminates on September 5, 2002.

     The Company has a $27,500 and a $43,475 term loan with the BoS (USA) at
December 31, 2001 and February 28, 2001, respectively. The Company's obligation
under this arrangement at December 31, 2001 and February 28, 2001 includes
$25,000 and $40,000, respectively, which bears interest at LIBOR plus 1% (3.41%
and 7.45% at December 31, 2001 and February 28, 2001, respectively) and $2,500
and $3,475, respectively, which bears interest at LIBOR plus 1% (2.92% and 7.0%
at December 31, 2001 and February 28, 2001,

                                       112
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

respectively). The loans mature on August 18, 2003. The loans are secured by
residual interests in securitization transactions.

(7) SUBORDINATED CAPITAL NOTE

     The Company has a note payable to BoS (USA), for $32,000 and $20,000 at
December 31, 2001 and February 28, 2001, respectively, and bears interest at a
predefined rate of 14%. The note allows borrowings up to $40,000 and matures
February 15, 2006. Such note is subordinate to all other obligations of the
Company. At December 31, 2001 and February 28, 2001, there was no required
amortization of the debt.

(8) SECURITIZATION ACTIVITY

     The table below summarizes the cash flows received from securitization
trusts:

<Table>
<Caption>
                                                       DECEMBER 31, 2001   FEBRUARY 28, 2001
                                                       -----------------   -----------------
<S>                                                    <C>                 <C>
Gross proceeds from new securitizations..............      $357,698             87,400
Servicing fees received..............................         9,344              3,149
Incentive service fees received......................            --                350
Cash flows received on interest-only strips..........           787              1,430
Cash flows received on subordinated holdings.........        21,059              5,670
Cash received upon release from reserve accounts.....         7,609              3,540
</Table>

     Substantially all of the proceeds from new securitizations were used to
reduce borrowings on the warehouse line of credit. For presentation in the
consolidated statements of cash flows, these proceeds have been included in the
net decrease in the warehouse line of credit with affiliate.

     For the periods ended December 31, 2001 and February 28, 2001, the Company
recognized $39,033 and $9,434, respectively, of gains on sales of retail
installment contracts.

     During the period ended December 31, 2001, the Company exercised early
purchase options on the 1998-1 and 1998-2 securitizations. The receivables were
recorded at a fair value of $7,886. Cash paid for the exercise of early purchase
options was $3,900.

     The table below summarizes delinquencies and historical losses at and for
the period ended December 31, 2001:

<Table>
<Caption>
                                 PRINCIPAL AMOUNT                          AVERAGE BALANCE
                                     OF RETAIL           DELINQUENT           OF RETAIL              CREDIT
                                    INSTALLMENT       PRINCIPAL OVER 60      INSTALLMENT            LOSSES --
                                     CONTRACTS              DAYS              CONTRACTS        (NET OF RECOVERIES)
                                -------------------   -----------------   ------------------   -------------------
<S>                             <C>                   <C>                 <C>                  <C>
Retail installment contracts:
  Held for sale...............       $ 81,650              $ 4,578             $115,564              $10,679
  Securitized.................        472,381               15,182              386,157               29,994
                                     --------              -------             --------              -------
Total managed retail
  installment contracts.......       $554,031              $19,760             $501,721              $40,673
                                     ========              =======             ========              =======
</Table>

(9) LEASES

     The Partnership has obligations under various lease agreements for computer
equipment and office furniture with multiple equipment lease schedules. The
leases are classified as capital leases. The total future minimum rental
payments are included in the future minimum rental payments schedule below.

                                       113
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Future minimum rental payments under capital leases together with the
present value of minimum lease payments at December 31, 2001 are as follows:

<Table>
<Caption>

<S>                                                           <C>
Year ending December 31:
  2002......................................................  $616
  2003......................................................   326
                                                              ----
     Total minimum lease payments...........................   942
                                                              ----
Less amounts representing interest..........................   112
                                                              ----
     Present value of minimum lease payments................  $830
                                                              ====
</Table>

     The Company has entered into various operating leases, primarily for office
space and certain equipment, which expire over the next three years. Lease
expense incurred during the periods ended December 31, 2001 and February 28,
2001 totaled $840 and $842, respectively, and remaining obligations under the
lease commitments are $770 in 2002, $653 in 2003, and $616 in 2004.

(10) COMMITMENTS AND CONTINGENCIES

     In connection with the sale of retail installment contracts from
securitizations, the Company has made standard representations and warranties
customary to the consumer finance industry. Violations of these representations
and warranties may require the Company to repurchase loans previously sold. As
of December 31, 2001 and February 28, 2001, the Company had no repurchase
requests outstanding. In the opinion of management, the potential exposure or
other recourse obligations related to the Company's retail installment contract
sales agreements will not have a material adverse effect on the consolidated
financial position or operating results of the Company.

     The Company has letters of credit issued by Bank of Scotland totaling
$19,000 and $6,351 at December 31, 2001 and February 28, 2001, respectively, of
which none has been drawn. The letters of credit are collateral for the Drive
2000-1, 2001-1, and 2001-2 Securitization Reserves, an IBM Credit Corporation
operating lease and a CIT Financial USA operating lease. The letters of credit
expire at various dates through December 2002.

     Periodically, the Company is party to or otherwise involved in legal
proceedings arising in the normal course of business. The Company does not
believe that there is any proceeding threatened or pending, if determined
adversely, would have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.

(11) RELATED-PARTY TRANSACTIONS

     The Company has the aforementioned subordinated capital note payable to BoS
(USA) totaling $32,000 and $20,000 at December 31, 2001 and February 28, 2001,
respectively, (see note 7). Interest costs incurred on such subordinated capital
note payable totaled $2,564 and $70 for the periods ended December 31, 2001 and
February 28, 2001, respectively.

     Additionally, the Company has letters of credit issued by Bank of Scotland
totaling $19,000 and $6,351, as previously discussed in note 10, at December 31,
2001 and February 28, 2001, respectively. Fees associated with these letters
totaled $65 during 2001.

     Interest costs incurred in connection with other debt with BoS (USA)
totaled $5,180 and $5,303 for the periods ended December 31, 2001 and February
28, 2001, respectively, (see note 6).

                                       114
<PAGE>
                  DRIVE FINANCIAL SERVICES LP AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) FINANCIAL INSTRUMENTS

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

  (A) CASH AND CASH EQUIVALENTS

     The carrying amount of cash and cash equivalents approximated fair value at
December 31, 2001 and February 28, 2001, respectively, due to the short maturity
of these instruments.

  (B) RETAIL INSTALLMENT CONTRACTS

     Retail installment contracts are carried at the lower of cost or estimated
fair value. The estimated fair value is calculated by using estimated fair
values from securitizations of the contracts and discounting projected cash
flows using estimated market discount rates that reflect the credit and interest
rate risks inherent in the assets at December 31, 2001 and February 28, 2001.
The carrying value of the retail installment contracts was $70,447 and $139,377
at December 31, 2001 and February 28, 2001, respectively. The estimated fair
value of the retail installment contracts was $88,159 and $176,289 at December
31, 2001 and February 28, 2001, respectively.

  (C) RESIDUAL INTERESTS IN SECURITIZATIONS

     Residual interests in securitizations are carried at estimated fair value.
The residual interests were valued using various discount rates, loss, and
prepayment assumptions, as described in note 4.

  (d) NOTES PAYABLE AND SUBORDINATED CAPITAL NOTE

     Management believes that the repayment terms for similar rate financial
instruments with similar credit risks and the stated interest rates at December
31, 2001 and February 28, 2001 approximate the market terms for similar credit
instruments. Accordingly, the carrying amount of notes payable and subordinated
capital note is believed to approximate fair value.

     The fair value of the variable rate warehouse lines of credits is equal to
the carrying value as the effective variable rates are considered to be the
market rate.

(13) EMPLOYEE BENEFIT PLANS

     The Company sponsors a defined contribution plan covering substantially all
salaried employees. Employees participating in the plan may contribute up to 15%
of their base salary, subject to federal limitations on absolute amounts
contributed. The Company will match up to 6% of their base salary, with matching
contributions of 50% of employee contributions. The total amount contributed by
the Company for the periods ended December 31, 2001 and February 28, 2001 was
$210 and $23, respectively.

                                       115
<PAGE>

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

     Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth certain information concerning the members
of the Board of Directors of the Company.

<Table>
<Caption>
NAME                        AGE                            POSITION
----                        ---                            --------
<S>                         <C>   <C>
James R. Hawkins..........  65    Chairman of the Board
C. Ivan Wilson............  74    Vice Chairman of the Board
James T. Sartain..........  53    President, Chief Executive Officer and Director
Richard E. Bean...........  58    Director
Dane Fulmer...............  51    Director
Robert E. Garrison II.....  59    Director
Jeffery D. Leu............  45    Director
David W. MacLennan........  42    Director
</Table>

     Further information concerning the Board of directors, including their
business experience during the past five years, appears below.

     James R. Hawkins has been Chairman of the Board since the consummation of
the Merger, and was Chairman of the Board and Chief Executive Officer of J-Hawk
J-Hawk from 1976 until the Merger. Mr. Hawkins was also formerly Chief Executive
Officer of the Company through January 2001.

     C. Ivan Wilson has been Vice Chairman of the Board of the Company since the
Merger. From February 1998 to June 1998, Mr. Wilson was Chairman, President and
Chief Executive Officer of Mercantile Bank, N.A., Corpus Christi, Texas, a
national banking organization. Mr. Wilson was Chairman of the Board and Chief
Executive Officer of FCBOT from 1991 to the Merger. Prior to 1991, Mr. Wilson
was the Chief Executive Officer of FirstCity, Texas -- Corpus Christi, one of
FCBOT's banking subsidiaries.

     James T. Sartain has been President since the Merger and Chief Executive
Officer since January 2001 and has served as a Director of the Company since the
Merger. Prior to January 2001, Mr. Sartain was President and Chief Operating
Officer. From 1988 to the Merger, Mr. Sartain was President and Chief Operating
Officer of J-Hawk.

     Richard E. Bean has been a Director of the Company since the Merger and has
been Executive Vice President and Chief Financial Officer of Pearce Industries,
Inc. since 1976, which markets a variety of oil field equipment and machinery.
Mr. Bean has also been a member of the Portfolio Committee of the FirstCity
Liquidating Trust since the Merger. Prior to the Merger, Mr. Bean was Chairman
of the FCBOT's Official Committee of Equity Security Holders.

     Dane Fulmer has been a Director of the Company since May 1999. Mr. Fulmer
serves as Executive Vice President and director of risk management of John
Taylor Financial Group, a broker/dealer and investment advisory firm that Mr.
Fulmer co-founded in 1995. From July 1991 until August 1996, Mr. Fulmer served
as Executive Vice President of Merchants Investment Center of Fort Smith, and as
portfolio manager for Merchants National, the parent company.

     Robert E. Garrison II has been a Director of the Company since May 1999.
Mr. Garrison is the President, Chief Executive Officer and director of Sanders
Morris Harris Group, a publicly owned financial services firm. Previously, Mr.
Garrison served as Executive Vice President and director of Harris Webb &
Garrison and also served as Chairman, Chief Executive Officer, and director of
Pinnacle Management & Trust Co. Mr. Garrison co-founded both of these companies
in 1994. Both Harris Webb & Garrison and Pinnacle

                                       116
<PAGE>

Management & Trust Co. are subsidiaries of Sanders Morris Harris Group. In
addition, Mr. Garrison serves as Chairman of the Board of BioCyte Therapeutics,
a cancer diagnostic and therapeutic company focused on breast, ovarian, and
prostate cancer. Mr. Garrison serves as a director of TeraForce Technology
Corporation, Inc., a public defense electronics company, Somerset House
Publishing, First Capital Bank, and is a member of the Finance Committee of
Memorial Hermann Hospital System. He has over 36 years of experience in the
securities industry. Mr. Garrison is a Chartered Financial Analyst.

     Jeffery D. Leu has been a Director of the Company since December 2000. Mr.
Leu is President of the Value Investment Group of Cargill, a wholly owned
subsidiary of Cargill Incorporated, which is regarded as one of the world's
largest privately-held corporations. Mr. Leu joined Cargill in 1981 and has held
various management positions in Cargill's financial businesses.

     David W. MacLennan has been a Director of the Company since the Merger and
as of September 15, 2000 became Managing Director and President of Fixed Income
Capital Markets at U.S. Bancorp Piper Jaffray, and is also on the U.S. Bancorp
Piper Jaffray Board of Directors and Management Committee. Previously, Mr.
MacLennan was employed by subsidiaries of Cargill, Incorporated since 1991. From
October 1997 to September 2000 Mr. MacLennan was Chief Financial Officer of
Cargill Financial Services, Inc. From February 1996 to October 1997, Mr.
MacLennan was the Managing Director of Cargill Financial Markets, PLC in London.
From 1993 to February 1996, Mr. MacLennan was a Vice President of Cargill, and
was engaged primarily in the investment of proprietary funds and in the
proprietary trading of financial instruments and assets.

Shareholder Voting Agreement

     James R. Hawkins, Chairman of the Board of the Company, James T. Sartain,
President and Chief Executive Officer of the Company, and ATARA I, LTD., a Texas
limited partnership ("ATARA"), are parties to a Shareholder Voting Agreement
(the "Shareholder Voting Agreement"), dated as of June 29, 1995, with Cargill
Financial Services Corporation, a Delaware corporation ("Cargill"). The sole
general partner of ATARA is ATARA Corp., a Texas corporation, the Chairman of
the Board and President of which is Rick R. Hagelstein (a former executive
officer of the Company).

     Under the terms of the Shareholder Voting Agreement, Messrs. Hawkins and
Sartain, and ATARA, are required to vote their shares of Common Stock to elect
one designee of Cargill as a director of the Company, and Cargill is required to
vote its shares of Common Stock to elect one or more of the designees of Messrs.
Hawkins and Sartain, and ATARA, as directors of the Company. With respect to the
Board nominees for director,

     (1)  Messrs. Hawkins and Sartain, and ATARA, will vote their shares of
          Common Stock for the election of such nominees as directors, including
          nominee Jeffery Leu, Cargill's designee under the Shareholder Voting
          Agreement, and

     (2)  Cargill will vote its shares of Common Stock for the election of such
          nominees as directors, which nominees are the designees of Messrs.
          Hawkins and Sartain, and ATARA, under the Shareholder Voting
          Agreement.

Information pertaining to the number of shares of Common Stock owned on December
31, 2001, by each of Messrs. Hawkins and Sartain, and ATARA and Cargill, is set
forth under the caption "Security Ownership of Certain Beneficial Owners and
Management."

                                       117
<PAGE>

EXECUTIVE OFFICERS

     The executive officers of the Company, who are elected by the Board of
Directors of the Company and serve at its discretion, are as follows:

<Table>
<Caption>
NAME                         AGE                        POSITION
----                         ---                        --------
<S>                          <C>   <C>
James R. Hawkins...........  65    Chairman of the Board
James T. Sartain...........  53    President and Chief Executive Officer
J. Bryan Baker.............  40    Senior Vice President and Chief Financial Officer
Terry R. DeWitt............  44    Senior Vice President and Co-President of
                                   FirstCity Commercial
G. Stephen Fillip..........  50    Senior Vice President and Co-President of
                                   FirstCity Commercial
Joe S. Greak...............  52    Senior Vice President and Tax Director
James C. Holmes............  45    Senior Vice President and Executive Vice President
                                   of FirstCity Commercial
Jim W. Moore...............  51    Senior Vice President and President of FirstCity
                                   Consumer Lending
Richard J. Vander Woude....  47    Senior Vice President, General Counsel and
                                   Secretary
</Table>

     The business experience of Messrs. Hawkins and Sartain is set forth above.

     J. Bryan Baker has been Senior Vice President and Chief Financial Officer
since June 2000. Previously, Mr. Baker served as Vice President and Treasurer
from August 1999 to June 2000, as Vice President and Controller of the Company
from November 1996 to August 1999, and as Vice President and Assistant
Controller from 1995 to November 1996. From 1990 to 1995, Mr. Baker was with
Jaynes, Reitmeier, Boyd & Therrell, P.C., an independent public accounting firm,
involved in both auditing and consulting. From 1988 to 1990, Mr. Baker was
Controller of Heights Bancshares in Harker Heights, Texas.

     Terry R. DeWitt has been Senior Vice President responsible for Due
Diligence and Investment Evaluation of the Company since the Merger and has
served as Co-President of FirstCity Commercial ("FirstCity Commercial") since
October 1999. Mr. DeWitt served as Senior Vice President responsible for Due
Diligence and Investment Evaluation of J-Hawk from 1992 to the Merger. 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.

     G. Stephen Fillip has been Senior Vice President since the Merger. Mr.
Fillip has served as President of FirstCity Servicing Corporation since October
1999 and has served as Co-President of FirstCity Commercial since October 1999.
Mr. Fillip was Senior Vice President of J-Hawk from 1991 to the Merger. 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 has been Senior Vice President, Tax Director and Secretary of
the Company since the Merger. Mr. Greak was the Tax Manager of FCBOT 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 has been Senior Vice President since the Merger. Mr. Fillip
has served as Executive Vice President of FirstCity Commercial since October
1999. From the Merger to August 1999 Mr. Holmes served as Senior Vice President
and Treasurer and held the same positions with J-Hawk from 1994 to the Merger.
From 1988 to 1991, Mr. Holmes was a Vice President of MBank, Waco, a national
banking association.

     Jim W. Moore has been a senior officer of the Company or its predecessor
since November 1992. Currently, Mr. Moore is President of FirstCity Consumer
Lending Corporation, which owns a 31% direct and

                                       118
<PAGE>

indirect interest in Drive Financial Services, LP, where he has served as
Executive Vice President and a member of the Board of Managers since August
2000.

     Richard J. Vander Woude has been General Counsel and Senior Vice President
of the Company since January 1998 and has served as Secretary since June 2000.
Prior thereto, Mr. Vander Woude was a director and shareholder in the law firm
of Vander Woude & Istre, P.C., Waco, Texas from 1992 through 1997. From 1978 to
1992, Mr. Vander Woude was a director and shareholder of Sheehy, Lovelace &
Mayfield, P.C., Waco, Texas.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10 percent of the Company's
Common Stock, to file with the Securities and Exchange Commission certain
reports of beneficial ownership of the Company's Common Stock. Based solely on
copies of such reports furnished to the Company and written representations that
no other reports were required, the Company believes that all applicable Section
16(a) filing requirements were complied with by its directors, officers and 10
percent stockholders during the last fiscal year.

ITEM 11.  EXECUTIVE COMPENSATION.

     The following table sets forth certain information concerning compensation
for services during each of the last three years to (1) the Company's Chief
Executive Officer during 2001, and (2) the Company's other four most highly
compensated executive officers during 2001 serving as such at the end of
2001(collectively, the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                                     LONG TERM
                                                                    COMPENSATION
                                                                       AWARDS
                                         ANNUAL COMPENSATION         SECURITIES
                                    -----------------------------    UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION         YEAR   SALARY ($)   BONUS ($)   OPTIONS (#)    COMPENSATION (1)($)
---------------------------         ----   ----------   ---------   ------------   -------------------
<S>                                 <C>    <C>          <C>         <C>            <C>
James T. Sartain,.................  2001    300,014           --       50,000            15,190
  President and Chief               2000    300,014      130,000       50,000            16,018
  Executive Officer                 1999    300,014           --           --            16,843
Terry R. DeWitt,..................  2001    250,000           --       25,000             4,800
  Senior Vice President and         2000    250,000       80,640           --             5,040
  Co-President of FirstCity         1999    214,584      128,400           --             5,089
  Commercial Corporation
G. Stephen Fillip,................  2001    250,000           --       25,000             5,190
  Senior Vice President and         2000    250,000       83,400           --             5,310
  Co-President of FirstCity         1999    214,584       83,400           --             5,455
  Commercial Corporation
Richard J. Vander Woude,..........  2001    275,000           --       25,000             4,950
  Senior Vice President, General    2000    270,883       50,000       25,000             5,378
  Council and Secretary             1999    222,917       49,174           --             5,534
Jim W. Moore......................  2001    250,000      125,000       25,000             5,190
  Senior Vice President and         2000    206,250      130,000           --            16,977
  President of FirstCity            1999    172,917       10,000           --             4,428
  Consumer Lending
</Table>

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

(1) With respect to Messrs. Hawkins, Sartain, DeWitt, Fillip and Moore, the
    total amounts indicated under "All Other Compensation" for 2001 consist of
    (a) amounts contributed to match a portion of such employee's contributions
    under a 401(k) plan ("401(k) Match"), (b) excess premiums paid on

                                       119
<PAGE>

    supplemental life insurance policies ("Supplement Life") and (c) personal
    use of a business vehicle ("Auto"), and (d) amounts paid for moving expenses
    ("Other"). The following table details the amounts paid during 2001 for each
    of the categories:

<Table>
<Caption>
                                                 401(K)    SUPPLEMENT
EXECUTIVE                                       MATCH($)    LIFE($)     AUTO($)   TOTAL($)
---------                                       --------   ----------   -------   --------
<S>                                             <C>        <C>          <C>       <C>
James T. Sartain..............................   4,500        690       10,000     15,190
Terry R. DeWitt...............................   4,500        300           --      4,800
G. Stephen Fillip.............................   4,500        690           --      5,190
Richard J. Vander Woude.......................   4,500        450           --      4,950
Jim W. Moore..................................   4,500        690           --      5,190
</Table>

STOCK OPTION AND PURCHASE PLANS AND 401(K) PLAN

     In October 1995, on the recommendation of the Stock Option Subcommittee of
the Compensation Committee, the Board of Directors approved the grant of 229,600
stock options under the 1995 Stock Option and Award Plan. Of these options,
173,600 were granted to the Company's executive officers. The exercise price for
all such options was equal to or greater than the fair market value of the
underlying the Common Stock at the date of grant. Therefore, the holders of the
stock options will benefit from such options only when, and to the extent, the
price of the Common Stock increases after the grant of the option. The
performance of individual executive officers and other key employees was
considered by the Stock Option Subcommittee in allocating such grants, taking
into account the Company's performance, each individual's contributions thereto
and specific accomplishments in each individual's area of responsibility. In
October 1996, on the recommendation of the Stock Option Subcommittee, the Board
of Directors approved the grant of 18,000 stock options under the 1996 Stock
Option and Award Plan (no such shares were granted to executive officers). In
February 1997, on the recommendation of the Stock Option Subcommittee, the Board
of Directors approved the grant of 95,200 stock options under the 1996 Stock
Option and Award Plan Of these options, 46,200 were granted to the Company's
executive officers. In September 1997, on the recommendation of the Stock Option
Subcommittee, the Board of Directors approved the grant of 30,000 stock options
under the 1996 Stock Option and Award Plan (no such shares were granted to
executive officers).

     At the Company's annual stockholders' meeting, held on April 24, 1996, the
Company's stockholders approved (1) the 1995 Stock Option and Award Plan, which
provides for the grant of up to 230,000 options to purchase the Common Stock to
plan participants (229,600 of which have been granted), (2) the 1996 Stock
Option and Award Plan, which provides for the grant of up to 500,000 options to
purchase the Common Stock to plan participants and (3) the 1995 Employee Stock
Purchase Plan, under which up to 100,000 shares of the Common Stock may be made
available for purchase by plan participants. Grants of options to purchase
15,473 shares of the Common Stock have been granted to date. The 1996 Stock
Option and Award Plan also provides for the grant of up to 50,000 performance
shares to employees of the Company, to be awarded in the discretion of the Stock
Option Subcommittee. The performance measure to be used for the purposes of
granting the performance shares will be the extent to which performance goals
are met, in addition to the factors of total stockholder return, return on
equity, earnings per share and the ratio of operating overhead to operating
revenue.

     Beginning January 1, 1994, the Company also initiated a defined
contribution 401(k) employee profit sharing plan (the "401(k) Plan") in which
the Company matches employee contributions at a stated percentage of employee
contributions to a defined maximum. The Company contributed approximately
$152,000, $263,000, $238,000 in 2001, 2000 and 1999, respectively, to the 401(k)
Plan.

OPTION GRANTS

     The following table sets forth certain information with respect to grants
of stock options under the 1995 Stock Option and Award Plan and the 1996 Stock
Option and Award Plan during 2001, to the Named Executive Officers. In addition,
there are shown hypothetical gains or "option spreads" that could be realized
for the respective options, based on arbitrarily assumed rates of annual
compound stock price appreciation of

                                       120
<PAGE>

5 percent and 10 percent from the date the options were granted over the full
option terms. The Company granted no stock appreciation rights during 2001.

<Table>
<Caption>
                                                                                                      POTENTIAL
                                                                                                 REALIZABLE VALUE AT
                                                                                                    ASSUMED ANNUAL
                                                OPTION GRANTS IN 2001                               RATES OF STOCK
                                                  INDIVIDUAL GRANTS                               PRICE APPRECIATION
                       -----------------------------------------------------------------------     FOR OPTION TERM
                        NUMBER OF SHARES     PERCENT OF TOTAL    EXERCISE OR BASE                        (2)
                       UNDERLYING OPTIONS   OPTIONS GRANTED TO      PRICE (PER      EXPIRATION   --------------------
NAME                     GRANTED(#)(1)      EMPLOYEES IN 2001       SHARE)($)          DATE       5%($)      10%($)
----                   ------------------   ------------------   ----------------   ----------   --------   ---------
<S>                    <C>                  <C>                  <C>                <C>          <C>        <C>
James T. Sartain.....        50,000               15.97%               3.06         12/2/2009       --         --
Terry R. DeWitt......        25,000                7.99%               3.06         12/2/2009       --         --
G. Stephen Fillip....        25,000                7.99%               3.06         12/2/2009       --         --
Richard J. Vander
  Woude..............        25,000                7.99%               3.06         12/2/2009       --         --
Jim W. Moore.........        25,000                7.99%               3.06         12/2/2009       --         --
</Table>

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

(1) The options granted to the above persons were granted as of December 20,
    2001, at an exercise price of $3.06 (greater than fair market value of the
    Common Stock on the date of grant). The shares of the Common Stock
    underlying such option were 50% vested on the grant date, with the remaining
    50% vesting in two equal, consecutive annual installments, commencing on the
    first anniversary of the grant date. Subject to the terms of the 1996 Stock
    Option and Award Plan, such option may be exercised to purchase all or any
    portion of such vested shares at any time prior to the termination thereof.
    The unexercised portions of such options, if any, terminate ten years from
    the grant date. Such options are non-transferable other than by will or the
    laws of descent and distribution. Under the 1996 Stock Option and Award
    Plan, the right to exercise options with respect to unvested shares may be
    accelerated in certain circumstances.

(2) As the weighted-average fair value of stock options granted during 2001 was
    $.99 on the grant date (compared to an exercise price of $3.06), there is no
    potential realizable value at assumed annual rates of stock price
    appreciation of 5% and 10% for the Option term. There can be no assurance
    that the assumed annual appreciation rates will be achieved.

OPTION EXERCISES AND YEAR-END VALUES

     The following table sets forth, for the Named Executive Officers, the
number of shares of the Common Stock underlying both exercisable and
non-exercisable stock options held by such persons as of December 31, 2001, and
the year-end values for unexercised "in-the-money" options, which represent the
positive spread between the exercise price of any such options and the year-end
market price of the Common Stock. All such options were granted under the 1995
Stock Option and Award Plan and 1996 Stock Option and Award Plan. No options
were exercised by the officers listed below during 2001.

                        AGGREGATED 2001 OPTION EXERCISES
                           AND YEAR-END OPTION VALUES

<Table>
<Caption>
                                                     NUMBER OF SHARES            VALUE OF UNEXERCISED
                                                  UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS
                                                    OPTIONS AT YEAR END            AT YEAR END($)(1)
                                                ---------------------------   ---------------------------
NAME                                            EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                            -----------   -------------   -----------   -------------
<S>                                             <C>           <C>             <C>           <C>
James T. Sartain..............................    62,300         62,500           --             --
Terry R. DeWitt...............................    30,200         25,000           --             --
G. Stephen Fillip.............................    30,200         25,000           --             --
Richard J. Vander Woude.......................    18,750         31,250           --             --
Jim W. Moore..................................    29,800         25,000           --             --
</Table>

                                       121
<PAGE>

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

(1) Calculated using the aggregate market value (based on December 31, 2001
    stock price of $1.20 per share) of the shares of the Common Stock underlying
    such options, less the aggregate exercise price payable.

DIRECTOR COMPENSATION

     Directors of the Company who are not employees of the Company or any of its
subsidiaries receive a retainer of $3,000 per quarter for their services as
directors (from January 1, 2001 through December 31, 2001, each such director
received an aggregate of $12,000 for such director's services as director for
such period). Such directors also receive $1,000 plus expenses for each regular
and special Board meeting attended, and $1,000 plus expenses for each meeting of
any committee of the Board attended, and $500 per each telephonic meeting.
Directors who are employees of the Company do not receive directors' fees.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

     The following report concerning the specific factors, criteria and goals
underlying decisions on payments and awards of compensation to each of the
executive officers of the Company for fiscal year 2001 is provided by the
Compensation Committee of the Company's Board of Directors.

GENERAL

     Recommendations regarding compensation of the Company's executive officers
are prepared by the Compensation Committee of the Board of Directors and are
subject to the review, modification and approval of the Board, except that (1)
the Chief Executive Officer does not participate in the preparation of
recommendations, or the review, modification or approval thereof, with respect
to his compensation and (2) all such recommendations, reviews, modifications and
approvals with respect to awards under the 1996 Stock Option and Award Plan are
made solely by the Stock Option Subcommittee of the Compensation Committee.

     The Company's compensation program is designed to enable the Company to
attract, motivate and retain high quality senior management by providing a
competitive total compensation opportunity based on performance. Toward this
end, the Company provides for competitive base salaries, annual variable
performance incentives payable in cash for the achievement of financial
performance goals, and long-term, stock-based incentives which strengthen the
mutuality of interests between senior management and the Company's stockholders.

     Section 162(m) ("Section 162(m)") of the Internal Revenue Code of 1986, as
amended (the "Code"), provides that no deduction for federal income tax purposes
shall be allowed to a publicly held corporation for applicable employee
remuneration with respect to any covered employee of the corporation to the
extent that the amount of such remuneration for the taxable year with respect to
such employee exceeds $1.0 million. For purposes of this limitation, the term
"covered employee" generally includes the chief executive officer of the
corporation and the four highest compensated officers of the corporation (other
than the chief executive officer), and the term "applicable employee
remuneration" generally means, with respect to any covered employee for the
taxable year, the aggregate amount allowable as a federal income tax deduction
for services performed by such employee (whether or not during the taxable
year); provided, however, that applicable employee remuneration does not
include, among other items, certain remuneration payable solely on account of
the attainment of one or more performance goals ("performance based
compensation"). It is the Company's general intention that the remuneration paid
to its covered employees not exceed the deductibility limitation established by
Section 162(m). Nevertheless, due to the fact that not all remuneration paid to
covered employees may qualify as performance-based compensation, it is possible
that the Company's deduction for remuneration paid to any covered employee
during a taxable year may be limited by Section 162(m).

                                       122
<PAGE>

SALARIES

     Salaries for the year 2001 for each of the Company's executive officers,
including its Chief Executive Officer, were determined based upon such officer's
level of responsibility, time with the Company, contribution to the Company and
individual performance. The evaluation of these factors was subjective, and no
fixed, relative weights were assigned thereto.

BONUSES

     Messrs. Sartain, DeWitt, Fillip, Vander Woude and Moore were participants
in a bonus plan in each of their respective business units. Messrs. Sartain,
DeWitt, Vander Woude and Fillip were not eligible for bonuses paid in 2001. Mr.
Moore participated in a bonus pool established for executive management of
Drive.

STOCK OPTIONS

     The Stock Option Subcommittee of the Compensation Committee believes that
stock options are critical in motivating and rewarding the creation of long-term
stockholder value, and the subcommittee has established a policy of awarding
stock options each year based on the continuing progress of the Company as well
as on individual performance.

     In 2001, the Stock Option Subcommittee recommended, and the Board of
Directors approved, the grant of stock options for 275,500 shares of the Common
Stock under the 1996 Stock Option and Award Plan (217,000 were granted to the
Company's executive officers). The exercise price with respect to all such
grants was equal to or greater than the fair market value of the underlying the
Common Stock at the date of grant so that the holders of such options will
benefit from such options only when, and to the extent, the price of the Common
Stock increases after such grant. The performance of individual executive
officers and other key employees was considered by the Stock Option Subcommittee
in allocating such grants, taking into account the Company's performance, each
individual's contributions thereto and specific accomplishments in each
individual's area of responsibility.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

     Recommendations regarding compensation of the Company's Chief Executive
Officer are prepared by those members of the Compensation Committee, and are
subject to the review, modification and approval of those members of the Board,
other than the Chief Executive Officer. Such recommendations, reviews,
modifications and approvals for 2001 were based on the Chief Executive Officer's
level of responsibility, time with the Company, individual performance and
significant contributions to the successful implementation of several important
decisions that are expected to benefit the Company in future years, including
the acquisition of various purchased asset portfolios.

                                          THE COMPENSATION COMMITTEE
                                          C. Ivan Wilson, Chairman
                                          David W. MacLennan
                                          Robert E. Garrison II

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Messrs. Wilson (Chairman), Garrison and MacLennan served as members of the
Compensation Committee of the Board of Directors during 2001. Messrs. Wilson,
Garrison and MacLennan served as members of the Stock Option Subcommittee of the
Compensation Committee during 2001. Neither of Messrs. Wilson, Garrison nor
MacLennan was an officer or employee of the Company or any of its subsidiaries
during 2000 or any prior year. No interlocking relationship exists between the
members of the Company's Board of Directors or Compensation Committee and the
board of directors and compensation committee of any other company, nor has any
such interlocking relationship existed in the past.

                                       123
<PAGE>

EMPLOYMENT AGREEMENTS

     In 1999, the FirstCity Commercial entered into employment agreements with
Messrs. Terry R. DeWitt, G. Stephen Fillip and James C. Holmes. The term of each
of these contracts runs to December 31, 2004. These contracts provide for
salaries of $250,000, $250,000 and $200,000, respectively. Additionally, these
contracts provide for the establishment of a bonus pool based on the annual net
profits of Commercial before taxes and interest expense on the indebtedness of
Commercial to the Company exceeding certain thresholds. Messrs. DeWitt, Fillip
and Holmes participate in the benefit plans of the Company.

CUMULATIVE TOTAL STOCKHOLDER RETURN

     The following performance graph (the "Performance Graph") compares the
cumulative total stockholder return on the Common Stock, based on the market
price thereof, with

     I.  the cumulative total return of the CRSP Total Return Index for the
Nasdaq Stock Market (US) (the "Nasdaq Market Index") prepared for Nasdaq by the
Center for Research in Security Prices ("CRSP") and

     II.  the CRSP Financial Stocks Index (the "Nasdaq Industry Index") prepared
for Nasdaq by CRSP for the period beginning on December 31, 1996 and ending on
December 31, 2001. Cumulative total stockholder return is based on an annual
total return, which assumes the reinvestment of all dividends for the period
shown and assumes that $100 was invested on December 31, 1996 in each of the
Common Stock, the Nasdaq Market Index and the Nasdaq Industry Index. The Company
has not declared any dividends during the period covered by the Performance
Graph. The results shown in the Performance Graph are not necessarily indicative
of future performance.

                              [PERFORMANCE GRAPH]
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------------
                                 12/31/96   03/31/97   06/30/97   09/30/97   12/31/97   03/31/98   06/30/98   09/30/98   12/31/98
---------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
 Nasdaq Market                     100.00      94.57     111.90     130.82     122.48     143.34     147.28     132.69     172.68
 NASDAQ Financial Stocks           100.00     104.36     121.45     141.68     153.93     162.15     158.01     130.72     148.57
 FirstCity Financial               100.00      74.14      96.55      87.93     104.74     104.31     100.00      55.17      44.61

</Table>


<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------------
                                 03/31/99   06/30/99   09/30/99   12/31/99   03/31/00   06/30/00   09/29/00   12/29/00   03/31/01
---------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
 Nasdaq Market                     193.65     211.83     217.11     320.89     360.25     313.24     288.25     193.01     144.08
 NASDAQ Financial Stocks           146.11     162.89     142.08     147.58     138.47     128.29     150.73     159.40     153.14
 FirstCity Financial                34.37      18.97       5.17       9.48       8.19       6.47       6.57       5.82       4.31

<Caption>
-------------------------------  ------------------------------
                                 06/29/01   09/28/01   12/31/01
-------------------------------  ------------------------------
<S>                              <C>        <C>        <C>
 Nasdaq Market                     169.81     117.81     153.15
 NASDAQ Financial Stocks           173.00     166.01     175.34
 FirstCity Financial                 4.83       6.03       4.14
</Table>

                                       124
<PAGE>

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

     The following table sets forth certain information regarding the Common
Stock owned on March 15, 2002 (the "Measurement Date") by (1) each person who is
known by the Company to be the beneficial owner of more than five percent of the
Common Stock as of such date, (2) each of the Company's directors, (3) each of
the Named Executive Officers and (4) all directors and executive officers of the
Company as a group. Except as otherwise indicated, all shares of the Common
Stock shown in the table are held with sole voting and investment power.

<Table>
<Caption>
                                                                   SHARES            PERCENT
                                                                BENEFICIALLY           OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1)                            OWNED              CLASS
---------------------------------------                         ------------         -------
<S>                                                             <C>                  <C>
James R. Hawkins............................................     1,138,754(2)(11)     13.6%
James T. Sartain............................................       427,097(3)(11)      5.1%
Ed Smith....................................................       539,451(4)          6.4%
     1021 Main Street, #1000
     Houston, Texas 77002
Lindsey Capital.............................................       419,969(4)          5.0%
     1021 Main Street, #1000
     Houston, Texas 77002
Richard E. Bean.............................................        89,883(5)          1.1%
Dane Fulmer.................................................        29,850(6)            *
Robert E. Garrison II.......................................        55,550(6)            *
Jeffery Leu.................................................         1,250(7)            *
David W. MacLennan..........................................         4,250(5)            *
C. Ivan Wilson..............................................         6,914(5)            *
Terry R. DeWitt.............................................        45,082(8)            *
G. Stephen Fillip...........................................        76,587(8)            *
Jim W. Moore................................................        35,957(9)            *
Richard J. Vander Woude.....................................        24,185(10)           *
All directors and executive officers as a group (15
  persons)..................................................     2,024,244            23.5%
</Table>

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

 * Less than 1%

(1) The business mailing address of each of such persons (except as otherwise
    indicated) is P.O. Box 8216, Waco, Texas 76714-8216.

(2) Includes 250,994 shares of Common Stock held of record by J-Hawk, Ltd., the
    sole general partner of which is Combined Funding, Inc. Mr. Hawkins may be
    deemed to beneficially own such shares of Common Stock as a result of his
    ownership of 50% of the common stock of 5-Star Management, Inc.

(3) Includes 24,800 and 37,500 shares that may be acquired within 60 days of the
    Measurement Date upon the exercise of options granted under the Company's
    1995 and 1996 Stock Option and Award Plan.

(4) 419,969 of such shares of Common Stock are held of record by Lindsey Capital
    Corporation. Mr. Smith beneficially owns such shares of Common Stock as a
    result of his ownership of 100% of the common stock of Lindsey Capital
    Corporation.

(5) Includes 4,250 shares that may be acquired within 60 days of the Measurement
    Date upon the exercise of options granted under the Company's 1996 Stock
    Option and Award Plan.

(6) Includes 2,500 shares that may be acquired within 60 days of the Measurement
    Date upon the exercise of options granted under the Company's 1996 Stock
    Option and Award Plan.

(7) Includes 1,250 shares that may be acquired within 60 days of the Measurement
    Date upon the exercise of options granted under the Company's 1996 Stock
    Option and Award Plan. Mr. Leu is an officer of certain affiliates of
    Cargill, which, as of the Measurement Date was the record owner of 221,683
    shares of

                                       125
<PAGE>

     Common Stock. Mr. Leu disclaims beneficial ownership of such shares.
     Cargill is party to the Shareholder Voting Agreement with Messrs. Hawkins
     and Sartain, and ATARA, regarding the Common Stock.

(8)  Includes 11,500 and 18,700 shares that may be acquired within 60 days of
     the Measurement Date upon the exercise of options granted under the
     Company's 1995 and 1996 Stock Option and Award Plan, respectively.

(9)  Includes 10,200 and 19,600 shares that may be acquired within 60 days of
     the Measurement Date upon the exercise of options granted under the
     Company's 1995 and 1996 Stock Option and Award Plan, respectively.

(10) Includes 18,750 shares that may be acquired within 60 days of the
     Measurement Date upon the exercise of options granted under the Company's
     1996 Stock Option and Award Plan.

(11) Messrs. Hawkins and Sartain and ATARA, the sole general partner of which is
     ATARA Corp., are parties to a Shareholder Voting Agreement with Cargill
     regarding the Common Stock, pursuant to which ATARA and Messrs. Hawkins and
     Sartain are required to vote their shares of Common Stock to elect one
     designee of Cargill as a director of the Company, and Cargill is required
     to vote its shares of Common Stock to elect one or more designees of ATARA
     and Messrs. Hawkins and Sartain as directors of the company. Each of
     Messrs. Hawkins and Sartain and ATARA disclaims beneficial ownership of the
     shares of Common Stock owned by Cargill.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The Company owns equity interests in various purchased asset portfolios
through limited partnerships and limited liability companies ("Acquisition
Partnerships") in which a corporate affiliate of the Company is the sole general
partner or managing member, and the Company and other non-affiliated investors
are limited partners or members. Certain directors and executive officers of the
Company may also serve as directors and/or executive officers of the general
partner or managing member, but receive no additional compensation from or on
behalf of such general partner or managing member for serving in such capacity.
The Company provides asset servicing to such Acquisition Partnerships pursuant
to servicing agreements between the Company and such Acquisition Partnerships.

     Under the Right of First Refusal Agreement, if the Company receives an
invitation to bid on or otherwise obtains an opportunity to acquire interests in
loans, receivables, real estate or other assets located in the United States,
Canada, Mexico, or the Caribbean in which the aggregate amount to be bid exceeds
$4 million, the Company is required to follow a prescribed notice procedure
pursuant to which CFSC has the option to participate in the proposed purchase by
requiring that such purchase or acquisition be effected through an Acquisition
Partnership formed by the Company and Cargill (or an affiliate). The Right of
First Refusal Agreement does not prohibit the Company from holding discussions
with entities other than CFSC regarding potential joint purchases of interests
in loans, receivables, real estate or other assets, provided that any such
purchase is subject to CFSC's right to participate in the Company's share of the
investment. The Right of First Refusal Agreement further provides that, subject
to certain conditions, CFSC will bear 50% of the due diligence expenses incurred
by the Company in connection with proposed asset purchases. The Right of First
Refusal Agreement is a restatement and extension of a similar agreement entered
into among the Company, certain members of the Company's management and Cargill
in 1992. The Right of First Refusal Agreement has a termination date of January
1, 2003.

     The Company has loans receivable, totaling $18.6 million at December 31,
2001, made to certain Acquisition Partnerships located in Mexico. These loans
are at fixed rates ranging from 19% to 20%, with default provisions allowing for
rates from 23% to 30%. The Company also has a loan receivable ($1.2 million at
December 31, 2001) to a domestic Acquisition Partnership bearing interest at
Prime plus 7%. Payments on these notes are dependent upon proceeds from the
resolution of Portfolio Assets held by the Acquisition Partnerships. See notes 1
and 5 of the Notes to Consolidated Financial Statements.

                                       126
<PAGE>

     During the first quarter of 2001, the Company sold 35% of its equity
interest in a domestic Acquisition Partnership to CFSC for $7.0 million
resulting in a gain of $3.1 million. In the third quarter of 2001, the Company
sold all of its interest in another domestic Acquisition Partnership to CFSC for
$.6 million resulting in a gain of $.2 million.

     During 2000, Cargill provided the Company with a $30 million credit
facility, which matures in March 2003. Borrowings under such facility bore
interest at LIBOR plus 4.5% and were secured by investments in Acquisition
Partnerships. As of December 31, 2001, outstanding borrowings under such
facility were $27.4 million. Jeffery D. Leu, a director of the Company, is an
officer of certain affiliates of Cargill. The Company believes that the terms of
this credit facility are generally as favorable to the Company as the terms it
would receive from an independent third party.

     During 1999, Cargill provided the Company with a $9.6 million credit
facility, which matures in January 2003. Borrowings under such facility bore
interest at LIBOR plus 5% and were secured by the stock of Bosque Asset
Corporation and the proceeds of the class F and UR certificates held by
FirstStreet Investment, LLC. As of May 18, 2001, outstanding borrowings under
such facility were $7.6 million. The Company believes that the terms of this
credit facility are generally as favorable to the Company as the terms it would
receive from an independent third party.

     Pursuant to a noncancellable operating lease, the Company leases the office
space for its principal executive offices in Waco, Texas from a trust created
for the benefit of the children of James R. Hawkins, the Chairman of the Board
of the Company. This lease expires in December of 2001 and contains an option in
favor of the Company pursuant to which the Company may renew the lease for two
additional five-year periods, with escalating lease payments. Rental expenses
under such lease for calendar year 2001 were $90,000. The Company believes that
the terms of such lease are generally as favorable to the Company as the terms
it would receive from an independent third party.

     At March 15, 2002 Terry R. DeWitt, the Co-President of FirstCity
Commercial, had indebtedness with the Company in the amount of $125,000. The
largest amount of indebtedness outstanding at any time during 2001 was $132,000.
Such indebtedness is unsecured and bears interest at the rate of 5% annually.
Repayment of such indebtedness is expected from future performance bonuses from
the Company. To the extent such repayment from performance bonuses does not meet
the amounts due under this indebtedness, the difference between the amount due
and the amount repaid from performance bonuses will be forgiven. If employment
is terminated during the term, the remaining amount due will not be forgiven.

                                    PART IV

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

(a) 1.  Financial Statements

     The consolidated financial statements of FirstCity, the combined financial
statements of the WAMCO Partnerships (Acquisition Partnerships), and the
consolidated financial statements of Drive Financial Services LP are
incorporated herein by reference to Item 8, "Financial Statements and
Supplementary Data," of this Annual Report on Form 10-K.

     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."

                                       127
<PAGE>

     3.  Exhibits

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
   2.1    --   Joint Plan of Reorganization by First City Bancorporation of
               Texas, Inc., Official Committee of Equity Security Holders
               and J-Hawk Corporation, with the Participation of Cargill
               Financial Services Corporation, Under Chapter 11 of the
               United States Bankruptcy Code, Case No. 392-39474-HCA-11
               (incorporated herein by reference to Exhibit 2.1 of the
               Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
   2.2    --   Agreement and Plan of Merger, dated as of July 3, 1995, by
               and between First City Bancorporation of Texas, Inc. and
               J-Hawk Corporation (incorporated herein by reference to
               Exhibit 2.2 of the Company's Current Report on Form 8-K
               dated July 3, 1995 filed with the Commission on July 18,
               1995).
   3.1    --   Amended and Restated Certificate of Incorporation of the
               Company (incorporated herein by reference to Exhibit 3.1 of
               the Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
   3.2    --   Bylaws of the Company (incorporated herein by reference to
               Exhibit 3.2 of the Company's Current Report on Form 8-K
               dated July 3, 1995 filed with the Commission on July 18,
               1995).
   4.1    --   Certificate of Designations of the New Preferred Stock
               ($0.01 par value) of the Company. (incorporated herein by
               reference to Exhibit 4.1 to the Company's Current Report on
               form 10-K dated March 24, 1998 filed with the Commission on
               March 26, 1998).
   4.2    --   Warrant Agreement, dated July 3, 1995, by and between the
               Company and American Stock Transfer & Trust Company, as
               Warrant Agent (incorporated herein by reference to Exhibit
               4.2 of the Company's Current Report on Form 8-K dated July
               3, 1995 filed with the Commission on July 18, 1995).
   4.3    --   Registration Rights Agreement, dated July 1, 1997, among the
               Company, Richard J. Gillen, Bernice J. Gillen, Harbor
               Financial Mortgage Company Employees Pension Plan, Lindsey
               Capital Corporation, Ed Smith and Thomas E. Smith.
               (incorporated herein by reference to Exhibit 4.3 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 26, 1998).
   4.4    --   Stock Purchase Agreement, dated March 24, 1998, between the
               Company and Texas Commerce Shareholders Company.
               (incorporated herein by reference to Exhibit 4.4 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 26, 1998).
   4.5    --   Registration Rights Agreement, dated March 24, 1998, between
               the Company and Texas Commerce Shareholders Company.
               (incorporated herein by reference to Exhibit 4.5 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 24, 1998).
   9.1    --   Shareholder Voting Agreement, dated as of June 29, 1995,
               among ATARA I Ltd., James R. Hawkins, James T. Sartain and
               Cargill Financial Services Corporation. (incorporated herein
               by reference to Exhibit 9.1 of the Company's Form 10-K dated
               March 24,1998 filed with the Commission on March 26, 1998).
  10.1    --   Trust Agreement of FirstCity Liquidating Trust, dated July
               3, 1995 (incorporated herein by reference to Exhibit 10.1 of
               the Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
  10.2    --   Investment Management Agreement, dated July 3, 1995, between
               the Company and FirstCity Liquidating Trust (incorporated
               herein by reference to Exhibit 10.2 of the Company's Current
               Report on Form 8-K dated July 3, 1995 filed with the
               Commission on July 18, 1995).
</Table>

                                       128
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.3    --   Lock-Box Agreement, dated July 11, 1995, among the Company,
               NationsBank of Texas, N.A., as lock-box agent, FirstCity
               Liquidating Trust, FCLT Loans, L.P., and the other
               Trust-Owned Affiliates signatory thereto, and each of
               NationsBank of Texas, N.A. and Fleet National Bank, as
               co-lenders (incorporated herein by reference to Exhibit 10.3
               of the Company's Form 8-A/A dated August 25, 1995 filed with
               the Commission on August 25, 1995).
  10.4    --   Custodial Agreement, dated July 11, 1995, among Fleet
               National Bank, as custodian, Fleet National Bank, as agent,
               FCLT Loans, L.P., FirstCity Liquidating Trust, and the
               Company (incorporated herein by reference to Exhibit 10.4 of
               the Company's Form 8-A/A dated August 25, 1995 filed with
               the Commission on August 25, 1995).
  10.5    --   Tier 3 Custodial Agreement, dated July 11, 1995, among the
               Company, as custodian, Fleet National Bank, as agent, FCLT
               Loans, L.P., FirstCity Liquidating Trust, and the Company,
               as servicer (incorporated herein by reference to Exhibit
               10.5 of the Company's Form 8-A/A dated August 25, 1995 filed
               with the Commission on August 25, 1995).
  10.6    --   12/97 Amended and Restated Facilities Agreement, dated
               effective as of December 3, 1997, among Harbor Financial
               Mortgage Corporation, New America Financial, Inc., Texas
               Commerce Bank National Association and the other warehouse
               lenders party thereto. (incorporated herein by reference to
               Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998
               filed with the Commission March 26, 1998).
  10.7    --   Modification Agreement, dated January 26, 1998, to the
               Amended and Restated Facilities Agreement, dated as of
               December 3, 1997, among Harbor Financial Mortgage
               Corporation, New America Financial, Inc. and Chase Bank of
               Texas, National Association (formerly known as Texas
               Commerce Bank National Association). (incorporated herein by
               reference to Exhibit 10.7 of the company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.8    --   $50,000,000 3/98 Chase Texas Temporary Additional Warehouse
               Note, dated March 17, 1998, by Harbor Financial Mortgage
               Corporation and New America Financial, Inc., in favor of
               Chase Bank of Texas, National Association. (incorporated
               herein by reference to Exhibit 10.8 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.9    --   Employment Agreement, dated as of July 1, 1997, by and
               between Harbor Financial Mortgage Corporation and Richard J.
               Gillen. (incorporated herein by reference to Exhibit 10.9 of
               the Company's 10-K dated March 24, 1998 filed with the
               Commission March 26, 1998).
  10.10   --   Employment Agreement, dated as of September 8, 1997, by and
               between FirstCity Funding Corporation and Thomas R. Brower,
               with similar agreements between FC Capital Corp. and each of
               James H. Aronoff and Christopher J. Morrissey. (incorporated
               herein by reference to Exhibit 10.10 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.11   --   Shareholder Agreement, dated as of September 8, 1997, among
               FirstCity Funding Corporation, FirstCity Consumer Lending
               Corporation, Thomas R. Brower, Scot A. Foith, Thomas G.
               Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent
               and Blake P. Bozman. (incorporated herein by reference to
               Exhibit 10.11 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
  10.12   --   Revolving Credit Loan Agreement, dated as of March 20, 1998,
               by and between FC Properties, Ltd. and Nomura Asset Capital
               Corporation. (incorporated herein by reference to Exhibit
               10.12 of the Company's Form 10-K dated March 24, 1998 filed
               with the Commission March 26, 1998).
  10.13   --   Revolving Credit Loan Agreement, dated as of February 27,
               1998, by and between FH Partners, L.P. and Nomura Asset
               Capital Corporation. (incorporated herein by reference to
               Exhibit 10.13 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
</Table>

                                       129
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.14   --   Note Agreement, dated as of June 6, 1997, among Bosque Asset
               Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
               Investment Realty Partners, L.P. and Bankers Trust Company
               of California, N.A. (incorporated herein by reference to
               Exhibit 10.14 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
  10.15   --   60,000,000 French Franc Revolving Promissory Note, dated
               September 25, 1997, by J-Hawk International Corporation in
               favor of the Bank of Scotland. (incorporated herein by
               reference to Exhibit 10.15 of the Company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.16   --   Loan Agreement, dated as of September 25, 1997, by and
               between Bank of Scotland and J-Hawk International
               Corporation. (incorporated herein reference to Exhibit 10.16
               of the Company's Form 10-K dated March 24, 1998 filed with
               the Commission March 26, 1998).
  10.17   --   Guaranty Agreement, dated as of September 25, 1997, by
               J-Hawk (incorporated herein by reference to Exhibit 10.17 of
               the Company's Form 10-K dated March 24, 1998 filed with the
               Commission March 26, 1998).
  10.18   --   Guaranty Agreement, dated as of September 25, 1997, by
               FirstCity Financial Corporation in favor of Bank of
               Scotland. (incorporated herein by reference to Exhibit 10.18
               of the Company's Form 10-K dated March 24, 1998 filed with
               the Commission March 26, 1998).
  10.19   --   Warehouse Credit Agreement, dated as of May 17, 1996, among
               ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and
               National Auto Funding Corporation. (incorporated herein by
               reference to Exhibit 10.19 of the Company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.20   --   Funding Commitment, dated as of May 17, 1996 by and between
               ContiTrade Services L.L.C. and the Company. (incorporated
               herein by reference to Exhibit 10.20 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.21   --   Revolving Credit Agreement, dated as of December 29, 1995,
               by and between the Company and Cargill Financial Services
               Corporation, as amended by the Eighth Amendment to Revolving
               Credit Agreement dated February 1998. (incorporated herein
               by reference to Exhibit 10.21 of the Company's Form 10-K
               dated March 24, 1998 filed with the Commission March 26,
               1998).
  10.22   --   Master Repurchase Agreement Governing Purchased and Sales of
               Mortgage Loans, dated as of July 1998, between Lehman
               Commercial Paper Inc. and FHB Funding Corp. (incorporated
               herein by reference to Exhibit 10.1 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission August
               18, 1998).
  10.23   --   Warehouse Credit Agreement, dated as of April 30, 1998 among
               ContiTrade Services, L.L.C., FirstCity Consumer Lending
               Corporation, FirstCity Auto Receivables L.L.C. and FirstCity
               Financial Corporation. (incorporated herein by reference to
               Exhibit 10.2 of the Company's Form 10-Q dated August 14,
               1998, filed with the Commission August 16, 1998).
  10.24   --   Servicing Agreement, dated as of April 30, 1998 among
               FirstCity Auto Receivables L.L.C., FirstCity Servicing
               Corporation of California, FirstCity Consumer Lending
               Corporation and ContiTrade Services L.L.C. (incorporated
               herein by reference to Exhibit 10.3 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission August
               16, 1998).
  10.25   --   Security and Collateral Agreement, dated as of April 30,
               1998 among FirstCity Auto Receivables L.L.C., ContiTrade
               Services L.L.C. and Chase Bank of Texas, National
               Association. (incorporated herein by reference to Exhibit
               10.4 of the Company's Form 10-Q dated August 14, 1998, filed
               with the Commission August 16, 1998).
  10.26   --   Loan Agreement, dated as of July 24, 1998, between FirstCity
               Commercial Corporation and CFSC Capital Corp. XXX
               (incorporated herein by reference Exhibit 10.5 of the
               Company's Form 10-Q dated August 14, 1998, filed with the
               Commission on August 18, 1998).
  10.27   --   Loan Agreement, dated April 8, 1998 between Bank of Scotland
               and the Company (incorporated herein by reference to Exhibit
               10.6 of the Company's Form 10-Q dated August 14, 1998, filed
               with the Commission on August 18, 1998)
</Table>

                                       130
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.28   --   First Amendment to Loan Agreement, dated July 20, 1998,
               between Bank of Scotland and the Company (incorporated
               herein by reference to Exhibit 10.7 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission on
               August 18, 1998).
  10.29   --   Employment Agreement, dated October 1, 1998, by and between
               FirstCity. Financial Mortgage Corporation, and Buddy L.
               Terrell (incorporated herein by reference to Exhibit 10.29
               of the Company's Form 10-Q dated May 17, 1999, filed with
               the commission on May 17, 1999).
  10.30   --   Security Agreement, dated as of April 30, 1998 among
               Enterprise Funding Corporation, FCAR Receivables L.L.C.,
               MBIA Insurance Corporation, FirstCity Funding Corporation,
               NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing
               Enterprise (incorporated herein by reference to Exhibit
               10.30 of the Company's Form 10-Q dated May 17, 1999, filed
               with the Commission on May 17, 1999).
  10.31   --   Note purchase agreement, dated March 30, 1999 among
               Enterprise Funding Corporation, FCAR Receivables, L.L.C. and
               NationsBank, N.A. (incorporated herein by reference to
               Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999,
               filed with the commission on May 17, 1999).
  10.32   --   Custodian Agreement, dated March 30, 1999, among FCAR
               Receivables L.L.C., FirstCity Funding Corporation,
               NationsBank, N.A., Enterprise Funding Corporation and Chase
               Bank of Texas, N.A. (incorporated herein by reference to
               Exhibit 10.32 of the Company's Form 10-Q dated May 17, 1999,
               filed with the Commission on May 17, 1999).
  10.33   --   Credit agreement dated effective as of May 28, 1999 made by
               and among Harbor Financial Mortgage, New America Financial,
               Inc., FirstCity Financial Mortgage Corporation, and Guaranty
               Federal Bank F.S.B. as Administrative Agent and Bank One,
               Texas, N.A. as Collateral Agent (incorporated herein by
               reference to Exhibit 10.33 of the Company's Form 10-Q dated
               August 16, 1999, filed with the Commission on August 16,
               1999).
  10.34   --   Tenth Amendment to Loan Agreement, dated August 11, 1999
               between Bank of Scotland and the Company (incorporated
               herein by reference to Exhibit 10.34 of the Company's Form
               10-Q dated August 16, 1999, filed with the Commission on
               August 16, 1999).
  10.35   --   Amended and Restated Loan Agreement, dated December 20,
               1999, by and among FirstCity Financial Corporation as
               Borrower and the Lenders Named therein, as Lenders and Bank
               of Scotland as Agent (incorporated herein by reference to
               Exhibit 10.1 of the Company's Form 8-K dated December 22,
               1999, filed with the Commission on December 28, 1999).
  10.36   --   Subordinated Secured Senior Note Purchase Agreement, dated
               December 20, 1999, between FirstCity Financial Corporation,
               as Issuer and IFA Corporation, as Purchaser (incorporated
               herein by reference to Exhibit 10.2 of the Company's Form
               8-K dated December 22, 1999, filed with the Commission on
               December 28, 1999).
  10.37   --   Employment Agreement, dated October 1, 1999, by and between
               FirstCity Commercial Corporation and Terry R. DeWitt.
               (incorporated herein by reference to Exhibit 10.37 of the
               Company's Form 10-K dated February 8, 2000, filed with the
               commission on February 8, 2000).
  10.38   --   Employment Agreement, dated October 1, 1999, by and between
               FirstCity Commercial Corporation and G. Stephen Fillip.
               (incorporated herein by reference to Exhibit 10.38 of the
               Company's Form 10-K dated February 8, 2000, filed with the
               Commission on February 8, 2000).
  10.39   --   Shareholder Agreement, dated October 1, 1999, by and among
               FirstCity Holdings Corporation, FirstCity Commercial
               Corporation, Terry R. DeWitt, G. Stephen Fillip and James C.
               Holmes (incorporated herein by reference to Exhibit 10.39 of
               the Company's Form 10-K dated February 8, 2000, filed with
               the Commission on February 8, 2000).
  10.40   --   Securities Purchase Agreement, dated as of August 18, 2000,
               by and among the Company, Consumer Corp., Funding LP,
               Funding GP, IFA-GP and IFA-LP. (incorporated herein by
               reference to Exhibit 10.40 of the Company's Form 8-K dated
               August 25, 2000, filed with the Commission on September 11,
               2000).
</Table>

                                       131
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.41   --   Contribution and Assumption Agreement by and between
               Consumer Corp. and Drive dated as of August 18, 2000.
               (incorporated herein by reference to Exhibit 10.41 of the
               Company's Form 8-K dated August 25, 2000, filed with the
               Commission on September 11, 2000).
  10.42   --   Contribution and Assumption Agreement by and between Funding
               LP and Drive dated as of August 18, 2000. (incorporated
               herein by reference to Exhibit 10.42 of the Company's Form
               8-K dated August 25, 2000, filed with the Commission on
               September 11, 2000).
  10.43   --   Second Amendment to Amended and Restated Loan Agreement,
               dated December 20, 1999, by and among the Company, as
               borrower, and the Lenders, as lenders, and Bank of Scotland,
               as Agent. (incorporated herein by reference to Exhibit 10.43
               of the Company's Form 8-K dated August 25, 2000, filed with
               the Commission on September 11, 2000).
  10.44   --   Receivables Financing Agreement, dated August 18, 2000,
               among Drive BOS LP, Drive Financial Services LP, each
               Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
               (incorporated herein by reference to Exhibit 10.44 of the
               Company's Form 10-K dated April 13, 2001, filed with the
               Commission on April 13, 2001).
  10.45   --   Amendment to Loan Agreement and extension of Promissory
               Note, dated January 12, 2001, by and between FirstCity
               Holdings Corporation and CSFC Capital Corp. XXX
               (incorporated herein by reference to Exhibit 10.45 of the
               Company's Form 10-K dated April 13, 2001, filed with the
               Commission on April 13, 2001).
  10.46   --   Second Amendment, dated as of February 16, 2001, to the
               Receivables Financing Agreement, dated as of August 18,
               2000, among Drive BOS LP, Drive Financial Services LP the
               Lenders party thereto, IPA Incorporated and Wells Fargo Bank
               Minnesota, NA (incorporated herein by reference to Exhibit
               10.46 of the Company's Form 10-K dated April 13, 2001, filed
               with the Commission on April 13, 2001).
  10.47   --   Subordinate Capital Loan Agreement, dated as of February 16,
               2001, among Drive Financial Services LP, DRIVE BOS LP, the
               financial institutions from time to time party hereto and
               IPA Incorporated (incorporated herein by reference to
               Exhibit 10.47 of the Company's Form 10-K dated April 13,
               2001, filed with the Commission on April 13, 2001).
  10.48   --   Amended and Restated Amendment #4 (Option and Option
               Warrant), dated as of December 31, 2001, between the Company
               and BoS(USA) Inc. (incorporated herein by reference to
               Exhibit 99.1 of the Company's Form 8-K dated January 18,
               2002, filed with the Commission on January 18, 2002).
 *21.1    --   Subsidiaries of the Registrant.
 *23.1    --   Consent of KPMG LLP.
 *23.2    --   Consent of KPMG LLP.
 *23.3    --   Consent of KPMG LLP.
</Table>

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

 *  Filed herewith.

(b) Reports on Form 8-K.

     No reports on Form 8-K were filed with the Commission during the fourth
quarter of 2001.

                                       132
<PAGE>

                                   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 29, 2002

     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
                    ---------                                      -----                       ----
<S>     <C>                                          <C>                                  <C>

               /s/ JAMES R. HAWKINS                  Chairman of the Board and Director   March 29, 2002
 ------------------------------------------------
                 James R. Hawkins


               /s/ JAMES T. SARTAIN                  President, Chief Executive Officer   March 29, 2002
 ------------------------------------------------               and Director
                 James T. Sartain                      (Principal Executive Officer)


                /s/ J. BRYAN BAKER                    Senior Vice President and Chief     March 29, 2002
 ------------------------------------------------            Financial Officer
                  J. Bryan Baker                       (Principal financial officer)


                /s/ C. IVAN WILSON                       Vice Chairman of the Board       March 29, 2002
 ------------------------------------------------               and Director
                  C. Ivan Wilson


               /s/ RICHARD E. BEAN                                Director                March 29, 2002
 ------------------------------------------------
                 Richard E. Bean


              /s/ ROBERT E. GARRISON                              Director                March 29, 2002
 ------------------------------------------------
                Robert E. Garrison


                 /s/ DANE FULMER                                  Director                March 29, 2002
 ------------------------------------------------
                   Dane Fulmer


                /s/ JEFFERY D. LEU                                Director                March 29, 2002
 ------------------------------------------------
                  Jeffery D. Leu


                /s/ DAVE MACLENNAN                                Director                March 29, 2002
 ------------------------------------------------
                  Dave MacLennan
</Table>

                                       133
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
   2.1     --  Joint Plan of Reorganization by First City Bancorporation of
               Texas, Inc., Official Committee of Equity Security Holders
               and J-Hawk Corporation, with the Participation of Cargill
               Financial Services Corporation, Under Chapter 11 of the
               United States Bankruptcy Code, Case No. 392-39474-HCA-11
               (incorporated herein by reference to Exhibit 2.1 of the
               Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
   2.2     --  Agreement and Plan of Merger, dated as of July 3, 1995, by
               and between First City Bancorporation of Texas, Inc. and
               J-Hawk Corporation (incorporated herein by reference to
               Exhibit 2.2 of the Company's Current Report on Form 8-K
               dated July 3, 1995 filed with the Commission on July 18,
               1995).
   3.1     --  Amended and Restated Certificate of Incorporation of the
               Company (incorporated herein by reference to Exhibit 3.1 of
               the Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
   3.2     --  Bylaws of the Company (incorporated herein by reference to
               Exhibit 3.2 of the Company's Current Report on Form 8-K
               dated July 3, 1995 filed with the Commission on July 18,
               1995).
   4.1     --  Certificate of Designations of the New Preferred Stock
               ($0.01 par value) of the Company. (incorporated herein by
               reference to Exhibit 4.1 to the Company's Current Report on
               form 10-K dated March 24, 1998 filed with the Commission on
               March 26, 1998).
   4.2     --  Warrant Agreement, dated July 3, 1995, by and between the
               Company and American Stock Transfer & Trust Company, as
               Warrant Agent (incorporated herein by reference to Exhibit
               4.2 of the Company's Current Report on Form 8-K dated July
               3, 1995 filed with the Commission on July 18, 1995).
   4.3     --  Registration Rights Agreement, dated July 1, 1997, among the
               Company, Richard J. Gillen, Bernice J. Gillen, Harbor
               Financial Mortgage Company Employees Pension Plan, Lindsey
               Capital Corporation, Ed Smith and Thomas E. Smith.
               (incorporated herein by reference to Exhibit 4.3 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 26, 1998).
   4.4     --  Stock Purchase Agreement, dated March 24, 1998, between the
               Company and Texas Commerce Shareholders Company.
               (incorporated herein by reference to Exhibit 4.4 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 26, 1998).
   4.5     --  Registration Rights Agreement, dated March 24, 1998, between
               the Company and Texas Commerce Shareholders Company.
               (incorporated herein by reference to Exhibit 4.5 of the
               Company's Form 10-K dated March 24, 1998 filed with the
               Commission on March 24, 1998).
   9.1     --  Shareholder Voting Agreement, dated as of June 29, 1995,
               among ATARA I Ltd., James R. Hawkins, James T. Sartain and
               Cargill Financial Services Corporation. (incorporated herein
               by reference to Exhibit 9.1 of the Company's Form 10-K dated
               March 24,1998 filed with the Commission on March 26, 1998).
  10.1     --  Trust Agreement of FirstCity Liquidating Trust, dated July
               3, 1995 (incorporated herein by reference to Exhibit 10.1 of
               the Company's Current Report on Form 8-K dated July 3, 1995
               filed with the Commission on July 18, 1995).
  10.2     --  Investment Management Agreement, dated July 3, 1995, between
               the Company and FirstCity Liquidating Trust (incorporated
               herein by reference to Exhibit 10.2 of the Company's Current
               Report on Form 8-K dated July 3, 1995 filed with the
               Commission on July 18, 1995).
  10.3     --  Lock-Box Agreement, dated July 11, 1995, among the Company,
               NationsBank of Texas, N.A., as lock-box agent, FirstCity
               Liquidating Trust, FCLT Loans, L.P., and the other
               Trust-Owned Affiliates signatory thereto, and each of
               NationsBank of Texas, N.A. and Fleet National Bank, as
               co-lenders (incorporated herein by reference to Exhibit 10.3
               of the Company's Form 8-A/A dated August 25, 1995 filed with
               the Commission on August 25, 1995).
  10.4     --  Custodial Agreement, dated July 11, 1995, among Fleet
               National Bank, as custodian, Fleet National Bank, as agent,
               FCLT Loans, L.P., FirstCity Liquidating Trust, and the
               Company (incorporated herein by reference to Exhibit 10.4 of
               the Company's Form 8-A/A dated August 25, 1995 filed with
               the Commission on August 25, 1995).
</Table>

                                       134
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.5     --  Tier 3 Custodial Agreement, dated July 11, 1995, among the
               Company, as custodian, Fleet National Bank, as agent, FCLT
               Loans, L.P., FirstCity Liquidating Trust, and the Company,
               as servicer (incorporated herein by reference to Exhibit
               10.5 of the Company's Form 8-A/A dated August 25, 1995 filed
               with the Commission on August 25, 1995).
  10.6     --  12/97 Amended and Restated Facilities Agreement, dated
               effective as of December 3, 1997, among Harbor Financial
               Mortgage Corporation, New America Financial, Inc., Texas
               Commerce Bank National Association and the other warehouse
               lenders party thereto. (incorporated herein by reference to
               Exhibit 10.6 of the Company's Form 10-K dated March 24, 1998
               filed with the Commission March 26, 1998).
  10.7     --  Modification Agreement, dated January 26, 1998, to the
               Amended and Restated Facilities Agreement, dated as of
               December 3, 1997, among Harbor Financial Mortgage
               Corporation, New America Financial, Inc. and Chase Bank of
               Texas, National Association (formerly known as Texas
               Commerce Bank National Association). (incorporated herein by
               reference to Exhibit 10.7 of the company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.8     --  $50,000,000 3/98 Chase Texas Temporary Additional Warehouse
               Note, dated March 17, 1998, by Harbor Financial Mortgage
               Corporation and New America Financial, Inc., in favor of
               Chase Bank of Texas, National Association. (incorporated
               herein by reference to Exhibit 10.8 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.9     --  Employment Agreement, dated as of July 1, 1997, by and
               between Harbor Financial Mortgage Corporation and Richard J.
               Gillen. (incorporated herein by reference to Exhibit 10.9 of
               the Company's 10-K dated March 24, 1998 filed with the
               Commission March 26, 1998).
  10.10    --  Employment Agreement, dated as of September 8, 1997, by and
               between FirstCity Funding Corporation and Thomas R. Brower,
               with similar agreements between FC Capital Corp. and each of
               James H. Aronoff and Christopher J. Morrissey. (incorporated
               herein by reference to Exhibit 10.10 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.11    --  Shareholder Agreement, dated as of September 8, 1997, among
               FirstCity Funding Corporation, FirstCity Consumer Lending
               Corporation, Thomas R. Brower, Scot A. Foith, Thomas G.
               Dundon, R. Tyler Whann, Bradley C. Reeves, Stephen H. Trent
               and Blake P. Bozman. (incorporated herein by reference to
               Exhibit 10.11 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
  10.12    --  Revolving Credit Loan Agreement, dated as of March 20, 1998,
               by and between FC Properties, Ltd. and Nomura Asset Capital
               Corporation. (incorporated herein by reference to Exhibit
               10.12 of the Company's Form 10-K dated March 24, 1998 filed
               with the Commission March 26, 1998).
  10.13    --  Revolving Credit Loan Agreement, dated as of February 27,
               1998, by and between FH Partners, L.P. and Nomura Asset
               Capital Corporation. (incorporated herein by reference to
               Exhibit 10.13 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
  10.14    --  Note Agreement, dated as of June 6, 1997, among Bosque Asset
               Corp., SVD Realty, L.P., SOWAMCO XXII, LTD., Bosque
               Investment Realty Partners, L.P. and Bankers Trust Company
               of California, N.A. (incorporated herein by reference to
               Exhibit 10.14 of the Company's Form 10-K dated March 24,
               1998 filed with the Commission March 26, 1998).
  10.15    --  60,000,000 French Franc Revolving Promissory Note, dated
               September 25, 1997, by J-Hawk International Corporation in
               favor of the Bank of Scotland. (incorporated herein by
               reference to Exhibit 10.15 of the Company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.16    --  Loan Agreement, dated as of September 25, 1997, by and
               between Bank of Scotland and J-Hawk International
               Corporation. (incorporated herein reference to Exhibit 10.16
               of the Company's Form 10-K dated March 24, 1998 filed with
               the Commission March 26, 1998).
  10.17    --  Guaranty Agreement, dated as of September 25, 1997, by
               J-Hawk (incorporated herein by reference to Exhibit 10.17 of
               the Company's Form 10-K dated March 24, 1998 filed with the
               Commission March 26, 1998).
</Table>

                                       135
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.18    --  Guaranty Agreement, dated as of September 25, 1997, by
               FirstCity Financial Corporation in favor of Bank of
               Scotland. (incorporated herein by reference to Exhibit 10.18
               of the Company's Form 10-K dated March 24, 1998 filed with
               the Commission March 26, 1998).
  10.19    --  Warehouse Credit Agreement, dated as of May 17, 1996, among
               ContiTrade Services L.L.C., N.A.F. Auto Loan Trust and
               National Auto Funding Corporation. (incorporated herein by
               reference to Exhibit 10.19 of the Company's Form 10-K dated
               March 24, 1998 filed with the Commission March 26, 1998).
  10.20    --  Funding Commitment, dated as of May 17, 1996 by and between
               ContiTrade Services L.L.C. and the Company. (incorporated
               herein by reference to Exhibit 10.20 of the Company's Form
               10-K dated March 24, 1998 filed with the Commission March
               26, 1998).
  10.21    --  Revolving Credit Agreement, dated as of December 29, 1995,
               by and between the Company and Cargill Financial Services
               Corporation, as amended by the Eighth Amendment to Revolving
               Credit Agreement dated February 1998. (incorporated herein
               by reference to Exhibit 10.21 of the Company's Form 10-K
               dated March 24, 1998 filed with the Commission March 26,
               1998).
  10.22    --  Master Repurchase Agreement Governing Purchased and Sales of
               Mortgage Loans, dated as of July 1998, between Lehman
               Commercial Paper Inc. and FHB Funding Corp. (incorporated
               herein by reference to Exhibit 10.1 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission August
               18, 1998).
  10.23    --  Warehouse Credit Agreement, dated as of April 30, 1998 among
               ContiTrade Services, L.L.C., FirstCity Consumer Lending
               Corporation, FirstCity Auto Receivables L.L.C. and FirstCity
               Financial Corporation. (incorporated herein by reference to
               Exhibit 10.2 of the Company's Form 10-Q dated August 14,
               1998, filed with the Commission August 16, 1998).
  10.24    --  Servicing Agreement, dated as of April 30, 1998 among
               FirstCity Auto Receivables L.L.C., FirstCity Servicing
               Corporation of California, FirstCity Consumer Lending
               Corporation and ContiTrade Services L.L.C. (incorporated
               herein by reference to Exhibit 10.3 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission August
               16, 1998).
  10.25    --  Security and Collateral Agreement, dated as of April 30,
               1998 among FirstCity Auto Receivables L.L.C., ContiTrade
               Services L.L.C. and Chase Bank of Texas, National
               Association. (incorporated herein by reference to Exhibit
               10.4 of the Company's Form 10-Q dated August 14, 1998, filed
               with the Commission August 16, 1998).
  10.26    --  Loan Agreement, dated as of July 24, 1998, between FirstCity
               Commercial Corporation and CFSC Capital Corp. XXX
               (incorporated herein by reference Exhibit 10.5 of the
               Company's Form 10-Q dated August 14, 1998, filed with the
               Commission on August 18, 1998).
  10.27    --  Loan Agreement, dated April 8, 1998 between Bank of Scotland
               and the Company (incorporated herein by reference to Exhibit
               10.6 of the Company's Form 10-Q dated August 14, 1998, filed
               with the Commission on August 18, 1998)
  10.28    --  First Amendment to Loan Agreement, dated July 20, 1998,
               between Bank of Scotland and the Company (incorporated
               herein by reference to Exhibit 10.7 of the Company's Form
               10-Q dated August 14, 1998, filed with the Commission on
               August 18, 1998).
  10.29    --  Employment Agreement, dated October 1, 1998, by and between
               FirstCity. Financial Mortgage Corporation, and Buddy L.
               Terrell (incorporated herein by reference to Exhibit 10.29
               of the Company's Form 10-Q dated May 17, 1999, filed with
               the commission on May 17, 1999).
  10.30    --  Security Agreement, dated as of April 30, 1998 among
               Enterprise Funding Corporation, FCAR Receivables L.L.C.,
               MBIA Insurance Corporation, FirstCity Funding Corporation,
               NationsBank N.A. and CSC Logic/MSA LLP d/b/a Loan Servicing
               Enterprise (incorporated herein by reference to Exhibit
               10.30 of the Company's Form 10-Q dated May 17, 1999, filed
               with the Commission on May 17, 1999).
  10.31    --  Note purchase agreement, dated March 30, 1999 among
               Enterprise Funding Corporation, FCAR Receivables, L.L.C. and
               NationsBank, N.A. (incorporated herein by reference to
               Exhibit 10.31 of the Company's Form 10-Q dated May 17, 1999,
               filed with the commission on May 17, 1999).
</Table>

                                       136
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.32    --  Custodian Agreement, dated March 30, 1999, among FCAR
               Receivables L.L.C., FirstCity Funding Corporation,
               NationsBank, N.A., Enterprise Funding Corporation and Chase
               Bank of Texas, N.A. (incorporated herein by reference to
               Exhibit 10.32 of the Company's Form 10-Q dated May 17, 1999,
               filed with the Commission on May 17, 1999).
  10.33    --  Credit agreement dated effective as of May 28, 1999 made by
               and among Harbor Financial Mortgage, New America Financial,
               Inc., FirstCity Financial Mortgage Corporation, and Guaranty
               Federal Bank F.S.B. as Administrative Agent and Bank One,
               Texas, N.A. as Collateral Agent (incorporated herein by
               reference to Exhibit 10.33 of the Company's Form 10-Q dated
               August 16, 1999, filed with the Commission on August 16,
               1999).
  10.34    --  Tenth Amendment to Loan Agreement, dated August 11, 1999
               between Bank of Scotland and the Company (incorporated
               herein by reference to Exhibit 10.34 of the Company's Form
               10-Q dated August 16, 1999, filed with the Commission on
               August 16, 1999).
  10.35    --  Amended and Restated Loan Agreement, dated December 20,
               1999, by and among FirstCity Financial Corporation as
               Borrower and the Lenders Named therein, as Lenders and Bank
               of Scotland as Agent (incorporated herein by reference to
               Exhibit 10.1 of the Company's Form 8-K dated December 22,
               1999, filed with the Commission on December 28, 1999).
  10.36    --  Subordinated Secured Senior Note Purchase Agreement, dated
               December 20, 1999, between FirstCity Financial Corporation,
               as Issuer and IFA Corporation, as Purchaser (incorporated
               herein by reference to Exhibit 10.2 of the Company's Form
               8-K dated December 22, 1999, filed with the Commission on
               December 28, 1999).
  10.37    --  Employment Agreement, dated October 1, 1999, by and between
               FirstCity Commercial Corporation and Terry R. DeWitt.
               (incorporated herein by reference to Exhibit 10.37 of the
               Company's Form 10-K dated February 8, 2000, filed with the
               commission on February 8, 2000).
  10.38    --  Employment Agreement, dated October 1, 1999, by and between
               FirstCity Commercial Corporation and G. Stephen Fillip.
               (incorporated herein by reference to Exhibit 10.38 of the
               Company's Form 10-K dated February 8, 2000, filed with the
               Commission on February 8, 2000).
  10.39    --  Shareholder Agreement, dated October 1, 1999, by and among
               FirstCity Holdings Corporation, FirstCity Commercial
               Corporation, Terry R. DeWitt, G. Stephen Fillip and James C.
               Holmes (incorporated herein by reference to Exhibit 10.39 of
               the Company's Form 10-K dated February 8, 2000, filed with
               the Commission on February 8, 2000).
  10.40    --  Securities Purchase Agreement, dated as of August 18, 2000,
               by and among the Company, Consumer Corp., Funding LP,
               Funding GP, IFA-GP and IFA-LP. (incorporated herein by
               reference to Exhibit 10.40 of the Company's Form 8-K dated
               August 25, 2000, filed with the Commission on September 11,
               2000).
  10.41    --  Contribution and Assumption Agreement by and between
               Consumer Corp. and Drive dated as of August 18, 2000.
               (incorporated herein by reference to Exhibit 10.41 of the
               Company's Form 8-K dated August 25, 2000, filed with the
               Commission on September 11, 2000).
  10.42    --  Contribution and Assumption Agreement by and between Funding
               LP and Drive dated as of August 18, 2000. (incorporated
               herein by reference to Exhibit 10.42 of the Company's Form
               8-K dated August 25, 2000, filed with the Commission on
               September 11, 2000).
  10.43    --  Second Amendment to Amended and Restated Loan Agreement,
               dated December 20, 1999, by and among the Company, as
               borrower, and the Lenders, as lenders, and Bank of Scotland,
               as Agent. (incorporated herein by reference to Exhibit 10.43
               of the Company's Form 8-K dated August 25, 2000, filed with
               the Commission on September 11, 2000).
  10.44    --  Receivables Financing Agreement, dated August 18, 2000,
               among Drive BOS LP, Drive Financial Services LP, each
               Lender, IPA Inc. and Wells Fargo Bank Minnesota, N.A.
               (incorporated herein by reference to Exhibit 10.44 of the
               Company's Form 10-K dated April 13, 2001, filed with the
               Commission on April 13, 2001).
  10.45    --  Amendment to Loan Agreement and extension of Promissory
               Note, dated January 12, 2001, by and between FirstCity
               Holdings Corporation and CSFC Capital Corp. XXX
               (incorporated herein by reference to Exhibit 10.45 of the
               Company's Form 10-K dated April 13, 2001, filed with the
               Commission on April 13, 2001).
</Table>

                                       137
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<C>       <C>  <S>
  10.46    --  Second Amendment, dated as of February 16, 2001, to the
               Receivables Financing Agreement, dated as of August 18,
               2000, among Drive BOS LP, Drive Financial Services LP the
               Lenders party thereto, IPA Incorporated and Wells Fargo Bank
               Minnesota, NA (incorporated herein by reference to Exhibit
               10.46 of the Company's Form 10-K dated April 13, 2001, filed
               with the Commission on April 13, 2001).
  10.47    --  Subordinate Capital Loan Agreement, dated as of February 16,
               2001, among Drive Financial Services LP, DRIVE BOS LP, the
               financial institutions from time to time party hereto and
               IPA Incorporated (incorporated herein by reference to
               Exhibit 10.47 of the Company's Form 10-K dated April 13,
               2001, filed with the Commission on April 13, 2001).
  10.48    --  Amended and Restated Amendment #4 (Option and Option
               Warrant), dated as of December 31, 2001, between the Company
               and BoS(USA) Inc. (incorporated herein by reference to
               Exhibit 99.1 of the Company's Form 8-K dated January 18,
               2002, filed with the Commission on January 18, 2002).
* 21.1     --  Subsidiaries of the Registrant.
* 23.1     --  Consent of KPMG LLP.
* 23.2     --  Consent of KPMG LLP.
* 23.3     --  Consent of KPMG LLP.
</Table>

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

 *  Filed herewith.

                                       138